• Home
  • Obstacles to Unleashing the Gulf’s Entrepreneurial Potential
Qatari investors follow the stock market activity at the Qatar Stock Exchange, in Doha,Qatar, on 16 January 2023. (Photo by Noushad Thekkayil/NurPhoto via AP)

Obstacles to Unleashing the Gulf’s Entrepreneurial Potential

The Gulf Cooperation Council (GCC) countries have long striven to become less dependent on oil revenue and, in the process, make their citizenry less dependent on the public sector for employment. To this end, policymakers across the Gulf’s Arab monarchies plan to transform their citizens into entrepreneurs and their states into start-up nations, realizing a knowledge economy no longer dependent on oil rents to generate GDP or government revenue.

To achieve this goal, the GCC states have set out to encourage venture capital, founding incubators and accelerators, and build a more competitive higher education system, with assistance from Western universities. They have also established special economic zones with no- or low-tax regimes, developed local capital markets, and host high-profile business-focused events like Dubai’s Expo 2020 and Riyadh Expo 2030. Taken together, these efforts have begun to bear fruit, with celebrated start-up unicorns like Careem and Tabby reshaping entire industries across the Gulf. Despite early successes, the long-term viability of innovation and entrepreneurship in the Gulf remains in doubt. Whether start-ups can eventually replace the highly profitable fossil fuel industry will depend on the policy decisions made by today’s leaders.

The Long and Winding Road to Start-Up Nation

The global competition for entrepreneurship, venture capitalism, and successful start-ups is fierce. Two crucial local advantages that make start-up hubs in the United States, Europe, China, and, increasingly, India so successful are their existing agglomeration economies. Start-ups thrive where a start-up community already exists. In countries that lack such an entrepreneurial ecosystem, new businesses struggle to get off the ground. Further, start-ups flourish in the presence of top universities, which provide the fundamental education and research required to begin innovative businesses. While GCC countries (notably the UAE, Saudi Arabia, and Qatar) are catching up in these domains, they continue to search for unique competitive advantages that will set the region apart, as well as new markets into which Gulf companies can expand.

Unfortunately, in addition to global competition, intense rivalry within the GCC itself may stymie growth. Instead of cooperating and coordinating their economic policies, member states are engaged in a potentially ruinous “rat race” with one another. Within the wider region, start-up giant Israel may prove to be more of a rival than a partner, as economic pressures will lead it to invest in its own companies’ products and services. Regional joint ventures, especially in security-sensitive areas, may prove infeasible. Thus, the GCC states may need to look at internal coordination and cooperation if they want to develop a strong start-up culture.

Gaps in the Innovation Ecosystem

The university system’s two main functions are to produce innovations and develop human capital. Most research-intensive start-ups begin as spin-offs from leading research universities, such as Silicon Valley’s Stanford and UC Berkeley or the robotics champion Carnegie Mellon in Pittsburgh. These ventures use both the intellectual property developed and the skilled workforce educated at these institutions to great success. Examples include Google, which grew out of founders Larry Page and Sergey Brin’s PhD work at Stanford University and Pfizer’s blockbuster COVID-19 vaccine, which was developed by the German university spin-off BioNTech.

Policymakers in the Gulf seek to replicate these successes at home. There have been some initiatives to establish home-grown world-class university research in the GCC, such as the King Abdullah University of Science and Technology (KAUST) in Saudi Arabia and the Doha Institute in Qatar, which concentrate on doctoral and post-doctoral education and research. However, these efforts have so far not yielded the hoped-for breakthroughs, as lackluster patent numbers, scientific citations, and global academic rankings show. As a result, there is an innovation gap in the pipeline for start-ups in highly profitable but R&D-intensive sectors like pharmaceuticals and IT.

This gap between aspirations and reality has widened because the GCC states have not focused enough on developing university research. Although the region frequently spawns higher-education initiatives, these tend to remain isolated and short-lived. What is needed instead is a long-term, well-funded, nationally coordinated strategy for research and development. Countries such as the United States, Germany, and Switzerland show that national science foundations are crucial for the success of such a strategy. Qatar appears to have learned this lesson; it has been attempting to compensate for its small size and population with a centralized research coordination strategy through the Qatar Foundation, flanked by commensurate funding and specialized National Research Institutes.

The second main hurdle is scale. Like start-ups, research ecosystems exhibit a strong tendency toward agglomeration: the more high-quality research in one location, the more top researchers it will attract, and so on. As long as the critical mass of top-level research institutions is lacking, the GCC region will remain to be seen as a backwater for world-class researchers. Saudi Arabia has advanced the furthest in correcting this perception by leveraging both its large, well-educated population and several established research universities that have steadily increased their scientific output, climbing the rankings in the process. But a world-class R&D cluster in the Gulf remains far off, especially in the absence of GCC-wide research cooperation and coordination efforts.

Lack of Holistic Policy Planning and Evaluation

The obstacles to fostering a competitive R&D ecosystem in the Gulf are part of a larger policy issue. Although the Gulf countries’ proliferatingVisions” suggest an overarching strategy, suboptimal policy planning, coordination, and evaluation often hampers implementation. Many initiatives lack the three necessary ingredients for success: thorough due diligence during planning, close monitoring throughout their active phase, and systematic follow-up after completion. As a result, individual policy projects tend to remain unconnected and follow “hype cycles” that leave a trail of abandoned, half-completed pet projects in their wake.

