UAE – Innovating to Grow & Diversify

UAE – Innovating to Grow & Diversify

  • The UAE has been able to quickly and successfully transform itself from an oil-based economy into an innovative, knowledge-based economy; actively promoting innovation through policies and initiatives aimed at developing the three pillars of the innovation ecosystem – human, financial and technological capital
  • Being the first-ever World Expo to be held in the MENA region and themed as ‘Connecting Minds, Creating the Future’, Dubai Expo 2020 is expected to strengthen the innovation ecosystem in the region.
  • UAE’s private sector will need to play an increasingly important role in supporting the government’s agenda and promoting the national innovation ecosystem to ensure that the UAE is able to maintain and strengthen its position as a hub for innovation, not just in the Middle East, but across the world.

The United Arab Emirates (UAE), which used to be known as an oil-based economy, has been able to quickly and successfully transform itself into an innovative, knowledge-based economy over the past decade. In fact, knowledge-based revenues now constitute a greater proportion of the nation’s GDP than oil revenues, having grown from 32.1% in 2001 to 37.5% in 2012. In its move towards becoming a knowledge-based economy, the UAE has diversified its economy, becoming a key player in the real estate and renewable energy sectors, in addition to becoming a global hub for trade, financial services and tourism. This vision to become a knowledge economy is evident in the UAE’s Vision 2021, which aims to build a nation where ‘knowledgeable and innovative Emiratis will confidently build a competitive and resilient economy’.

The nation has been actively promoting innovation through policies and initiatives aimed at developing the three pillars of the innovation ecosystem – human, financial and technological capital. 

Let’s talk about the human capital first as it is the most critical and fundamental pillar for all innovative changes. UAE has advanced its human capital on numerous fronts. Thanks to consistent investments across all education levels, UAE boasts one of the most advanced education systems in the MENA region. Moreover, advancing women’s education and economic participation has led to women taking up leadership roles throughout the country.

The UAE government’s budget allocation to education makes up more than 20% of the overall budget amount — this is way above than the benchmark average of 13%. Besides overhauling primary, secondary, and higher education systems, the nation is facilitating expansion of higher education institutes by establishing world-class local universities, attracting foreign universities to open branches in the nation, and entering into international partnerships. For instance, the Masdar Institute was established in 2007 in close cooperation with the Massachusetts Institute of Technology (MIT). All these efforts have paid off, with the UAE’s rank on the Education sub-pillar of the Global Innovation Index going up from 65th in 2011 to 15th in 2013.

Second key element of knowledge economy is the financial capital because even the highly skilled human capital can fail to perform to its full potential without sufficient funds. Several sources of funding are available in the nation, including government funds, equity investing and crowd funding. Government funds typically provide early-stage funding and include the Khalifa Fund, the Expo 2020 fund, among others. In terms of equity investment, venture capital is the most accessible, despite the low risk tolerance of VC funds. The number of regional VC funds actively investing in the region is going up. Also, the number of VC deals has increased by 50% between 2010 and 2012, with 47% of the investment focused on technology.

Along with human capital and financial capital, technology accounts for another critical element for facilitating ground-zero innovation.  Although the UAE’s R&D expenditure as a percentage of its GDP (0.47% in 2011) is still below international benchmarks (global average of 2.08% and the OECD average of 2.32%), it is launching several targeted initiatives to develop its R&D efforts. Besides driving R&D in universities, the UAE government is keen to establish scientific hubs, for example, TechnoPark was set-up as a science and technology park managed by the Dubai Institute of Technology (DIT). Also, the Masdar Institute is developing a technology for desalinating sea water using renewable energy sources, and building the London Array, the world’s largest offshore wind farm.

The UAE’s innovation ecosystem has been encouraging many residents to become entrepreneurs. UAE-based technology start-up launches are expected to increase at a faster rate than the MENA average. By 2015, the UAE is expected to witness 185 new technology-based start-ups. Furthermore, the UAE government has reviewed its intellectual property and copyright laws with an aim to align them with international standards.

