Israel’s Economy Refused to Break.

Three years of war have inflicted enormous costs on Israel, but its technology sector has continued to attract capital, drive exports, and secure global partnerships. For India, the experience offers important lessons in innovation, strategic cooperation, and economic resilience.

Israel’s enemies set out to do more than inflict a devastating blow on October 7, 2023. The ensuing war threatened a central pillar of the country’s prosperity: its ability to turn a limited resource base into global economic influence through technology, talent, and international investment. Reservists left their offices for military service. Flights were canceled, construction sites fell quiet, and investors began asking a question that no financial model could comfortably answer: could the Startup Nation continue to function through a prolonged, multi-front war?

The answer was not that Israel escaped the damage. It did not. Defense spending surged, public debt increased, tourism and construction suffered, and thousands of technology professionals spent extended periods in the reserves.

Yet Israel’s technology sector continued to expand. By 2025, it was delivering results that would have been impressive even in peacetime. The country’s experience offers a compelling lesson: economic resilience is not the absence of crisis, but the ability to sustain productive capacity, maintain international confidence, and keep innovating under extraordinary pressure.

The Numbers Behind Israel’s Resilience

According to the Israel Innovation Authority’s 2026 status report, Israeli high-tech output rose by 8.2% in real terms in 2025, reaching 352 billion shekels. The sector accounted for 18.3% of GDP and approximately half of the country’s economic growth.

Technology exports reached $85 billion, representing 58% of Israel’s total exports. Israeli technology companies raised approximately $14.6 billion, a 30% increase over 2024.

The figures point to a sector that continued to generate substantial economic value despite the demands of war.

One statistic, however, requires careful qualification. Technology-related exits associated with 2025 reached approximately $84 billion, a record, but that figure includes major transactions signed in 2025 and approved in 2026. Completed transactions during 2025 alone were worth considerably less. The distinction is important when assessing the sector’s performance: the evidence of resilience is substantial without overstating the numbers.

Momentum continued into 2026. According to a review by IVC and LeumiTech, exit values reached approximately $76 billion in the first half of the year, driven by several exceptionally large transactions.

Google’s $32 billion acquisition of Wiz and Palo Alto Networks’ $25 billion acquisition of CyberArk underscored the strategic importance of Israeli cybersecurity companies to the world’s largest technology businesses.

Cybersecurity and enterprise software remained major strengths, while generative AI, defense technology, semiconductors, quantum computing, and space technology attracted growing attention.

The sector’s changing composition is equally revealing. Software continued to account for 69% of high-tech output, but hardware contributed much of the latest increase. Computers, electronic equipment, and optical devices added approximately 16 billion shekels after years of more modest annual gains.

Demand for sensors, communications equipment, defense electronics, and AI infrastructure helped drive that expansion. Meanwhile, approximately 775 startups were established in 2025, up from 743 in 2023, although still well below the 2014 peak.

Israel was generating more value from a relatively mature, increasingly concentrated technology ecosystem.

Why Global Capital Stayed

Why did investors continue putting money into a country at war?

One answer lies in the nature of Israel’s technology industry. Software, cloud security, and artificial intelligence are not dependent on tourists arriving at Ben Gurion Airport or construction cranes operating continuously in Tel Aviv. Their customers, revenues, and investors are spread across international markets.

Exports account for almost four-fifths of Israeli high-tech output. Long before the war, the sector had built an international commercial presence that allowed companies to continue serving customers abroad even as the domestic economy absorbed the shock.

Another factor is the country’s distinctive innovation ecosystem. Military units, universities, venture capital firms, and multinational research centers have developed a network capable of translating demanding operational problems into commercially viable products.

Military mobilization disrupted companies and depleted their available workforce. At the same time, the professional networks associated with reserve service have helped cultivate experience in improvisation, rapid problem-solving, and decision-making under pressure.

War did not create Israeli innovation. It exposed the depth of an operating culture already accustomed to uncertainty and risk.

That is not an argument that conflict benefits business. Nor can defense technology alone explain the sector’s performance. Practical measures also mattered: remote working arrangements, overseas subsidiaries, international customers, financial reserves, and managers reorganizing responsibilities around employees’ reserve commitments.

More than 500 multinational companies operate in Israel, while foreign investors supplied approximately 70% of venture capital investment in 2025.

The result was an ecosystem that combined domestic ingenuity with international financing and commercial reach.

Markets Recognize Economic Staying Power

Financial markets eventually began reflecting the difference between severe economic damage and systemic breakdown.

In November 2025, S&P Global Ratings revised Israel’s sovereign outlook from negative to stable while affirming its A rating. On January 30, 2026, Moody’s also returned the outlook on its Baa1 rating to stable.

Neither agency restored Israel’s prewar credit standing, and both continued to flag security and fiscal risks. Nevertheless, the decisions suggested that the immediate deterioration in the country’s capacity to finance itself had stabilized.

Credit ratings are not endorsements of government policy, and financial markets do not pass judgment on the morality of a war. They assess factors including repayment capacity, institutional continuity, and the likelihood of further economic deterioration.

Those assessments can change quickly if fighting intensifies or public finances weaken. But the revised outlooks indicated that prolonged insecurity had not automatically translated into expectations of economic failure.

