In December, the Government of the United Arab Emirates announced 2015 as the Year of Innovation.
The declaration follows the launch of the national innovation strategy in October 2014, which aims to make the Emirates the most innovative country in the world by 2021. The first phase of the strategy includes 30 national initiatives to be completed within three years, to help the UAE reach the top global benchmarks for innovation.
Current annual investment in innovation is worth Dhs14 billion (approximately $4 billion) in the UAE, of which Dhs7 billion goes to research and development. But with the new strategy innovation spending will rise significantly in the years to come.
The 30 national initiatives will cover new legislation, innovation incubators, investment in specialised skills, private-sector incentives, international research partnerships, and an innovation drive within the government. Concretely this means a series of projects focused on bringing innovation into seven sectors, namely renewable energy, transport, education, health, technology, water and space.
The drive seems very ambitious but that is nothing new in the United Arab Emirates. The two major cities, the capital Abu Dhabi and the commercial and tourism hub Dubai, are known for their hugely ambitious mega projects. The UAE also have the funds to match the ambitions. Abu Dhabi is by far the richest city in the world with high GDP and GDP per capita and a Sovereign Wealth Fund of approximately $875 billion and the oil reserves are the seventh largest in the world.
The Petroleum Trap
The United Arab Emirates depends on petroleum products in supporting its economy, where oil activities accounted for 49.38% of its total GDP in 2009. To develop the country, the UAE has been spending billions of dollars from oil income on infrastructure and construction. Much of the construction work is spectacular and tourist attractions by themselves, like the 110 meter tall headquarters of the construction company Aldar, as seen above. This distinctive building was voted the “Best futuristic Design” in an international architecture conference.
Like UAE, many of the other countries in the Middle East, especially the Arabian Gulf, are heavily reliant on one sector – oil. In Saudi Arabia oil accounts for roughly 80 % of budget revenues and 90 % of export earnings, whereas in Kuwait it accounts for 95 % of budget revenues and 95 % of export earnings. Overexposure to a commodity sector leaves the national economy highly vulnerable to fluctuations in supply, demand and pricing of the commodity, which makes planning for economic development difficult.
In the United Arab Emirates the infra-structure and urban environments are now to a large extent built, and therefore, the UAE has developed a Vision 2021 where by 2021 the country should have a more sustainable and diversified economy with lower dependency on fossil fuel and the construction boom. Based on the Vision 2021 statements, a number of new industries have been planned to enter in order to diversify the economy.
We want the UAE to transform its economy into a model where growth is driven by knowledge and innovation. Productivity and competitiveness will come to rival the best in the world, as a result of investment in science, technology, research and development throughout the fabric of the UAE economy.
The Innovation Imperative
Almost by definition, one of the key requirements for economic diversification is innovation, which Peter Drucker defined as the ability to achieve change that creates a new dimension of performance – at least new to the national economy, if not new to the wider world. This does not just mean ‘invention’ or ‘R&D’, but rather the capacity to absorb, implement and exploit innovation effectively within industrial sectors in order to build competitive strength and generate added value for the economy.
Governments in the Middle East have launched and implemented various initiatives to foster innovation. However, the innovation output in the region has generally fallen short of expectations. In 2010, Google’s managing director for Southern/Eastern Europe, Middle East and Africa highlighted the lack of innovation in the Middle East by pointing to the fact that a mere 3,224 patents were filed from the Middle East and North Africa (MENA) region in the last 13 years. Japan, in 2008 alone, filed 233,000 patents.
The Potential for Innovation in the UAE
Innovation is driven by people and when it comes to the population, there are some important facts that may help to enable innovation driven growth. In the UAE´s total population of 9.2 million, 1,4 million are Emirati citizens and 7.8 million are foreign expatriates.
Many of these expatriates are the kind of people who 100 years ago would have emigrated to United States, with creative entrepreneurial minds. This is clear for anyone visiting UAE and meeting people in the business environment. Western expatriates, from Europe, Australia, Northern America and Latin America make up 500,000 people of the population.
Establishing a culture that encourages innovation and individual characteristics conducive to the ability to look beyond an established norm is essential to an environment that enhances innovative ability. Cultural barriers to innovation, such as fear of failure and an aversion to taking risks, can present serious difficulties. Such barriers are starting to diminish in the UAE. According to research, 71% of UAE millennials (those who are 35 years old or younger) currently have entrepreneurial aspirations.
Innovation is not new in the Islamic world. Especially during the Islamic Golden Age from the 8th to the 13th centuries. During this period, artists, engineers, scholars, poets, philosophers, geographers and traders in the Islamic world contributed numerous innovations to agriculture, the arts, economics, industry, Islamic law, literature, navigation, philosophy, sciences, sociology, and technology, both by preserving earlier traditions and by adding inventions and innovations of their own.
The Spanish Islamic city of Cordoba, for example, was in the 10th century the most populous city in the world, and under the rule of Caliph Al Hakam II it became a centre for education with many libraries on top of the many medical schools and universities which existed at this time. Such universities contributed towards developments in mathematics and astronomy. During these centuries Córdoba had become the intellectual centre of Europe and the city was the first in the world to have public street lights. I think the early Islamic heritage can be a great inspiration for this new drive for innovation in the 21st century.
