BoozCo Stimulating Innovation Digital Advantage MENA

8/2/2019 BoozCo Stimulating Innovation Digital Advantage MENA

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Perspective

Stimulating InnovationBuilding the DigitalAdvantage forMENA Countries

Bahjat El-Darwiche

Ramez Shehadi

Louay Abou Chanab

Tarek El Zein


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Booz & Company

Contact Information

Beirut

Bahjat El-DarwichePartner

+961-1-985-655

[email protected]

Ramez Shehadi

Partner

+961-1-985-655

[email protected]

Louay Abou Chanab

Principal

+961-1-985-655

[email protected]

Tarek El Zein

Associate

+961-1-985-655

[email protected]
mailto:[email protected]:[email protected]


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Booz & Company

EXECUTIVESUMMARY

Countries in the Middle East and North Africa (MENA)

region have a substantial opportunity to drive economic

growth by developing a vibrant and innovative technologysector. However, these countries have not yet fully capitalize

on this opportunity. They enjoy the gains in efciency that

come from using products and services within the informatio

and communications technology (ICT) sector, yet to date the

remain consumers and net importers of technology. Over

time, economies with a robust ICT sector enjoy a substantia

competitive advantagethey become more innovative acros

all sectors of their economies, and thus better prepared to fa

the challenges of the 21st century.

To strengthen their ICT sectors and foster innovation, gov-

ernments in the MENA region must act on ve core elements

identifying key focus areas, establishing innovation-friendly

policies and regulations, making funding more widely avail-

able, 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.


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KEY HIGHLIGHTS

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 startups, creating

business-friendly policies and

regulations in such areas as

patent lings, and devoting a

larger percentage of their GDP

to R&D.

Some focus areas with strong

local potential are Arabic andIslamic services and applications,

IT services and smart devices

for the energy and utilities

sectors, e-education and

e-health systems, and devices

and systems for urban and

infrastructure management.

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 prod-

ucts 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 fueled tremendous

growth not only for the companies

within the ICT sector but for manyother industries as well (see Exhibit 1).

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 recognize

that innovation in ICT products and

services can have a multiplier effect,

driving productivity growth and

economic performance across the

country as a whole. The European

Commission notes innovation in ICT

has contributed to 40 percent of the

continents productivity gains.

This is why governments of both

developed and emerging markets have

made ICT innovation a priority on

their national agendas. Recent initia-

tives include the European Unions

Digital Agenda, Malaysias Strategic

ICT Roadmap, Germanys ICT 2020

Research for Innovation, and the U.S.s

Strategy for American Innovation.

These programs aim to establish

national ecosystems capable of pro-

moting 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 scientic

institutions and large corporations,

such as telecom operators (Orange),

hardware manufacturers (Apple),infrastructure players (Ericsson), or

service players (Google). These com-

panies identify the market potential

of ideas generated through R&D

and seek to commercialize them. 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. The

two sources are complementary, and

although in rare cases entrepreneurial

initiatives become mainstream prod-

ucts (such as Facebook), more typi-

cally, large corporations will attract

smaller initiatives that orbit around

them and tap into their ecosystem. An

example of this phenomenon is the

number of applications developed for

Apples iPhone and Googles Android

mobile platform.

CREATINGDIGITALECONOMIES


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Currently, the countries of the MENA

region have a signicant opportunity

to improve R&D and entrepreneur-

ship in the ICT sector. In 2007, the

Arab world spent an average of 0.3

percent of its total gross domestic

product (GDP) on overall R&D,

compared with 2.3 percent forcountries within the Organisation

for Economic Co-operation and

Development (OECD). In the last 13

years, the MENA region has led a

total of 3,224 patents, compared with

some 1.7 million patents for Japan

alone. In terms of entrepreneurship,

the region also lags behind global

peers. According to recent World

Bank data measuring the number of

new rms created per 1,000 people,

the ve MENA countries included in

the survey (Algeria, Jordan, Oman,Morocco, and Egypt) averaged just

0.9 startups, signicantly behind

countries such as France (3.08),

Finland (3.37), Singapore (7.4), and

the United Kingdom (8.05). As a

result, the MENA region generates

roughly 2 percent of its GDP through

ICT revenues, compared with 15

percent for truly innovative economiessuch as that of South Korea.