The currency and credit markets offered further evidence.

Allianz Trade estimated that the shekel strengthened by approximately 15% against the dollar in 2025. By June 2026, the cost of insuring Israeli sovereign debt against default through five-year credit default swaps had fallen to around 54 basis points, close to its prewar level. Israeli equities also outperformed major global markets during much of the recovery.

Investors were not treating the conflict as irrelevant. They were recognizing that Israel had absorbed a historic security shock without losing control of its institutions, export capacity, or currency.

Monetary policy also began to reflect improving expectations. The Bank of Israel reduced its policy rate in November 2025 and January 2026, bringing it to 4%, before cutting it further to 3.5% in July.

The bank’s July forecast projected economic growth of 4% in 2026, while Moody’s subsequently projected 3.7%.

The precise forecasts differed, but their broad direction was consistent: the economy was expected to expand as construction recovered and tourism gradually returned, rather than suffer an inevitable, prolonged collapse.

Resilience Has a Price

Celebrating Israel’s economic performance without acknowledging its weaknesses would obscure the real story.

High-tech employment grew by just 2.5% in 2025, significantly below its average growth rate over the previous decade. For the first time in more than ten years, the number of research and development employees working in Israel fell, declining by approximately 3,500.

The proportion of private Israeli technology company employees based inside the country also fell. By March 2026, it stood at 62%, down from 69% in 2019. Senior management and research and development operations have increasingly shifted to the United States and Eastern Europe.

Investment figures also conceal an uneven distribution of opportunity.

Although technology companies raised $14.6 billion in 2025, the number of funding rounds continued to decline. Deals worth less than $10 million fell to their lowest level in a decade, while exceptionally large transactions absorbed a disproportionate share of available capital.

A handful of global winners can lift total investment while younger companies struggle to secure their first substantial funding. Likewise, a few major acquisitions can produce record exit figures without demonstrating that the wider startup ecosystem is thriving equally.

Public finances present another challenge. Government debt stands at approximately 69% of GDP, materially above its prewar level, while defense expenditure is unlikely to return quickly to its previous baseline.

The economic statistics also fail to capture the full human cost of prolonged reserve service: interrupted careers, exhausted families, and employers repeatedly losing skilled workers.

Even the strengthening shekel presents complications. It reduces the value in local currency of dollar-denominated revenues, while salaries and many operating expenses remain payable in shekels.

Israel’s economic engine remains powerful, but it is carrying a heavier burden.

Why India Should Pay Attention

For India, Israel’s experience is more than a case study in economic survival. It offers an opportunity to build a deeper technological partnership with a country whose innovation ecosystem has been tested under extraordinary pressure.

Prime Minister Narendra Modi’s February 2026 visit produced agreements and institutional mechanisms covering cybersecurity, artificial intelligence, strategic technology, and agriculture. These included plans for an Indo-Israel Cyber Centre of Excellence and an India-Israel Innovation Centre for Agriculture.

The bilateral investment agreement entered into force on July 4, 2026, establishing a more predictable framework for investors while preserving policy flexibility. Negotiations on a free trade agreement have also advanced.

These initiatives provide a foundation for cooperation that extends beyond conventional trade and the purchase of finished equipment.

India’s ambitions in technology, agriculture, and national security could benefit from partnerships that connect researchers, universities, companies, and public institutions. The objective should be to create enduring capabilities rather than simply sign agreements or procure individual products.

Israel’s value lies not only in its missiles, sensors, cybersecurity systems, or irrigation technologies. It also lies in the processes that turn urgent national requirements into practical, deployable solutions.

For India, the opportunity is to adapt those capabilities to its own circumstances, including its enormous domestic market, industrial priorities, labor force, and development needs.

India should not attempt to replicate Israel’s model wholesale. The two countries operate at very different scales and face different economic challenges. But India can learn from Israel’s integration of research, investment, commercial enterprise, and strategic problem-solving.

The most valuable partnerships will be those that strengthen India’s own capacity to develop, manufacture, and deploy technology over the long term.

The Startup Nation Has Not Given In

Three years after the October 7 attacks, Israel’s economic record offers neither a miracle nor an unqualified victory.

The country faces higher public debt, an exhausted reserve force, an uneven recovery, and companies moving some of their operations overseas to reduce exposure to risk. Its technology sector, however, continues to generate substantial export revenues, attract international investment, produce major acquisitions, and support confidence in the national currency.

The contradiction is instructive. Economic resilience does not require every indicator to improve simultaneously. It requires institutions and businesses to retain enough capacity to operate, adapt, and invest despite sustained pressure.

Israel’s adversaries imposed enormous costs and sought to undermine the country’s security and international economic standing. They did not, however, destroy the technological ecosystem that helps finance its economy, connects it to global markets, and converts difficult problems into commercial innovation.

For India, the lesson is clear: strategic resilience depends not only on military strength, but also on research, capital, skilled people, international partnerships, and the ability to sustain productive activity when circumstances deteriorate.

Israel’s Startup Nation emerged from the war battered, burdened, and far from unscathed. But it continued to innovate, export, and attract investment.

It did not escape the crisis. It learned to operate through it.