The themes of technological innovation, entrepreneurship, and organizing

Natural Resource Dependency and Innovation in the GCC Countries

Thomas Andersson

Jonkoping University, Sweden & The Research Council, Sultanate of Oman

ABSTRACT

Whether the current strong performance displayed by the Gulf Cooperation Council (GCC) countries proves sustainable for the long term will cast new light on the extent to which natural resource abun­dance can be turned into a “blessing”, rather than a “curse”, and then the requirements for that. This chapter synthesizes new evidence on the conditions for innovation in these economies, including through examination of innovative performances atfirm level, collected through the first Community Innovation Survey (CIS) carried out in the GCC countries. Whereas strengths are recorded in some respects, e. g., Information and Communication Technology (ICT), education and some conditions for start-up activity, challenges remain in others, including with regard to governance. The chapter ends with recommen­dations what further action is required to enable better conditions for innovation both in the natural resource sector itself, and broadly in the economy.

INTRODUCTION

Explaining the determinants of cross-country variation in economic growth has proven a severe challenge for economists. The availability of capital, land or labour contribute s only marginally

DOI: 10.4018/978-1-61350-165-8.ch016 to the productivity performance of a particular country relative to others. Although there has been somewhat more convincing outcomes of the analysis of education and human capital, the unexplained residual in studies of productivity growth has continued to account for the bulk of cross-country variation. This residual, or so-called

total factor productivity growth (TFP)1, has been interpreted as associated with “technical progress” (Solow, 1957).

Economists traditionally viewed natural resources as an essential building bloc for devel­opment. Once systematic empirical work was undertaken, however, most evidence pointed to a significant negative impact. A good deal of re­search has subsequently been devoted to further substantiating whether such a “curse”, as opposed to a “blessing”, actually exists, and what then might explain it, worsen it, or make it go away. The conditions that may create such a negative relationship will be further reviewed below.

Gradually, however, the performance of sev­eral so-called Natural Resource-Rich Economies (NRE), has led to questioning whether it is actually correct to speak of a curse for growth. At least, it has been demonstrated that no universal negative relationship exists. The starkest examples of ex­ceptions are now to be found within the category of the oil & gas producers, notably among the GCC countries2. This is because this country grouping, despite exceptional dependence on their natural resource base, has displayed very high economic growth over the last couple of decades. Over a relative short time span, they have all moved be­yond the middle-income economy status. A few of them now rank among the richest and most stable economies in the world.

On the whole, these countries have advanced from a state of hardly populated “Middle Age desert land” into an era marked by modern infra­structure and institutions, notably in urban areas but also, in several cases, with wealth diffused to the countryside as well. The GCC region now stands out as the world’s second most important source of excess savings and capital exports, af­ter East Asia. Although there are also significant downsides to their development, and yet outstand­ing challenges, the performances displayed must be viewed as nothing short of spectacular.

This development would clearly not have been possible, had it not been for their oil & gas richness. This is despite the fact that the prime initial outlier in terms of economic expansion in the region, the Emirate of Dubai, is basically lacking a natural resource base. More recently, on the other hand, Dubai has been saved from the outlook of economic collapse, brought about by the radically altered conditions for real estate investment, by the helping hand of the oil-rich Emirate of Abu Dhabi, which also represents the capital of the United Arab Emirates (UAE).

The question remains, however, whether the economic surge of the GCC countries is sustain­able, and what wider implications their record will have for our understanding of the role played by natural resources in economic growth. The an­swer to such questions will much depend on their ability to create conditions that are conducive to innovation in a genuine sense, beyond reliance on already established winners and brand names, both as a basis for furthering their performance in and around the incumbent (natural resource related) industry, and for the rise of new high-value added goods and services.

According to mainstream perspectives, innova­tion is the more or less linear output of expenditures on Research and Development (R&D). With the recent exception of Qatar, the GCC countries are known to have invested only scanty resources in R&D thus far. It cannot be taken for granted, how­ever, that R&D is the main source of innovation, neither in these countries nor elsewhere. On the contrary, there is by now plenty of evidence that innovation does not emanate from investments or actions undertaken by individuals or firms in isolation, but that, linkages between different kinds of often complementary actors and competencies are greatly important.3 So far, the lack of data has prevented any systematic examination of the situation in the GCC countries when it comes to innovative performance beyond R&D.

