The Middle East needs a technological revolution. Start-ups can lead the way

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Khalid Al Rumaihi, Chief Executive, Bahrain Economic Development Board

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Globally, economies with agile ecosystems that are equipped with the infrastructure to support innovation in technology are witnessing a revolution. In order for governments, large-scale multinationals and new start-ups to take advantage of this revolution, the right support systems and regulations must be in place. And the movement of data needs to be low-cost and flexible.

Nowhere is this more apparent than in the Middle East. In 2016, 33% of companies were at an advanced level of digitization, according to PwC, and this is expected to more than double to 72% by 2020. Data centres could be the Gulf’s new refineries.

But it’s not all plain sailing. The Middle East was late to the first, second and third industrial revolutions. This time, it must be ahead of the curve. There are certain common elements to strong entrepreneurial ecosystems. Some of these are within policy-makers’ control, such as reducing bureaucracy and moving government online. Others stem less directly from government action, such as social changes to foster a strong academic base and encourage greater diversity of talent and more women in the workforce. Fortunately in Bahrain, more than 70% of coders are female. But just as important as these changes are actions to create an entrepreneurial environment and provide easy access to funding for start-ups.

Our region has its challenges, including legacy issues such as difficulties in registering businesses, job protectionism, and low investment in research and development (R&D). In the Middle East, countries generally spend less than 1% of their GDP on R&D, compared to the OECD average spend of 2.5%. According to a Strategy & Middle East report, Gulf Cooperation Council (GCC) states could achieve 2.2% growth by increasing R&D spending by 1%.

There are other inhibitors of innovation, including a general lack of skills and training; closed visa policies which restrict entrepreneurship; and complex customs processes. Across the Middle East and North Africa (MENA), intra-regional trade as a percentage of total trade is traditionally much lower than other regions, at just under 10%.

On the other hand, we have a significant advantage thanks to our youthful demographic profile. The region’s median age is under 30, and strong population growth continues. There is no country in the GCC where people under 25 make up less than 30% of the population.

This makes technological revolution both relevant and urgent. Relevant because we have a young, digitally-savvy population with some of the world’s highest levels of smartphone penetration – in Bahrain and the UAE, there are up to twice as many phone subscriptions as people. Urgent because the region suffers from high youth unemployment rates – nearly 30% in many of our countries.

So how can we support start-ups and create jobs? We must reduce the pain points around e-commerce. We also need to embrace open banking, crowdfunding and cryptocurrencies, as well as focus training on digital and data skills and professions. Above all, we need to develop entrepreneurial ecosystems to go into the cloud.

Yet cloud spending in the Middle East “is among the lowest in the world when measured as a percentage of total IT spending”, according to a report by research consultancy Gartner. One of the biggest inhibitors to cooperation is data sovereignty. Governments are fearful of data moving out of their jurisdictions and across borders. Accordingly, Bahrain has just announced a law that is the first of its kind, allowing other countries to “bring their own legal jurisdiction” to Bahrain when they store data with us in the cloud.

All this creates fertile soil for generating start-ups. But how can we encourage them to thrive? Access to funding is crucial. A culture of government spending and subsidies is entrenched. Gulf countries have often deployed their capital abroad rather than at home, and often in real estate, not new technologies. But it’s investment that is needed, not subsidies. Accordingly, Bahrain has set up the $100 million Al Waha Fund of Funds, of which 45% has already been allocated. Start-ups account for 90% of enterprises in Bahrain.

There are further promising signs across the region. It is already home to innovative start-ups and businesses such as Careem and Talabat App. MENA Research Partners says it expects investment in the region’s fintech firms to rise from $150 million to $2 billion, as interest increases in digital offerings from banks and government initiatives, including accelerator programmes.

One example is Lebanon’s Circular 331, which promotes investment of $400 million in start-ups and aims to stop the Lebanese brain drain. If a bank invests in a start-up, it only loses 25% of its investment if the start-up goes bankrupt. This has spurred the creation of new VC funds and accelerators, as well as a broader ecosystem. It has even encouraged some of the talent lost to abroad to return home.

UAE start-ups attracted some $400 million of VC funding in 2017, according to the MENA Venture Report. Jordan has worked hard to make itself the Silicon Valley of the Middle East. With an impressive 25% annual growth in investment technology, its start-up culture has seen several companies develop new apps, such as Abjjad (an Arabic Facebook for bookworms) and social app Friendture.

The region wants to attract foreign direct investment (FDI) that grows new industry clusters. Consider what has happened in Nokia’s hometown, Espoo in Finland. Because of Nokia’s presence, the Espoo Innovation Garden has become the largest innovation community in the Nordic region.

In Bahrain, we are hoping that the new data centre created by Region Amazon Web Services (AWS) will be our equivalent tectonic shift. Nearly 2,500 people signed up for AWS Educate training programmes within a few months, a rate exceeding that in China and India. And there are more jobs to come. Amazon has said they estimate the cloud industry in the Middle East will need 10,000 data scientists.

Could this be a blueprint for the whole region? We hope so. As the “gateway to the Gulf”, Bahrain is committed to fostering dynamic ecosystems that give start-ups across MENA the chance to scale regionally and internationally. At the World Economic Forum for the Middle East and North Africa in April, the 100 best Arab start-ups will come together in Jordan.

It is time for our region’s countries to push harder on their path from carbon economies to knowledge economies. Start-ups are key to the journey.

For to find out more about the 100 Arab Start-ups shaping the Fourth Industrial Revolution, click here.