The bill, backed last month by parliament, allows companies approved by the health regulator and police to export medical cannabis to countries that permit its use. Israeli media said exports could start in as little as nine months.
"I am glad this is finally happening. It opens a very big market in Israel. The technology is here in Israel and until now we simply had to give the technology to other countries. Therefore, I am glad we can reap the profits here in Israel," said Justice Minister Ayelet Shaked.
Some lawmakers had tried to block the legislation, fearing more cultivation could push more drugs onto the streets at home.
Israeli companies—benefiting from a favourable climate and expertise in medical and agricultural technologies—are among the world's biggest producers of medical cannabis.
The government estimates exports could raise tax revenue by NIS 1 billion ($273 million). At the same time, the bill imposes tough regulations on exporters and threatens jail terms and hefty fines for violations.
Shai Babad, director-general of the finance ministry, said Israeli technology in medical cannabis significantly improves the lives of millions of people who use it as a permanent remedy.
Babad said the new law would "lead to the development of the economy, agriculture, industry and medicine in Israel".
Eight companies cultivate cannabis in Israel, many of which have opened farms abroad to get into the international market. Dozens of business owners have requested government authorization to export.
"The Israeli market has waited a long time to receive government authorization for export and Tefen is well positioned for any related developments," said Yona Levy, chairman of Tefen, a maker of medical-grade cannabis.
Levy said that as part of its international initiatives, the firm has entered into a strategic cooperation that will assist it in penetrating the European market through Portugal.
After jumping on Thursday ahead of the vote, most shares of cannabis producers were down on Sunday in Tel Aviv.