Stimulating innovation: Building the digital advantage for MENA countries
Rushika Bhatia
Industry Watch

Stimulating innovation: Building the digital advantage for MENA countries

Countries in the Middle East and North Africa (MENA) region have a substantial opportunity to drive economic growth by developing a vibrant and innovative technology sector. However, these countries have not yet fully capitalised on this opportunity.

They enjoy the gains in efficiency that come from using products and services within the information and communications technology (ICT) sector, yet to date they remain consumers and net importers of technology. Over time, economies with a robust ICT sector enjoy a substantial competitive advantage – they become more innovative across all sectors of their economies, and thus better prepared to face the challenges of the 21st century.

To strengthen their ICT sectors and foster innovation, gov­ernments in the MENA region must act on five core elements: identifying key focus areas, establishing innovation-friendly policies and regulations, making funding more widely avail­able, improving ICT infrastructure, and developing the local talent pool. These elements are interconnected and will require a holistic approach, implemented in conjunction with private-sector ICT players. The end result will be a stronger innovation environment, not only for the ICT sector but for the national economy.

Around the world, the information and communications technology (ICT) sector has transformed societies and economies over the past decade, via a steady stream of innovative new prod­ucts and technologies. Product cycles in the sector are now so short that ICT companies must innovate simply to compete, and the intense pace of this innovation has fuelled tremendous growth not only for the companies within the ICT sector but for many other industries as well.

However, according toBooz & Company, new information technologies have changed the way we interact, added intelligence to core infrastructures such as transportation and utilities, and spurred widespread innovation across national economies. As a result, governments now recognise that innovation in ICT products and services can have a multiplier effect, driving productivity growth and economic performance across the country as a whole.

This is why governments of both developed and emerging markets have made ICT innovation a priority on their national agendas. Recent initia­tives include the European Union’s Digital Agenda, Malaysia’s Strategic ICT Roadmap, Germany’s ICT 2020 – Research for Innovation, and the U.S.’s Strategy for American Innovation. These programmes aim to establish national ecosystems capable of pro­moting ICT innovation at all levels, through a holistic and well-coordinated agenda of government policies.

To understand how best to foster ICT innovation in the Middle East and North Africa (MENA) region, it is important to understand the roots of such innovation. One primary source of innovation is the research and development function of scientific institutions and large corporations. The second source of ICT innovation is entrepreneurs who develop new business models or products from the ground up, relying on the Internet, application stores, the telecom sector, or IT devices to reach markets.

“Innovation within the ICT sector can lead to innovation in other sectors of a national economy and thus make it more competitive. Countries of the MENA region have an opportunity to develop a strong innovation culture for their ICT sectors by fostering technology start-ups, creating business-friendly policies and regulations in such areas as patent filings, and devoting a larger percentage of their GDP to R&D,” said Bahjat El-Darwiche, Partner, Booz & Company.

The lack of overall innovation can have a significant negative impact on the region’s long-term economic competitiveness. Currently, the MENA region is a net importer of information and communica­tions technology – companies in the region purchase ICT products and services that enhance efficiency, but the national economies do not enjoy the greater gains that come from a vibrant local ICT sector. To that end, national gov­ernments in the MENA region must take a holistic approach to addressing five key issues, with the long-term goal of establishing an ICT innova­tion ecosystem.

These five components are interconnected, and government is the enabler and supporter of all five. If implemented holistically, these elements can lead not only to a stronger and more inno­vative local ICT sector, but also to a more innovative regional economy across all sectors.

ICT key focus areas
ICT is a broad and growing sector, and no country can excel in all the sector’s many clusters. Focus and selection are thus critical. To identify the most relevant focus areas, regional governments must understand both where demand exists and how they can use their strengths to fulfil it. First, factors such as demographics and the socioeconomic agenda can identify specific market demands within each country.

“For the MENA region, key focus areas with strong local potential include Arabic and Islamic services and applications, IT services and smart devices for the energy and utilities sectors, e-education and e-health systems that support the massive build-up of related sectors in the Gulf Cooperation Council (GCC), and devices and systems for urban and infrastructure management to complement the development of several multibillion-dollar economic cities,” added El-Darwiche,

Simultaneously, regional governments must understand where their capa­bilities lie – assessing current eco­nomic strengths within their national economy to determine whether they have a sufficient manufacturing base or other industrial entities needed to support the ICT key focus areas.

Policies and regulations
Even though governments in the region have taken dramatic steps recently to establish business-friendly policies and reduce startup costs for companies, there is still more work to be done in developing efficient policies and regulations pertaining to intellectual property and copy­right protection.

