Blog: What Drives Innovation

By Mo Fakhro

Throughout history, the primary driver of economic growth has been innovation. From the invention of the wheel, to the invention of the airplane, to the invention of the personal computer, innovation has been a key contributor to economic growth. The fundamental reason for this in my view, is that the net result of innovation is to speed up the rate at which transactions can occur between buyers and sellers.

It is therefore reasonable to ask, what drives innovation, and what can we do to instigate innovation in the Arabian Gulf? For the past 200 years or so, the primary innovations of the world have been created in Europe and the United States. For the most part, the rest of the industrialized world has excelled by copying these innovations and doing so with lower costs of labor.

There is an old saying in some parts when it comes to business. When you make a case to utilize existing innovations, you are told to not “reinvent the wheel”. This is an important saying because of what it implies. It implies fundamentally, that before you begin innovating, you need to copy what has already been innovated, and then build on it.

The oil producing countries of the world have been unable to innovate for multiple reasons but I believe the main reason is that they have been unable to copy competitively due to the prevalence of oil. This is because the prevalence of oil has led, for various reasons, to an increase in the cost of labor, which has made it not practical to copy.

From a consumer standpoint, the main driver for a customer to buy an equal product to another is for the purchased product to have a lower price. Japanese and then Chinese products initially competed with Western products by being significantly cheaper copies with slightly lower quality. In the early 20th century, American products competed with British products by using a similar strategy. Innovation only begins at the microeconomic level in my view, after a company reaches the cutting edge through copying what has already been done. I use the term copying quite liberally here to refer to utilizing patents and existing products as the basis for creating a better product.

It therefore seems unfortunate that people who live in resource rich regions of the world will be unable to become true innovators because the high cost of labor resulting from the sale of those resources will make it impossible for them to copy competitively, and copying is a precursor to innovation when it comes to economic development.

The prevalence of the globalization of capital is the only way to mitigate this for companies that are keen to innovate, that are based in resource rich countries. By allowing companies from one country to invest in another, innovations can be financed by deploying the capital accumulated in the resource rich parts of the world, to those that possess an ability to copy or innovate competitively. Through this indirect route, companies in the economies of the Arabian Gulf could create economic progress through innovation by leap frogging over the hurdle placed by the high cost of human capital in their region. Such companies could then, through government incentives, create R&D centers in their resource rich parts of the world, and transfer knowledge from their foreign subsidiaries back to their local R&D centers.

This would seem like the only realistic route to achieving cutting edge industries in resource rich regions of the world. It is perhaps a strategy that should be focused on more by the economies of the Arabian Gulf, as they attempt to break free from their dependence on oil.