The manufacture of small weapons and explosives for the forerunners of the IDF had begun in secret arms factories during the 1930s. The War of Independence was fought with Sten guns, grenades, light mortars, antitank guns, flamethrowers, and light ammunition, much of it produced in Israel with surplus United States machinery acquired as scrap after World War II. After independence and the departure of the British, massive imports of wartime surplus aircraft, tanks, and artillery were possible. The Israeli arms industry made a specialty of upgrading and overhauling such equipment. The Israeli-designed Uzi submachine gun, adopted by the security forces of many nations, was a major export success, providing needed revenue for the arms industry. The Czechoslovak arms agreement with Egypt in 1955 and the 1956 War gave further impetus to weapons production. The decision to become a major producer of armaments was inspired by the arms embargo imposed by France--then Israel's main supplier of arms--just before the outbreak of the June 1967 War. By the mid to late 1970s, indigenous suppliers were delivering an increasing share of the IDF's major weapons systems. These systems included the Reshef missile boat, the Kfir fighter plane, the Gabriel missile, and the Merkava tank. The Kfir, based on plans of the French Mirage III acquired clandestinely through a Swiss source, was powered with a United States General Electric J79 engine, but embodied Israeli-designed and Israeli-produced components for the flight control and weapons delivery systems.

Domestic production reduced foreign exchange costs for imports, provided a degree of self-sufficiency against the risk of arms embargoes, and facilitated the adaptation of foreign equipment designs to meet Israeli requirements. A high concentration of well-qualified scientists, engineers, and technicians, a growing industrial base, and a flow of government resources toward military research and development facilitated the rapid expansion of locally produced military equipment. Officials asserted that spinoffs from the arms industry, especially in electronics, had stimulated the civilian high technology sector, thus contributing indirectly to export earnings. This claim has been disputed by Israeli economists who concluded that the US$700 million spent annually on military research and development would have produced five times the value in export earnings had it been spent directly on civilian research and development. Even among government leaders, there was growing realization that the defense industry had become too large and that the government should not be obliged to come to the rescue of large defense firms in financial difficulty.

Data as of December 1988