Dubai's investment plans focus on driving entrepreneurial growth

 

Building on its reputation as a global city, regional financial centre and showcase of smart technology, Dubai is forging an economic future based on investment in forward-thinking ideas. As part of this strategy, the emirate is set to welcome millions of visitors to Expo 2020, which is aimed at creating an international platform to foster creative thinking on development goals for the MENA region and South-east Asia.

The emirate’s leaders are already looking beyond the horizon at the impact modern science and technology can play in the UAE Centennial 2071 objectives, which offer an outlook for the long-term work planned to solidify the country’s reputation as a world leader.

Innovative Government

In October 2017 Sheikh Mohammed bin Rashid Al Maktoum, vice president and prime minister of the UAE and the ruler of Dubai, launched the country’s strategy for artificial intelligence (AI), stating that AI would be a key pillar of the 2071 objectives. Coming 16 years after the adoption of e-government in the UAE, AI was described by authorities as a new wave of technology to improve the efficiency of services.

The strategy also sees the government leading from the front, setting an example as an early adopter of algorithmic administration to stimulate further investment and development that will enable the country to become an AI centre.

Civil servants in Dubai are accustomed to smart government. The UAE has invested both time and money in the adoption and implementation of ICT in daily state and administrative functions. In the World Economic Forum (WEF) 2017-18 Global Competitiveness index, the UAE ranked first out of 137 countries in the category of government adoption of advanced technology. The UAE ranked 25th in the overall category of innovation, second in the GCC region.

Changing Ecosystems

The WEF’s index suggested a fundamental change in the global technology landscape. Innovation was typically driven by individuals working in corporate or university laboratories, but the emphasis has shifted. Companies and governments are now crowdsourcing to find solutions to world problems and spur global business. Embracing the move from product to platform, and brain to machine is seen as an example of AI that has the potential to change the fundamentals required to drive ground-breaking economies.

The UAE performs relatively modestly in terms of the traditional model of innovation based around the campus and the laboratory, ranking 43rd in the number of patents, 30th in quality of scientific research, and 25th in university-led collaboration with industry in research and development (R&D). However, in the overall capacity for innovation category, it places 15th.

Global Indices

The UAE also led the GCC region ranking 35th out of 127 countries, with an overall score of 43.24, on the 2017 Global Innovation Index, an annual survey completed by Cornell University, INSEAD and the World Intellectual Property Organisation.

The index is compiled around input and output measurements categories: inputs are subdivided into institutions, human capital and research, infrastructure, market sophistication and business sophistication factors; and outputs are subdivided into knowledge and technology, and creative outputs. By comparison, Switzerland came first, scoring 67.69, while the second-best performing country in the region was Qatar, with a score of 37.90 and an overall ranking of 49th.

An assessment of the UAE’s innovation field was highlighted in the report, with high scores for online government services, logistics performance, cluster development and R&D funded by business. There was more modest performance on ease of accessing credit, high-tech exports, and the numbers of trademarks and industrial designs registered in the UAE.

When it comes to capitalising on creativity, the 2018 Global Entrepreneurship Index also highlights the UAE’s strengths; it placed 26th out of 137 countries. The index is produced by researchers at the Global Entrepreneurship and Development Institute, which was founded by academics from the London School of Economics, George Mason University in the US, Hungary’s University of Pécs and Imperial College London. The 2018 report illustrated the country performs well in the categories of product innovation, cultural support, networking and internationalisation, but that there is considerable room for improvement in the areas of risk acceptance, start-up skills and the advancement of the technology sector.

On the ease of doing business index in the World Bank’s “Doing Business 2018” report, the UAE’s ranking reached 21st out of 190 countries, up from 26th in 2017 and 34th in 2016. Its position in the ease of starting a business category climbed from 65th in 2016 to 53rd in 2017 and 51st in 2018 thanks to improvements in procedures for naming and legally registering businesses, and the streamlining of processes related to the General Pension and Social Security Authority, and the Ministry of Human Resources and Emiratisation. Although the survey represented the UAE as a whole, the data was collected in Dubai.

