Creating Jobs in the Arab World through Innovation and a Culture of Venture Capital
A speech by Odeh Aburdene at a conference sponsored by Abana, August 6, 2010, Salve Regina, Newport, RI.
The Arab World contains 60% of the world’s oil and gas reserves. Its financial capital approximates $3 trillion. This sum of money represents the savings of governments and private sector individuals, families, and corporations. Since 1970, the GCC countries (Saudi Arabia, Kuwait, The U.A.E., Qatar, Bahrain and Oman) created a world-class infrastructure by spending a total of $2 trillion. These countries tripled literacy levels to 75% and added 20 years to average life expectancy. The Arab world also created sound financial institutions in countries such as Kuwait, Jordan, Lebanon, Egypt and Saudi Arabia. Many of these banks have the highest liquidity ratios in the world and have strong balance sheets. Despite the impressive economic progress and the creation of many western-style colleges and universities in the Gulf region, the Arab world suffers from high unemployment, poverty and mediocre education. According to the Economist, “By far the biggest difficulty facing the Arabs—and the main item in the catalogue of socio-economic woes submitted as evidence of looming upheaval—is demography. The population of the Arab world is expected to grow some 40% over the next two decades. That amounts to almost 150m additional people, the equivalent of two new Egypts. But Arab countries already have the lowest employment rates in the world and one of the highest rates of youth unemployment, with about one in five young people out of work. The median age in the three most populous Arab countries—Egypt, Algeria and Morocco—is 24, 26 and 26 respectively. Even before the downturn in energy prices and the world economy, the prospects of creating enough jobs for all these young workers as they enter the labour market looked remote.”
The Arab world has to import most of its food, medicine and telecommunications from the industrial countries. Looking ahead, Arab countries will have major power and water shortages, which requires billions of dollars in investments. The Arab region will not be able to create sustainable employment and wealth until it begins to combine its culture of mercantilism with a culture of entrepreneurship and risk taking in the fields of science, telecommunications, technology, medicine and alternative energy.
In 1843, the British magazine, the Economist, stressed the case for liberty and especially economic freedom. Economic freedom, much like political freedom, puts great weight on checks and balances, on limits to power and hence to abuses of power. In economics, the most potent checking force, bar none, is competition. The Arab World can achieve higher economic growth through more competition and entrepreneurship. Entrepreneurs are a breed of men and women who are not afraid of failing by assuming risk. This can only come about if you create a culture that has an appetite for innovation, risk taking and bet on people of talent and ideas. This is how Microsoft, Google and Intel came about.
The secret of American prosperity and innovation was in education. According to the former president of Harvard, Lawrence Summers, “Harvard’s greatness has always come from its ability to evolve as the world and its demands change – to educate and draw forth the energy of each successive generation in new and creative ways.” It should be noted that the acquisition of knowledge begins with knowing how to acquire it. Post-war America saw the emergence of an ethnically diverse middle class, a group that had attained its status not through blood ties but through unparalleled access to good schools and lucrative employment. Education, however, can lift productivity and wages of people, especially the poor and their children. Arab education must emphasize empirics and analytics. Its core values should be facts, logic, reason, and honesty. Moreover, Arab education must also emphasize foreign languages, science, medicine, technology, engineering, business and law.
A venture capital culture starts with a business friendly environment. Security of private property, the effectiveness of the judiciary and ability to enforce contracts are necessary. As Frederic Bastiat observed, “No society can exist unless the laws are respected to a certain degree. The safest way to make laws respected is to make them respectable.” The Arab World has to establish a commercial and legal environment that is both predictable and secure. A pre-condition for economic growth and gains in income is the establishment of bankruptcy laws. Bankruptcy laws provide for orderly distribution to business creditors through reorganization or liquidation of a troubled business entity. Bankruptcy law also gives the borrower time to develop a plan that allows the troubled business to resolve the debt issue through a division of assets among creditors.
Arab higher education must produce and maintain research scientists of the highest caliber. Wealth and economic growth will depend upon the technological and scientific advancement and entrepreneurial zeal. Therefore, scientific infrastructure in the Arab World is required. You cannot attract high technology investments if you lack a highly educated and technologically skilled population.
Nancy F. Koehn, a historian at the Harvard Business School, writes “Innovation is one of the most seductive words in the business world. It conjures up visions of bold new products and processes, entrepreneurial heroism, market leadership and big financial rewards. Small wonder, then, that the study has attracted all manner of executives, scholars, government officials, and other curious observers.”