Exhibit 1: Snapshot of Some UAE Start-ups

UAE – Innovating to Grow & Diversify 1

Source: The Global Innovation Index 2014: The Human Factor in Innovation, Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO)

The UAE topped the World Bank’s Knowledge Economy Index (KEI) among Arab countries, ranking 42nd globally with a score of 6.94. On all the four pillars of the knowledge economy—the economic and institutional regime, education, innovation, and information and communication technologies (ICTs), UAE was ranked among the top four Arab nations.

While the UAE leads the Middle East with a global ranking of 46 in overall innovation performance, Dubai is the first city in the region to establish first knowledge centers, including Dubai Internet City, Dubai Media City and Knowledge Village.

Further, the Dubai Expo 2020 is expected to benefit several sectors of the economy such as hospitality, tourism, trade, shipping logistics and real estate; nearly $7 billion (Dh25.7 billion) has been allocated for development and infrastructure projects in Dubai so far. Being the first-ever World Expo to be held in the MENA region, the Expo will also add more than Dh140 billion to Dubai’s GDP, create nearly 277,000 new jobs and draw over 25 million visitors.  The theme of Dubai Expo 2020, Connecting Minds, Creating the Future emphasizes the importance of partnerships and innovation for building a sustainable world today and in the future­. Especially Dubai Expo’s new 100-million-euro Expo Live initiative will help drive innovation by uniting research institutes, companies, citizens and entrepreneurs across the globe in finding solutions to global challenges.

Exhibit 2: World Bank’s Knowledge Economy Index (KEI) Ranking of Arab Nations

UAE – Innovating to Grow & Diversify 2

Source: IMF, MRD/Orient Planet

Overall, if we look at the UAE’s innovation ecosystem, it seems that the pieces of the puzzle are falling into the correct places. The nation now boasts a number of unique advantages, such as strong education system, a diverse talent pool, a growing innovation culture, and a number of targeted R&D initiatives. While the UAE government has been capitalizing on these strengths and issuing relevant policies that address the issues of talent, funding and stakeholder cooperation, the private sector will need to play an increasingly important role in supporting the government’s agenda and promoting the national innovation ecosystem to ensure that the UAE is able to maintain and strengthen its position as a hub for innovation, not just in the Middle East, but across the world.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

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We Can Do It as Arabs

We Can Do It as Arabs

  • Lack of successful entrepreneurs, especially in the technology space has been challenge faced by our region for a long time, despite abundance of human as well as financial resources
  • The main reason for this lack of self-belief in Arab Entrepreneurs in their ability to innovate or emulate the success of Western counterparts.
  • Another reason is that most Arab investors do not like to act as Venture Capitalists, but “play it safe”, which makes it difficult for entrepreneurs to get access to capital for growth.
  • If these problems can be addressed innovation and entrepreneurial success for Arabs should be easily achievable.

One thing that has always intrigued me whilst I was abroad, during the first half of my life, was why we as Arabs seemed not to be able to produce any measurable, perceivable success in the various facets of technology.

At the time (exactly 30 years ago) I was just embarking upon a prospective surge in my carrier, as a post-doctorate researcher at the former McDonnell Douglas Aircraft Company and part-time Assistant Professor at California State University, Long Beach, U.S.A.; I decided to return to my home country, Egypt, to try to do find out why we, as Arabs, were lagging behind and to try to do something that would make us stand out!

Over the years, I discovered a few problems that are holding us back from making positive steps forward in the advancement of technology; the most prominent problem is the inherent lack of the ability that we are able to achieve any progress, because of the lack of resources, such as money, human competency, amongst other ‘excuses’. However, I soon found out that the Arab nations possess a plethora from both these resources, which seemed to me to be very strange.

