The Evolving Face of the Tech Entrepreneurship Ecosystem in the UAE
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The Evolving Face of the Tech Entrepreneurship Ecosystem in the UAE
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By Naam Chakravorty, Gulf Region Analyst, Botho Emerging Markets Group
November 18, 2020
In 2018, I worked on an off-grid electrification concept with a UAE-based company that sought to unlock power distribution for rural African consumers. The company’s target consumer earned less than a dollar a day and consumed ~10 kWh/year — equivalent to the amount of electricity a single TV consumes in 5 days. To meet demand at low cost, we explored the use of AI to map consumer behaviors and earning/spending patterns, and subsequently connect them to the grid using the same technology. We looked for talent in Europe and India. It did not even occur to us to develop the tech solution in the UAE, because we thought the R&D costs would eat into our limited start-up budget.
We weren’t alone in that perspective: many tech-entrepreneurs face such obstacles when launching new ventures in the country. The UAE has introduced several initiatives to discourage the outsourcing of technology development, inspire local innovations, and position the country as a tech-cocoon. Given the UAE’s aim to foster home-grown tech innovations developed by both local and global enterprises, the country's current business environment is such that only larger firms with deep pockets can afford to not outsource their R&D to cheaper countries. This limits the potential of small, experimental players from developing cutting-edge technological solutions within the UAE’s borders.
The UAE’s Tech Ecosystem at a Glance
The UAE has championed tech innovations for over a decade, the most recent example being the Emirates Mars Mission. The country also developed the world's most sustainable eco-city, Masdar, and Dubai Police’s ‘Robocop’. The government has set up 45 free zones, opened up to 100% foreign ownership in companies, eliminated corporate taxes, and allowed 100% repatriation of revenues. In addition, the country boasts 17 accelerator programs, 12 incubators, and 7 co-working spaces focussing on increasing the uptake of youth entrepreneurship.
The UAE is rapidly building the ecosystem to increase the risk appetite of tech entrepreneurs - citizens and expats, alike. However, the innovation landscape is evolving at a pace and scale that alienates some potential tech-enthusiasts, especially youth-owned and growth-stage tech enterprises, which need a tailored and subsidized support system. The lack of a central body overseeing these efforts creates barriers to entry for UAE citizens and expats looking to experiment with tech-entrepreneurship, thus potentially curtailing the domestic creation of tech innovations.
Outsourcing R&D: Where’s the Tech Being Developed?
The UAE is the most preferred headquarters for global corporations and investment vehicles whose work covers the Middle East and Africa, with over 155 regional and sub-regional headquarters overseeing business in the entire MEA region. The presence of reputable accelerators and incubators, such as Area 2071 (Dubai Future Foundation), FinTech Hive, and Dubai Technology Entrepreneur Campus (DTEC) all contribute to making the UAE a conducive environment for starting a tech or tech-enabled company.
DTEC offers a tech-entrepreneur 100% business ownership, multiple work visas, startup boot camp education, and a bright, airy working space with high-speed Wi-Fi. Should the techpreneur need to de-stress, DTEC has an indoor jogging park and life-sized chess. If that’s not enough, the accelerator also offers networking opportunities with many participants and investors, most of whom are receptive to collaboration, pitches, and investment opportunities. The cost of shared office space ranges from US$ 5000 (flexi-desk) to US$ 20,000 (furnished/ unfurnished office space) annually.
However, even though the UAE provides strong resources for tech-entrepreneurs, the relatively higher costs of corporate incorporation and operational requirements drive start-ups towards an outsourcing model. This approach involves positioning the client-facing office in the UAE with backend R&D offices in countries, such as Egypt, Jordan and India.
Is 100% Foreign Ownership Good News for Tech Investments?
This outsourcing model extends beyond R&D to investment considerations, too. In 2019, the UAE cabinet approved select eligibility for 100% foreign investor ownership, whereas previously, foreign companies could hold up to 49% of a mainland UAE company. Under the new provisions, companies must meet certain conditions, such as fulfilling the range of share capital requirements between AED 2 and 100 million, contributing towards R&D, introducing and using new technologies, etc. How these conditions are set and measured are not yet clear and will be studied by the Department of Economic Development (DED) on a project by project basis.
One additional hurdle: the high minimum capital requirement for most of the activities eligible for 100% ownership may be prohibitive for many SMEs. Even larger firms might still opt for multiple entity registration to bypass the aforementioned conditions. For example, a single company can establish an entity for investment in the British Virgin Islands or the Cayman Islands, along with a free zone company in the UAE to register their IP. In this manner, the UAE may be losing out on tech investments from both SMEs and larger companies.
How Can the UAE Nurture More SME Techpreneurs?
As the UAE aims to increase SMEs’ GDP contribution from 40% in 2017 to 45% in 2021, policymakers should consider fostering greater equilibrium between start-ups and large tech firms. A comparative example would be Israel, the first non-native English-speaking country to be dubbed ‘The Start-up Nation’, with over 3000 tech-focussed startups founded in the past decade. The Israeli government has set up over 20 incubators that offer early stage projects funding of up to 85% for two years, thus encouraging youth and growth-stage participants in the tech-ecosystem. The country also boasts the world's 2nd highest R&D expenditure, amounting to 4.3% percent of GDP. The investment law in Israel enables foreign and local companies to take advantage of reduced corporate tax and public grants, which in turn are complemented by a thriving venture capital industry. The Israeli ecosystem possesses a unique adaptability to create a risk friendly entrepreneurial environment, which in turn has shown strong performance.
Given the UAE government’s current role as the key driver of the country’s tech ecosystem, it should prioritize creating a uniquely identifiable organization that is decentralized and approachable for enterprises of every size. In Israel, for example, the Israel Innovation Authority is a decentralised, publicly funded agency that specifically addresses the dynamic needs of the tech ecosystem. Their support extends to tech-entrepreneurs (both local and foreign), mature companies, academia and foreign governments interested in collaborating with the Israeli tech sector. A comparable organization in the UAE could be a one-stop-shop that caters to all types of tech entrepreneurs, including SMEs, encouraging innovation without the prohibitive business setup requirements and costs. The decentralized body would connect policymakers, academia, and the private sector to the entrepreneur to support and mentor them in navigating the UAE’s social mindset, market, and investment culture.
The UAE, as a gateway between Asia, Africa and Europe, is well-positioned to develop a globally competitive tech ecosystem. The country’s strong infrastructure and talent pool combined with a supportive public sector have addressed many of the growing pains within the ecosystem. However, to achieve its growth objectives, it requires targeted initiatives to create an enabling, cost-effective environment for tech SMEs to experiment, fail, and bounce back, as an iterative process is critical to innovation. Eventually, the government's efforts should expand the pool of local and expatriate entrepreneurs, stimulate competition, and make the ecosystem self-sustaining.
Sources: OC&C 2019, DCCI, DTEC, SME10x, KU, U.ae, DubaiFuture, Gateway to Abu Dhabi