The most prominent examples of these are the region’s half-finished megaprojects—such as the King Abdullah Economic City in Saudi Arabia and various Hyperloop plans involving several regional states that have never come to fruition—but also targeted industrial policies, like the Metaverse and FTX debacles. The latter left a trail of hagiographic advertisements billing the company as the future of commerce for weeks after its demise. These failures tend to follow the same pattern and could often be avoided with more professional and systematic policy planning and evaluation.

Finally, to the extent that start-ups feature in government planning, these are rarely “native.” For example, Volocopter, the company behind Dubai’s planned (but as yet undelivered) drone taxis, is a German start-up. Local start-ups also face headwinds when it comes to raising capital. GCC countries’ attempts to privatize public utility “whales” have crowded out smaller IPOs from capital markets—exemplified by the dominance of Aramco in Saudi Arabia and the Dubai Electricity and Water Authority and toll road operator Salik in the UAE. Because the region’s stock markets remain dominated by these conventional heavyweights, they have so far failed to develop the depth and liquidity to serve the capital needs of small and medium enterprises (SMEs), and of innovative start-ups in particular.

The journey from petrostates to start-up nations for the GCC holds immense potential but is also fraught with challenges. While high-profile projects and global events bring visibility, the actual transformation hinges on nurturing local capacity, fostering an entrepreneurial ecosystem, and investing in research and development. The GCC countries must overcome internal competition, develop comprehensive and coordinated policies, and focus on sustainable, long-term strategies to build a robust SME sector. By learning from successful global models and tailoring strategies to their unique contexts, the Gulf states can achieve a diversified and resilient economy. The future of innovation and entrepreneurship in the GCC will ultimately depend on the policy decisions and commitments made today, steering the region towards a knowledge-based economy that can thrive beyond its reliance on fossil fuels.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Issue: Economy & Innovation
Country: GCC

Start-Ups and SMEs: Key Lessons for the GCC from Global Models

June 18, 2024

The ambition to diversify the Gulf Cooperation Council (GCC) economies away from their reliance on the fossil fuel industry is a formidable challenge. Fostering a…

Geopolitics and Challenges in Iraq’s Quest for Regional Connectivity

May 28, 2024

Last month, after Turkish President Recep Tayyip Erdogan visited Baghdad, Iraq announced that it would join the region-wide “Development Road” project, which will link the…

New Year’s Woes: Five Worrying Trends for Iranian Households

March 20, 2024

March 21 marks the turn of the Persian calendar. Iranians welcome the Persian New Year as people worldwide celebrate the start of the Gregorian calendar:…

GCC

Start-Ups and SMEs: Key Lessons for the GCC from Global Models

Commentary

The ambition to diversify the Gulf Cooperation Council (GCC) economies away from their reliance on...

GCC

Gulf States and Diplomatic Challenges Post-Gaza War: Paving the Way for Peace

Commentary

Discussions about “day after” scenarios for Gaza have dominated diplomatic circles ever since Israel launched...

GCC

Obstacles to Unleashing the Gulf’s Entrepreneurial Potential

Commentary

The Gulf Cooperation Council (GCC) countries have long striven to become less dependent on oil...

GCC

Normalization at What Cost? The Risk of Pushing Amid the Gaza War

Commentary

As Israel’s war on Gaza approaches its ninth month and its aggressive tactics have come...

GCC

Gulf States’ Interests in Mediating Ukraine Peace Initiatives

Commentary

Once again, Qatar finds itself in the international spotlight for its high-profile international mediation efforts....

GCC

The GCC’s Joint Security Vision: Reading Between the Lines

Commentary

On March 29, Jasem Mohamed Albudaiwi, the Secretary General of the Gulf Cooperation Council (GCC),...

Dr. Frederic Schneider holds a PhD in economics from the University of Zurich. He specialises in labour economics and consults on Middle Eastern economic policy, particularly post-oil economic transition in the GCC. He has held posts at Yale University, the University of California at Berkeley, and the University of Cambridge. His academic research has been cited over 800 times and published in world-leading journals such as the Proceedings of the National Academy of Sciences, the American Economic Journal, the Economic Journal, and the Journal of the European Economic Association. His policy analysis has appeared in news outlets like the Washington Post, Al-Monitor, Orient XII, and The National, and with institutions such as the Arab Gulf States Institute in Washington, the Washington Institute for Near East Policy, the Anwar Gargash Diplomatic Academy, and the London School of Economics’ Middle East Centre.


GCC

Start-Ups and SMEs: Key Lessons for the GCC from Global Models

Commentary

The ambition to diversify the Gulf Cooperation Council (GCC) economies away from their reliance on...

GCC

Gulf States and Diplomatic Challenges Post-Gaza War: Paving the Way for Peace

Commentary

Discussions about “day after” scenarios for Gaza have dominated diplomatic circles ever since Israel launched...

GCC

Obstacles to Unleashing the Gulf’s Entrepreneurial Potential

Commentary

The Gulf Cooperation Council (GCC) countries have long striven to become less dependent on oil...

GCC

Normalization at What Cost? The Risk of Pushing Amid the Gaza War

Commentary

As Israel’s war on Gaza approaches its ninth month and its aggressive tactics have come...

GCC

Gulf States’ Interests in Mediating Ukraine Peace Initiatives

Commentary

Once again, Qatar finds itself in the international spotlight for its high-profile international mediation efforts....

GCC

The GCC’s Joint Security Vision: Reading Between the Lines

Commentary

On March 29, Jasem Mohamed Albudaiwi, the Secretary General of the Gulf Cooperation Council (GCC),...

Subscribe to Receive Latest Updates from GIF.