Upon further analysis, I discovered that the real reason was that we lacked the self-confidence to achieve success, as entrepreneurs; one very dear friend, with great honesty, once confessed that we have the “Khawaja’s (foreigner’s) hat embedded inside our hearts”! As such, we are incapable of achieving success to the level of the Western countries. This is where I strongly disagree with this falsity.

As a challenge, I decided to travel the road of entrepreneurship in order to experience it for myself and discover the realities. To do this, I changed my career to Arabic Computational Linguistics, as I believed it was fervently needed for our Arab nations; thirty years ago, I was labelled as mad, as the field was not known then. What made it worse was that I had the dream of developing an Arabic search engine that would someday be the “Google” of the Arab nation!

Here is when I started to meet the real problems that entrepreneurs suffered in the Arab world; in addition to the lack of aforementioned lack of self confidence amongst entrepreneurs, I also faced the lack of confidence, on the part of investors, in the capabilities of entrepreneurs. I believe that this is one of the main hindrances that is holding back the formation of the entrepreneurial ecosystem in the Arab nations. I spoke about this particular problem when I was invited as a panellist at the annual meeting of the World Bank Group in 2011.

Arab investors are “playing it safe” and are treating the financing of entrepreneurs as a bank which should guarantee a return on investment, only with a much higher rate than a bank. This redefines the term “venture capital” to “extremely safe capital”, which, in my opinion, defies the objective of the entrepreneurial exercise. I wish to mention something that a well-respected marketer once told me: The Chinese word for “Threat” is composed of the two words “Danger” and “Opportunity”.

This “Take the Safe Side” attitude, I believe, will never allow the Googles or Microsoft’s to emerge in the Arab world; what we really need is to produce real technology and not just a whole lot of applications, of which there are already a dime a dozen. What we really need are daring real risk takers who are willing to finance regional projects (“regional” meaning for the whole MENA region), that are capable of catapulting the Arab nation to the realm of real technology.

I also wish to stress that technology cannot be imported, but is created in its own environment; this is why I have embarked upon linguistic technologies for the Arabic language, as it is unique to the Arab world. Its applications are innumerable, as we have recently discovered in the areas of sentiment analysis, trending and various analytics, let alone search results that return meaningful and useful search results for the Arab user.

I believe that if we overcome the problems highlighted in this article, we can do it as Arabs!

Source: http://www.infodev.org/highlights/out-valley-death-meeting-challenges-financing-innovation

The article is written by Hossam Mahgoub for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Opening-up of Saudi Stock Exchange to Foreign Investors

Opening-up of Saudi Stock Exchange to Foreign Investors

  • The decision of the Saudi Capital Market Authority (CMA) to open the Saudi stock exchange to foreign investors has induced a lot of excitement and optimism in the market. In this article, we discuss what the change is all about, why it is important, how it is likely to be implemented, and what will be its impact on various stakeholders.

What? Why? How?

So what exactly is going to happen? On July 22, 2014, the Saudi government announced that the Tadawul All Shares Index (TASI) will be open to direct foreign institutional investment from the first half of 2015. This would mark a welcome departure from the current state of affairs, where foreigners can purchase Saudi stocks only via trades conducted through international banks and by making a small number of costly and time-consuming exchange-traded funds (ETFs). As a result of these restrictions, foreign investors currently own less than five percent of the Saudi market, and account for a meagre one percent of the volumes traded on the TASI, which is dominated completely by local retail investors. But once these restrictions are eased in 2015, foreign investors will be able to participate much more freely in the Saudi market, and own and trade stocks of public companies in the kingdom.

Why is the change important? With a capitalization of $530 billion, the Saudi capital market is much bigger than its regional peers (Dubai and Abu Dhabi combined have a market cap of about $235 billion, Qatari listed companies are worth $196 billion and Egypt’s market is about $69 billion), and also boasts of superior liquidity – the daily average turnover at TASI is $2 billion, which is once again much ahead of the trading volume in other Arab nations. And to add to these points is the fact that the Tadawul is home to the some of the largest companies & IPOs in the region, belonging to diverse sectors ranging from petrochemicals to banking to telecommunications to retail and real estate. Therefore, from an investor standpoint, the TASI is one the biggest market which is currently closed to foreign money; therefore, its proposed opening to foreign investors is perhaps the most significant investor-friendly step taken by a Middle East or GCC nation in many years.

