In Israel the story is different. Margalit is one of tens of thousands of serial entrepreneurs. No one picked him; he picked himself. All of his success came from creating innovative companies and hooking into a global venture and tech ecosystem that is constantly searching for new products and markets. And while the physical infrastructure that facilitated this process in Israel may have been inferior to Dubai’s, the cultural infrastructure has proved to be vastly richer soil on which to cultivate innovation.
Attracting new members to a cluster by offering a less expensive way to do business might be sufficient to create a cluster, but not to sustain it. If price is a cluster’s only competitive edge, some other country will always come along to do it more cheaply. The other qualitative elements—such as tight-knit communities whose members are committed to living and working and raising families in the cluster—are what contribute to sustainable growth. Crucially, a cluster’s sense of shared commitment and destiny, which transcends day-to-day business rivalries, is not easy to manufacture.
The obstacles for Dubai, in this sense, are profound. Foreign nationals—European and Persian Gulf business adventurers or South Asian and Arab temporary laborers—are there to make money, period. Once they’ve done so, they have typically returned home or moved on to their next adventure. They have a transactional relationship with Dubai; they are not part of a tight-knit community, and they are not collectively laying roots or building anything new. They evaluate their standing and accomplishments vis-à-vis the communities in their home countries, not those in Dubai. Their emotional commitment and sense of rootedness lie elsewhere. This, we believe, is a fundamental obstacle to a fully functioning cluster, and it may also be an impediment to cultivating a high-growth entrepreneurial economy.
“If there is an Internet bubble in Israel, then Yossi Vardi is the bubble.”4 So says Google cofounder Sergey Brin, referring to Vardi’s role in helping to rebuild Israel’s Internet sector from the ashes of the global technology market crash of 2000. Vardi’s name has become synonymous with the world of Israeli Internet start-ups. He is best known for ICQ, the Internet chat program founded by his son Arik Vardi and three pals when they were in their early twenties. Isaac Applbaum of The Westly Group says that ICQ—once the world’s most popular chat program—was one of a handful of companies that “transformed technology forever,” along with Netscape, Google, Apple, Microsoft, and Intel.
ICQ (a play on “I seek you”) was introduced in November 1996, with seed funding from Vardi. It was the first program to allow Windows users to communicate with one another live. America Online (AOL) invented its own chat program, called Instant Messenger (AIM), at about the same time, but at first AOL’s program was available only to its subscribers.
The Israeli program spread much faster than AOL’s. By June 1997, close to half a year after ICQ’s launch—when only 22 percent of American homes had Internet access—ICQ had over a million users. In six months the number of users had jumped to 5 million, and ten months later to 20 million. By the end of 1999, ICQ had a total of 50 million registered users, making it the largest international online service. ICQ became the most downloaded program in the history of CNET.com, with 230 million downloads.
Back in mid-1998, when ICQ hit about 12 million users, AOL bought the start-up for what at the time was the largest amount paid for an Israeli tech company: $407 million. (They wisely insisted on taking all cash instead of stock.)
Though Israel was already well into its high-tech swing by then, the ICQ sale was a national phenomenon. It inspired many more Israelis to become entrepreneurs. The founders, after all, were a group of young hippies. Exhibiting the common Israeli response to all forms of success, many figured, If these guys did it, I can do it better. Further, the sale was a source of national pride, like winning a gold medal in the world’s technology Olympics. One local headline declared that Israel had become an Internet “superpower.”5
Vardi invests in Internet start-ups because he believes in them. But his dogged focus on the Internet when almost everyone else was in either classic “Israeli” sectors, such as communications and security, or hot new areas, like cleantech and biotech, is not attributable just to profit calculation. For one, Israel is his cluster, and he is conscious of his status as an “insider” in this community—a community that he wants to succeed. And with that commitment, he is also conscious of his role in sustaining this sector through a dry spell. Investing with a personal as well as a national purpose has been called “profitable patriotism,” and has been getting renewed attention of late.
