Israel’s high tech sector is second only to California’s Silicon Valley. But it’s unlikely Silicon Wadi will challenge its American rival any time soon.

Over the next decade, the Israeli high tech will have to face politically motivated economic pressure from abroad and a lack of skilled workers on the domestic front.

A 2015 Rand Corporation study warns Israel’s economy could shed $47 billion over the next ten years as a result of Boycott Divest and Sanction movement, which aims to punish Israel for its treatment of Palestinians. The European Union, independent of BDS, adopted a policy identifying all Israeli exports of settler origin.

Further, Israel’s chief scientist warned in June that unless the government took bold action the nation would lack more than 10,000 engineers and programmers over the next decade.

Silicon Wadi an economic driver

Israel’s high tech sector is a major growth engine for the nation. It accounts for 12.5 percent of Israel’s GDP and half of it’s industrial exports.

After decades of more robust growth, the overall Israeli growth rate has slowed to about 2.5 percent annually. That’s below developed world peers when the tiny nation’s steady population growth is factored in.

The term Silicon Wadi makes use of the Arabic word for valley, which is also used in colloquial Hebrew. It refers to a specific coastal plain region near Tel Aviv and Haifa that was once the main cluster of tech startups that have since spread across the country. The tiny, raw material scarce nation for decades struggled to compete on the international electronic hardware market.  But in the 1980s into the ‘90s, a focus on and demand for software suddenly allowed Israel an avenue for export.

In their 2009 book Start Up Nation, Saul Singer and Dan Senor attribute much of Israel’s past success in high tech to two factors: the Israeli Defense Force’s mandatory service, and robust immigration.

Young Jews in Israel complete a compulsory tour in the Army, which the authors argue is unique among armed services in that questioning of superiors and searching for more efficient work-arounds is expected of conscripts. They also write that in a nation where everyone serves, a vast network is immediately available for possible business ventures after a soldier finishes an enlistment.

Many Israelis in particular graduate from intelligence and computing corps in the Army to lucrative start up careers in the civilian world.

Ben Lang served in one such elite intelligence unit near Tel Aviv for two years. After two years as a soldier, his resume has such titles as ‘creator’ and ‘co-founder,’ as the 20-something seamlessly traded in his combat fatigues for khakis in Israel’s start up arena.

“So much of the startup community is influenced by their service in the IDF, what unit they served in, people they know,” he said. “I think it makes people more resilient too.”

The authors also credit an influx of highly educated, hungry emigrees from the crumbling Soviet Union. Nearly a million flooded into Israel in the ‘90s –  a nation that today is home to less than eight million people.

“Immigrants are not averse to start from scratch,” they write.  “They are by definition risk-takers. A nation of immigrants is a nation of entrepreneurs.”

Whatever the driving factors, the result is Israel’s high tech is a force to be reckoned with, and it’s hundreds of start ups broke records last year – leaving neighboring Arab sectors far behind – after being acquired for $5.6 billion in the first half of the year.

Immigration down

The Israeli Defense Force, of course, still requires mandatory service of nearly all Israeli citizens, but immigration to Israel isn’t what it used to be.

It’s what the Israeli’s call making Aliyah, something like ‘becoming higher.’ Jews from around the world still immigrate to Israel, but in fewer numbers today than in years past. From Russia, the new arrivals have for the past several years slowed to a trickle, between 4,000 and 6,000 annually.

Israel’s current education minister, Naftali Bennet, was a start up entrepreneur himself before going into government. His software company, Cyota Inc, was acquired for $145 million in 2005.

Times have changed since then.

“High tech’s biggest problem is a severe lack of engineers,” he tweeted earlier this year. “This is a real threat to the future of Israel caused by a shortage of degrees in science and math.”

An Israeli government report published earlier this year warns of a cycle of increasing salaries for the few engineers and scientists left, which in turn makes Israel less competitive internationally and stagnates the rate of job growth.

To be sure, the tech sector is still growing, but not as quickly as it used to. In 10 of 14 years leading up to 2012, according to this report, high tech was the biggest driver of the growing Israeli economy. It fell behind the general Israeli economy in 2013, and has remained behind sectors it used to outpace since then.

But Lang is optimistic.

“It’s always hard to find engineers. There definitely is always demand for engineering talent and not enough supply,” he said. “But that’s not just in Israel, it’s similar in other startup hubs too.”

Made in Israel?

Still, other start up hubs don’t have to consider the image of their government abroad when recruiting engineers or attracting investors.israelfintech-996x440

While it’s true that so far the tech industry has been insulated from the effects of BDS, it’s unclear how long that will last.

Israel faces a trend toward international delegitimization in parts of Europe and the United States, where Israelhas traditionally enjoyed unrivalled support,” wrote Robert Danin, Senior Fellow for Middle East Studies at the Council on Foreign Relations, right before the last Israeli elections. “The next Israeli government will face a BDS movement that is gaining momentum and threatens to take root with a new generation of academics and politicians, among others.”

That next government turned out to be dominated by Benjamin Netanyahu and his Likud party, which has been growing more right wing by including members of the settler Jewish Home coalition in important posts.

The government has in the past six months taken the increasingly provocative steps that will likely add fuel to he BDS movement. A fringe right wing settler was promoted to minister of defense. Settlements were extended across the West Bank and now essentially half the Palestinian territory, drawing an unusually frank rebuke from the Obama administration.

And the Israeli government’s seriousness in responding to the BDS movement, belies its potential effects.  His administration created and funded to the tune of $25 million a taskforce to counter BDS. As an Israeli daily, Haaretz, stated in an editorial last year: “Netanyahu’s Declaration of War on BDS Is Its First Major Victory.”

For tech, the danger is less the movement’s effects on investors, and more on its effects on college campuses. BDS is most potent among young students, many of which are future engineers and programmers.

Even Lang admits it’s starting to have an affect, if not a fiscal one just yet.

“Some tech companies prefer not to say they’re from Israel,” he said.  “And many open offices in the US to use as their base.”

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