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Abu Dhabi, UAESaturday 23 June 2018

Is Bahrain the region’s next innovation hub?

The island has big plans to attract entrepreneurs and start-ups from around the world. But can it develop enough resources to compete with regional rivals?

S&P said its rating decision was due to "the country's net external asset position and modest level of economic wealth".  Photo: Getty Images
S&P said its rating decision was due to "the country's net external asset position and modest level of economic wealth".  Photo: Getty Images

The government of Bahrain is expecting 2,500 entrepreneurs from around the region to gather in Manama for its first Start-Up Bahrain Week, which kicked off on Sunday.

The event is part of an aggressive strategy by the Bahrain Economic Development Board (EDB) to turn Bahrain into a leading innovation hub for the Middle East and North Africa region. “If we can get all the elements right, then Bahrain can become an amazing hub for start-ups from around the region,” EDB chief executive Khalid Al Rumaihi tells The National. “How amazing it would be if we could get Egyptian entrepreneurs, Tunisians, Moroccans, to come to our country to innovate and scale their businesses.”

The week began with a gaming conference and a start-up bootcamp, and will continue until Thursday with “Follow the Leaders,” a day of talks, discussions and classes surrounding entrepreneurship, and “unbound Bahrain”, a two-day innovation festival previously held in cities such as Singapore, Miami and London.

The government recently launched Fintech Bay, the country’s first dedicated hub for financial technology, as well as the region’s first onshore regulatory sandbox, which offers business licences tailored specifically for start-ups. Other initiatives in the works include a crowdfunding platform, a $100 million fund of funds for venture capital and a revised bankruptcy law that allows room for entrepreneurial risk and failure.

Bahrain is unique among the GCC countries in that offers foreign entrepreneurs benefits similar to those of nationals, for example 100 per cent land and business ownership, even outside of free zones. “We need a wide base and a wide diaspora in order to provide the idea diversity and the talent diversity required to succeed,” says Mr Al Rumaihi, noting that a shortage of technologically educated graduates is Bahrain’s greatest innovation challenge. “If we are serious about [developing] an [innovation] ecosystem, then [that ecosystem] will have to embrace people who come from the outside.”

Wifag Adnan, an economics professor at NYU Abu Dhabi, however, argues that the strategy of importing innovators from the wider Mena region may be unsustainable. “Given the geopolitical situation and security concerns in the region, there are always going to be limits to the mobility of entrepreneurs,” she says, pointing to intensive vetting processes for foreign workers across the GCC. “There is definitely an incentive for an Egyptian or Tunisian entrepreneur, for example, to collaborate with someone from Bahrain on a project, but given all the constraints and institutional requirements, how feasible is it for that to happen on a large scale?”

According to Mr Al Rumaihi, fostering an innovation ecosystem will increase foreign direct investment and promote SME growth, ultimately creating more jobs across the country. With annual growth of 3.6 per cent in the first three quarters of 2017, Bahrain claims to be the fastest growing economy in the GCC. The country achieved more than $733m in inward investment in 2017, a stark increase from $281m in 2016. Some 80 per cent of the year’s investment came from countries outside the Mena region – 67 per cent from North America and 13 per cent from Europe and Asia.

EDB chief economist Jarmo Kotilaine adds that generating innovation has become imperative for Bahrain, due to deflated oil prices and reduced public sector spending. “When you look at the history of the growth in the region over the past 20 years, GDP growth was driven by new inputs, whether that was physical capital or more people coming in through natural population growth or immigration,” he says. “Going forward, the economy has to be much more about productivity.”

“I think we are still at a relatively early stage in that story but I do think we have turned a corner, and this transition truly is happening.”

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Amin Al Arrayed, the chief executive of the real estate company First Bahrain, says he has experienced this transition firsthand, beginning with the 2008 financial crisis. Tighter margins pushed his company to pursue ideas that were new to the Bahrain market, for example Majaal, the first high-quality warehouse development tailored specifically to SMEs, or El Mercado Village, a mall with an open-air plaza in a country where customers were used to shopping indoors.