A Global City

The role cities can play in acting as engines of progressive entrepreneurship has long been recognised, and in repeated surveys of urban centres around the world, Dubai has often been ranked as the most influential centre in the MENA region. From 2012 to 2017 the emirate held a top-30 position in AT Kearney’s Global Cities index, placing 28th out of 128 countries in 2017, below Montreal in 27th place, but ahead of Frankfurt (29th), São Paolo (31st), Zurich (32nd), and Vancouver (35th). The index examines the current performance and potential of cities against several criteria, including business activity, human capital, information exchange, innovation, governance and personal well-being. It also notes that Dubai is the recognised business leader in the Middle East, highlighting that the city is investing in nurturing a start-up environment to capitalise on its status as a trading hub and magnet for international talent.

Smart Dubai

Additional efforts to position the city as a global leader in technology-based government services have led to the implementation of the Smart Dubai 2021 initiative – a four-year programme that aims to digitise big data, reduce the need for customer service centres and eliminate paper transactions. A collaboration between the Smart Dubai Office and the Dubai Future Foundation, an organisation with the goal of bringing government and private actors together to shape strategic sectors, is looking to make the emirate the world’s first blockchain-powered government by 2020. According to Smart Dubai, using blockchain will unlock annual savings of Dh5.5bn ($1.5bn) – the cost of building the Burj Khalifa – in document processing alone. In late 2017 the Dubai Land Department stated it had already started using the technology for its transactions. Other blockchain proposals in the pipeline include Cheque Chain, a government initiative with Dubai banking group Emirates NBD to integrate blockchain technology into cheques to reduce fraud, and a deal signed with UK firm ObjectTech to combine blockchain and biometric technologies to develop digital passports eliminating the need for certain security checks at Dubai International Airport.

Year Of Innovation

The UAE government declared 2015 the “Year of Innovation”, while at the same time Dubai embarked on an ambitious strategy to become the world’s most innovative city by 2021. That year also saw the Dubai Chamber of Commerce and Industry launch the “Dubai Innovation Index Report”, alongside PwC highlighting the world’s most pioneering cities. According to the results of the 2015 and 2016 reports, Dubai ranked 16th and 15th, respectively, out of 28 cities. The top three in 2016 in descending order were New York, Paris and Hong Kong.

The report went on to suggest that the emirate’s standing had improved thanks to a rise in foreign direct investment and the impact of new government strategies on the private sector. Noted areas for improvement included the need to both attract and retain the right skills for future progress, and boost the number of patents, trademarks and scientific journal articles. The report’s authors suggested that the 2016 index results could act as a trigger for greater investment in education to encourage new skills development, as well as in the creation of policies to protect intellectual property and investment in R&D.

Legal Moves

To facilitate more innovative enterprises, the government made significant legislative changes allowing greater use of the public-private partnership (PPP) model of financing, offering more support for small and medium-sized enterprises (SMEs), and overhauling its bankruptcy laws.

The model had previously been reserved for funding independent power and water projects. By lifting the restrictions limiting the use of PPPs to utilities provision, the government hopes to stimulate growth in entrepreneurship by encouraging more private sector involvement in development projects. The new PPP law allows firms to make proposals to government agencies employing either a build-operate-transfer or build-own-operate-transfer model, where the company receives a concession to create, finance and operate a facility for a specific period before transferring ownership to the government. All partnerships are subject to the approval of the Supreme Financial Policy Committee at the Ministry of Finance.

In 2017 the UAE government reported that the PPP model was being used for a number of Roads and Transport Authority schemes, such as the Union Square development project and the upcoming Dubai Metro Route 2020 project to extend the line from Jebel Ali to the Expo 2020 site. Services are also getting a boost from the new PPP legislation; the Dubai eSupply platform, the official procurement portal for the emirate, is being run by the government agency Smart Dubai in collaboration with private sector partners local Tejari and Italian firm BravoSolution.

Small Businesses

Recent economic and political developments have recognised the contribution SMEs make in promoting inclusive growth, generating employment and boosting competitiveness. Mandated to enhance contributions made by SMEs, the Mohammed bin Rashid Establishment for SME Development (Dubai SME) operates as a branch of the Department of Economic Development (DED). In July 2017 Dubai SME announced that since its inception in 2002, 23,000 Emirati entrepreneurs had used its services, more than Dh290m ($78.9m) worth of incentive packages had been delivered to 4000 enterprises and Dh3.3bn ($898.3m) in contracts had been secured under its Government Procurement Programme.

