Growing demand for AI to spare Israel from prolonged tech downturn

Al-Monitor Pro Members

David Rosenberg

Israeli reporter specializing in business, economics and politics

April 5, 2023

Israel’s artificial intelligence sector will struggle in the coming year to take full advantage of the rapidly growing demand for AI products and services due to a sharp drop globally in high-tech funding and a chronic shortage of AI talent. However, medium-term prospects remain robust due to the sector’s strong human capital base, large number of multinational companies present in Israel conducting research in the field, government support and cutting-edge academic research. The government’s decision March 27 to pause its controversial judicial-reform overhaul for now at least lifts a threat to the AI sector and the tech industry generally.

Scenario 1:  Although it will have to contend with an agonizing global tech environment, Israel’s AI industry will fare better than much of the Israeli tech industry in the coming year due to growing global interest in AI and a global shortage of AI talent.

That said, even late-stage companies remain unprofitable and will be forced by the poor fundraising environment to cut payrolls in order to stretch out existing capital. In the medium term, the Israeli AI industry should track the recovery of global tech, which hinges on an easing of global monetary tightening and the greater availability of startup capital, and the outcome of the judicial reforms. Labor shortages, however, will continue to put a cap on growth even as the industry rebounds. The government’s decision to suspend its judicial overhaul will likely lead to a more acceptable version of the plan lifting the threat it posed to the tech and AI industry.

Scenario 2: The Israeli industry fails to leverage the growing global demand for AI technology.

A prolonged global technology slump prevents AI startups from raising capital and many fail for lack of funds even though they have promising technology. Meanwhile, countries with far larger government and university budgets as well as big multinational companies such as Microsoft and Amazon crowd out smaller players and startups of the kind that comprise the Israeli industry. A deteriorating business environment in Israel due to the judicial overhaul and persistent talent shortages causes leading entrepreneurs and AI experts to start up companies overseas rather than at home.

David Rosenberg has more than 30 years experience reporting, commenting and speaking on business, economics and politics in Israel and the Middle East. He has worked for Reuters, The Jerusalem Post and Dow Jones, and was bureau chief for Israel for Bloomberg News. He is the author of two books (Cloning Silicon Valley, 2001, and Israel’s Technology Economy, 2018) and has been published in The Wall Street Journal and Foreign Policy. He now writes commentary for the Haaretz daily.