Israel's more than 150 defense and defense-related firms (thousands of other firms were engaged in subcontracting) fell into one of three ownership categories: state-owned enterprises, privately owned firms, and firms with mixed state and private ownership. One firm, Armament Development Authority, commonly known as Rafael, was the main military research and development agency responsible for translating the ordnance requirements of IDF field units into development projects. Rafael had a unique status under the direct supervision of the Ministry of Defense.

Total employment in the defense sector reached a peak of 65,000 persons in the mid-1980s, more than 20 percent of the industrial work force. By 1988, however, retrenchment of the defense budget and shrinkage of the world arms market had exposed the defense industry to severe financial losses and layoffs that reduced the work force to about 50,000 employees.

The largest of the defense firms was the government-owned conglomerate, Israel Aircraft Industries (IAI) that manufactured the Kfir and Arava aircraft, the Ramta light armored car, Gabriel antiship missiles, and high-speed patrol boats. IAI began in 1933 as a small machine shop, later catering to the maintenance and upgrading of the motley collection of aircraft acquired during the War of Independence. It continued to specialize in the overhaul and retrofitting of the whole range of aircraft in the air force inventory. Until the cancellation of the Lavi project in 1987, IAI had been entrusted with the development of the advanced fighter aircraft.

The factories of Israel Military Industries (IMI), another government-owned conglomerate, produced the Uzi submachinegun, the Galil rifle, explosives, propellants, artillery shells, and light ammunition. IMI also specialized in the upgrading and conversion of tanks and other armored vehicles. Tadiran Electronic Industries was the largest private firm engaged in defense production, notably communications, electronic warfare, and command and control systems, as well as the pilotless reconnaissance aircraft of which Israel had become a leading manufacturer. Soltam, another private firm, specialized in mortars and artillery munitions.

Growth of the defense industry was achieved by a mixture of imported technology and Israeli innovation. Israeli firms purchased production rights and entered into joint ventures with foreign companies to manufacture both end products and components. Nearly every electronics firm had links of some sort with United States producers. Purchase agreements for foreign military equipment frequently specified that production data and design information, together with coproduction rights, be accorded to Israel. Nevertheless, American firms often were reluctant to supply advanced technology because of fears that Israel would adapt the technology for use in items to be exported to third countries on an unrestricted basis. Some American firms also feared that collaboration would encourage Israeli competition in already saturated world markets.

Data as of December 1988