Businesses are encouraged to join Dubai SME, which in turn issues them with commercial licences for the first three years of operation, with membership costing Dh1000 ($272) per year. A law passed in 2015 stated that any business in which the government owned 25% or more in equity must allocate 10% of purchases to firms run by Emirati entrepreneurs.

The law also sets aside 5% of retail space to outlets owned by Dubai SME members and offers them a 20% reduction in rental prices on business premises.

Bankruptcy Laws

To ensure success among small businesses and mitigate the number of SMEs that fail, reforms to the bankruptcy law came into force in December 2016. Images of abandoned high-performance cars left behind by foreign entrepreneurs or redundant workers were published worldwide in the wake of the global financial crisis of 2008-09. Those who had lost money feared they would be jailed if lines of credit were closed, preventing them from meeting their financial obligations. Indications of so-called runaway cases can also be seen more recently. The Financial Times reported that in the six quarters preceding March 2017 global credit insurer Coface had dealt with 814 cases where business owners fled the UAE due to lack of liquidity and bank finance.

While Dubai is keen to protect consumers and creditors from the impact of business failures, strict bankruptcy laws may have contributed to an unstable small business environment. A study of 2.8m smaller retailers by the University of Michigan found that between 1990 and 2011 the longevity of second or third companies was much greater than for first-timers, indicating that entrepreneurship takes practice. Taking these findings into account, in September 2016 the government of Dubai’s Federal Decree Law No. 9 of 2016 on Bankruptcy was introduced to modernise and streamline the insolvency process in line with international best practices, remove the stigma that comes with business failure and ensure directors remain accountable for business failures. The new law includes protections for debtors, encourages the orderly unwinding of bankrupt companies and allows delays in proceedings on bounced cheques where court-approved insolvency processes have been instigated. The law applies to commercial firms, government-owned entities and individual traders, but not to private, individual debt.

Business Growth

Regulatory changes are helping promote economic development and job creation, but that is not to say that Dubai’s business community has been holding back. In 2016 the DED reported that 26,707 new business licences were issued by the Business Registration and Licensing Department (BRLD), an 18% increase on the 22,691 registered in 2015. The BRLD also renewed 107,043 licences and registered 39,819 new trade names in 2016.

Over the course of the first half of 2017, 10,455 commercial licences were issued, 71,831 were renewed and 6776 new trade names were approved. While data for the second half of 2017 was unreleased as of early 2018, local media reported a record number of transactions at the BRLD in November 2017. These included 1666 new business licences and 3261 renewals approved during that month alone.

In January 2017 the DED noted the contribution state policies had made to entrepreneurial success at the UAE Economic Outlook Forum 2017. Speaking on this topic, Abdul Baset Al Janahi, CEO of Dubai SME, told the forum, “The government of Dubai has adopted a clear policy in stimulating innovation and support across different sectors. Dubai SME has taken strategic steps in promoting innovation among SME owners.” Al Janahi also pointed to the role of sectors such as hospitality, design, fashion and media in helping to diversify the economy. “We are now focusing on devising solutions and new initiatives that emphasise creativity, business leadership, environmental protection and the ability of SMEs to contribute to sustainable economic growth.”

Start-Up Stars

Adding to the pioneering start-ups that have gained traction, large-scale technology-driven businesses have had a huge impact in a number of sectors. In July 2017 Amazon paid $580m for Souq.com, the local online retailer launched in 2005, marking a watershed moment for the digital enterprise community as a local entrepreneur graduated from tech start-up to global retail giant.

The Saudi Telecom Company (STC) paid $100m for a 10% stake in the ride-hailing app Careem. Founded in 2012, by late 2016 Careem had a fleet of 90,000 drivers and more than 4m registered users in over 80 cities from Egypt to Pakistan, and across the MENA region. Its rival, Uber, also received a cash injection from Saudi Arabia in 2016, when the Public Investment Fund (PIF), the country’s sovereign wealth fund, pumped $3.5bn into the firm. At the time Uber was valued at $62.5bn, making it the most valuable start-up globally.

