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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Case Studies: Corporate Governance in the Middle East

Case Studies-Corporate Governance in the Middle East

  • Numerous companies in the Middle East improved their governance practices in ways that boosted their performance and growth, highlighting that corporate governance is not a one-size-fits-all concept, but a customized approach.
  • The Nuqul Group case study highlights the role played by corporate governance in the decentralization of power and creation of higher level of accountability among all layers of management.
  • On the other hand, adoption of corporate governance by the Sorouh Group helped improve the credibility of its Sukuk issuance in the eyes of credit rating agencies, thereby resulting in one of the largest and most successful debt issuance in the region.

In part one of our corporate governance article series, we had talked about the meaning of corporate governance and the factors driving the implementing of corporate governance reforms in the Middle East. In the second part, analyzed the progress made on corporate governance implementation by various Middle East nations. And in this third and final part, we share two specific case studies of Middle East-based companies that implemented corporate governance practices to boost business performance and growth.

Case Study 1: Nuqul Group | Jordan   

Founded: 1952 | Conglomerate of over 30 companies                                           

Company Overview: Nuqul Group is a Jordan-based producer of manufactured goods. In 1985, Ghassan Nuqul, the vice chairman of Nuqul Group, took a leading role 33 years after his father founded the company.

Situation: After taking over the leading role, Ghassan Nuqul realized that the firm’s head office had to process all purchase orders, as well as account and audit documents from its four plants. As a result, little accountability existed outside the head office. Also, such a strong concentration of power in one office made the Nuqul Group unattractive to investors. To correct the situation, Ghasan Nuqul took a series of corporate governance steps to institutionalize processes, allocate tasks, and develop accountability mechanisms.  The steps were aimed at increasing accountability at all levels, and also to ensure that all family members understood their roles, responsibilities, and rights within the organization.

Corporate Governance Measures Taken:

  • Over a period of five years, Nuqul headed the firm’s decentralization process. He separated and delegated tasks, created job descriptions, measures of accountability for managers and employees, established key performance indicators (KPIs), balanced performance scorecards and evaluated the company against competitors in the industry.
  • The firm established a strong board composed of both family and non-family members. It now includes board members who are employed by the firm, board members from outside the firm, and board members with relevant specializations.
  • Being a private, non-listed, family-owned company, Nuqul Group is not required by the government to publish financial statements. However, the company publishes an internal annual report voluntarily disclosing information including staff turnover, corporate social responsibility indicators, community service participation, and philanthropy operations in the family foundation.

Impact: Nuqul Group has expanded from four subsidiaries in 1985 to 30 today, and as per vice chairman Ghassan Nuqul, this level of growth would not have been possible without the improved corporate governance practices.

  • As a result of the corporate governance measures taken, Nuqul Group increased accountability among managers, employees, and the family, which ensures the company’s sustainability.
  • By implementing a 10-year business plan, with forecasted budgets for every year, the company was able to create benchmarks and measure itself against global best practices.
  • Since the implementation of these practices, Nuqul Group has continued to grow in terms of size and level of profits.

SOROUH | U.A.E   

Founded: 2003 | Real Estate company                                           

Company Overview: Located in Abu Dhabi, Sorouh Real Estate PJSC is one of the largest real estate developers in the UAE, and currently has over AED 70 billion worth of projects under development.

Situation Faced: From 2006 to H1 2008, Sorouh did not make any major borrowings; however, it wanted to finance its growth. For this, it issued Sukuks to help finance the development of 170 hectares on Al Reem Island and the Saraya development in Abu Dhabi’s central business district. However, as part of this process, Sorouh’s corporate governance practices had to be assessed by external credit agencies responsible for rating the Asset Backed Securities (ABS) transactions that Sorouh used to raise the money.

Corporate Governance Measures Taken: The company’s successful Sukuk issuance is rooted in the improvements it made in its corporate governance framework, in compliance with the UAE Securities and Commodities Authority’s standards. Sorouh had adopted these regulations and implemented all its material requirements in 2007, two years ahead of the compliance deadline.

  • Sorouh developed an Employee Disclosure Policy to ensure that employees are able to “blow the whistle” whenever and wherever they have adequate reasons to believe that ethical conduct has been breached.
  • The company has developed an Insider Share Dealing Policy in order to ensure that directors and employees do not misuse their possession of the company’s stock price-sensitive information.
  • In 2007, the company implemented an enterprise-wide risk management system, which has been initiated to structure and formalize existing risk management practices.

Impact: According to Sorouh’s Chief Corporate Officer, Afshar Monsef, “The actions we took for our corporate governance had a direct impact on the rating we received for our Sukuk and ultimately the interest rate premium, which resulted in paying a lower premium compared with other companies in the region.”

  • Sorouh’s corporate governance practices allowed it to issue more than US$ 1 billion worth of securitized Islamic certificates (or Sukuks), to be used for growth and expansion purpose
  • Moody’s rated the majority of the notes “AA3” while S&P rated them “A”.
  • The high ratings helped Sorouh to gain market acceptance for the Sukuks, resulting in millions in savings for the company.
  • The debt issuance was the first of its kind and size for a Middle East and North Africa (MENA) region corporation.
  • In 2009, Sorouh was ranked 1st in Abu Dhabi and 3rd regionally by the BASIC2 GCC-wide study of corporate governance.

