From importer to innovator

The Gulf is altering its profile as a seller of oil and gas and an importer of everything else by diversifying in the hydrocarbons field and developing other products and services for export.

The Gulf has earnt a reputation for being heavily reliant on imports of goods, services and skills. Everything from machinery to manpower has been brought into the country, with oil being one of the few commodities heading in the opposite direction.

While extensive reserves of crude oil and natural gas mean states can easily carry on depending on imports, signs are gradually emerging of an increase in global bilateral trade. A UAE company supplying oil rigs as far afield as Venezuela and a Saudi Arabian firm providing specialist housing in Papua New Guinea are among examples of enterprises from the region leading the way by exporting innovative business services. But such cases are still relatively few and far between.

A greater focus on research and development in the public and private sectors to increase the export of services and goods is seen as vital to building the knowledge-based economy the region is striving to develop. "Innovation can be an engine to achieve economic growth and address social issues," says Chadi Moujaes, a principal at the management consultancy Booz and Company in Abu Dhabi. "But it requires passion and need, and the need is not necessarily urgent when one has large reserves of natural resources."

Another big barrier to raising the level of innovation here is the region's strong reliance on cheap foreign goods and labour. "Many products are not designed in the Middle East, hence technological innovation is less evident," says Dr Anil Khurana, a director at PRTM Management Consultants in the UAE. Investment in product engineering and service development needs to increase to world standards for business model innovation to take off, he says.

Equally, if the region is to improve the skill levels of its nationals, it will have to speed up the shift in its economic focus from sectors heavily reliant on foreign labour such as construction into more high-tech industries. Opportunities for innovation are also being stifled in the private sector, management consultants say. With family businesses, particularly in retail, often acting as sales outlets for international brands, there is less capacity for the creation of innovative business concepts unique to the region.

Unsurprisingly, it is in the oil and gas industry that the region is demonstrating the most progress in exporting innovative business services. The Abu Dhabi National Energy Company (Taqa) has established a global energy footprint, spanning oil and gas tracts in Canada and the northern North Sea to gas storage facilities in the Netherlands and power plants in Morocco and Ghana. The company said in March it would spend US$1.4 billion (Dh5.14bn) on new drilling and expansion of existing plants. The UAE oil services companies Maritime Industrial Services (MIS) and Global Petro Tech have established themselves as major players in the oil sector, with MIS delivering to Venezuela last year the first jack-up oil drilling rig built in the UAE.

Perhaps among the best hopes for the region for creating business models that could be replicated globally are the research and development centres springing up. King Abdullah University of Science and Technology in Saudi Arabia and Qatar Science and Technology Park in Doha are both intended to become incubators for research and development. Attracting the most global attention has been the Masdar Institute of Science and Technology, the research arm of Abu Dhabi's Masdar Initiative, which plans to build the world's first carbon-neutral city.

"Masdar is promising," says Dr Khurana. "One of Masdar's intentions is to bring in technologies from outside the region, develop them further in a lab and export them." While such investment is intended to help carve a niche for the region in industries in which it has little background, the Gulf may be better off concentrating on sectors in which it already has a foothold. One such sector is Islamic finance, which is expected to grow to $1 trillion by 2012 from $420bn last year, the management consultancy Oliver Wyman estimates. Yet despite a number of Gulf banks operating in Islamic finance, Malaysia is widely considered the global leader in the industry.

"It makes no sense that Malaysia should be leading the way in Islamic finance as this region has sufficient capital to be a centre of the industry," says John Sfakianakis, the chief economist at Banque Saudi Fransi. Central Asian economies with Muslim populations are seen as the next growth markets for the sector, which still accounts for only about 1 per cent of global financing. The management consultancy McKinsey and Company has urged Islamic banks in the Gulf to explore international growth opportunities either through niche banking in target countries or joint ventures with existing market players.

While most of the investment in innovation initiatives in the region until now has been driven by government-owned enterprises, the private sector has been urged to start demonstrating more creative thinking. One example of a Gulf private-sector enterprise that is outside the oil and gas sector and has established itself as a global leader in its field is the Saudi company Red Sea Housing, which this month won a $127.9 million contract to build specialist worker housing in Papua New Guinea.

"The private sector needs to take a more active role and move from a rent-seeking mentality towards a model based on real economic value-add," Mr Moujaes says. "An important question to be asked is: how can the region monetise its investments in innovation to ensure lasting returns and localisation of know-how?" [e-mail]