In this chapter, after having reviewed more general aspects ofthe link between natural resource abundance and economic performance, we take stock of relevant conditions and policies related to innovation in the GCC countries. While start­ing out with the available aggregate statistics, we extend by drawing upon a unique set of micro data reporting innovative behaviour and practices at firm level. This data, which has become available through the first Community Innovation Survey (CIS) carried out in the GCC countries, covers a representative sample of enterprises inAbu Dhabi.

On this basis, we attempt to broadly character­ize the state and nature of innovation in the GCC countries today, and how their performances relate to natural resource abundance. We take note of outstanding issues, and what may be crucial for these countries to go the whole way in overcom­ing the looming risk of ending up with a natural resource curse after all. In this, we argue the GCC countries need to take further action both so as to generate innovation which can increase their returns from the hydrocarbon sector itself, and as a source of diversification and renewal of the wider economy.

A CURSE OR A BLESSING?

Whereas traditional development theory viewed natural capital as a cornerstone for development (Nurkse, 1953; Rostow, 1960), a number of stud­ies later concluded that natural resource wealth serves as a drag rather than a facilitator (Auty, 1990; Sachs & Warner, 1995; Gylfason, 2001; Jones, 2002). The notion of the so-called “Dutch disease” was placed at the centre of the stage from the outset. As natural resource abundance boosts foreign exchange earnings, it tends to result in an appreciation of the exchange rate and the subsequent crowding out of other activities in the open and tradable part of the economy, while benefiting public sector growth and non-tradable.

Adding to this, because the production of most natural resources is capital intensive, high fixed costs tend to be required. At the same time, commodity prices are generally volatile, bringing the risk of severe macroeconomic fluctuations, including periods of low returns. Not only may this in itself hurt growth performance (van der Ploeg & Poelhekke, 2010). High volatility further undercuts the support of long-term investment, such as R&D.

Gradually, it has become clear that consider­ations of macroeconomic aspects, while relevant in many situations, convey only part of the story. Influences on the directions of human effort are critical. Rich natural resources serve as a lure for rent-seeking, i. e. for gaining privilege and a share of the gains through political clout rather than economic achievement, as well as complacency when it comes to pushing for competition and economic efficiency (Corden, 1984; Auty, 1990; Sachs & Warner, 2001). Even where regimes make the effort to distribute the returns more widely among the population at large, there is the danger of picking up the habits of a “cosy life”.

Because natural resource riches tend to accrue directly to the government, the latter may obtain an inflated status relative other stakeholders. The proportion of national income that flows to the population at large will tend to be smaller as a consequence. Further, since government revenue is not collected through taxes of the general public, there is less accountability and pressure on govern­ment to make best use of its financial muscle, and less strive for use of public resources to support societal objectives (Devarajan et al. 2010). Also when it comes to the resource basis itself there is generally a lack of investment in supportive knowledge generation, both because of the noted bias against long-term R&D, and because of a common failure to inspire the set-up of special­ized educational institutions and programmes that can support its upgrading. In short, there is a risk of natural resource wealth translating into poor governance. Some have argued this leads to less incentive to develop democratic institutions, although that notion has been defused in other studies, and the relationship to economic growth in this case appears unclear in any event.

A number of studies have concluded the curse operates through institutional factors (Isham et al., 2005; Sala-i-Martin & Subramanian, 2003; Bulte et al., 2005; Arzeki & Bruckner, 2009). Part of the impact may emanate from less pres­sure to undertake needed structural reforms, such as those aimed to open up for more competition, sharper frameworks for education, learning and merit-based promotion, and the establishment of new enterprises (Amin & Djankov, 2009). Because natural resource generated revenues invariably boost the public sector, they tend to inflate the status and rewards associated with public service. There is thus a distinct risk of weak incentives and drive for institutions as well as for individu­als to engage in private sector development more generally, and in risk-taking, entrepreneurship, and start-up activity specifically.