More than a century ago, prominent banker J. P. Morgan almost single-handedly stabilized the U.S. economy during the Panic of 1907. At a time when there was no Federal Reserve, “Morgan was not only committing some of his own money but also organizing the entire financial community to join in the rescue,” said Ron Chernow, a business historian and biographer.6
When the crisis of 2008 hit, Warren Buffett seemed to play a similar role, pumping $8 billion into Goldman Sachs and General Electric over just two weeks. As the panic deepened, Buffett knew that his decision to make massive investments might signal to the market that he, America’s most respected investor, was not waiting for shares to plunge further and believed that the economy was not going to collapse.
Vardi’s interventions are not on nearly as large a scale, of course, but even so, he has had an impact on the mix of Israeli start-ups by playing a leadership role in keeping the Internet segment of the pie afloat. His mere presence and steadfastness in a sector that everyone was writing off helped turn it around.
At the 2008 TechCrunch, an influential conference that singled out the fifty-one most promising start-ups in the world, seven of them were Israeli, and many of those had raised capital from Yossi Vardi. TechCrunch founder Michael Arrington is a strong supporter of Vardi’s: “You [Israel] should build a statue of Yossi Vardi in Tel Aviv,” he says.7
In the best-selling book Built to Last, business guru James Collins identifies several enduring business successes that all have one thing in common: a core purpose articulated in one or two sentences. “Core purpose,” Collins writes, “is the organization’s fundamental reason for being. [It] reflects the importance people attach to the company’s work . . . beyond just making money.” He lists fifteen examples of core purpose statements. All of them are by companies—including Wal-Mart, McKinsey, Disney, and Sony—with one exception: Israel. Collins describes Israel’s core purpose as “to provide a secure place on Earth for the Jewish people.” Building Israel’s economy and participating in its cluster—which are interchangeable—and pitching it to the most far-flung places in the world are what in part motivates Israel’s “profitable patriots.”8 As historian Barbara Tuchman observed before Israel’s tech boom, “With all its problems, Israel has one commanding advantage: a sense of purpose. Israelis may not have affluence . . . or the quiet life. But they have what affluence tends to smother: a motive.”9
The absence of motive is a problem in a number of the states of the Gulf Cooperation Council (GCC), which is composed of the UAE, Saudi Arabia, Bahrain, Kuwait, Qatar, and Oman. In the case of Dubai, one of the emirates in the UAE, most of the entrepreneurs that come from elsewhere are motivated by profit—which is important—but they are not also motivated by building the fabric of community in Dubai. And as we have seen in examining Michael Porter’s cluster theory, a profit motive alone will get a national economy only so far. When economic times are difficult, as has been the case in Dubai since late 2008, or security becomes dicey, those not committed to building a home, a community, and a state are often the first to flee.
In the other GCC economies, the problem is somewhat different. In our travels throughout the Arabian Peninsula, we have seen firsthand how Saudi nationals—young and old—are proud of the economic and infrastructural modernization of their economy. Many Saudis have a tribal lineage that traces back centuries, and building an advanced economy that is recognized globally is a
matter of tribal and national pride.
But all of these economies also face challenges that can stifle any potential for progress.
A number of business and government leaders throughout the Arab world have turned their attention to stimulating a high-growth entrepreneurial economy, and some have been quietly studying Israel. “How else are we going to create eighty million jobs in the next decade?” Riad al-Allawi asked us. Al-Allawi is a successful Jordanian entrepreneur who has done business all over the region. Eighty million is the number we kept hearing from experts during our travels to Arab capitals.