“These regulations are a factor in virtually all industries throughout the region, but they are especially critical in ICT, in which ideas drive success. Companies will reap little reward for developing an innovative new software suite if they can’t protect that software in the market. Although some coun­tries have intellectual property and copyright laws in place, they are not consistently enforced. As a result, the MENA region experienced losses of more than $1.4 billion in 2009 due to IT software piracy, according to the Business Software Alliance,” stated Ramez Shehadi, Partner, Booz & Company.

Furthermore, governments must enhance dispute resolution laws and enforce contracts. The current lack of advanced bankruptcy laws in most MENA countries leads to significant uncertainty regarding early-stage financing – investors are understand­ably hesitant to back young compa­nies if they aren’t protected in some way should the company fail. Finally, foreign business ownership laws must be relaxed (not only within business parks, which often have more flexible ownership laws, but nationwide), and labour laws should become more flex­ible.

“In devising these policies, govern­ments should solicit the input of all stakeholders in the innovation eco­system – public, private, and educa­tional – to ensure collaboration after the relevant laws is put in place. Finally, governments need to deter­mine the best way to interact with key members of the ICT innovation com­munity. They should work to develop ICT business associations and trade groups, which must emphasise exports as a key target of the local ICT innovation ecosystem,” Shehadi added.

Without funding, neither innovators nor entrepreneurs would be able to develop new products or commercial­ise their ideas. This is why the E.U.’s Digital Agenda calls for doubling Europe’s R&D investment in ICT by 2020, from USD 8 billion to USD 16 billion for public spending, while promoting an equiva­lent increase in private spending, from USD 51 billion to USD 102 billion.

MENA governments must significantly increase their R&D spending and provide financing for entrepreneurs in key focus areas by setting up national funds for innova­tors and entrepreneurs. However, such government funds are not enough – they should be complemented by broader and more efficient funding on the part of the private sector.

“The region’s network of venture capital (VC) firms and angel investors is less mature than networks elsewhere. This network could be fur­ther developed by clarifying the terms for how venture and angel investments are structured, including cross-border investment laws and bankruptcy laws,” Louay Abou Chanab, Principal, Booz & Company commented.

Besides improving the funding climate for small companies and entrepreneurs, MENA governments should look to enhance innovation financing through large ICT companies. Corporations such as Orange, Deutsche Telekom, and Telefónica all have internal innovation programmes, along with funds to invest in external startups and thus boost their own services. In markets such as Europe and the U.S., governments provide such companies with incentives and subsidies to run these programmes.

“However, in the MENA region, no similar innovation programmes exist for large ICT players, a gap that limits entrepreneurs’ access to markets and networks. In parts of the MENA region, particularly in the GCC, taxes are negligible and tax cuts are therefore not available as an incentive. In that context, governments must be more creative in devising ways to drive innovation in these companies, or launch public–private partnerships that can accomplish the same thing,” said Abou Chanab.

Governments should make sure that modern infrastructure is available to support innovation in the key focus areas. At a minimum, this includes the basic elements required to ensure competitiveness in any business sector: reliable and affordable energy and utilities; an extensive, high-quality transportation network; and affordable office space.

“Beyond that, policymakers must ensure that infrastructure is in place for more specialised ICT needs, including a robust telecom and broad­band network. If next-generation ICT applications are to thrive and support economies, they must run on next-generation broadband networks that enable ultrafast connections at affordable prices. Governments worldwide have invested billions of dollars in order to deploy the broad­band networks that will act as the backbone of data-hungry economies,” explained El-Darwiche.

Talent pool
Building the right talent pool is the most crucial step for any national ICT innovation programme, and the one that requires the longest time frame. In the short term, MENA countries – specifi­cally those in the GCC – have little choice but to rely on imported talent. However, they can derive the greatest benefit from this temporary work­force by ensuring that some knowl­edge transfer takes place.

Shehadi remarked, “In the long term, nations must guarantee a consistent supply of local talent if they are to build a sustainable, long-term comparative advantage. In the World Economic Forum’s Global Competitiveness Report 2010–2011, MENA countries scored poorly when it came to the availability of scientists and engineers. Although there are some exceptions, such as Jordan, Lebanon, and Egypt, many nations in the region need to educate and train more engineers.”

A holistic approach in which gov­ernments address all five innovation ecosystem components – identifying key focus areas in ICT, establishing innovation-friendly policies and regu­lations, improving funding, upgrading infrastructure, and developing local talent – will help countries develop a dynamic innovation environment. As a result, MENA countries will be better equipped to generate a steady stream of innovative ICT products and services. More important, over time this innovation environment will lead to a greater goal – a sustainable long-term economic advantage over other countries.

“Policymakers have a range of tools at their disposal with which they can achieve these goals, including social networking, which can draw together the disparate elements of the ICT inno­vation community. For some MENA nations, the path to ICT innovation will be faster and smoother than for others. However, the end result will justify the journey,” concluded Abou Chanab.

More Communications & Technology thought leadership is available on the Booz & Company Middle East website.