The causal link between natural re source abun­dance and growth remains contestable, however. If natural resources earnings, as a share of Gross Domestic Product (GDP), are used as proxy for natural resource assets, the group of NRE will by definition include agriculture-dependent and undiversified economies. These would probably be better defined as “innovation and human capital poor”, and a high share of natural resource in the economy is then as much an outcome of slow growth, and a proven inability to diversify, as the opposite (Smith, 2007).

Others have questioned to what extent natural resource abundance really can be observed to act as a drawback for a given economy. Lederman and Maloney (2002), for instance, found Sachs’ and Warner’s results not to hold given a different specification ofthe studied time period, although they did conclude that high export concentra­tion exerts a robust negative effect on growth. Gylfason’s result also depends on a few outliers that have achieved high growth without natural resources. Herb (2005) and Alexeev & Conrad (2009) evaluate a range of recent statistical stud­ies and conclude against the presence of a natural resource curse, especially when it comes to oil and mineral wealth. As for volatility, a well developed financial system will cushion the impact (van der Ploeg & Poelhekke, 2009).

The recent experience of several countries, especially within the group of the GCC countries but also among some other NRE across the Middle East, Africa, Latin American and East Asia, has demonstrated there is no generally applicable notion of a curse (Fasano, 2002: Sturm et al., 2008; Frankel, 2010). 4 Lending support in this regard is also the experience of several (by now) developed countries, includingAustralia, Canada, Finland, Norway and Sweden. Of these, Finland and Sweden displayed important spillovers and spinoffs emanating around the paper/pulp indus­try, benefiting the long-term growth potential of these economies as a whole (Blomstrom & Kokko, 2007).

The GCC countries nevertheless represent the most compelling case, which is due both to the exceptionally rapid growth they achieved over a sustained period of several decades by now, coupled with their remaining extreme dependence on their natural resource, in this case oil & gas. Whereas their advance has not been unaffected by the financial crisis of recent years, on the whole there has only been some temporary moderation of their performance. The equity and real estate posi­tions ofthe GCC countries in debt-struck overseas markets took a toll on their accumulated net wealth. Several of them, including Bahrain, experienced painful recession. Still, the only economy suffering from a severe lasting impact is probably that of Dubai, which had been exceptionally dependent on capital imports motivated by accelerating real estate assets. While the stabilizing counterweight of oil revenue in this case has been lacking at the regional level, that factor has been at force in the national economy of the UAE. Thus, Dubai too keeps muddling through, aided by the support of lending and some unconventional internal transfers of equity and intangible investments by Abu Dhabi.5

As seen from Figure 1, several of these coun­tries have now attained an income level above that of a “comparable high income” European segment (here labelled EU 12+3)6. The converse distance to prominent other Middle East and North Africa (MENA) countries, such as Egypt, Morocco and Jordan, is stark.7 At the same time, as seen from Figures 2 and 3, the GCC countries continue to stand out as markedly undiversified economies.

The share of high tech exports in total exports is particularly low, suggesting the presence of a strong “Dutch disease” effect, i. e., the crowding out of an open tradables sector. Some observers of the governance models applied in the Gulf argue that they suffer from particularly severe obstacles to instituting needed micro economic reforms, suggesting that changing the curse into a blessing stands a better chance elsewhere, e. g., in Africa (Devarajan et al., 2010).

Further examination is needed to gain a better understanding ofthe way in which NRE encounter special issues, why that is the case, and what it may take for a rich supply of natural resources to be turned away from a hindrance towards be­coming a source of long-term strength. The GCC countries may define the ultimate test case in this regard, due to their high level of natural resource dependence, combined with their proven strong growth record.

THE SCOPE FOR RESEARCH AND INNOVATION

At the cost and income level now attained by the GCC countries, their ability to shift from a tradi­tional industrial model based on the availability of natural resources, combined with routinized and mature technologies, to one that is nimble, knowledge-intensive and capable of generating economic activities with higher value-added, is of central importance to their total factor productivity (TFP). This implies that education and training, R&D, innovation, private enterprise develop-

ment and entrepreneurial activities relevant to the creation and use of knowledge in new ways, require high attention, so as to pave the way for competitiveness in potential high-growth new market-niches and sectors.

