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Arab world needs to invest further in institution-building, human capital

But moving economies to become more innovative can be a gargantuan task, as decision makers and policymakers strive to put in place the necessary framework to facilitate innovation. In the Arab world, where economies have been very dependent on oil, this task is undoubtedly tough.

"To be successful operating on the world stage and to build a sustainable competitive edge, you have to be operating in the third stage," says Dutta, referring to an economy that needs to move from being factor-driven to innovation-driven. "These economies are the richest and capture the most value and wealth for the citizens," he adds.

INSEAD and Dubai-based knowledge brand, Moutamarat, are together compiling the second Arab Innovation Index (AII), the results of which will be released later this year. The index measures the factors that are key to economic, technological and social progress and development and is the only comprehensive index of innovation in the region.

Yet despite the challenges that Arab countries must tackle in order to compete globally and create more wealth for their economies and citizens, "the results are more positive than one would expect," says Dutta. "That is because we are using a slightly broader model of innovation, rather than just patents produced and the level of research and development (R&D). We are using a holistic definition of innovation," he says.

This holistic model is based on eight pillars. These, in turn, are divided into two categories: input pillars, or enablers, and output pillars. The input pillars are those that enable an economy to become more innovative. These are: institutions, human capital; infrastructure development, including technology; market sophistication; and business process sophistication. The output pillars ask three questions: how much knowledge is being created in an economy? How competitive is the economy? And how much wealth is being created?

Describing the model, Dutta says: "The model tries to capture the degree to which the economy is creating the enabling conditions for innovation and also the degree to which an economy is succeeding at being innovative." Moreover, innovation is more than idea creation, it is value creation, he says. "Innovation is about taking ideas, taking them to market and creating value from them."

In the Arab world "if there are two messages coming out at a very high level from the work we have completed is the need to focus on institution building and on human capital development," Dutta says.

In both these respects, Arab countries have a long way to go. When it comes to institution building- referring to the political, regulatory and judicial environments — many countries in this region "perform extremely poorly", he says. 'What we find in the Arab world is that there is a tremendous need to invest in institution building. This is very important because just having trade agreements, or economic agreements, don't by themselves create the right holistic environment for innovation," he says.

"If you don't have the right institutions then it is very difficult to get innovation to succeed," he says, adding that in the Arab World "the time it takes to get basic procedures done, and the time it takes to enforce contracts can be extremely long."

He compares Central and Latin America with the European Union (EU). In the former, where there has been a focus on trade agreements such as NAFTA rather than on institution building, "a lot of countries are not making much progress," he says.

Contrast this to the EU where there is a very strong focus on institution building, Dutta continues. "Before you join (the EU) you have to build institutions. Whether it is a five-year or 10-year process the country must be guided through institution building. That's a very important reason why the EU is succeeding and why the newer states that are coming in have very high growth rates."

To encourage innovation, it is important to have a regulatory environment that supports new ideas. In other words it is important to have laws that protect intellectual property rights (IPRs). "Companies will invest in innovation if they feel that institutional support is good," says Dutta. "This happens as an economy becomes more innovative."

So although criticism is often levelled at Arab countries for failing to protect IPRs sufficiently, over time this is likely to change. "As Chinese companies become more innovative they are demanding stronger support for IPR. It is a natural thing that is demanded by innovative companies and the environment in which it is offered," he says.

Another pressing concern for economies across the region - and one that will come as no surprise to most- is the need for human capital development. And while investing in educational institutions and building local talent, it is also important to attract global talent, says Dutta. "Global talent is very mobile so it is critical that the local economy is able to attract that talent." He also notes. "Countries have to fight a war for talent. In a sense what the UAE is doing is very interesting as it is a place where global talent feels at home."

Economies also require strong leadership if they are to innovate successfully. "You need more innovative companies and more innovative leaders to be role models for others in the region," he says.

Although it will be a good few months until the results of the Arab Innovation Index are known an indication of where the UAE will be ranked can be gleaned from the World Business/ INSEAD Innovation Index released in February. In this index, the UAE was ranked 14th out of 107 countries, ahead of India and China, which were ranked 23 and 29 respectively. Kuwait, the only GCC country on the list, is ranked number 30. Dutta also adds: "There are positive indicators for the Arab world. There are clearly hotspots of innovation emerging, including one in this country."

Dutta emphasises that the purpose of the index is to go beyond merely producing a ranking. "It is to put the attention of these economies on innovation and to help them move onto the third stage," he says. To make this happen, however, "requires focused action from key stakeholders, and it needs a partnership on both sides. I think it has to be a priority for these economies if they want to succeed in a globally competitive environment."