However, the Saudi government is not taking this step simply to appease investors. Instead, this move is a part of the kingdom’s long-term strategy to reduce dependence on oil revenues, and strengthen the non-oil sector of the largest economy in the Middle East. The decision also comes close on the heels of Qatar and the UAE getting included in the MSCI emerging market index, and Saudi authorities surely don’t want to be left behind on this front, so an indirect aim would be to get the TASI listed on the MSCI frontier or emerging market index.

The importance attached by the market to this move can be gauged from the fact that the TASI jumped 2.8 percent to a six-year high on the day the announcement was made. Also, the IMF boosted its 2015 GDP growth forecast for KSA from 4.1% to 4.6%, based on expectations of strong private sector performance.

How will the change be implemented? The CMA is yet to come out with a definite plan, but it is obvious that the roll-out to foreign investors will a slow and gradual process to avoid volatility in the market, and also to test waters in a phased-out manner.

One of the reasons that this change has taken so long to come is that Saudi authorities have been very protective of the companies in the kingdom, and have been averse to foreign investors taking control of key listed companies. Therefore, we can expect the CMA to impose caps on the amount being invested. While official numbers are yet to be announced, the market expects that foreign institutions will not be allowed to own more than 10% of the Saudi market and more than 20% of a Saudi company.

Further, to start with, a limited number of investment licenses are likely to be granted to qualified investors only, in order to avoid a sudden influx of foreign money into the Saudi companies. Such investors likely to be chosen based on the size of their assets under management (AUM) and global investment management experience, with most expectations pointing to an AUM bar of at least $5 billion. Retail investors are unlikely to be given licenses for buying and trading in the first phase of the roll-out.

Finally, most experts believe that the KSA is likely to follow the route adopted by emerging markets like China and Taiwan, where a free and open market is regulated by government officials. Also, oil and gas companies may be kept out of the purview of the initial roll-out to ensure that the Saudi government retains control over firms currently generating majority of the national revenue.

What are the implications of opening-up of the market to foreign investors?

  • On the KSA economy: Saudi Arabia’s economy is likely to get a double boost from this move. First, the influx of foreign capital will boost the overall GDP, and push along the diversification to non-oil revenues that will ensure sustenance of growth. Secondly, a well-diversified and growing economy will help tackle the high level of unemployment, especially among the youth, in the country. As cited earlier, the IMF has already increased its 2015 growth forecast from 4.1% to 4.6%, expecting economic diversification to drive growth.
  • On the Tadawul Index (TASI) and the overall capital market in the kingdom: The index will become the gateway to foreign fund inflow worth ~$50 billion into the country, strengthening its case for inclusion into MSCI’s emerging market index. Even though such an inclusion unlikely to take place before 2016, the TASI will account for three to five percent of the index, when eventually included. The move will also boost trading and IPO activity on the TASI, and will also result in production of higher quality equity research in the region.
  • On Saudi Companies: Most large Saudi companies are cash rich, so obtaining additional funding will not be the biggest gain for them. Instead, such companies will benefit from shareholder activism and improved corporate governance and accounting standards that are likely to be implemented to meet the high standards expected by foreign investors. These companies will also benefit from receiving guidance and expertise from globally experienced investors, on operational as well as strategic issues. For medium-sized companies, influx of foreign capital will lead to lower financing costs and improved valuation. Further, working with global investors will allow companies in the KSA to think global, and will help them execute their international expansion plans (regional or global) in a better manner.
  • On Investors: The move will give investors much awaited access to the largest economy in the GCC and in the Middle East. Huge foreign reserves, a low-risk sovereign credit quality, and an emerging-market like growth potential make the KSA an especially attractive destination for foreign investors.  Additionally, through the TASI, it will give them access to leading firms across industries, such as Samba Bank, Saudi Basic Industries, Saudi Industrial Investment Group, and Yanbu National Petrochemical Company. Not only do these companies have a huge “upside” potential, most Saudi companies also have better corporate governance standards as compared their peers in the Middle East.
  • On Other Asset Classes: The current move is aimed at opening-up of the equity market. However, if the move is successful, it could prompt the government to open even the bond (or Sukuk) market to such investors. Even though such a follow-up move will take a long time before being implemented, the opening-up of the local Sukuk market would give foreign investors access to companies that sold 42 billion riyals ($11.2 billion) through a dozen sales in the past year, according to Bloomberg.