The lack of overall innovation can

have a signicant negative impact

on the regions long-term economic

competitiveness. Currently, the

MENA region is a net importer

of information and communica-

tions technologycompanies in the

region purchase ICT products and

services that enhance efciency, but

the national economies do not enjoy

the greater gains that come from avibrant local ICT sector.

However, there are some signs of pro

ress. Jordan, for example, has becom

a regional ICT innovation powerhous

in a relatively short time, mainly

owing to sound government policies

Among other initiatives, Jordan has

appointed a chief technology ofcer

for the country and created a freetrade zone specically for the U.S.

market. The countrys ICT sector no

includes hardware, software, consult

ing, programming, and installation;

employs more than 11,000 people an

can tap into a steady inow of more

than 6,000 IT graduates per year. Th

growth has attracted the attention of

global ICT players. Intel Capital, for

example, has invested in two ICT sta

ups in the countrya Web-communi

platform called Jeeran and ShooFeeTV

which aggregates Arab satellite TV lisings and entertainment content.

Energy Supply

Telecommunications

Transport Services

Retail

Hospital Activities

ICT Manufacturing

Tourism

Construction

Consumer Electronics

Steel and Iron

Furniture

Glass, Cement, Ceramics

Note: The methodology and metrics used to assess both innovation and ICT contribution were dened by

the e-Business W@tch study ICT and e-Business for an Innovative and Sustainable Economy.

Source: e-Business W@tch, 2010

Exhibit 1ICT Enables Innovation in All Industry Sectors

PERCENTAGE OF INNOVATION ACTIVITY ENABLED BY ICT, BY INDUSTRY (20062009)

Energy Supply

Telecommunications

Transport Services

Retail

Hospital Activities

ICT Manufacturing

Tourism

Construction

Consumer Electronics

Steel and Iron

Furniture

Glass, Cement, Ceramics

89

86

76

70

64

54

53

53

49

48

44

42

97

92

81

80

76

75

75

70

70

67

64

59

Product and Service Innovation Process Innovation


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Talent Pool

Infrastructure

Funding

Policies &Regulations

ICT KeyFocusAreas

Development TimeFastest Slowest

Although Jordan represents an ICT

success in the region thus far, like all

other countries in the region, it can

do more. To that end, national gov-

ernments in the MENA region must

take a holistic approach to addressing

ve key issues, with the long-term

goal of establishing an ICT innova-tion ecosystem (see Exhibit 2). These

ve components are interconnected,

and government is the enabler and

supporter of all ve. If implemented

holistically, these elements can lead

not only to a stronger and more inno-

vative 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 allthe sectors many clusters. Focus

and selection are thus critical. For

example, Malaysias Strategic ICT

Roadmap has identied three focus

areaswireless sensor networks,

predictive analytics, and 3-D Internet

technologiesthat could advance the

country economically and technologi-

cally over the next 10 years.

To identify the most relevant focus

areas, regional governments must

understand both where demand exists

and how they can use their strengths

to fulll it. First, factors such as

demographics and the socioeconomic

agenda can identify specic 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 buildup 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.

Simultaneously, regional governmentsmust understand where their capa-

bilities lieassessing current eco-

nomic strengths within their national

economy to determine whether they

have a sufcient manufacturing base

or other industrial entities needed to

support the ICT key focus areas.

After weighing both factors,

governments should have a nite

number of promising subsectors

for ICT innovation that can be

assessed on the basis of their overallreturn potential. Once they decide

on a specic set of key focus areas,

Source: Booz & Company

Exhibit 2

The Booz & Company Framework for an ICT Innovation Ecosystem Includes Five Core Components

Legal Environment

RegulationsICT Policies

ICT Industry Associations

Local ICT Talent

Imported ICT Talent

Basic Infrastructure

Specialized Infrastructure

Public Funding

Private Funding

National ICT Positioning


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governments must prioritize these

areas within their national innovation

policy agenda, ensuring that all

remaining components are geared

toward going after and developing the

identied opportunities.

Again, selection and focus are key.Only by identifying a small number of

promising subsectors that align with

current market demands and eco-

nomic strengths, and then applying a

relentless focus on these subsectors,

will MENA national governments be

able to compete against global ICT

powerhouses. Signicantly, this means

excluding other market opportunities

that may appear tempting but that

ultimately distract from the countrys

main ICT capabilities.

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 efcient

policies and regulations pertaining

to intellectual property and copy-

right 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 cant protect that software in

the market. Although some coun-

tries 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.

