Oportunities and Challenges of Doing Business in Israel: A Strategic Analysis as of June 26, 2025
uncertainties that make the business environment more unpredictable. However, despite these potential challenges and changes, the business climate in Israel, particularly in areas such as technology (including Fintech), remains an opportunity for investors to build long-term value through innovation and market leadership.
This report provides in-depth analysis of the emerging business environment in Israel as of June 26, 2025. While regional tensions will likely continue and geopolitical uncertainties remain, Israel’s economy continues to show great resilience with strong financial markets, a resilient technology sector and solid international trade. The country is still waiting for operational stability from its government, however, it still received over 27.8 billion dollars in investments, a considerable amount of which was in new frontier areas such as artificial intelligence, cyber security, biotech, and cleantech. Moreover, with over 9,000 active start-ups with the highest R&D invested at approximately 5% of GDP in the world, Israel still wears the “Startup Nation” badge well.
The strategic government policy direction, such as the National AI Fund and various missions establishing incentives and creating confidence in entrepreneurs and multinational firms to make investments is crucial to the success of the technology sector. Additionally, it is to be noted that Israel offers high levels of protection for IP and contracts that are a key consideration for overseas investors.
However, companies still face some very significant barriers to investment and operations. The current conflict with Iran and Gaza is clear security, supply chain, and operational risk, while public spending, elevated labor costs from defense spending and inflation increases continued pressure on public finances and operational costs, and political uncertainties surrounding the domestic protests and reforms designed to develop the judiciary further add a element of uncertainty to the already complex and unique business environment of Israel in the present and over the last 18 months. Despite the potential for these challenges and changes, the ability to navigate this complicated but still promising business environment is still a long-term opportunity for investors to build value through innovation and market leadership in Israel, and similar to other global
Introduction
Israel is recognized worldwide as one of the most innovative and entrepreneurial countries in the world. This combination of an extraordinary and mature tech sector, strong and mature financial markets, and robust global ties offer tremendous opportunities for business. However, in mid-2025, Israel has serious obstacles to business; perhaps, following years of dealing with political instability and violence, the country is falling back into serious challenges related to inflation, geopolitics, and political uncertainty/will it remain stable? This report provides an analysis of the pros and cons of doing business in and with Israel in various contexts (e.g., countries across the globe) as of June 26, 2025, and provides strategic assessments for potential investors, entrepreneurs, and policymakers. Abundance of Goodfortune in doing business with Israel 1. Strong and resilient financial markets have proven stable Despite the continuing military and geopolitical threats posed by Iran and instability in the Gaza Strip, the Israeli stock market has shown surprising strength and resilience in the near term. The Tel Aviv 125 (TA-125) index was up approximately 21% year-to-date (YTD) as of June 26 (only about 2.1% off the annual predictive forecast), and the TA-35 index was up 6.8% YTD, which demonstrates much more relative strength than many major global indices. In addition to stock market strength, investors are regaining confidence in Israel’s economy, especially as the Israeli Shekel has reached its strongest levels in two years.
2. Economic Growth and Stability
Israel’s economy experienced a 3.4% growth rate in quarter one of 2025, led by the business sector with 4.4%. The OECD estimates that Israel’s growth rate will be 3.3% in 2025 and 4.9% in 2026. Even as it faces geopolitical pressures, the Bank of Israel is optimistic, through their planned modeling scenarios, indicates continued GDP growth of 3.5% if there are no more escalations during the year.
3. World-Leading Technology Sector
Israel spends about 5% of its GDP on research and development (R&D) spending, which is the highest percentage in the world. The Israeli tech sector is a world leader in: artificial intelligence, cybersecurity, agritech, healthtech, and cleantech. Multinational companies Intel, Google, and IB have established over 530 R&D centers in Israel. It is estimated that Israeli start-ups attracted around three billion dollars in venture capital, especially in the area of AI, as they account for 25% of the Israeli startup ecosystem.
4. Strategic Trade Agreements
Israel has free trade agreements with the United States, the E.U., Canada, Mercosur, and the UAE. The Abraham Accords fostered an increase in trade agreements, particularly with Gulf countries, such as the UAE which had their tariffs removed on 96% of goods that are traded with Israel. That allows for open markets for the Israeli exports.
5. Skilled Workforce and Low Unemployment
Israel has the highest per capita ratio of engineers and scientists anywhere in the world. In2025, there remains low unemployment (2.6%-2.8%), with median wage growth at an increase of 6.2% annually. The availability of highly-skilled talent allows for Israel’s,
6. Government Support and Innovation Ecosystem
Israel provides a considerable amount of government support for startups, including tax incentives, means-tested funding just for startups (through the Israel Innovation Authority) and incubators developed specifically for startup funding. Additionally, the National AI Fund supports a variety of public efforts to build out the startup ecosystem with a total of $400 million allocated towards startups for growth, innovation, and funding.