The Arab economies of North Africa (Egypt, Algeria, Morocco, and Tunisia), the Middle East (Lebanon, Syria, Palestine, Iraq, and Jordan), and the Persian Gulf (Saudi Arabia, the UAE, Qatar, Bahrain, Kuwait, and Oman) comprise approximately 225 million people, just over 3 percent of the world’s population. And the total GDP of the Arab economies in 2007 was $1.3 trillion—almost two-fifths the size of China’s economy. But wealth distribution varies widely: there are oil-rich economies with tiny populations (such as Qatar, with 1 million people and a per capita GDP of $73,100) and oil-poor economies with large, dense populations (such as Egypt, with 77 million people but a per capita GDP of just $1,700). Generalizations about development strategies for the region are risky since the sizes, structures, and natural resources of the Arab economies vary widely.
But even with all the differences, the unifying economic challenge for the Arab Muslim world is its own demographic time bomb: approximately 70 percent of the population is under twenty-five years old. Employing all of these people will require the creation of eighty million new jobs by 2020, as al-Allawi told us.10 Meeting this goal means generating employment at twice the U.S. job growth rate during the boom decade of the 1990s. “The public sector isn’t going to create these jobs; big companies aren’t going to create these jobs,” says Fadi Ghandour, a successful Jordanian entrepreneur. “The stability and future of the region is going to depend on our teaching our young people how to go out and create companies.”11
But entrepreneurship has played only a negligible part in Arab world economies. Even before its economy imploded less than 4 percent of the UAE’s adult population was working in early-stage or small enterprises. So what are the barriers to an Arab “start-up nation”? The answer includes oil, limits on political liberties, the status of women, and the quality of education.
The vast majority of the region’s economic activity is driven by the production and refinement of hydrocarbons. The non-oil GDP exported by the entire Arab world—with a population of approximately 250 million people—is less than that of Finland, with a population of 5 million. Outside of oil, there are some successful multinationals, such as UAE-based Emirates Airlines, Egypt-based Orascom Telecom, and Jordan-based Aramex, a logistics support provider. (Orascom and Aramex were founded and built by savvy entrepreneurs.) Family-owned service businesses are also prominent and—in the case of countries like Egypt—textiles and agriculture, too. But the oil industry is by far the biggest contributor to the region’s GDP. The region produces almost one-third of the world’s oil and 15 percent of the world’s gas.
There is an ever-increasing growth in demand for oil, with China and India the most prominent examples of countries that need more oil. Beginning in 1998, India and China’s combined demand increased by a third in less than a decade. So however much the price of oil fluctuates, the demand is undergoing a global transformation.
But the Arab world’s oil economy has stymied high-growth entrepreneurship. Distributing oil wealth largesse to the masses has insulated governments in the Persian Gulf from pressure to reform politically and economically. Oil wealth has cemented the power of autocratic governments, which do not have to collect taxes from their citizens and therefore do not need to be terribly responsive to their complaints. As historians of the Muslim world have put it, in Arab countries “the converse of a familiar dictum is true: No representation without taxation.”12
The badly needed reforms that the elites regard as a threat—the right to free expression, tolerance of experimentation and failure, and access to basic government economic data—are necessary for a culture in which entrepreneurs and inventors can thrive. For precisely all the reasons that entrepreneurship helps economies grow and societies progress—it rewards merit, initiative, and results rather than status—the Persion Gulf governments have stifled it. This is what political scientist Samuel Huntington once called the “king’s dilemma”: all modernizing monarchs ultimately try to balance economic modernization with limits on liberalization, since liberalization challenges the monarch’s power. In the Arab world, British journalist Chris Davidson, author of Dubai: The Vulnerability of Success, calls this the “sheikh’s dilemma.”
With the exception of Lebanon and Iraq, there has never been a genuinely free election in any of the other twenty-two Arab League countries. After one attempt at an election in the UAE in 2006 attracted low voter turnout, a prominent member of the government remarked, “This is particularly disappointing given that all of the candidates and participants were from very good families, and were all personally approved by the UAE’s rulers.”13
A number of Persian Gulf Arab governments have sought to work around the “sheikh’s dilemma” by using oil wealth to modernize the hard infrastructure of their economies, while leaving the political structures virtually untouched. Income from the previous oil booms—in the 1970s—was not absorbed by the regional economies but, rather, spent on imports from the West, investments overseas, and military arms. The local economies saw little direct benefit. But since 2002, over $650 billion from this new—demand-driven—oil windfall have been reinvested in the gulf economies alone.
