Publications
Memorandum No. 202, INSS, July 2020
The defense industries are one of the cornerstones of Israel’s security. They were born of an understanding that Israel could not rely on external sources for procurement of needed materials and systems. Local production goes hand in hand with research and development in Israel, enabling the tailoring of unique weapons systems to the IDF’s changing needs, giving it advantages on the battlefield.
The IDF is widely seen as the defense industries’ central customer, and its use of the industries’ products enhances their reputation when exporting their products to countries around the world.
The defense industries rely to a great extent on orders from the Ministry of Defense, which to date have been in large part funded by converting US$815 million in American aid money into shekels for local development and procurement. According to the latest Memorandum of Understanding outlining the US military aid agreement, which covers 2019-2028, Israel’s ability to convert the aid money for use with the local industries will be gradually decreased – especially from 2025, until it ceases entirely in 2028.
As a result, the Institute for National Security Studies set up a research team in the summer of 2018 on the topic of Israel’s defense industries, with the participation of researchers from the INSS and guest experts from relevant fields. The team discussed the strategic role of Israel’s defense industries today, the US military aid, the possible implications for the Israeli defense industries of ending the conversion to shekels, and ways to cope with this process. This memorandum is the product of the comprehensive work of the research team.
Table of Contents:
The defense industries in Israel are essential in a number of respects. For one thing, Israel cannot always rely exclusively on external procurement sources. Domestic production is thus an integral part of research and development. It makes it possible to adapt unique weapons systems to the changing needs of the Israel Defense Forces (IDF) – systems that provide a critical edge to the IDF on the battlefield. Independent production capability is particularly important during a conflict in which the supply chain is affected, or when there are political restrictions on the use of certain types of arms. In the economic sphere, although the defense industry does not account for an especially large slice of Israel’s GDP, it is one of the country’s high-tech engines and a source of quality work for thousands of employees. In the political sphere, its ability to supply advanced military solutions to other countries contributes to those countries’ support for Israel...
The Israeli defense industry is one of the most prosperous industries in Israel. It originally emerged as a response to the country’s immediate military needs and to cope with restrictions on arms procurement from abroad. Today, the Israeli defense industry manufactures advanced weapons systems for the Israel Defense Forces (IDF) and enjoys a high rating in the global arms market. According to the Stockholm International Peace Research Institute (SIPRI), Israel is in eighth place in the world in arms exports, and in first place in defense exports in relation to its size...
The development of the defense industries in Israel has been characterized by radical and sometimes contradictory changes. They were built to serve local military needs, yet in recent decades the bulk of their activity does not involve supplying the Israel Defense Forces (IDF). Initially, the defense industries’ role was derived from restrictions imposed by foreign governments on the supply of weapons systems and military equipment to the IDF. Later, however, following the United States’ willingness to extend military assistance to Israel, including monetary grants to pay for the imported goods, that role changed and its development took a different course. Defense exports began as a secondary business, mainly in order to balance domestic demand fluctuations and to lower research and development (R&D) and production costs for the IDF. In time, exports grew so rapidly as to place Israel among the world’s largest defense exporters. Somewhat paradoxically, the earlier dependence on foreign suppliers has been replaced by a dependence on overseas customers. Up until the 1980s, the defense industries retained important direct influence on the development and structure of the Israeli economy, but since then their relative share has declined and they no longer constitute an influential economic actor...
The size, development, and ownership structure of the Israeli defense industry depend on Israel’s defense needs, geopolitical changes in the Middle East, the size and power of the Israeli economy, and various aspects of Israeli society. Developments in the global defense industries and market also have a direct impact on the industry in Israel...
The latest memorandum of understanding (MOU) on US foreign defense aid to Israel was signed in September 2016 after over three years of negotiations. The negotiations went through ups and downs, and were even temporarily suspended at one point. The new agreement covers 10 years (2019-2028), during which total American aid will be increased to $38 billion: $33 billion in ordinary defense aid (foreign military financing – FMF), compared with $30 billion in the previous agreement, and $5 billion in a new multi-year agreement for ballistic missiles defense (BMD), compared with $400 million annually with no multi-year commitment in the preceding decade...
The opening of US Fiscal Year 2019 on October 1, 2018 marked the beginning of the implementation of the US-Israel Memorandum of Understanding (MOU) on military assistance. Signed in September 2016 in the final months of the Obama Administration, and building on the previous 10-year MOU, it marked a major milestone in the US-Israel defense partnership...
In September 2016, the Memorandum of Understanding (MOU) was signed between the governments of Israel and the United States for a $38 billion American defense aid package under the Foreign Military Funding (FMF) Program for the period 2019-28 (hereafter “the new aid agreement”)...
The conference at the Institute for National Security Studies in Tel Aviv on the subject of the defense industries can be summarized in two sentences: first, the defense industries are very important to the IDF, the economy, and the country’s outlying areas; and second, a reduction of the shekel component in US aid will have a severe negative impact on Israel’s security, the economy, and the local defense industries...
This article analyzes a number of the trends currently affecting the defense innovation system (DIS) in Israel, especially the defense industry. Among these trends are: the change in the character of warfare, the variety of threats and new domains; the modern weapons systems necessary to deal with the change; the digital transformation, information technologies (IT) revolution and emergence of the cyber domain; the transfer of technology (TOT) revolution and the use of commercial off-the-shelf (COTS) products and technologies in weapons systems; the relative decline in defense R&D investments (in comparison with commercial R&D); and the anticipated decline in the volume of orders for local industry, resulting from the most recent changes in the security MOU between Israel and the US...
US military aid contributes greatly to Israel’s security, but also imposes restrictions. Opinions (unofficial ones) are occasionally expressed in Israel arguing that the time may have come for the country to stand on its own two feet and voluntarily forgo this military aid for the sake of its independent image and in order to reduce the possibility of the United States exerting pressure on it. Moreover they argue that the annual US aid accounts for only 1 percent of Israel’s GDP and Israel has already relinquished economic aid from the United States in the past. This article examines the pros and cons of US military aid to Israel, and concludes that the advantages of the aid clearly outweigh its disadvantages...
On September 15, 2016, the United States and Israel signed the third defense aid MOU for 2019-2028, amounting to $38 billion – $3.8 billion a year. By 2019, Israel had received over $100 billion in defense aid since its founding. This is a substantial sum that eased the defense burden on Israel, and constituted the main source of funding for the IDF’s build-up in American technology and primary weapons systems. The aid in 2019, constitutes approximately 1 percent of Israel’s GDP, 2.5 percent of the state budget, and 20 percent of the defense budget. This sizable amount has considerable advantages beyond the money, in the form of an uncompromising American commitment to Israel’s security and direct access to American technology and the American defense establishment. Furthermore, American aid benefits the American defense industry, which receives additional contracts and is able to sell to other countries that regard the IDF as a sophisticated user whose choice constitutes important sales promotion. It also benefits the American defense establishment, which gains invaluable intelligence and operational knowledge from the Israeli defense establishment...
The opinions expressed in INSS publications are the authors’ alone.
Publication Series
Memoranda