We hope you have enjoyed our coverage on Corporate Governance in the region. Please free to comment and share your views and other relevant examples on this increasingly important issue for businesses in the Middle East.

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

The Arab Digital Divide and the March towards a True Arab Knowledge Economy

The Arab Digital Divide

  • Most Arab nations have made significant progress towards becoming knowledge-based economies by making major improvements in ICT diffusion since the mid-1990s
  • However, the difference in ICT use across the region is so wide that it almost creates a digital divide with the Gulf Cooperation Council (GCC) countries on one side and the rest of the MENA countries standing on the other side of the divide.
  • Therefore, despite making significant progress towards becoming a knowledge-based economy, a lot needs to be done for expanding broadband capacity and spreading ICT usage in non-GCC Arab nations to create a true Arab Knowledge Economy.

In today’s fast progressing information era, numerous countries are focusing on knowledge creation and advanced technological development—together termed as ‘Knowledge Economy’.  In order to remain competitive in the global economy of the 21st century, most Arab nations are also utilizing the power of high-quality knowledge. They are laying out relevant policies and taking important steps to meet all requirements that define a knowledge economy and these efforts have yielded positive results as well. Since 2001, the Arab World has recorded the largest growth in Internet users across the regions in the world. There has been more than a 600% increase in the number of citizens accessing the Internet in the region. Some Arab countries have also launched initiatives for improving their education system and Information and Communications Technology (ICT) infrastructure.

A dynamic ICT infrastructure is a pre-requisite for a nation to fully participate in the global knowledge economy and to accelerate economic growth – it is measured by the extent of mobile telephony, computers, Internet access, and new electronic applications, all supported by a dynamic IT industry that boosts employment and economic growth. There is enough evidence that information and communication technology (ICT) plays an increasingly significant role in economic growth. According to a World Bank’s report, every 10 percentage-point increase in broadband penetration in low- and middle- income countries accelerates their economic growth by 1.38 percentage points.

Majority of the Arab countries have made significant progress towards becoming knowledge-based economies by making major improvements in ICT diffusion since the mid-1990s — the mobile cellular segment has grown from almost nothing in 2000 to 87 subscriptions per 100 people in 2010; during the same period, the number of Internet users in the MENA region increased tenfold to more than 100 million, with wide variation across nations, ranging from 12 users per 100 people in Algeria to 81 per 100 in Qatar. ­ According to a report by Madar Research and Development and Orient Planet, the number of Arab internet users is expected to increase to nearly 197 million users by 2017, with the internet penetration rate jumping from about 32% in 2012 to over 51% in 2017 — this would be nearly 3% above the world average at that time.

However, the difference in ICT use across the region is so wide that it almost creates a digital divide with the Gulf Cooperation Council (GCC) countries on one side and the rest of the MENA countries standing on the other side of the divide. The figure below shows the disparity between GCC and non-GCC countries. Libya is the only exception among non-GCC nations, with mobile broadband penetration of nearly 43 per 100 people, a rate comparable with GCC nations. Growth in Libya is driven by strong government support, which compensates for the low fixed broadband penetration, and Libya having a GNI per capita of $16,400.

Fixed and Mobile Broadband Internet Subscription Rate in Select Arab Countries

The Arab Digital Divide-1

 Source: International Telecommunications Union, ICT Adoption and Prospects in the Arab Region 2012

Overall, despite the progress made, a lot needs to be done for expanding broadband capacity and spreading ICT usage in the region. Just looking at the basic technology statistics, one can easily make out the inadequacy of the region’s ICT infrastructure. For instance, the average bandwidth in the Arab region is low at around 1 Mb/1,000 people, compared with 40 Mbs/1,000 people in the U.K. and 30 Mbs/1,000 people in France.

High costs of ICT services, driven by monopolies in certain segments, act as inhibitors in the Arab world. In 2008, Egypt, Lebanon, Syria, and Tunisia still had monopolies over international long-distance communication; Lebanon continued to have a monopoly on mobile services. Also, if we glance through World Bank’s report, only four Arab countries (UAE, Bahrain, Oman and Saudi Arabia) rank in the top 50 on the Knowledge Economy Index, as there is a lack of a coherent strategy among the Arab nations to support growth based on knowledge and innovation. The region continues to face many challenges in pursuit of transforming into an information-based economy, which requires implementation of key cross-sector reforms in education, innovation, ICT infrastructure, etc.

Thus, there is much more that can be done for ensuring that ICTs are used as the tool for increasing productivity, growth and employment, and that digital growth in the Arab world is inclusive. As this is done, MENA governments should introduce and implement policies for improving the ICT skills of their workforce, which will make them more employable, more innovative and an effective contributor to the development of a strong and inclusive Arab Knowledge Economy.

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