Alongside the cluster strategy adopted by Dubai and a number of other gulf Arab countries, much of the region’s oil revenues have gone into real estate development. The GCC real estate sector has been the fastest growing in the world. Between 2000 and 2010, an estimated 19.55 million square yards of new leasable space—new office buildings, shopping malls, hotels, industrial facilities, and housing developments—will have been added in the region, mostly in Saudi Arabia and the UAE, growing at 20 percent annually during this period. (China’s annual growth in leasable space was 15 percent.)
But as in much of the rest of the world, the Persian Gulf real estate bubble has burst. As of early 2009, residential and commercial values in Dubai, for example, have declined by 30 percent and are expected to plummet further. Home owners have actually been abandoning their homes and just leaving the country—to avoid the prospect of imprisonment for failure to pay a debt. Large-scale construction projects have been frozen.
Neither oil nor real estate nor clusters have built a high-growth entrepreneurial or innovation economy.
With the demographic time bomb ticking, the gulf’s oil-rich governments have also tried to build academic research clusters. Every technology cluster has a collection of great educational institutions. Silicon Valley famously got its start in 1939 when William Hewlett and David Packard, two Stanford University engineering graduates, pooled their funds of $538 and founded Hewlett-Packard. Their mentor was a former Stanford professor, and they set up shop in a garage in nearby Palo Alto.
But the Arab world’s cultural and social institutions, as was reported by a U.N.-sanctioned committee of Arab intellectuals, are chronically underdeveloped. The United Nations’ Arab Human Development Report, which presented the organization’s research from 2002 through 2005, found that the number of books translated annually into Arabic in all Arab countries combined was one-fifth the number translated into Greek in Greece. The number of patents registered between 1980 and 2000 from Saudi Arabia was 171; from Egypt, 77; from Kuwait, 52; from the United Arab Emirates, 32; from Syria, 20; and from Jordan, 15—compared with 7,652 from Israel. The Arab world has the highest illiteracy rates globally and one of the lowest numbers of active research scientists with frequently cited articles. In 2003, China published a list
of the five hundred best universities in the world; it did not include a single mention of the more than two hundred universities in the Arab world.14
Recognizing the importance of universities for R&D, which is necessary for patents and innovation, Saudi Arabia is opening the King Abdullah University of Science and Technology, to create a research home for twenty thousand faculty and staff members and students. It will be the first university in Saudi Arabia to have male and female students in the same classes. Qatar and the UAE have established partnerships with iconic Western academic institutions. Qatar’s Education City houses satellite campuses for Weill Cornell Medical College, Carnegie Mellon University’s computer science and business administration programs, a Georgetown University international relations program, and a Northwestern University journalism program. Abu Dhabi—one of the seven emirates in the UAE—has established a satellite campus for New York University. The idea is that if Arab countries can attract the most innovative researchers from around the world, it will help stimulate an innovation culture locally.
But these new institutions have not made much progress. They cannot recruit a reliable stable of foreign academic talent to lay roots and make a long-term commitment to the Arab world. “It has been more about bringing education brands to the gulf than immigrating and assimilating brains,” Chris Davidson told us. “These universities are focused on national reputation building, not real innovation.”15
Israel’s case was different. Top-notch universities were founded well before there even was a state. Professor Chaim Weizmann, a world-renowned chemist who helped launch the field of biotechnology with his invention of a novel method of producing acetone, commented on this oddity at the inauguration of the Hebrew University of Jerusalem on July 24, 1918: “It seems at first sight paradoxical that in a land with so sparse a population, in a land where everything still remains to be done, in a land crying out for such simple things as ploughs, roads, and harbours, we should begin by creating a centre of spiritual and intellectual development.”16
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