With regard to aggregate expenditures on R&D, Figure 4 draws on a combination of data sources to present an estimate as good as we can get. As noted in previous studies (Aubert & Reiffers, 2002), in most cases the GCC countries demonstrate scanty activity levels. Except for the

additional factors of relevance for innovation in the GCC countries.

It is well understood today that meaningful benchmarking of science, research and innovation must take into account the status of complemen­tary and enabling factors (UNCTAD, 2010b). Policymakers must similarly address a broader

portfolio, if they are to be effective in enacting improved conditions.

Among such related factors, human capital assumes particular importance. Figures 5 to 8 present a few relevant cross-country comparisons in this area. Judging from the aggregate numbers, the rate of primary school enrolment, displayed in Figure 5, does not appear to have been much affected by the resource abundance of the GCC countries, neither compared with the EU nor within the MENA region. This reflects the fact that the rate of school enrolment at primary level has in­creased strongly in more or less all the countries considered here, reaching close to 100 percent across-the-board.

Examining enrolment at secondary level, on the other hand, the GCC countries lead the MENA country peers consistently, and with a wide mar­gin in most cases. Adding to the latter observation, Figure 6 indicates the GCC countries have escaped the gravity of the illiteracy problems that con­tinue to plague the wider MENA region. No doubt, the hydrocarbon-generated finances have helped fed increased effort in both primary and second­ary schooling, in some cases showing up in enrol­ment numbers, in others as improved results.

Figure 5. Primary and secondary school level enrolment (as percent of relevant age group) (Source:World Bank (2070a). Data are from 2008 or latest available.

TOC o "1-5" h z Morocco 44

Yemen 39

Egypt 1^_____________________ J 34

Algeria 27

Saudi Arabia 15

Oman 13

UAE 10

Bahrain 9

Jordan 8

Qatar ■■ 7 Kuwait І^Ш 6 EU12+3 0

0 20 40 6C

Expenditures on tertiary education vary mark­edly, as seen from the comparison between Oman and Kuwait with the EU-comparator in Figure 8. Here, Kuwait is at a much higher level, while Oman is behind. Figure 9 shows there are limited differences in expenditure per student at second­ary and primary level within the MENA region, whereas the EU is at a much higher level, espe­cially in secondary education.

These figures suggest that the hydrocarbon economy has fed only a slight increase in the share

of national resources that has gone into education, whereas the sharply increased size of the econo­my nevertheless means that education has bene­fited, at least proportionately, and also a little bit more than that.

Needless to say, any quantitative considerations ofthe amount of resources devoted or the number of students enrolled, applying to primary, second­ary to tertiary education, vocational training, or other forms of investment in human capital, are unable to fully capture essential aspects of the quality of education and learning, or how human resources are put to use. Multiple studies point to the continued presence of outstanding challenges in this area for the GCC countries, including those that are associated with labour market distortions caused by political motives and market segmen­tation between indigenous and foreign labour (Andersson et al., 2010a; Djeflat, 2010).

Nevertheless, it appears the availability of more resources has fed not only the allocation of greater investment to education, and the provision of a greater number of teachers, but also created a drive for raising the quality and relevance of education as well as to put in place better work­place training across the GCC countries. To what extent there has been genuine progress thus far on this basis, including when it comes to raising TFP, requires further evaluation and examination. The development ofthe media industry adds further to the picture, as there has been a marked opening for more competition through new establishments followed by soaring, diversified content in public service communication.

Related to the latter, modern Information and Communications Technology (ICT), applying to infrastructure as well as services, is now crucial for enabling the successful advance of a knowl­edge-based economy. Figure 10, which shows a relatively low presence of secure servers in the GCC countries, indicates a “digital gap” between the advanced European countries and the MENA region. Figure 11, on the other hand, conveys a more complex picture. The number of Internet
users is higher in the UAE and Bahrain than the EU. Even more impressive, the number of mobile subscriptions is considerably higher in several of the GCC countries compared to the EU. The peers in the MENA region are much behind, with considerably lower levels of mobile penetration.

