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Of the top five global economic superpowers - the European Union, the United States, Japan, China and Arab League countries (the latter with equivalent of more than Dh4 trillion combined GDP) - the last two have yet to make their marks as world-class innovators.
That's not for lack of intent or effort. Dubai has initiatives like the Dubai Internet City and Dubiotech that promise future support for research and development.
Additionally, there is Mohammad Bin Rashid Establishment for Young Business Leaders which works mainly with small and medium enterprises, but also encourages entrepreneurship.
So how does the UAE fare on a global scale? London-based Global Entrepreneurship Monitor, which tracks global entrepreneurial activity worldwide, notes that the UAE "expected job growth is very strong with the second highest proportion of start-up businesses and established businesses expecting to hire ten or more employees within five years."
But this cheery news comes from a teacup, because the report also says that early-stage entrepreneurial activity in the UAE is among the lowest of all participating nations.
Venture capital
Entrepreneurial lore is full of legends like Jobs and Wozniak, two California geeks working from a garage, who created the first Apple Computer - and founded a company and an industry. Dubai has garages and geeks - why so few entrepreneurs?
Another ingredient was money - venture capital money to be precise. Venture capitalists fund start-up companies, as they did with Apple. Indeed, an industry of venture capitalists specialises in this type of investment. Under the right conditions, the combination of these two - entrepreneurs and venture capitalists - can have a whopping impact on economic growth.
The US has 70 per cent of the world's venture capitalists. Companies they have funded (Google, Intel, Microsoft, and eBay among others) account for almost 10 per cent of US economic activity. Their sales and employment grow almost twice as fast as other companies.
Results are even more pronounced in specific sectors. The US National Venture Capital Association reports that venture-capital backed biotechnology companies grew 23 per cent and computer software 17 per cent compared to declines for other companies in both industries.
Industry birth
So what hinders the regional venture capital initiatives? The answer comes from the Gulf Venture Capital Association which was formed in Bahrain in 2005. It recently held its first conference.
Among the challenges identified for the region's venture capitalists were a weak legal framework, insufficient awareness of venture capital as an industry, shortage of professionals and lack of communication among industry players.
In other words, there is not yet an 'institutionalised' venture capital industry in the Gulf. That's different from saying that money is not available to invest in promising start-ups.
The region's excess liquidity virtually guarantees that capital will be available as the opportunities are identified. This single fact may have much to say in the future about how the venture capital industry evolves in the Middle East, perhaps in a way that is unique compared to other countries - developed and developing alike.
But a mature venture capital industry offers a great deal more to start-up companies than just money. People who work within the industry offer expertise that helps launch the entrepreneur into business, and then shepherds him through each stage of the commercialisation process.
Sources
Obtaining venture capital funding is rarely easy, and CEOs of start-up companies often attend 'meat market' conferences to meet venture capitalists. Brief presentations are made, business cards are exchanged, and then everyone races to the next session. Often a 40 minute session will have three different entrepreneurs presenting, one of which may have flown half way around the world for the opportunity to get his company's 'story' in front of a crowd of potential financiers.
"Angels" are another funding source, but are not part of the mainstream venture capital industry. Angels are usually high-wealth individuals who make investments that other venture capitalists shun.
In most countries, banks are not a good source for start-up capital primarily because new companies have no credit history to rely on when making the loan decision. The exception is where governments provide some sort of guarantee to the bank if the business fails.
Islamic finance
However, here again, the Middle East may eventually create a venture capital industry that is different because of the role of Islamic banking. Under Sharia, equal risk sharing is required so that Islamic banks may end up playing a key role in venture capital whereas in non-Islamic banks typically do not.
Experts have found that the experience of venture capitalists themselves is an important factor in the success of their investments, and specifically experience within the industry being funded.
A successful venture capitalist in telecommunications would not necessarily be successful at medical imaging or biotechnology.
In fact, this industry specific experience is so important, some experts say, that it overshadows experience as a venture capitalist per se. However, having said that, venture capitalists can often replicate successes from one company to the next in the same or closely-related industries.
Venture capitalists also tend to be very actively involved in the management of the start-up. As one expert dryly observed, "the talents needed to start a business are not necessarily the talents needed to manage it competently."
Venture capitalists also provide credibility to a start-up company just as a prestigious investment banking firm lends its good name to a public stock offering. The involvement of successful venture capitalists is a signal that the start-up has received a 'seal of approval.'
Going public
The venture capital industry itself is dependent on a robust, healthy stock market. The reason is that venture capitalists rarely continue to own the company in which they invest, but usually cash in and move on.
So, an "exit strategy" is typically put into place when funding is granted. Venture capitalists may sell their interest back to the founding entrepreneur. The second option is to sell the start-up to a larger, established company with superior production and marketing experience.
However, the gold ring is to "take the company public" - to sell stock through an initial public offering (IPO). This is where the millionaires are made. This is also why it's important to have a robust, healthy stock market.
Logic suggests that more start-ups eventually lead to more initial public offerings. But it doesn't work that way. Instead, experts say, more initial public offerings create more start-ups, at least in late stages of funding. In other words, stock markets must give encouraging signals to venture capitalists.
Venture capitalists are not the only ones watching for these signals. Entrepreneurs and employees are often willing to work at below-market wages in trade for lucrative stock options which can be worth a fortune if the company goes public. Microsoft has created four billionaires and many millionaire employees.
However, it's difficult for a start-up in Dubai, for example, to go public in London or New York.
In fact, venture capitalists tend to be highly geographically concentrated and stick close to home. Because venture capital has been centred in developed countries, the issue arises of whether their methods can be cloned in developing economies.
Some observers note that there are differences, while others see the gradual emergence of a "universal" approach to venture capital. But in the Middle East, these issues are not so clear because no other market has had a like combination of liquidity and Islamic law.
Still, developed economies offer a starter recipe. As one wag says, "combine liberal amounts of technology, entrepreneurs, capital, and sunshine. Add one university. Stir vigorously."
The relationships are clear. As one researcher notes, labour-force quality, not just quantity, has a consistent, stable, and strong relationship with economic growth.
Michael Porter - the Harvard guru of national competitive advantage - sums up the issue by saying "Universities and specialised research centres are the driving force behind innovation in nearly every region.
Although companies and individuals do create a large number of innovations, universities and research centres institutionalise entrepreneurship and ensure a steady flow of new ideas." He is, of course, speaking of research-oriented universities.
Even with the right ingredients - research, innovation, entrepreneurs, venture capital, an active IPO market and supportive infrastructure - a chef may still be needed to get things cooking. There should be a challenge or a goal that drives innovation and encourage funding.
In the US, for example, President John Kennedy in 1963 challenged the US to put a man on the Moon within ten years. The Soviets had just launched the first manned spacecraft, bruising American egos. But Kennedy also wanted to spur a sluggish US economy.
The space challenge, helped by generous government funding, galvanised entrepreneurs and venture capitalists alike. All sorts of technologies were needed to go deeper into space, and many of these turned out to have lucrative commercial applications. Going to the Moon was good for the economy.
New Zealand attacked the problem of encouraging innovation by creating a Ministry of Research, Science and Technology to advise the government on policy that relates to research.
This includes increasing the level of research and development, structuring the research system, commercialising results and making sure that research is responsive to environmental and social issues. Again, a galvanising force.
If the UAE apparently has all the ingredients for encouraging entrepreneurship, what is left to see results is to create the challenge and the need for them.
The writer is a business professor at the American University in Dubai.
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