Furthermore, governments mustenhance dispute resolution laws and

enforce contracts. The current lack

of advanced bankruptcy laws in most

MENA countries leads to signicant

uncertainty regarding early-stage

nancinginvestors are understand-

ably hesitant to back young compa-

nies if they arent 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 exible

ownership laws, but nationwide), andlabor laws should become more ex-

ible. These legislative tools are critical

to driving innovation, as they estab-

lish a clear and transparent regulatory

framework and protect investors.

In devising these policies, govern-

ments should solicit the input of all

stakeholders in the innovation eco-

systempublic, private, and educa-

tionalto ensure collaboration after

the relevant laws are put in place.

Finally, governments need to deter-

mine the best way to interact with key

members of the ICT innovation com-

munity. They should work to develop

ICT business associations and trade

groups, which can spread industry

knowledge quickly and lead to a

critical core group of ICT executives

capable of collaborating to expand

the sector. These trade groups must

emphasize exports as a key target of

the local ICT innovation ecosystem.

FundingWithout funding, neither innovators

nor entrepreneurs would be able to

develop new products or commercia

ize their ideas. This is why the E.U.

Digital Agenda calls for doubling

Europes R&D investment in ICT by

2020, from 5.5 billion to 11 billion

(US$8 billion to $16 billion) for pub

spending, while promoting an equiv

lent increase in private spending, fro

35 billion to 70 billion ($51 billio

to $102 billion).

Conversely, the MENA region has

shied away from investing in innova

tion or entrepreneurship ventures to

date, mainly because of the tradition

of investing in lower-risk oppor-

tunities such as real estate or the

stock market, where exits are easier.

According to data from the Global

Entrepreneurship Monitor 2009

MENA report, nearly 80 percent of

entrepreneurs in seven MENA coun

tries are funded by family members,

and only approximately 10 percent

tap into government programs.

In that context, MENA government

must signicantly increase their R&

spending and provide nancing for

entrepreneurs in key focus areas by


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setting up national funds for innova-

tors and entrepreneurs. As an exam-

ple, Jordans King Abdullah II Fund

for Development (KAFD) has estab-

lished Oasis 500, an ICT seed capital

fund for innovative new startups. By

2015, the fund will provide initial

capital of $15,000 to $70,000 each to500 startups focused on media, online

content, and applications. Another

example is the Qatar Foundations

effort to provide funds worth 2.8

percent of its GDP to nance four

distinct areas, one of which is ICT

research in the elds of digital society,

Arabic Internet content, bioinformat-

ics, and computational science.

However, such government funds

are not enoughthey should be

complemented by broader and moreefcient funding on the part of the

private sector. The regions network of

venture capital (VC) rms and angel

investors is less mature than networks

elsewhere. This network could be fur-

ther developed by clarifying the terms

for how venture and angel investments

are structured, including cross-border

investment laws and bankruptcy

laws. VCs and angel investors are a

critical component of any innovation

ecosystem because they provide entre-

preneurs access to smart capital

funding along with access to a pool of

experts who can direct the growth of

promising young companies.

A 2010 survey by the U.S. National

Venture Capital Association, includ-

ing more than 500 VCs in nine coun-

tries, identied the most important

factors for creating a favorable envi-ronment for venture capital. Among

them were an improving entrepre-

neurial environment, dened as

access to a wide range of investment

opportunities (59 percent), and a

strong R&D climate supported by the

government (49 percent). In addition,

respondents identied the factors

that created a negative environment

for venture capital: unfavorable tax

policies (56 percent) and an unstable

regulatory environment (48 percent).

All these factors can be controlledby governments, and MENA lead-

ers must make an effort to build the

elements that attract investors while

eliminating those that are deterrents.

In addition to improving the funding

climate for small companies and

entrepreneurs, MENA governments

should look to enhance innovation

nancing through large ICT

companies. Corporations such

as Orange, Deutsche Telekom,

and Telefnica all have internal

innovation programs, 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 programs. However, in the

MENA region, no similar innovation

programs 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

publicprivate partnerships that can

accomplish the same thing.

Infrastructure

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 ofce space, for example.

Beyond that, policymakers must

ensure that infrastructure is in place

for more specialized ICT needs,

It is critical that the regionstechnology parks serve to

foster a more local

ICT innovation ecosystem.