The surge in mobile subscriptions is particular neither to the GCC nor to NRE more broadly, but applies to a diverse set of emerging and develop­ing economies (UNCTAD, 2010a).

However, cross-country variation in the pen­etration of either Internet use or mobile telephony is clearly reflective of price levels, which in turn hinge on the extent to which regulatory reforms have been enacted to break the privileges of (cur­rent, or the legacy of) state monopolies, and open for competition in the development and launch of new, rivalling services. To examine the situation in this respect, Figure 12 compares country scores derived through an index that weighs together prices for fixed telephony, mobile and Internet services. As can be seen, prices in the GCC coun­tries are, in most instances, highly competitive compared to the MENA peers (Yemen is included as well here, to demonstrate the discrepancy to many other developing countries). They are also on par with the European comparator. In the case of ICT, oil and gas wealth has clearly not stood in the way of reforms.

While a comprehensive examination of regu­latory reform goes beyond this work, interna­tional ranking of public procurement practices resulted in a strong upgrading of the GCC coun­tries in recent years (World Bank, 2008: World Economic Forum, 2010). It is also worth taking note of a proxy variable for red type, in this case when it comes to hindering the establishment of business. This is the number of days it takes to start up a new company, shown in Figure 13. Here, most of the GCC countries offer less burdensome conditions than the MENA peers, although the difference is modest. Most of them compare fa­vourably with the EU-comparator. Kuwait is an outlier in this respect.

INNOVATIVE ACTIVITIES AT FIRM - LEVEL

Whereas the GCC countries do not appear to have increased expenditures on R&D significantly, we do not know whether this ought to be interpreted as a sign of complacency and lack of support for innovation. It may be the status oftheir innovation

Figure 8. Expenditure per student, as percent of GDP per capita, primary, secondary and tertiary level (Source:World Bank (2010a). Data are from 2008 or latest available.

Figure 9. Expenditure per student, as percent of GDP per capita, primary and secondary level (Source: WorldBank (2010a). Data are from 2008 or latest available.

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system, e. g. the dominance of the hydrocarbon sector and shortage of qualified researches, makes R&D difficult to justify. In the areas of human resource development, ICT, and conditions for starting a new business, the previous sections pointed to signs of progress in regulatory reform and also, in some cases, associated economic performances. It is worth taking a closer look at the status of innovation more broadly in the GCC countries.

A fundamental problem in this regard is the lack of data on R&D and innovation. In the fol­lowing, we thus examine the single source of quantitative information that is currently available on innovative activity at the micro level in these countries. This is the data generated by the first Community Innovation Survey (CIS)9 carried out in the region, namely on a population of statisti­cally representative enterprises in Abu Dhabi.10 While not necessarily applicable to other GCC countries, this allows us to examine the state of firm behaviour in regard to innovation within a regional economy (the Emirate level) that is as natural resource dependent (and undiversified) as any of the national economies (Andersson et al., 2010a). 11

On this basis, the innovation landscape is seen to be dominated by three sectors: manufacturing, mining and petroleum, and business services. We find the highest share of innovation active firms within manufacturing and also the mining and petroleum sector (Figure 14). Interestingly, on the whole there is a distinctly higher prevalence of innovation in new services (38.5 per cent) relative to new goods (27 per cent), which applies to min­ing and petroleum as well. Manufacturing firms, along with those in trade and utilities, on the other hand, focus on innovation in goods (Figure 15).

Innovation active firms draw on various kinds of investments, as shown in Figure 16. In-house R&D represents merely one kind among others, mirroring the situation in other countries where CIS surveys have been conducted. Customers are important partners in innovation, particularly when it comes to sharpening design, and for test­ing new or improved products and services. Among firms indicating collaboration with other partners, customers and suppliers feature prominently as partners along the value chain. Specialised sources of expertise are sourced from consultants and universities (around 30-35 per cent of times identified as partners).

