March 29, 2017

The Lure of Technology in the Gulf

A man walks inside the world’s first functional office building made using 3-D printer technology in Dubai, United Arab Emirates, May 31, 2016. (AP Photo/Kamran Jebreili)

Gulf states are turning to technology as a placement for outward investment and as a source of generating jobs and economic growth in domestic markets. The diversification effort away from oil and gas markets has increasingly focused on two priorities: first, to invigorate nascent private sector activity within Gulf states; second, to place state investment funds internationally in high growth sectors that will generate a steady stream of revenue.

There have recently been some notable efforts by Saudi Arabia, the United Arab Emirates, and Qatar to deploy these strategies, specifically through technology-focused investments. These domestic investments in technology-related industries include e-commerce and high tech manufacturing in diverse sectors, from defense industries and transport to renewable energy. External placements have been in equity investments in technology-enabled companies such as Uber (in which Qatar and Saudi Arabia hold positions), as well as more general investment funds, including the new SoftBank fund, of which Saudi Arabia is a key stakeholder; Qatar and possibly Abu Dhabi’s Mubadala may be next to join the fund.

There is significant foreign investment interest in the deployment of technology-based businesses across Gulf Cooperation Council states. The recent Amazon acquisition of Souq.com (an online retailer created by a Syrian entrepreneur in Dubai) is a prime example of increasing investor interest in the potential growth market of the region for online products. It is also a test of how the regional Gulf economy can support a technology and entrepreneurial ecosystem.

Reinventing the tech startup wheel is a risk to Gulf economies. The Gulf has its own version of Uber: Careem, founded by former McKinsey employees in the region and supported by a local private equity firm. Interestingly, Dubai, as an ecosystem, was essential to this pairing of ideas, innovation, and financing. (Migrants are also part of that story.) Dubai also has Aramex, its own version of FedEx, which will be central to the growth of the Amazon/Souq venture and yet to be released rival Noon. The competition should be healthy, but Amazon could also be walking onto a playing field in which the state and state-linked firms have some advantage.

It is perhaps easier to identify technology stocks and investment funds abroad than to create nascent private sectors that nurture new ventures. The creation of a technology ecosystem – where new businesses, ideas, and innovations coexist – requires human and monetary capital, as well as mobility. Mobility can be as simple as the right to work, but also the right to fail and start again.

To that end, the import of highly skilled foreign labor will continue to be integral to Gulf economic development. In the UAE, there is some movement on labor market reforms to prioritize visas for highly skilled workers. There is also significant investment in training, specifically at the intersection of technology and security, including partnerships with Raytheon and other defense contractors and national university systems.

Changes in legal frameworks for businesses, especially in bankruptcy and access to finance, will be essential across the GCC states. In Saudi Arabia, the development of a new parallel exchange market, Nomu, is meant to be a trading platform for small and medium-sized businesses to go public and seek investment. Nasdaq Dubai has attempted, with some success, to do the same since 2008. New bankruptcy laws came into effect in the UAE in late 2016 after consideration of a draft law that lagged since 2011. A draft bankruptcy law is under discussion in Saudi Arabia, and is expected later this year.

There are implications for intellectual property rights, copyright, and patent law, which GCC states will need to confront. For some entrepreneurs, the ability to form a company within a free zone, where commercial and contract law from an outside authority (usually the United States or United Kingdom) applies, will be an attractive advantage, though it can also be very expensive for startups and firms without significant investment.

Gulf states have traditionally been importers rather than innovators in new technology. However, the new economy models these states envision require a wholesale reconfiguration of state-market relations to encourage entrepreneurship, but also very specialized entrepreneurship in very expensive fields. Saudi Arabia’s National Transformation Program has explicit targets for the use of digitization and information technology in health care and government services, which will certainly spur growth in the provision of services and purchase of equipment, but it may be harder to ignite the localized development of applications and software. The budding defense industries of the GCC states, particularly in the UAE and Saudi Arabia, serve two goals: to create technology-intensive sectors with high-skilled job opportunities for citizens; and to build national self-sufficiency in some areas of defense, or, in the words of a senior Emirati official, “to always have a technology edge” against regional adversaries. Technology and innovation are, therefore, part of a national survival strategy, in much of the same way that Israel has approached its technology and defense sectors.

In technology and innovation ecosystems, there is also usually some state support, either as a consumer of new technology products (especially in the security and aerospace industries) or as an incubator, often so much so that military technology has driven innovation historically in the aerospace and communications fields. These are institutional settings that economic historians describe as “national systems of innovation.” The ecosystem, which includes the policy framework along with the community of working minds and supporting businesses (from “micro-factories,” incubators, technical supply chains, to basic services) can define the possibilities of bringing an innovative idea to market.

For the GCC states, there are a number of state-directed projects devoted to building a technology ecosystem. The chart below lists key government-funded incubators across the GCC.

Sources: KFED, MBRCGI, QBIC, BBIC, Riyada

The joining of national security priorities, labor market policy, and economic reforms prioritizing private sector development will depend on efforts by individual states to grow national systems of innovation.

Market Watch is a blog conceived by AGSIW Senior Resident Scholar Karen E. Young seeking to provide insights from the crossroads of Gulf politics and finance.