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Executive Insight – Booz & Co

Investing in the digital age

by Bahjat el-Darwiche

Developing a vibrant and innovative information and communication technology (ICT) sector would provide the Middle East and North Africa (MENA) region with a propitious opportunity to increase productivity and boost its national economies. However, the region’s innovation sector does not yet offer sufficient support to unlock entrepreneurs’ ideas and investors’ capital. It will take a concerted, collaborative effort from governments and the private sector to stimulate digital innovation and ensure that it is engrained in MENA countries’ future growth.

Why is ICT innovation important to the MENA region? Around the world, the ICT sector has transformed societies and economies over the past decade via a steady stream of innovative new products and technologies. These innovations have changed the way we interact with each other. They have helped entire sectors — such as transportation and utilities — to operate more efficiently and at lower costs. ICT has also spurred widespread modernization across national economies. The impact ICT has had in a relatively short period has been remarkable; the European Union, for example, credits the ICT’s multiplier effect with contributing 40 percent to Europe’s productivity gains over the last 10 years. 

Governments — both in developed and emerging markets — have recognized the potential of ICT and prioritized ICT innovation on their national agendas. Recent examples include the European Union’s Digital Agenda, Malaysia’s ICT Strategic Roadmap, Germany’s ICT 2020 Research for Innovation and the United States’ Strategy for American Innovation. These programs all strive to establish national environments conducive to the promotion of ICT innovation at all levels, through a comprehensive and well-coordinated agenda of government policies.

Poor performance

To date, the MENA region as a whole has shied away from promoting innovation. In 2007, the Arab world spent an average of 0.3 percent of its total gross domestic product (GDP) on overall research and development(R&D), compared to an average of 2.3 percent by countries within the Organization for Economic Cooperation and Development (OECD). In the last 13 years the MENA region filed a total of 3,224 patents, compared to some 1.7 million patents for Japan alone.

In terms of entrepreneurship, the MENA region also lags behind its global peers. According to recent World Bank data that measures the number of new firms created per 1,000 people, the five MENA countries included in the survey (Algeria, Jordan, Oman, Morocco and Egypt) averaged just 0.9startups. That figure trails by a significant margin countries such as France (3.08), Finland (3.37), Singapore (7.4) and the United Kingdom (8.05).

Software piracy has also had a deleterious effect on innovation in the MENA region; in 2009, software piracy accounted for more than $1.4 billion in losses, further reducing the attractiveness of the ICT sector for entrepreneurs. As a result, ICT generates approximately 2 percent of GDP in the MENA region. That number is far higher in truly innovative countries.  In Korea, for example, ICT accounts for around 8 percent of GDP.

If the MENA region were to address these issues, it would have an opportunity to become a significant global contributor to ICT innovation. Jordan, for example, has emerged over a relatively short period of time as a regional powerhouse in ICT innovation, mainly because of sound government policies and strong partnerships between the public and private sectors.

The country’s ICT sector now includes hardware, software, consulting, programming and installation, employs more than 11,000 people and can tap into a steady flow of more than 6,000 information technology graduates per year. Jordan’s King Abdullah II Fund for Development (KAFD) has established Oasis 500, an ICT seed capital fund for innovative startups.

This growth has attracted the attention of major international ICT companies. Intel Capital has invested in two Jordan-based ICT startups — Jeeran, a web-community platform, and ShooFee TV, which aggregates Arab satellite television listings and entertainment content.

To build an innovation environment geared to support the development of a local ICT sector, governments must play a leading role. They have an array of options at their disposal to help stimulate digital innovation, including the implementation of policies and regulations to support and protect entrepreneurs, the creation of and support for funding incentives, the development of an advanced, competitive and high-speed ICT infrastructure and finally, the promotion and development of young talent.

Working together

Governments, however, cannot alone provide the solution to creating a digitally innovative society. The private sector has a pivotal role to play, especially with regards to providing capital to entrepreneurs. To date, the MENA region has largely shied away from investing in innovation or entrepreneurship ventures in favor of lower-risk opportunities such as real estate or the stock market, where exit strategies are easier.

Without funding, neither innovators nor entrepreneurs in ICT can develop new products or commercialize their ideas. According to the Global Entrepreneurship Monitor 2009 MENA report, family members provided the funding for nearly 80 percent of all projects launched by entrepreneurs in seven MENA countries.

That same study revealed that approximately only 10 percent of entrepreneurs tapped into government programs for their funding. While government-subsidized programs are picking up across the MENA region, these funds are not enough to foster a globally competitive platform for innovation.

The private sector needs to step in and bridge the gap and provide funding to entrepreneurs. This will require accelerating the development of the region’s network of venture capital (VC) firms and angel investors. VC firms and angel investors are a critical component of any innovative economy because they provide entrepreneurs with access to “smart capital” — funding along with access to a pool of experts who can direct the growth of promising young companies. The VCs that set up shop early on will gain access to the most attractive investments at the lowest prices. An example of a successful investment is Jordan’s Maktoob, which was acquired by Yahoo in 2009 for an unofficial amount of $85 million.

The worldwide growth of ICT — and its impact on economies and societies — is showing little sign of slowing down. In recent months, the multi-billion-dollar valuations of ICT firms such as Facebook, Skype and Groupon send a strong signal that this sector will continue to generate value, even in the face of a potential bubble. Developing markets, such as China, Russia and Latin American countries, have also witnessed similar growth and high valuations for ICT companies, indicating that the industry is not constrained by geography.

We forecast that the MENA region’s ICT market will grow to reach approximately $120 billion within just four years; a sharp gain from its$90 billion level today. That 33 percent surge in business by 2015 presents entrepreneurs and investors with a significant opportunity.

The path to ICT innovation in the MENA region might take some time and it will  be smoother in some countries than in others — especially when it comes to finding the right balance between government and private sector involvement.

However, governments and the private sector can work together to clear major hurdles like funding, infrastructure, policy and talent development. That in turn would allow the MENA region to realize its potential as an incubator for digital innovation for years to come.

BAHJAT EL-DARWICHE and RAMEZ SHEHADI are partners at Booz & Company

 

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Bahjat el-Darwiche

Partner with Strategy&
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