Contents
What factors have led to the fact that the UAE economy has become the most competitive in the Arab world? On what foundation is the technological progress of the country built and what place do companies occupy in it?
About the expert:
Anton Alikov, general partner of Arctic Ventures.
In recent years, the UAE has made a strong presence on the venture capital scene. Among the richest petrocracies in the Middle East, and indeed in the Arab world in general, success in technological development is a rather rare example of the successful transformation of natural resource revenues into large-scale progress. But capital alone would not be enough.
The UAE economy is the most competitive in the Arab world, according to rating of the International Monetary Fund for 2022. The nearest technological oases to the UAE are Israel and India, but the secrets of their success are completely different. Wealthy Gulf states such as Qatar and Bahrain have similar visions of technological development, but so far have not come close to the success of the UAE. This further supports the conclusion that the recipe for economic prosperity is usually very specific and rarely works in other countries.
Government support
The world is currently undergoing the fastest energy transition in history, and the UAE government has long been aware of the implications of this transition for its core oil and gas assets, which could become irrelevant over a 15 to 20 year horizon. Therefore, for many years it has set itself the most ambitious goals of expanding economic diversity and building resilience.
To achieve these goals, the UAE has implemented major fiscal and legal reforms, as well as launched large-scale programs:
on the privatization of assets,
expansion of public-private partnership,
revealing the value of real assets and infrastructure,
development of human capital.
As a result, foreign capital and technology entered the country. In this context, the UAE quickly recognized the high importance of venture capital investments in achieving the above goals.
It is government initiatives that have become a key factor in the rapid economic growth of the technology sector. The success of the policy can be emphasized by the following fact: in November 2021, the Israeli venture fund OurCrowd is the first Israeli fund to target tech start-ups in the UAE.
This situation is also explained by a number of historical and economic factors that came together in the UAE, because even the closest neighbors in terms of technology are still quite boring, although there are funds. Let’s try to figure them out.
multiculturalism
The favorable location at the crossroads of trade routes between Europe, Asia and Africa, as well as access to the sea, has attracted close attention to the region from the European superpowers, especially Portugal and Great Britain, since the XNUMXth century. The largest commercial structure of those years, the British East India Company, appeared on the peninsula. The British left behind the English language, extensive trade relations, as well as English law, which was mixed with Sharia. Thus, the country has long hosted many foreigners, which manifested itself in the moderation of Islamic customs, cultural diversity, knowledge of languages, and trade relations.
Close business ties with the UAE and even obtaining citizenship is a fairly common story among our compatriot entrepreneurs. FROMamong those who became citizens of the country – the creator of the social network “VKontakte” Pavel Durov and Andrey Melnichenko, the main beneficiary of EuroChem.
Rapid economic diversification
As already noted, the basis of the current wealth of the UAE is the oil and gas that was found in the country in the 1950s. Oil exports began in the 1960s, and the global oil crisis of the 1970s drove up prices to unprecedented heights and quickly propelled the UAE into the cohort of the leading countries in the region.
During these years, the sovereign investment fund Abu Dhabi Investment Authority was created. The influx of capital and the invitation of foreign workers and specialists made it possible to quickly build an excellent infrastructure (roads, airports, ports), as well as significantly diversify the economy, forming almost from scratch such industries as tourism, transport, telecoms, agriculture, energy, retail trade.
Young consumers
An important factor in the success of the UAE is also demographics. The Middle East and North Africa region is home to 7,5% of the world’s population, and the young population predominates.
Of the nearly 600 million people in the region, more than half are under 25 years of age. That is, the population is open to innovation and is not tied to traditional business methods.
Who invests in what in the UAE
Since the 2000s, the UAE has been creating a financial center at the regional and then global level. This was due to oil capital, trade relations, the availability of the necessary infrastructure, the attention of the government and the ability to invite a large number of foreign specialists. Representative offices of the largest banks, consulting firms, brokerage houses have opened in the UAE. Gradually, international private equity funds began to appear, and then venture funds.
In the 2000s, their own large investment structures appeared: Mubadala Investment Company, Emirates Investment Authority, Investment Corporation of Dubai, Dubai Investment Fund and others. They are all connected in one way or another with the state. In the 2010s, own venture funds also appeared, including Arzan Venture Capital, Dtec Ventures, EQ2 Ventures, Iliad Partners, Jabbar, BECO Capital. In the spring of 2022, the Crown Prince and Chairman of the Executive Council of Dubai announced the launch of a venture capital fund with a funding volume of $100 million to support startups and entrepreneurs.
The country very quickly went from a resource-based economy to state financial capitalism and, as a result, a developed investment business. Thanks to this, it was possible to diversify the economy and create a direction for venture investments in technology businesses. The UAE structures act both as suppliers of venture capital to foreign projects, and as recipients of foreign capital and technologies at home.
A report from research firm Magnitt says the UAE had to 46% of all venture capital received by startups in the Middle East and Africa in 2021, and 26% of deals made in the region are registered there.
The UAE is also cultivating its own “unicorns”. Two Emirati companies, Kitopi, a leading cloud kitchen platform, and Pure Harvest Smart Farms, a sustainable farming innovator, are among the top five companies that have raised the largest rounds in the region.
The top five Emirati startups raising venture capital are food tech, financial technology, e-commerce, transport and logistics, and enterprise software.
The country and the government are also open to the startups of the future. Cryptocurrency projects and metaverses are gaining popularity. For example, the authorities are launching the Dubai Metaverse project in order to create 40 thousand additional virtual jobs. Emirates Airline also announced plans to develop the metaverse. In July 2022, the government launched the $820 million National Space Fund to develop its space industry — not the first space initiative, but the first step of its magnitude.
Oil and gas capital and government initiatives to create a diversified economy are the foundation on which the country’s technological progress is built. However, the historical features of the country, the demographics of the region, cultural and linguistic diversity, and the rapid development of the financial industry were also important success factors. The UAE has found its recipe for success in a complex combination of many rare factors and skills that are hardly a complete list in other countries.
investors and entrepreneurs
investors and startups are also trying to join the venture capital trend set by the UAE government. But for now, these are targeted projects and deals.
By the way, the country did not become a place for the relocation of IT startups and venture funds from our country in the spring of 2022, and even those who tried to do it in an emotional outburst have already returned. Among the reasons often cited is the rather complex process of organizing a business in the UAE, which requires a more strategic than spontaneous approach. The summer heat, forcing people to leave the region for several months, is also one of the factors why the country is not considered for year-round work and residence.
Individual entrepreneurs enter the UAE market on their own or through accelerators. Especially popular among accelerators is Zayed Middle East Accelerator, there are also joint programs with Russian companies, such as Hub71 and Sberbank. Examples of projects with Russian roots are the YallaMarket product express delivery service and the Hot-WiFi WiFi marketing network.
If we talk about venture investments, the UAE is not among the top countries for Russian investors. They still prefer the United States (investments in American projects, by the way, despite the huge number of sanctions, are legal both from the United States and from our country), as well as Europe and Asia. But there are examples, and mostly these are cryptocurrency projects.
The attitude towards Russian investors in the country is neutral and friendly, no restrictions are observed. The actions of our country on the world stage have led to the strongest rise in oil and gas prices in recent years – a real oil and gas renaissance, and the UAE is a direct beneficiary of this situation. In the first quarter of 2022, the country’s economy grew by 8,2%, and for the first half of the year the growth may be more than 10%, as in Saudi Arabia. The country directs capital inflows to venture investments, among other things.