Enabling innovation in the UAE

For the UAE government, innovation is indispensable to keep pace with technological advancements and to address the most pressing societal and economic challenges. Over the past few years the government has launched and supported various strategies, initiatives and programmes to promote and encourage an innovation ecosystem, but barriers still remain for startups looking to disrupt the market.

Some of these initiatives include the UAE National Innovation Strategy, Strategy for Fourth Industrial Revolution and Strategy for Artificial Intelligence, which aim to drive and foster innovation in all fields. The government has also introduced a new fund to boost research and development (R&D), long-term visas schemes, a drive to develop the eco-tourism sector and most recently, the launch of The 50 Year Innovation Challenge.

The UAE currently leads the Arab countries in the Global Innovation Index, ranking in 36th place, rising from 47th place in 2015. The country is aiming to rank among the top 10 countries over the coming years as it pushes ahead with plans to boost the nation’s private sector.

“Breakthrough technological transformations of the industrial and economic structure are very much the need of the hour, and we are confident that the developments in the areas of innovation and technology can change the nature of our future professions, industry, cities and the way humans live,” said Sultan Bin Saeed Al Mansoor, minister of economy of the UAE while speaking at the Technology Innovation Pioneers (TIP) summit, in Abu Dhabi last week.

Al Mansoori confirmed the UAE’s commitment to supporting small and mediums enterprises (SME), as the country acknowledges the role of the private sector in advancing its economy to a knowledge-based one driven by innovation.

“We believe that the UAE is making great strides in establishing innovation, science and technology as the main drivers of its industrial and economic transformation, with a strong focus on building capacity and capabilities in new sectors such as biotechnology, food technology systems, material science, aerospace, healthcare and water solutions technologies,” Al Mansoori said.

Building such capacity however, requires investment and while access to finance has increased over the past few years, research and development is still underfunded (R&D expenditure stood at just 0.94 per cent of gross domestic product in 2017 according to the Federal Competitiveness and Statistics Authority) and deep tech startups struggle to raise the kinds of cheques that service-based startups are managing.

“Venture capital [VC] and seed capital have reached an all-time high in 2019, and are set to reach $300 billion in 2023,” according to Pamela Attebery, head of innovation, Middle East North Africa and Turkey at HSBC. “We work to enable entrepreneurs to grow and scale across markets. Ninety-four per cent of registered companies in the UAE are small businesses, and it is our responsibility to upscale the communities we live and work in, supporting innovators and creating leaders for tomorrow.”

Startups though continue to experience difficulties in opening a bank account in the UAE, largely due to the various risk policies adopted by banks, a whitepaper published by the Dubai Chamber of Commerce and Industry called on the government entities to play a leading role in reducing the risks incurred by banks in financing early-stage startups.

According to Ibrahim Ajami, head of Mubadala Ventures, it is important investors have a local team to support and interact with founders, a global platform with access to businesses all over the world, and a partnership for a lifecycle investment. “We aim to invest much earlier in the life cycle, because we want to be working with visionary founders from the beginning of their journey,” he said.

Ajami sees the potential for innovation is unprecedented, “if you add up all the value of fintech companies in the world, they would not add up to the value of one of the largest five banks in the US. The opportunity for innovation to transform financial services is massive, imagine the opportunity for transportation, education and healthcare service over the next 10 years”.

He clarified that startups and founders go through many ups and downs, and it is the community that helps them through collaboration, saying “in order to succeed, VCs cannot live in the present, they have to take a long term perspective and make a bold decision”.

Although the UAE continuously works to improve public policy frameworks and regulations to boost the creativity and innovation of the private sector, the difficulties entrepreneurs face stem from the complexity of the requirements, the application process and the high setup costs of licence issuance, office space and visa fees to hire staff, which all may lead to deferring young innovative entrepreneurs. Moreover the introduction of the five-year residency visa scheme offered to new entrepreneurs nominated by HUB71 in Abu Dhabi and Dubai Future Foundation’s Area2071 leaves already existing entrepreneurs in the UAE out of the equation.

The Chamber of Commerce’s whitepaper also lists high hurdle rates to qualify for equity capital, and lower risk appetite of debt lenders as key challenges for startups in the UAE. The paper also called for closer cooperation in the ecosystem to support the growth of startups in the UAE. It added that interest in startups as an asset class is still relatively new, and a lack of reliable market data adds complexity, cost and uncertainty when it comes to due diligence.

Yet despite these hurdles, the UAE remains the best positioned in the Middle East to embrace and enable innovation. Dubai in particular remains the preferred location for entrepreneurs in the region and the number of startups is multiplying fast, which in turn would help drive the UAE forward in its mission to be a technological leader.