Pressing ahead with an innovation eco-system

Reading the regional headlines today, it is easy to forget that the Middle East gave us many of the innovations we take for granted – from simple things like coffee, modern-day soap, and fountain pen to Al Jazari’s crankshaft and algebra, from Al Jabrwa Al Muqabilah, a 9th century mathematics book.

Half a millennium before Galileo, many Middle Eastern scholars took it for granted that Earth was a sphere. These are but just a few examples.

It is a truism that innovation drives economic growth, employment, and national competitiveness. Twelve centuries ago the Middle East was a true knowledge-based economy and, probably therefore, one of the most advanced of that time.

Today, China — whose economic transformation is unparalleled — is home to world’s largest intellectual property offices. Research by two US economists, Klenow and Rodríguez-Clare, attributes 90 per cent of the variation in the growth of income per worker across countries to effective use of capital, or ‘innovation’ in other words.

Now when the countries of the GCC are seeking to diversify beyond petroleum, promoting innovation should be a priority. Sky-high buildings, mega shopping malls, European football clubs, stakes in Western Banks, and fancy Knightsbridge stores undoubtedly make the oil-rich Gulf a major global investor and also provide short-term economic gains. But they are no shortcuts to long-term sustainable economic growth.

While phrases such as ‘knowledge-based economy’ and ‘innovation-development’ find frequent mention when the GCC countries envision their future, bringing this vision to fruition calls for a structured approach to innovation: a strategy that focuses on both ends of innovation cycle, from creation of new technologies to enhancements in the production organisation and service delivery.

Further, to be successful, innovation requires strong state support and a facilitative eco-system.

The state, or the government, has a key role to play in innovation strategy.

First, economic returns to innovation are uncertain, and therefore, cannot be left to the markets alone. Recent history is instructive. Investments in some of 20th century’s transformational technologies were underwritten by the US government after the Second World War. For 25 years through 1978, Federal sources accounted for more than 50 per cent of national R&D expenditure, which laid the groundwork for the computer industry; the Internet; and advances in chemicals, agriculture, and medical science, creating millions of jobs.

This holds some important lessons for GCC countries’ innovation strategy. Part of national wealth should be earmarked for upstream innovation – basic scientific research and creation of science parks and research centres. Abu Dhabi’s Masdar Institute — with focus on clean energy technologies — is one case in point; more are welcome.

Second, inter-generational equity is important for the GCC nations. They must find the right balance between the interests of present and future generations, for besides being uncertain, returns on such investments take a long time to materialize.

Foregoing current consumption is not easy, but then long-term national competitiveness depends on this very trade-off, which only the state can make.

Third, it is the state that drives investments in human capital, which is a key element for promoting economic growth and increasing innovative capacity. Government guidelines to educational institutes on the specific scientific and technical skills that fuel the innovative processes will go a long way.

Equally important is the ability to attract the right talent. If the US and the UK have investor-visas to attract financial capital, there is no reason the GCC cannot have something similar to attract intellectual capital.

While research and creation of new technologies is one aspect of innovation, equally, if not more, important is downstream innovation — improvements in products, processes, and business practices. One of the best definitions of this kind of innovation comes from a Chinese government official: “Even if you want to make cups, you can make smaller cups. This is innovation” (quoted in Breznitz and Murphee’s brilliant book on Chinese innovation, ‘Run of the Red Queen’).

Chinese-style innovation — keeping industrial production and service industries just at the technological frontier, without actually advancing the frontier itself, meaning by innovating in many stages of production, but not in novel-product R&D — helped China achieve unprecedented economic growth.

This form of innovation can also be adopted by the Gulf countries. The infrastructure is already in place: Gulf governments are pressing ahead with ambitious developments of clusters of special economic zones, or SEZs. Traditionally these SEZs and trading hubs are hotbeds of downstream innovation.

Here, too, government’s policies are critical, especially in promoting a facilitative eco-system by protecting intellectual property rights, facilitating backward linkages with local firms, reforming business climate, and easing access to both private and state finance.

Building an innovative society is not easy, but the choices made today will influence the long-term economic competitiveness of the region and prosperity of generations to come. The best way to predict the future, in the words of American computer scientist, Alan Kay, is to invent it.

— The writer is vice-president at National Bank of Abu Dhabi (NBAD). The views expressed are those of the author and not necessarily those of the Bank.