The State and Innovation — An Analytical Framework

Abstract

In the recent decades, states of the Gulf Cooperation Council have actively sought to diversify their oil-based economies into robust and sustainable high-growth economies. Evident within the rhetoric and strategies of their respective national visions and development plans, is the underlying intent to diversify their economic foundation and to develop knowledge based economies that capitalize on knowledge creation and transfer to foster innovation. These development plans have spurred investments catered towards building the post-oil era foundation and the necessary knowledge infrastructure. By decreasing their dependence on hydro-carbon wealth and becoming "knowledge hubs", GCC states intend to safeguard their economic and financial security, bolster up their competition in global markets and ultimately pave a solid path for economic and social prosperity. 1 As these states rollout ambitious development plans, they are simultaneously contending with forces of globalization, social change, population pressures, business reform and technological advancement. While state, economy and societal structures and relations are evolving in light of these global forces and development strategies, there is a fundamental permanency of the political order and of socio-political dynamics in the Gulf. Much of this continuity is attributable to the rentier nature of Gulf states. Recent embarkations on knowledge creation and on increased global integration indicate an underlying recognition by policy-makers of the need to transition from allocation-based states to production-based states. 2 The articulated development plans however, do not signify a break from the old rentier arrangement that has been prevalent for decades since the discovery of oil. Rentier bargains continue to underpin the socio-political and economic arenas of Gulf states, and as such, there are structural realities that hinder the ability of states to effectively build knowledge based economies or national systems of innovation. This paper argues that while national plans and capital investments in building the necessary innovation infrastructure in the GCC are not lacking, core structural elements of these rentier states hinder the realization of robust knowledge based economies that can spur innovation. This paper begins by laying out the socio-political characteristics and dynamics of GCC states. Through this lens we can understand recent development trajectories in the GCC and the structural challenges and opportunities associated with creating knowledge based economies and more acutely, in fostering innovation. The following section reviews the components of knowledge-based economies and the core elements of creating national systems of innovation. After giving a brief overview of the current status of innovation in the GCC, the article examines how socio-political dynamics and structural realities in the Gulf have affected education, research and development, human capital formation and the labor market, and entrepreneurship and private sector growth — elements that are integral to building knowledge based economies and national systems of innovation. The active involvement of the state in crafting development policies, in pursuing its developmental goals, and its exhibited "autonomous embeddedness" within the economy, have characterized GCC states within the literature as developmental states. 3 The central motivations for the active and interventionist developmental characteristics of the state in the Gulf lie in catching up with the developed world, and more acutely in their case, in their ability to sustain themselves once their resource wealth runs out. It is increasingly realized within neo-development state theories that markets alone cannot spur higher productivity and greater innovation, leaving a vital role for constructive government involvement in economic development broadly, and more specifically, in the private sector. 4 State-economy dynamics and structures are largely characterized by the rentier nature of GCC states. Rent from vast resource wealth has strengthened the state's role in politics and economics. 5 What precisely makes the GCC states interesting is not the absolute resource wealth that they have, but rather, the proportion of their resources in relation to that of their respective societies. 6 This disproportionality is reflected in various ways. First, citizens benefit from state largesse in the form of highly subsidized healthcare, education, and utilities, amongst other social benefits that they attain. Second, by virtue of being a rentier state national, citizens are in a position to "pedal" their citizenship as an accessible source of income. 7 Third, the disproportionality also exists between state resources and state capacity, hindering effectiveness of government institutions and bureaucracies. Unlike other late-developing economies such as the Asian tigers, the embodiment of elements of neo-patrimonialism and rentierism in the Gulf — which are part and parcel of state-society relations — has directly impacted the development of institutions. Thus, while hydrocarbon rents have enabled these states to grow their economies at a rapid pace, to expand and develop economic and social infrastructure, to exhibit one of the highest urbanization rates in the world, and to become increasingly embedded within global connections and networks, it has also led to the slow development of state institutions that can effectively implement the stated development plans. 8 Currently, the Gulf state is characterized as "more entrepreneurial, supportive of development and responsive" than it used to be. 9 Despite this evolution, the state's political order has remained largely intact. These dual elements of continuity and change are reflected in the seemingly contradictory actions of crafting national visions that plan to develop knowledge based economies for which individuals are active contributors to economic growth that is production based, and simultaneously reinforcing the allocative nature of the state by giving out payments and salary increases to placate citizens during the regional unrest of the Arab uprisings. 10 These tensions arise from the evolving political economy of Gulf states and have taken shape since the 1990s to the present day. Heterogeneity among Gulf states also affects the ways in which each country is able to reach their economic targets — these include differences in resource wealth, population size, and political systems. Resource wealth and population size, largely dictate the urgency with which Gulf states are attempting to wean off their dependence on resource rents. In regards to political systems, Gulf monarchies have largely been autonomous in their economic decision-making. With the longest tradition in parliamentary politics, Kuwait's parliamentary system however, has proven to be largely economically detrimental due to the susceptibility of decision-makers to the pressures of electoral politics. These features of GCC states as highlighted above are valuable in explaining the recent development trends and in realizing the efficacy of such initiatives in light of the underpinning political order and rentier arrangements, as will be explored in further detail in the following sections of this paper. Various economic efforts by states around the world have targeted knowledge as an economic good to bolster economic prosperity and to enter the race for global economic advantage. While the term "knowledge economy" has been widely utilized, the continuous evolution of its conceptualization and definition has led some to define it is a "rhetorical rather than analytically useful [concept]". 