Meanwhile, manufacturing and the mining and petroleum sectors are reported to represent

Figure 10. Secure internet servers, per million people (Source:World Bank (2010a). Data are from 2008 or latest available.

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the most important drivers of innovation in other sectors, as measured via the influence of custom - er-producer relationships. Firms with a main customer in these two sectors tend to be innova­tive to a higher degree than firms with main customers from other sectors (Figure 17).

Retail and construction come across as par­ticularly unimportant in customer-led innovation, which is in line with the evidence from other countries. These two sectors have a general ten­dency to be relatively sheltered from foreign competition, and lack of openness tends to be accompanied by less pressure for generating in­novative activity. On the other hand, the great weight of mining and petroleum in aggregate in­novative activity clearly distinguishes the Abu Dhabi innovation system from those of other economies for which CIS data is available. While we cannot confirm the situation in the rest of the GCC countries, due to the lack of data, there is good reason to believe the situation is similar to that of Abu Dhabi in this respect, especially to the extent hydrocarbon weighs heavily in the economy.

Figure 18 illustrates the relationship between the main market of the firm and the degree to which firms are innovative or not. The greater the international exposure, the higher the inno­vativeness. Figure 19 demonstrates that the same relationship holds with regard to innovations of different calibre. Firms that export play a more prominent role especially for innovations that are new to international markets, although they are also more active in introducing innovations that are new to the domestic market.

While the above applies to innovation in gen­eral, Figure 20 highlights how firms across the different sectors generate innovations that are new to the domestic market and to international mar­kets respectively. As can be seen, manufacturing primarily plays a role as gate-opener to innovation in the local market, applying to a lesser extent to business services, trade and transport. The clear - cut exception is the mining and petroleum sector, which displays a markedly higher activity level when it comes to introducing innovations that are new to the international market. This suggests that the natural resource sector not only represents the most internationally exposed component of the Abu Dhabi economy, but that it is also the leader in regard to the capacity to innovate in international markets.

Figure 12. ICTPrice Basket (Source: UNCTAD (2010a)

I ICT Price Bosket

Meanwhile, in the other leading sectors, such as manufacturing and business services, the high percentage of innovations that are new to the national market suggests innovation activities are value chain centred to a high degree. Abu Dhabi innovation active firms tend to serve as suppliers of goods and services to other firms, rather than end-consumers. This is verified by Figure 21, which shows that 65 per cent of innovation active firms focus on the business-to-business segment.

With regard to ownership, Figure 22 shows that subsidiaries of Abu Dhabi or UAE firms have a higher propensity to innovate than foreign-owned firms. However, foreign-owned subsidiaries have a higher propensity to introduce international market novelties. Subsidiaries of Abu Dhabi or UAE groups are thus more likely to focus on national markets, whereas foreign-owned firms tackle international markets to a higher degree.

Foreign-owned firms further have a higher propensity to co-operate in innovation. This prob­ably reflects the presence of stronger, already established connections between such firms and research institutes, universities or partner firms in their countries of origin, as well as in third markets where their parent companies may have been present for a long time. On the other hand, domestic firms might have been expected to pos­sess better knowledge of viable co-operation partners and enjoy better access to national net­works.

In terms of frequencies, as can be seen from Figure 23, the average share of large firms that collaborate with partners in generating innovation shows up as relatively low inAbu Dhabi compared to other countries, based on statistics reported by Eurostat. There is a smaller share of co-operating firms in Abu Dhabi than in most European coun­tries. As already noted, foreign-owned firms and firms in mining and the petroleum sector are at the high end in this respect.

Keeping in mind the above data refer only to a set of representative firms in Abu Dhabi, the following conclusions stand out:

Innovation active firms tend to be con­centrated in three sectors: mining and petroleum, manufacturing, and business services.

Abu Dhabi firms pursue a mix of invest­ments related to innovation, with some em­phasis on R&D and the acquisition of new technology.

There is a high degree of innovation gener­ated via the supply-chains.

Innovation in mining and petroleum is more directed to international markets and display relatively high levels of collabora­tion, and a higher degree of services inno­vation, compared to manufacturing. Foreign-owned firms collaborate more in innovation.