Digital Investment

According to “The State of Digital Investments in MENA 2013-16” report, an analysis of regional investments produced by Arabnet Business Intelligence in partnership with Dubai SME, more than $900m was devoted to digital enterprises across the MENA region in 2016, not including the Uber deal. The Careem and Souq.com deals accounted for 78% of all US dollars – 44% and 34%, respectively – received across the MENA region. The UAE placed first in the report’s ranking of digital investment by country, accounting for 90% of all funds given in 2016, followed by Lebanon (6%), Jordan (2%), Egypt (1%) and Saudi Arabia. This marked the second year in a row that the UAE ranked ahead of Egypt, who in 2013 and 2014 accounted for 42% of all MENA digital investment.

The UAE has gradually attracted attention over the years, with its share of regional investment growing from 19% in 2013 to 32% in 2014 and 69% in 2015. In terms of the number of deals per country in the period from 2013 to 2016, the UAE, with 234 distinguished itself as having almost twice the number of the next country. In second place was Jordan with 118 deals, followed by Egypt (101), Lebanon (100) and Saudi Arabia (94). While the sheer size of both the Careem and Souq.com deals helped propel Dubai into the spotlight, two other important investments in local start-ups in 2016 also had an impact.

In January the property site Bayut raised $20m, while a month later e-commerce delivery firm Wadi received $67m in funds, accounting for a respective 2.2% and 7.3% of digital outlays in the MENA region in 2016.

Talent Pool

Dubai’s role as an international financial hub has helped attract talented business professionals with a clear understanding of the operational mechanics of technology start-ups. The founders of Careem and Wadi, for example, originally came to the city to work for consultancy McKinsey & Company. Magnus Olsson and Mudassir Sheikha, originally from Sweden and Pakistan, respectively, met at the company and came together to form the ride-hailing app. Also coming from McKinsey & Company, Kanwal Sarfraz, from Pakistan, and Ankit Wadhwa, from India, teamed up with Indian e-commerce veteran Pratik Gupta to found Wadi in 2015.

The emirate has been a destination for entrepreneurs from across the Arab world, with Souq.com’s co-founder, Ronaldo Mouchawar, coming from Syria in the early 2000s. The collaborations made by these global entrepreneurs suggest Expo 2020’s theme of “Connecting Minds; Creating the Future” is an apt reflection of the emirate’s current culture.

Funding Mechanisms

Early-stage investment, venture capital injections and the participation of growth funds are key instruments in most MENA countries. In 2016 early-stage investments of up to $500,000 accounted for 53.5% of all deals, while 31.5% were regarded as venture capital injections with values of $500,000 to $7m, and 5% of deals focused on big-ticket growth funding. When measured by value, 1.5% of the total $918m allocated went into early-stage deals, with venture capital injections worth 14.5% and growth funding accounting for the remaining 84%.

Corporate funding also played a role in supporting innovation, and while it is not new to the MENA region, from 2012 to 2017 the number of such investors increased by around 350%, climbing from 44 to 155. More than half, or 62%, of the MENA region’s corporate financial backers are based in the GCC.

Of this, the UAE is home to 44%, followed by Lebanon and Saudi Arabia, which are each home to 18.5%. Dubai’s top corporate investors are also based in the emirate, such as telecommunications company du, retail and food and beverage purveyor Alabbar Enterprises, and global services company Dubai Holding.

Funding also comes from government initiatives to inject money into the economy, which partly contributes to the low failure rate of new businesses. Of the more than 500 MENA start-ups that had raised funding from 2013 to 2016, only 15% folded during that period. The UAE had the highest number of active start-ups in the region, with 148, followed by Lebanon at 100 and Jordan with 74. The country also had a moderate number of shuttered businesses at 22, compared to Egypt with 21, and Saudi Arabia at 14. While the UAE is the clear leader, it must be pointed out that additional reasons for the low failure rate could be that recently funded start-ups are young and have not yet run the course of their life cycle.

Paving The Way

Mohamed Alabbar, founder and chairman of Emaar, Dubai’s partially government-owned developer, announced in November 2016 that he was working with the PIF to create Noon.com: a $1bn e-commerce platform selling items such as electronics, fashion, home and kitchen, beauty and fragrance, baby products and groceries. Half of the funding will come from the Saudi sovereign wealth fund, with Alabbar leading a group of financial backers in providing the remaining investment. The site went online in October 2017 and was shipping goods to customers in the UAE with the option to pay by card or cash. The founders announced their plan is to carry 20m products with warehouses in Dubai and Riyadh.