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including a robust telecom and broad-

band 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 ofdollars in order to deploy the broad-

bandnetworks that will act as the

backbone of data-hungry economies.

In several towns in the U.S., Google is

planning to set up a network capable

of reaching 1 gigabit per second, to

test how daily lives would be affected

by such high-speed access, and then

create innovative applications to meet

the new demand.

MENA governments should also

collaborate with the private sectorto develop specialized ICT clusters

such as technology parks, along with

other ICT-specic infrastructure

(R&D labs, manufacturing plants,

specialized incubators, etc.). Many

nations in the region have already set

up highly successful ICT technology

parks, such as Dubai Internet City,

Knowledge Oasis Muscat in Oman,

and Egypts Smart Village. These

parks have traditionally focused on

attracting global ICT enterprises

to set up commercial branches that

concentrate on the latter stages of

the ICT value chain, including sales,

implementation, and operations,

with limited investment in innovation

or R&D. Moving forward, it is

critical that the regions technology

parks serve to foster a more

local ICT innovation ecosystem.

Governments should require that

tenants participate in early-stage

research, with the goal of generating

marketable ideas that contribute to ahomegrown ICT sector.

Qatar Science & Technology Park

and Dubai TechnoPark are two recent

examples of parks that have taken

this stepboth now require that ten-

ants provide opportunities for local

entrepreneurs and invest in earlier

stages of the ICT value chain. In

addition, these parks are now setting

up their own incubators as well as

seed capital funds to help develop an

innovative ICT sector.

Talent Pool

Building the right talent pool is the

most crucial step for any national ICT

innovation program, and the one that

requires the longest time frame. In the

short term, MENA countriesspeci-

cally those in the GCChave little

choice but to rely on imported talent.

However, they can derive the greatest

benet from this temporary work-

force by ensuring that some knowl-

edge transfer takes place. The regions

nationals should gain critical skills

and information from expatriates,

reducing the demand for such talent

in the future.

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

Forums Global Competitiveness

Report 20102011, MENA countrie

scored poorly when it came to theavailability of scientists and enginee

Although there are some exceptions

such as Jordan, Lebanon, and Egypt

many nations in the region need to

educate and train more engineers.

Policymakers in the MENA region

must establish subsidized and

specialized education programs to

build the necessary talent pool in

their ICT key focus areas. They can

achieve this by collaborating with

universities to develop requiredcurricula, setting up specialized ICT

institutions, and developing ICT

centers of excellence. The curricula

should include entrepreneurship

courses and be closely intertwined

with either an ICT business incubato

or local ICT companies to ensure

that any new ideas can be tested and

commercialized quickly. In addition,

knowledge can be quickly spread via

e-learning portals where nationals ca

access focused curricula efciently.

One example is Qatars National

e-Learning Portal, which offers cours

for individuals in subjects including

software development, server

technologies, and website design.


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A holistic approach in which gov-

ernments address all ve innovation

ecosystem componentsidentifying

key focus areas in ICT, establishinginnovation-friendly policies and regu-

lations, improving funding, upgrading

infrastructure, and developing local

talentwill 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

CONCLUSION lead to a greater goal: a sustainablelong-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 inno-

vation 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.


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Booz & Company

About the Authors

Bahjat El-Darwiche is a

partner with Booz & Companyin Beirut. He specializes in

communications, media,

and technology and has led

engagements in the areas of

telecom-sector liberalization

and growth strategy develop-

ment, policymaking and regula-

tory management, business

development and strategic

investments, corporate and

business planning, and privati-

zation and restructuring.

Ramez Shehadi is a partner

with Booz & Company in

Beirut. He leads the informa-

tion technology practice in the

Middle East. He specializes

in e-government, e-business,

and IT-enabled transformation,

helping private corporations

and government organizations

leverage technology, achieve

operational efciencies, and

improve governance.

Louay Abou Chanab is a

principal with Booz & Companyin Beirut. He specializes in

telecom-sector policymaking,

regulatory management, sector

development, telecom whole-

sale strategies, and infrastruc-

ture business models for the

communications, media, and

technology industries.

Tarek El Zein is an associate

with Booz & Company in

Beirut. He specializes in

growth strategies, corporate

and business planning,

business development,

strategies for the digitization of

economies and innovation, and

development strategies for the

communications, media, and

technology industries.


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BoozCo Stimulating Innovation Digital Advantage MENA

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