For innovating firms on average, interna­tional collaboration is at a relatively low level.

CONCLUDING REMARKS AND RECOMMENDATIONS FOR ACTION

In this chapter, we have taken stock ofthe apparent natural resource “curse” for development, as well as of divergent views in the literature on its nature and generality across countries. We have noted that certain countries managed to perform well based on rich natural resources, and set off lasting growth processes on that basis. While some today developed economies, such as Australia, Canada, Finland, Norway and Sweden, may belong to this camp, as they were able to benefit from rich natural resources in early stages, the GCC countries now represent the most compelling case challenging the notion of a curse.

The reason why the performance of the GCC countries attracts special attention in this context is two-fold. On the one hand, they have attained an exceptionally strong economic position, based on basically just oil & gas (the prime exception, the Emirate of Dubai, has recently been bailed out

Figure 15. Share of new goods and services innovations across sectors (Source: CIS-IKED Pilot Data Innovation Survey, SCAD (2009))

Investment by innovative firms

with the help of the oil riches of Abu Dhabi). On the other hand, in line with the “Dutch disease”, whereas costs and incomes ofthe indigenous popu­lation have increased sharply, to date they remain heavily dependent on the hydrocarbon sector. Regardless of the time they have left before this source of revenue will start subsiding, continued excessive dependence on oil & gas will not do as a basis for sustainable prosperity, in part because it will perpetuate public sector dominance and costly labour market distortions.

Success with regard to innovation is now essential for the development and production of competitive high value added goods and services in the GCC countries. Whether they create condi­tions that are genuinely conducive to innovation will be crucial for their ability to ultimately break away from the natural resource curse. So far, in most cases they display a weak standing when it comes to R&D. As for wider reforms, we have taken note of strengths in ICT infrastructure and services, educational effort, public procurement, and some conditions of importance for the start-up of new enterprises.

All the GCC countries have, however, launched their special efforts to boost R&D and/or advance complementary means for generating innovations. This applies both to those economies, such as Kuwait, Qatar, Saudi Arabia and the UAE, which have plenty of time left before their oil & gas revenues subside, as well as Bahrain and Oman which have much less time to go.

To cite and comment briefly on a few ex­amples ofpursued policies, Qatar has put massive resources aside for R&D funding, according to unofficial data, while also engaging in an ambi­tious range of science park activities. Oman has initiated a call for open research grants, and has taken special initiatives to boost research capac­ity in prioritized niche areas, such as enhanced oil recovery, road safety, and biodiversity and genetic resources. Within the UAE, Abu Dhabi has launched an ambitious agenda to generate cluster-based development, spurred by Mubadala as a publicly-supported but business-minded investment agency, e. g., in renewable energy and cultural activities. Adnoc Technical Institute and the Petroleum Institute have been directed to raise the supply of prioritized technical skills.

The Khalifa Fund has also raised support for opportunity-based entrepreneurship, although so far limited to the Emirati population, and not freed ofthe complicating labour market distortions noted above. A research foundation has been introduced, although its establishment phase was prolonged due to bureaucratic hurdles. In Dubai, work has been going on to strengthen and upgrade the Tech­nopark. Kuwait has launched an ambitious centre on diabetes and related diseases research. Saudi Arabia, finally, has invested massively in several new knowledge cities and research universities. In several of these efforts, the GCC countries rely heavily on imported expertise, but they also attempt to ensure domestic capacity building for the long-term, especially in Oman.

At firm level, keeping in mind the limitations in generalizing the results, we have observed a

strong drive for innovation in the oil & gas sec­tor itself. Here, innovative firms are relatively active in collaboration, and firms innovate at a relatively high level. R&D is clearly not sufficient for measuring their innovativeness, since several other activities serve as important sources of in­novation as well. Further, according to our results, which draw on observations from the population of firms in Abu Dhabi, the mining and petroleum sector takes the lead in pulling innovation more broadly. This situation is likely to be more (less) applicable elsewhere in the GCC countries, the more (less) the dominance of the hydrocarbon sector in the economy. Sectors that are relatively more oriented towards the domestic market, and to a high degree sheltered from foreign competition, meanwhile, show clear signs of complacency, and are marked by low levels of collaboration in in­novation as well as less potent innovation output.

