In the moribund economy of the West Bank, there are few growth industries. Jobs are scarce, industry, agriculture and tourism are all in decline, and bureaucracy is the biggest employer.

So it comes as something of a surprise to find a hive of private-sector activity in an office block that appears to have been lifted in straight from Silicon Valley. Young men in T-shirts busy themselves at computer screens in work pods, their cool, climate-controlled offices remote from the blazing heat outside. A ping-pong table stands ready in a games room.

If the Palestinian territories have an economic future, this might be it. A growing number of Palestinian businesses are expanding into the lucrative, international high-tech market and rapidly building a reputation for cheap, high-quality tech expertise. These are still early days – the sector still languishes well behind its Israeli counterpart. But 2,500 Palestinians now work in the IT sector, specialists in software outsourcing, telecommunication development and manufacturing equipment.

A white paper commissioned by the US multinational Cisco and published on Tuesday found that the Palestinian IT sector grew from 0.8% of GDP in 2008 to 5% in 2010 and is still growing. The industry has seen a 64% increase in foreign business since 2009.

"Palestine is on the brink of becoming the next high-tech global hotspot," the paper concluded.

This growth spurt is due in part to the $78m (£49.7m) international donors have pumped into the Palestinian IT sector in the past three years. Cisco has invested $15m to provide training and lure international investors. But the company spokesperson insists only $4m was given charitably. The rest was a speculative investment from which the company expects high returns.

Palestinian high-tech is driven by repatriated entrepreneurs. Murad Tahboub, 42, chief executive and founder of Asal Technology, started his business life in Greece working in import and export. He returned to the West Bank in the mid 90s, the glory days of the Oslo accords, brought home by the promise of peace and prosperity but met with the outbreak of the second intifada in 2000 – a business catastrophe from which the Palestinian economy is still struggling to recover.

Searching for domestic products to export, Tahboub decided the West Bank's greatest resource was its workforce. Asal, which is a play on asol, meaning honey in Arabic, specialises in hardware design and customised software development.

"Palestinian parents save for their children's education rather than their health or a home," Tahboub explains. "Our difficult circumstances over the past 100 years mean that education is now our only asset. It was the one thing we could carry with us."

Tahboub argues that highly educated Palestinian workers are a perfect match for international high-tech business. Equally, IT suits the Palestinian context.

"IT is resilient to political turmoil. Checkpoints and borders don't matter. As long as you have access to electricity and a phone line, the basics of your business are in place," he says.

Tareq Maayah, chief executive of Exalt, returned from Silicon Valley to Ramallah in 1993 with the same optimism. From a staff of eight in 2006, Exalt now employs 85 people working on software solutions for multinationals including HP, Cisco and Alcatel-Lucent.

In the software outsourcing market, Maayah argues, the Palestinians' closest competitor is India. They can't offer the same scale of manpower but a Palestinian engineer is still cheaper than an Indian one.

As a business model, the Palestinian IT sector is more comparable to Israel's.

"We are also a very small nation. Our success also depends on innovation. We have to be ahead of the curve," Maayah says. He sees software outsourcing as a beginning, laying the ground for a thriving Palestinian startup culture. The virtually untapped Arab internet and gaming markets are fertile ground.

But despite its precocity and potential, the Palestinian high-tech industry is still very small. The community generates a combined profit of less than $6m annually compared to Israel's $1.3bn.

Palestinian universities offer excellent technology courses that produce around 2,000 graduates a year, but the nascent market can only accommodate a few. The Palestinian IT Association (Pita) estimates that at least half of these graduates are unemployed. The Palestinian Authority is very encouraging, Pita says, but it cannot afford to offer the industry desperately needed financial support.

The sector is also stunted by the occupation. Israel's restriction on high-frequency mobile signals in the occupied territory, for example, means Palestinian mobile companies cannot provide 3G, hampering software development in that field.

Ramzi Quabar, 36, has worked for Exalt on and off since 2001 and now heads a team of 16. The company's outlook may be promising and the industry unusually robust in the face of border restrictions and checkpoints, but Quabar says the conflict still poses insurmountable obstacles.

"We have raw ability. Our talent gives us an edge. But the rate at which we are growing is not what I expected, or hoped. We're still so small," he says. "Big companies of more than 500 employees, that's what I dream of. But I don't think it will happen in the short-term, or even the mid-term. Political factors won't allow it."