“Good times create complacency,” he says. “If you are making money, boards are reluctant to take risks. It is only when you are pushed to find new ways of doing things that you can stand out.”

Despite Bahrain’s efforts to attract and foster entrepreneurship, it is unclear whether the country can compete with more prevalent innovation hubs, particularly the UAE.

Dubai and Abu Dhabi rank number one and two, respectively, on the 2thinknow’s Innovation CitiesTM Index for Middle East and Africa, while Manama stands at 23, trailing behind most other cities in Mena, including Amman, Riyadh, Jeddah and Kuwait.

Todd Morrill, a Fellow at the Haas School of Business, University of California, Berkeley, whose research focuses on innovation in the GCC, notes that Bahrain has a narrow window to catch up to Dubai as a regional leader. “Entrepreneurial activity is just getting going in the [Arabian] Gulf, and, so far, I don’t see the necessary critical concentration of technical expertise, education, appropriate legal structure and venture capital anywhere in the region,” he says. “I still think that there are tremendous opportunities in Bahrain, if the country moves quickly and helps build the infrastructure.”

Regional entrepreneurs who have set up shop in Bahrain cite the country’s low living and operating costs, relaxed lifestyle, business-friendly regulations and proximity to the vast Saudi market as appealing factors. According to a 2016 KPMG report, the cost of doing business in Bahrain is 30 and 40 per cent cheaper than in Dubai and Qatar, respectively.

Saudi Arabian national Abdulaziz Al Jouf considered these factors when he selected Bahrain in 2015 as home base for his online payment company PayTabs, which raised $20m last year for expansion into 20 countries, making it the largest fintech start-up in the region. “I went to Dubai for a week, Riyadh for a week, Qatar for a week and Kuwait for a week, just trying to see where the best place was to start,” he recalls. “At first, Bahrain was at the bottom of my list, but when I did my calculations, I ended up with Bahrain as the number one.”

Bahrain also trumps the rest of the Gulf in terms of attitudes towards entrepreneurship among its youth. According to a 2016 EY survey, 70 per cent of young Bahrainis are interested in the idea of starting their own business, at least twice as many as anywhere else in the GCC.

Still, for many young adults in Bahrain, the choice to become an entrepreneur is less appealing than finding a job in the government. According to the Bahrain Labour Market Regulatory Authority, the median wage for Bahrainis in the private sector in the second quarter of 2017 was only 407 Bahraini dinars (Dh3,962), compared with 691 dinars in the public sector. More than 160,000 Bahraini nationals worked for the government in 2016, compared with just over 100,000 working in private companies.

“There is a strong pull for young people in the GCC to look for a stable government job, rather than to start their own businesses and run with their own ideas,” says Andrew Marrington, acting dean at Abu Dhabi's Zayed University’s College of Technical Innovation, noting that parents in the region tend to encourage their children to seek stable employment.

Mr Al Jouf recalls facing opposition from his family when he left his well-paying job with Saudi Aramco to start PayTabs. “When I told my dad about my idea, he kicked me out of the house,” he says, laughing.

While Mr Al Jouf has inspired a number of young people in the Gulf to start businesses, he insists not every one has the makings of an entrepreneur. “If you are not ready to do it fully, then don’t jump,” he says, recalling how multiple banks initially rejected his requests for financing. “Rejection means ‘try again,’ and ‘no’ means ‘yes’ in the future.”

Mishal Kanoo, chairman of the Kanoo Group, one of the largest family conglomerates in the GCC and which began in Bahrain 128 years ago, also suggests the need for managing the expectations of young entrepreneurs. “There needs to be a realisation among people that they do not need to create the next Facebook or the next Google, because that is not going to happen – these companies are one-offs,” he says, adding that most people expect innovation to be sudden and disruptive, even though it usually takes place in a way that is long term, consistent and incremental. “On the other hand, it is not that hard to create the next GE, because GE was not something that happened overnight.”

“I wish I could help people stop seeing innovation as a seismic event,” he says.

“If everyone thinks they can do something new, and they don’t fulfill that expectation, what a negative impact that will have on society.”

Kathryn Semcow is a researcher, writer and consultant, whose work focuses on generating innovation in the MENA region