As mentioned earlier, a culture of venture capital and innovation requires a political and economic system that is open. Openness is fundamental to progress. The market for ideas needs to be as open as possible in order to breed ingenuity for collaboration. Matt Ridley in his book, The Retired Optimist, argues that humans have achieved prosperity because “ideas begin to meet and mate”. David Freedman says that markets need to be doubly open about its errors as a positive step toward reliability. In the Arab world, failure in business is seen as shameful. However, it should only be shameful if you failed because you were dishonest or crooked, not because your business model or venture did not take off or because of market conditions or competition. The introduction of bankruptcy laws would go a long way towards diminishing the fear and shame of failure. Robert Boyle, one of the founding fathers of modern science, recognized error as part of the slow advance toward any scientific truth. You cannot have trial without error. Steven Johnson, in his book, Where Good Ideas Come From, the Natural History of Innovation, says that “some environments squelch new ideas; some environments seem to breed them effortlessly.” Johnson adds that innovation thrives “when ideas can serendipitously connect and recombine with other ideas,” and “compulsively connect and remix that most valuable of resources: information.”
The key elements for innovation are:
- You need seeds of innovation, which equate to talented people and their ideas. Human beings – with their talent and energy, creativity and insight, are a priceless resource.
- Innovations require a culture that understands and appreciates scientific inquiry and you need an economic system that rewards people for the risks they take and the value they create.
- For investors to take risk associated with innovation, they must have a fair chance at earning a return for successful work. That requires solid protection of intellectual property; a fair, rigorous and transparent system of regulation and a tax system that provides companies the ability and incentive to invest in innovation.
- You need immigration laws that allow and encourage top scientists, engineers, bankers, doctors and business people to choose to work in the Arab world and give them permanent residency and the choice of becoming nationals. One reason for American exceptionalism lies in the U.S. openness to immigrants of ambition, talent and useful knowledge. The Arab world has to create a community of science. The best teachers come to the Arab world for two or four weeks and do not live and teach for a long time. To attract people of talent and scientific knowledge, you also need to have a social and a living environment that is pleasant and not restrictive, such as in Lebanon, Dubai and Qatar.1
- David Bolchover in his book “Paycheck,” writes: “You need people, men and women, who aspire to achieve wealth through inventiveness and conscientiousness and not through commissions, greed or special privileges.”
- Women in the Arab world should be given the opportunity and the mobility to compete with men in the fields of science, engineering, biopharmaceuticals, medicine, business and law. This can only happen through education that emphasizes math and science.
- Accountability is a national concept in the West and it’s a necessary requirement for economic success. Therefore, the concept of accountability must be embedded in Arab work and business ethics.
The big challenge facing the Arab sovereign wealth funds and private corporations and families is whether they are going to invest their pools of capital, like pension funds, or allocate 20% of their funds to innovation and new opportunities and act more like venture capitalists. Unless Arab finance and investment institutions are willing to make lots of bets, and not just one or two large ones, on innovation, they will miss the “disruptive innovation” that has produced and will produce new products, new customers and markets. This is a world of change, innovation and adaptability.
Despite the sizeable savings of the GCC countries and the private wealth of Arab families and financial institutions, small amount of capital relative to their savings has gone into venture capital and private equity investments. The largest private equity firm in the Middle-East is Abraaj Capital which was founded in 2002. It has raised over $7 billion and invested in 35 deals and exited 11. Within the GCC countries, over 90% of all private businesses are controlled by family firms which number over 5,000. Their combined assets total $500 billion. Through private equity investments from the West, these family businesses can meet their capital restructuring, market repositioning, and management optimization. There are opportunities for private equity firms in the U.S., Europe and Asia to invest in these family. In order to invest in these businesses, Western investors must identify reliable businesses with sound financials and credible names. To entice Arab entrepreneurs to work with investors from outside the Arab world, it is imperative that Western investors must have a recognized name, who are in the forefront of technological innovation and who are prepared to commit capital, talent and management to such ventures. These investors must have a long view because you cannot build a lasting relationship if you are in a hurry and you are not committed. The potential for such joint ventures is immense. This is an approach that will entice Arab capital into venture capital and private equity investments.
In conclusion, it’s clear that to create job growth and prosperity, the Arab world has to start committing capital to people of talent and ideas. In order to bring new products, the Arab region has to combine “invention with innovation,” and adopt a spirit of innovation and entrepreneurship. The Arab world will not create jobs, betterment, prosperity, and personal happiness to the 350,000,000 Arabs today and who will be over 500,000,000 by the year 2030 unless they create a culture of innovation and entrepreneurship that fosters evolution of cultural values by promoting persuasion through appealing to reason. Without an innovative environment, the Arab world would remain stagnant economically and technologically. At present, only the Emirate of Abu Dhabi, has taken initial steps to create an innovative environment and let’s hope that others in the Arab world follow.
1.The first four elements of innovation are taken from an article by John Lechleiter, Chairman of Eli Lilly in the Wall Street Journal.
Published: Thursday, November 18, 2010