Japan’s telecom giant SoftBank is partnering with Saudi Arabia’s revamped sovereign wealth fund to launch a $100 billion USD technology investment fund. Through what they refer to as the “SoftBank Vision Fund,” SoftBank will invest $25 billion over five years and the Saudi Public Investment Fund could contribute up to $45 billion.
Why are the Saudis contributing so generously to the SoftBank partnership? Simply put, they and the region’s other governments are recognizing the need to support innovation. As part of its Vision 2021 agenda, the United Arab Emirates (UAE) is transitioning to an economy based on production, distribution, and information. In Iran, president Hassan Rouhani has gone on record as saying: “in today’s world, a traditional economy cannot rival the world, and we can compete with the world economy if we have a knowledge based economy.” Even Saud Arabiai, whose oil revenues have typically accounted for between 77% and 88% of its total income, has recognized the need to “stimulate its economy and diversify our resources” as part of its new Vision 2030 plan.
This focus on building Middle Eastern “knowledge economies” stems from the fact that oil, the traditional source of revenue for these countries, is no longer the gravy train it once was. Even with OPEC’s recent production accord and Russia’s willingness to cooperate with it, the Middle East’s largest economies will struggle to keep their heads above water in face of low crude prices. This change of tone is the silver lining: sinking oil prices have helped the elites of these countries realize they need to diversify, and fast.
Luckily for them, the Middle East has young, well-educated populations with all the skills required to help building the knowledge economies that will help wean their nations off oil.
Even though the Emirates, Iran, and Saudi Arabia all face some structural hurdles (like the aftermath of sanctions in Iran), all three are relatively well-placed to build vibrant tech sectors. Young people in these countries are very much “plugged in” to the global information economy, helped in no small part by a culture of international study. Saudi students studied abroad in extremely large numbers under the King Abdullah Sponsorship Program. Other oil producers in the region (including Qatar, Kuwait, the UAE, and Iraq) all operate similar schemes. Research from the Institute of International Education (IIE) showed that, in 2013/14, the number of students from Middle Eastern countries increased by more than 20% compared to the previous year. The direction isn’t all one way: more than 50 foreign universities have founded satellite facilities in the Arab world, including Cornell University and University College London.
This trend begets a structural advantage: in spite of their countries’ reputations for traditionalism, Middle Eastern students develop strong ties to Western companies and institutions as part of their studies. Thanks to those linkages, they can easily acquire the sweeping cultural knowledge required to function in a world where globalization is king.
Governments in the Middle East (especially the Emirates and Saudi Arabia) are investing heavily in the sectors that will help their young people build stronger, smarter economies at home rather than taking their skills elsewhere. Dubai’s Smart City initiative seeks to use technology to encourage social and economic development, particularly in key areas such as telecoms, tourism, utilities, education, buildings, public safety, transportation, and health care. Similarly, the Dubai Technology Entrepreneur Centre (DTEC) – one of the largest incubators and co-working spaces in the region – has attracted more than 500 start-ups from 62 countries and facilitated more than $13.6 million in investment since its launch in March 2015.
Although complacency and a reluctance of investors to engage with young, unproven start-ups has led to a lack of innovation in the past, Saudi Arabia is also trying to encourage an ecosystem conducive to supporting tech start-ups. As part of broader economic reforms, it is breaking down business and investment barriers – including enabling foreign access to its stock market.
Looking outwards is becoming a major theme, and both Iran and Saudi Arabia are pursuing investments and trade deals with foreign partners. Enjoying the freedoms of a post-sanction world after last year’s nuclear deal, Iran’s president Hassan Rouhani has begun outreach to Europe in earnest. In January, he enjoyed full state honors in Paris and signed a $438 million deal with French carmaker Peugeot Citroen for Iranian carmaker Khodro. He later welcomed more than 300 German companies to Iran in May.
Saudi is strengthening its links with Western businesses. On a trip to the US this year, Deputy Crown Prince Mohammed bin met with Twitter CEO Jack Dorsey. Twitter is now something of a family business for Saudi royals: Prince Alwaleed bin Talal owns 34.9 million shares of Twitter’s common stock, more than Dorsey himself. The Gulf Co-Operation Council (GCC), a political and economic alliance anchored by Saudi Arabia but also including Kuwait, the UAE, Qatar, Bahrain, and Oman is actively seeking an early trade agreement with the United Kingdom post-Brexit. With their longstanding political ties the many thousands of Saudi students who have studied at their universities, it is not surprising that Riyadh would be particularly interested in American and British capital.
For all the enthusiasm, there are still significant challenges to overcome. In Iran, religious leaders are demanding that the internet remain censored and controlled, while Saudi Arabia’s economic planners need to overcome the problems posed by the enduring lack of science and engineering skills among graduates. Even more urgently, they need to better leverage the skills of talented, ambitious female entrepreneurs.
Fortunately, the region is changing: according to a recent report by HSBC, the Middle East is the home to the highest number of business owners aged under 35 years old. These so-called ‘millennial entrepreneurs’ are exactly what the Gulf region needs. They, not oil barrels, hold the key to the region’s future.