7. Transparent Regulatory System
Israel’s laws are all based on common law principles of law, which gives strong protections for intellectual property, contracts in commerce, and foreign ownership. This bloody simple regulatory system is an assurance to investors as they go through long payback processes, besides providing strong business confidence signals.
8. Natural Gas Resources and Energy Security
Israel resumed natural gas exports in June of 2025 with most gas coming from the Leviathan and Karish fields. Israel has also started to invest in renewables, like solar power and hydrogen technology, as part of its work towards building a sustainable energy future.
Challenges of Doing Business in Israel
1. Geopolitical Conflict and Regional Instability
According to experts, the current conflict with Iran and the war in Gaza pose considerable risks and obstacles to business. Significant threats, from cyber-attacks, disruptions in supply chains, and uncertainty regarding military confrontation, offer a multitude of concerns. Financial markets have remained buoyant, but the concerns that these conflicts put on the region over an extended period will worsen uncertainty.
2. Increased Military Spending and Fiscal Pressure
Military spending reached $169 billion, increasing the national debt (estimated to reach 71% of GDP). The increase puts hard caps on public spending across other sectors, and adds financial and economic pressure as planning occurs in the economy.
3. Gaza War Effect on Labor and Production
Since 2023, the Gaza War has cost the Israeli economy $55.6 billion. The call-up of reservists for war has resulted in shortages of labor across construction, agriculture, and even tech. This has limited productivity across key sectors of the economy.
4. Drop in Private Consumption
Private consumption decreased approximately 5–6%, in terms of inflation and as security concerns and uncertainty began to change consumer behavior. Previously, in sectors such as retail, entertainment and any type of services, demand is particularly sensitive to public feelings.
5. Credit Rating Downgrades and Debt Risk
Considering the increased debt burden and the fiscal impact of war, rating agencies have begun to downgrade Israel’s credit rating as a consequence. Moody’s specifically, has downgraded Israel’s rating from A2 to Baa1. As a result, Israel will now be faced with more expensive borrowing, similar to how borrowing became more expensive for the US government after their debt was
6. Supply Chain and Trade Disruptions
Physical conflicts in the Red Sea and surrounding areas are disrupting Israel’s import and export venues. Gas exports in Egypt were suspended, restrictions on Palestinian laborers were imposed, and there are impacts on agriculture and construction.
7. Domestic Political Uncertainty
Judicial reforms, government spending priorities and power shifts to ultra-Orthodox parties are causing political protests and have affected the investors’ confidence. The tech sector is especially concerned about judicial independence and regulatory changes.
8. Inflation and High Interest Rates
Inflation is between 3.2%-3.7%, which is above the central bank’s target. The Bank of Israel has maintained a high interest rate (~4.5%) to keep inflation in check but that forces up borrowing costs and truncates business expansion.
Strategic Recommendations
Despite the mixture of prospects and pitfalls, businesses must be vigilant yet aggressive as they consider entering or expanding into Israel’s market by:
Utilising Innovation Authority Schemes
Utilising grants for Research and Development and tech accelerators to assist/ramp up rage start-up or expansion expenses
Diversifying Trade and Supply Chains
Try to develop an alternative route/alternate trade route network and partner with the network of allies to minimise geopolitical risks.
Focus on the Best Opportunities in Innovation Sectors
Try to concentrate on the strongest growth areas of AI, cyber; cleantech.
Investing in Risk Management
Invest in geopolitical insurance, weapons for cyber defence, hedging in both the market.
Keep on Top of Political and Legal Developments
Try to stay on the pulse, abreast of changes in court reforms, military policies and economic acts and bills.
Be Careful With Capital Investment During High-Interest Rates
Be careful about being too aggressive with any larger borrowing; try to defer taking on any more debt in the near future. Try and build cash-flow positive (efficient) business models for large projects with high spend requirements.
Conclusion
Israel will always stay a lively and very creative market that provides great!
Globally rated potential in technology and research. Yet, Israel has a unique geopolitical position to contend with, not the least of which is the various political and internal disputes. To that end, businesses have to think strategically and plan accordingly. For those with a very large risk appetite and being in the technology sphere will always align itself with the Israeli market great opportunity (world-class!). For everyone else, make sure you balance your reward to situation risk and always stay on top of developments and only plan decisions for large investments when you are confident from either an opportunity or a risk perspective.