Prior to the launch, Alabbar prepared by acquiring a number of sizeable investments in complementary businesses. These included a $2.36bn purchase of a 26% share of Kuwait Food Company’s Americana Group, $151m for a 51% stake in e-commerce luxury fashion retailer Namshi, a 16.45% share in Dubai-based logistics firm Aramex, a 4% holding in the Italian retailer Yoox Net-A-Porter Group and the purchase of the online marketplace JadoPado.

Shortly after its launch, Noon.com also signed a deal with the Emirati telecommunications company Etisalat, allowing it to sell mobile devices, pre-paid top-up cards, post-paid connections and broadband e-life products. Faraz Khalid, who was appointed CEO of Noon.com in July 2017, is the former managing director of Namshi and, as such, has first-hand experience in running an international e-commerce retailer.

Namshi’s former owner, Global Fashion Group, was part of Middle East Internet Group (MEIG), a joint venture created in 2013 by the South African telecommunications firm MTN and Rocket Internet of Germany. MEIG’s aim is to accelerate growth of internet businesses across the Middle East. Its stable of e-commerce companies includes Helpling, a platform for professional home cleaners; Vaniday, an online beauty and wellness platform; Easy Taxi, a taxi-booking app; Lamudi, a real estate classifieds market place; Carmudi, a car sales site; and Wadi.

Another local business paving the way for technology firms is iMENA, which was awarded the 2017 Forbes Middle East Innovators Award for Investors. Founded in 2012, the company has eight online businesses and focuses on online classified advertising through opensouq.com, electronic real estate services, payment processing, digital development strategy services, and taxi and restaurant bookings.

Mixed Fortunes

Although Careem was Dubai’s first tech start-up to attract an investment exceeding $1bn, it must by-pass certain obstacles before it can achieve its full potential. The firm aims to make a profit by 2018, with its current CEO Mudassir Sheikha, telling Reuters in January 2017 that an initial public offering is possible within the next two to three years. Meanwhile, in June 2017 investment firm the Abraaj Group announced it had sold its 7% stake in Careem to Saudi Arabia’s Kingdom Holding Company (KHC) for $62m, making the conglomerate one of the largest holders of preferred shares and granting them a seat on the board. At the same time, the German company Daimler acquired a share in Careem. This means that three of Careem’s financial backers hold stakes in rival ride-hailing apps, with KHC possessing a 5% share in Lyft, Daimler working with Uber on self-driving cars and Saudi Arabia’s PIF owning 70% of STC, which in turn owns 10% of Careem and a $3.5bn stake in Uber. The result is that many key investors are hedging their bets in the ride-hailing market as Careem and its rivals compete for fares and market share.

Challenges

Although the examples of Careem and Souq.com have shone a light on Dubai’s potential to become a global start-up centre, the city must also confront some of its shortcomings. Lyft and Uber had the distinct advantage of launching into the US market with a population of over 320m potential customers, a fraction of the emirate’s 2.8m. While a vibrant higher education centre is being encouraged, a deep-rooted, research-intensive university culture of the sort that might create spin-off technologies in bioscience, engineering or robotics has yet to be developed. A number of multinational companies may have opened offices in Dubai, but a greater challenge remains in encouraging these multinationals to relocate their R&D laboratories to the emirate.

However, the modest scale of the city, combined with its forward-looking ethos, does have the potential to draw businesses that might want to, for instance, pioneer the widespread use of autonomous vehicles assisted by detailed mapping data. “I believe that Dubai has huge potential to offer itself as a test bed for global technologies,” Mukund Menda, MENA director at Civil Maps, a Silicon Valley start-up that provides 3D mapping technology for autonomous vehicles, told OBG. Civil Maps is one of a portfolio of companies managed by Alrai Capital, a venture capital firm with offices in New York and Dubai.

Outlook

Dubai already has a strong record in the MENA region as a proving ground for new technologies, with its driverless metro trains being one striking example. The city has an international reputation for marketing and an allure that has attracted talented people from around the world to work in a variety of sectors. Dubai also has the benefit of dynamic, forward-looking leadership supportive of change and is set on using smart technology to cut through red tape.

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The Report: Dubai 2018

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