Let’s start with some interesting statistics provided by the world intellectual property office (WIPO). The graph below shows international collaborations in patenting (between inventors and/or assignees). Israel is mostly connected 'to the West'.
And the West (and the rest of the world for that matter) is connected to Israel. So perhaps the canny Israeli entrepreneur is responsible? Apparently not; as the following graph shows there are actually more foreign entities filing in Israel than Israelis - the foreign filing count (direct and PCT national phase) was nearly 6500 while there were around 1500 Israeli fiilngs.
Something is convincing a large group of IP holders to file in Israel. So what is it? The relatively tiny population precludes a large total GDP, which in total size ranks about 31 [3] behind such powerhouses as Poland and Nigeria.
Patenting in Israel thus apparently doesn’t have to do with sales in Israel. So why file in Israel?
Filing in Israel provides protection for one's own manufacturing in Israel, and prevents others from doing so - which in turn prevents export. This is relevant due to large manufacturing bases, e.g. for pharmaceuticals and computer hardware. For example, Teva is the largest generic drug company in the world; Teva does not require an Israel patent to sell in the US (as only a US patent prevents import into/sale in the US), but it does benefit from protection in Israel to manufacture in Israel. This prevents (for example) a rival from founding a factory down the road, hiring ex-Teva workers, and churning out ultra-generic generics. Similarly, an Israel patent held by a rival could prevent Teva from producing in Israel. For example, if Pfizer has an Israel patent on the Covid vaccine, this would prevent Teva from producing the vaccine (in Israel) and then selling it everywhere in the world that Pfizer doesn’t hold patents. Similarly, for computer hardware, software, medical devices, and military hardware.
Term extensions are allowable – up to 5 years, for example, for pharma.
Many non-Israel patent with granted claims can be allowed without examination, under the auspices of rule 17C. And granted claims or a positive PCT ISR/WO can be expedited in Israel, generally with favorable results being passed along, under the PPH. For many applicants this lowers world-wide patent prosecution costs by using prosecution in larger, more important jurisdictions, such as the USA to obtain a low-cost allowance in Israel.
It is cheap to file a patent application in Israel! The national phase fee is only about 350$.
It could be argued that a reason to patent in Israel is to prevent R&D in Israel. However there is a broad Israel research exemption, which alone (except for New Zealand) holds that any IP-protected matter whatsoever may be produced for research purposes. So the reasons above are apparently more likely.