In Abu Dhabi, The Louvre comes to the Gulf as a part of a spectacularly ambitious development on the Saadiyat island. The island, 500 meters off the cost of the main Abu Dhabi island, is developed to host a mixed commercial, residential, and leisure district which is expected to be completed in 2020. The ambition is that Saadiyat Island should become Abu Dhabi’s cultural centre, in collaboration with western partners including Guggenheim Abu Dhabi, the French Museum Agency, and New York University.
The white domed roof of the magnificent Louvre Abu Dhabi is made of hunks of interlocking steel, each weighing as much as 70 tonnes. But to the visitor standing below it should feel like a floating canopy, delicate, lacy and light. Jean Nouvel, a Pritzker prize-winning architect from France, is known for his ability to distil the essence of a country and give it physical shape. His design for the new National Museum of Qatar is based on the local desert rose and he is modelling the forthcoming National Art Museum of China on the Chinese symbol for the number one.
The roof of Louvre Abu Dhabi was inspired by the interlaced palm leaves traditionally used as roofing material in the Gulf. Louvre Abu Dhabi took as its model the hugely successful Guggenheim Museum in Bilbao, in northern Spain, which opened in 1997—and extended its scope and ambition.
One other essential element of a successful ecosystem of innovation is the encouraging and fostering of young entrepreneurs. One of the most effective ways to do this is through mentoring. In the UAE, this is taking shape. More than 10 incubators and accelerators are operational in the country, which is a substantial increase from the three that were active in 2008. These include in5 (in Dubai Internet City), Turn8 (by DP World), i360 accelerator, Silicon Oasis Founders, SeedStartup, Endeavor, twofour54’s Ibtikar, af kar.me, the First Steps Business Center, and the Dubai SME Business Incubation Center. These incubators and accelerators offer a variety of mentorship and business support services for UAE nationals and immigrants alike. SeedStartup, for example, brings international start-ups to a three month acceleration programme held in Dubai.
The government has undertaken many initiatives to support the funding of innovation. The Telecommunications Regulatory Authority´s ICT Fund aims to drive the country’s ICT sector by providing R&D funding, scholarships for students of ICT engineering programmes, and support for incubators. Additionally, the Khalifa Fund for Enterprise Development (with approximately US$550 million in capital) aims to develop local SME´s in Abu Dhabi by funding programmes, including microfinance and start-up loans, and by supporting entrepreneurs, and there are training programmes being prepared for local content.
But substantial economic development through innovation requires not only SME´s, great ideas and funding to achieve them. To succeed with business innovation, there needs to be an institutional framework that allows for private ownership of expanding firms, rules for capitalisation and investments and not the least good contract laws and possibility for swift and fair court action in case of business problems. The last is not the least important. We know that business in Eastern Europe is slow to develop for this reason, court action in the former Communist states can take many years to resolve.
If we look at statistics, foreign investment is flooding back into the UAE. The malls are full with shoppers and business in the United Arab Emirates is booming once again. The IMF upgraded its forecast for the emirates’ economic growth in 2014 from 3.9% to 4.4%. As memories of the crisis recede, companies are remembering the reasons that make the emirates attractive. The high income of the population is one and geography is another, as the country is conveniently located between Europe and Asia, with two world-class airlines, Emirates and Etihad.
The UAE has done a lot to make life easy for firms, keeping paperwork to a minimum and moving much of it online. It comes 23rd out of 189 economies in the World Bank’s latest ranking for the ease of doing business, which is the highest in a region. It takes only eight days to set up a company, three fewer than the average for the OECD.
The spring of 2014 brought a new law intended to promote smaller firms by giving them greater access to official contracts and loans. Yet businesspeople are disappointed by a draft of a broader companies law, which is expected to be sanctioned soon. The bill fails to solve the two big problems holding back business in the emirates.
First is the lack of a proper insolvency regime that makes clear the duties of a firm’s directors and the rights of its creditors if it hits financial trouble. Despite its high overall rating, the UAE comes 101st on this score in the World Bank’s ratings. Such minor matters as being late paying a phone bill may be treated as criminal offences rather than civil matters; businessmen tell tales of colleagues going to the airport only to be told they are banned from travelling.
The second issue the proposed legislation leaves untouched is foreign ownership. International businesses that set up local limited-liability companies, as most do, can own only 49% of them, and thus must find trustworthy local partners. Dubai has created several “free” zones, where full foreign ownership is allowed, but the other emirates have been slow to follow. Full liberalisation of ownership would attract more businesses.
Investor protection is another concern. The UAE has made progress, its courts tend to recognise the decisions of foreign arbitral tribunals. But enforcing contracts can be tricky, and the new law does not help much. Its biggest potential benefit is its lowering of the percentage that companies must float in an IPO from 55% to 30%. This should encourage more family-owned firms, until now worried about losing control, to raise equity market capital to expand.
Further legislation on insolvency and foreign ownership is promised. But when things go well in the Gulf, as they now are, the authorities tend to lose interest in reform. Still, businessmen agree that the UAE’s advantages far outweigh its still undeveloped sides. It will be very interesting to see if the new push for innovation will develop the institutional framework as well.