Overall, if implemented well, this move has huge positive implications not just for the KSA, but also for all other countries in the GCC and the Middle East, as discussed above. However, investors are keeping a close eye on the announcement since policymakers in the kingdom have put off such plans in the past. Therefore, it is important that the CMA comes out with a well-defined roll-out plan with actual dates and timelines to alleviate investor concerns, and implement what will be a landmark change in the way capital markets operate in the Arab World.

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

Overview of Banking System in Iraq

Overview of Banking System in Iraq

 

  • With 80% of population without a bank account, Iraq has one of the least developed banking sector in the MENA region.
  • The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow.
  • Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.
 

The reform of the Iraq banking system is a challenge, in the light of political and security environment issues, but the evidence from recent years has shown that the results are consistent and many of the solutions have already been implemented.

The banking sector of Iraq is the most underdeveloped banking system in the Middle East North Africa. According to the statistics, more than 80% of the population does not have a bank account (Sansar Capital, 2013).

Accounting for 75% of the financial system, in terms of assets and 77% of GDP, the Iraqi banking system is dominated by the state-owned banks (7) (IMF, 2013). The main issues of this segment are related to low capitalization, especially in the case of Rafidain Bank and Rasheed Bank. The banking sector reform, which started in 2006, has provided solutions, in terms of new capital, but the implementation has been very slow. The private banks (50) are small and their activities are short-term orientated to retail trade and wholesale. The professionalism of private banks is questioned by the Central Bank of Iraq officials, in regard to their real potential in supporting economic growth.

The regulation related to capital requirements, which must be met by the private banks favours public banks to monopolize the banking sector. The decision has the role to protect private banks funds but in the same time will slow down the activity. Also, forcing large banks to lend more and small banks to merge with other financial institutions is an attempt to implement central planning.

Additionally, the effectiveness of banking supervision is questioned and the audit standards are lax. The general mistrust of the banking system is driven by the lack of deposit insurance, the bankruptcy case of Warka bank and the losses registered by the two main banks in the system. There is a real need for transparency and reliable financial media.

 Other internal issues experienced by the Iraqi banking systems can be stated as follows:

  • Gaps in data collection on banking transactions in the northern region (Iraqi Kurdistan)
  • Party transactions role and actions – the majority shareholder family are using bank funds for projects of their own
  • Low financial infrastructure associated with shortages of skills and technology (The World Bank, 2012).

According to the Iraq Banking Reform Strategy – Action Plan (2008-2012), the actions designed to improve the overall situation are orientated to organizational structure, IT infrastructure, risk management and banking supervision. Increasing the dialogue between the Iraqi authorities and the banking system, associated with the restructuring process, in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.

We consider that the reform towards a modern banking system has to change the mentalities as well. The traditional way of holding cash at home becomes a real challenge for the banking development. The restrictions imposed on government agencies, state-owned companies and employees, to deal with private banking represent a drawback of growth.

However, we truly believe that the restructuring of the banking system of Iraq has determined positive results not only in terms of numbers, but also in the general perception over the role and potential of the banking activity on the economic growth. Many steps in overcoming the actual problems have been made. …Because adaptation to the internal and external conditions is crucial for the future.

 

The article is written by Falah Mousa for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review