Whereas we can refute the idea that there would be a lack of political support for undertaking re­quired policy action, the lack of tangible evidence of enhanced innovation and actual economic diversification at aggregate level indicates the presence of remaining hindering factors, which keep frustrating and delaying tangible progress. Here, the dominance of public sector activities and employment is likely to be a key factor, es­pecially as it is interrelated with serious labour market distortions following from the political motive of favouring the indigenous population. This applies especially to those GCC countries where the locals are in minority, including the UAE and Qatar, which in fact possess the larg­est natural resource pool relative the size of the population, resulting in special disincentives for genuine risk-taking, entrepreneurship and private sector development in the most well-off natural resource exporters.

The current situation can probably not be overcome merely through regulatory adjustment, no matter how pervasive. Substantive action to exert radical and lasting mindset change, as re­gards the merits of public sector and established institutional brands and structures relative those of experimenting with and developing new enti­
ties and solutions, needs to be enacted. In order to enable a substantive impact, measures should be synchronized across several policy domains.

Examples of what would most likely form important components of such an agenda include those that would increase mobility between the public and the private sector, reinforce merit-based career paths in the labour market, enable income transfers through other means than labour mar­ket distortions, support a long-term approach to R&D, facilitate the establishment particularly of potential high-growth knowledge intensive start­ups, and engineer an upgraded appreciation of entrepreneurship in education and labour market institutions. There is also the task of furthering the oil & gas sector itself, as well as its linkages to other sectors, including by spurning spin-offs, not least as this is where a lot of the already ex­isting professional expertise and most dynamic innovativeness no doubt resides. Universities and research institutes belong to those that should be incentivized to invest and partake more in com­bined knowledge creation and knowledge use, by specializing and developing diverse approaches
to science-industry interface and the kinds of knowledge brokering that can work out in their specific context.

All this requires an approach to governance that allows for innovation to attain a high priority in public and private decision-making across the board. An effective and consistent approach to fostering innovation is greatly facilitated by con­structive engagement of all the key stakeholders, in such a way as to enable a widely spread buy-in and room for bottom-up initiatives. Already enacted successful policy reforms, e. g., in ICT when it comes to the UAE and Qatar, may be built upon to solidify the momentum for such engagement. The improved access to new tools and services in ICT can also be used to help raise greater interest in, and acceptance of, new solutions in other areas.

Will the GCC countries succeed, and thus ultimately demonstrate that the natural resource curse is not cast in stone but can be turned around to realize a blessing? This we obviously do not know, and further observations and research work are thus warranted. The clock keeps tick­ing, however, with the natural resource riches of these countries extracted and consumed for fewer gains than could potentially be generated, because insufficient effort is going into long-term R&D and skills accumulation aimed to carve out a sustainable edge, and also into developing the competencies that are required for diversifying into those neighbouring and complementary activities that could still last after the current resource basis is gone. The later in the day it gets, the stronger the drive will be for the GCC countries to do what it takes to make their growth record sustainable. In this sense, there will be a race between the forces calling for reforms in support of long-term capacity building, and those that keep exploiting what can be relatively effortlessly consumed today. While that is not unique to NRE, but ap­plies rather universally, more is at stake for these societies than for most.

Finally, we argue that the empirical evidence and conclusions on innovation in the GCC coun­tries presented in this chapter lend some insights into what is crucially important for breaking away from the natural resource curse. At the same time, further studies are required on a number of issues. This includes the actual state and nature of inno­vation in natural resource based economies, the linkages between innovation in natural resource related industries and other parts ofthe economy, the quality issues in their educational systems and labour market institutions, how they can develop a vibrant university sector and research commu­nity that is also capable of generating productive science-industry interface, how to generate suc­cessful knowledge-intensive potential high-impact start-ups, and how to succeed in implementing governance reform in support of a comprehensive innovation system in such economies.