11 Some core properties of knowledge however have been identified within the literature as non-rival, cumulative, reproducible at negligible cost, partially excludable, intangible, and inherently uncertain. 12 Additionally, a working definition of "knowledge-based economies" crafted by the UK Economic and Research Council captures the global drive to invest in knowledge as an economic good: "economic success is increasingly based on effective utilization of intangible assets such as knowledge, skills and innovative potential as the key resource for competitive advantage. The term 'knowledge economy' is used to describe this emerging economic structure." 13 Unlike relying on tangible assets such as land, labor and natural resources to promote growth, utilizing and distributing knowledge does not diminish its inherent value and as such its economic and social returns are multiplied through its circulation. 14 This diffusion of knowledge in a knowledge-based economy is not restricted to select high-tech or knowledge intensive sector sectors, but rather incorporates and engages all sectors of the economy in the creation and transfer of both explicit "know-what" knowledge and tacit "know-how" knowledge. 15 In the context of the Gulf states, investing in non-rival, intangible economic goods — such as knowledge — provides a major departure from current resource-dependent economies to one that offers boundless productivity gains. 16 The level of knowledge diffusion within the economy and within society is vital in emerging knowledge economies; projects or institutions that generate knowledge but that tend to be isolated and operate in silos have minimal effect on the economy at large. Knowledge activities have their benefits in enhancing productivity; however, generating wealth and sustaining economic growth depend on their use, transfer and diffusion throughout the economy and society. Central to developing knowledge-based economies is the production, transfer and application of knowledge that leads to innovation. Knowledge acts as a source of discovery and innovation. 17 Similar to characteristics of knowledge in an economy, innovation is non-rivalrous and can spur further innovation. The innovation process is a complex phenomenon that requires intricate systemic policies. The Organization of Economic Cooperation and Development defines innovation as "the implementation of a new or significantly improved product (that is, a physical good or service), process, a new marketing method, or a new organization method in business practices, workplace organization, or external relations." 18 This definition highlights that innovation extends beyond research findings within a laboratory and beyond the bias in the literature which views innovation through the lens of codified scientific knowledge or the Science, Technology and Innovation (STI) mode. Rather, innovation also incorporates an experience-based mode that is focused more on learning and is based on Doing, Using, and Interacting (DUI). 19 While the latter may be much more difficult to empirically analyze, quantify and measure, it nonetheless provides a crucial component to successful innovation — one that is based on the ability of individuals, organizations and institutions to learn, interact and diffuse knowledge. The basic element of innovation that enables it to contribute to the economy lies in its novelty, which may be applicable at the level of the firm, the market, or the world. Although Gulf states may be characterized as latecomers to developing a robust innovation ecosystem as compared to industrialized countries, fostering innovation is possible without necessarily leaping to the global technological frontier. 20 Additionally, this novelty must also translate into a viable business concept; creating avenues and mechanisms for the commercialization of knowledge are crucial for the realization of knowledge's economic and social benefits. 21 Innovation as such, in its inherent drive for income, employment and economic growth by producing new goods, services, or processes has also become inextricably linked with improving living standards. 22 Out of this drive to competitively innovate, innovation policy emerged amongst a number of developed and developing states as a combined mixture of science and technology and industrial policy. 23 Increasingly so, the focus on innovation policy has shifted towards an emphasis on innovation systems and the interplay between actors and institutions within an economy and their embedded roles in the creation, diffusion and application of knowledge. National Systems of Innovation (NSI) is a theoretical concept developed in the late 1980s that applied an actor-centered vision to innovation processes. 24 While this theory arose out of its contextual application to industrialized developed countries in the Global North, it has evolved and has been increasingly analyzed from the perspective of developing countries. 25 This theory expands beyond the classical actors found in innovation studies such as scientists and entrepreneurs, to include the neglected role of policy makers, institutions and organizations. Furthermore, the theory accounts for the interactive processes between these actors. These relationships largely depend on institutional cultures and behaviors that are rooted in regional and national histories. 26 Thus in the context of the Gulf, investments in knowledge infrastructure are accompanied by reform of soft infrastructure — or institutional culture, governance and behavior — in order to effectively address barriers to innovation processes. NSI is a political concept and is a policy subject that describes components of the innovation ecosystem within a given country. While it does not mean that the system can be purposefully designed, political will and the deliberate crafting of innovation policies and mechanisms for successful implementation are vital when looking at countries such as the Gulf where science and technology did not take precedence in the development agenda until only recently. Building up domestic innovation-based industries can also be understood as a "national" policy. Countries that have some of the globally leading IT industries — such as Israel and Taiwan — have shaped their economic policies and endeavors as part of the nation-building process. The relationship between economic policy, innovation and instability is evident in several national contexts: "Ireland's economic policy was shaped within the context of its long dependency on Britain and its struggle to create itself anew; … Israel's science and technology policies were formed by both the Israeli-Arab conflict and the ongoing quest for a national Jewish identity; and the Taiwanese IT industry has been shaped by its formal international political isolation and the need to craft and present a new and better model of 'a China.' " 27 Unlike other resource-based economies such as Norway that have successfully diversified and transitioned into KBEs, the discovery of oil in the Gulf coincided with the establishment of nationhood. 28 As such, to consolidate their rule and to settle and bring together the nomadic tribes that were populating the region, states focused on building physical infrastructure and providing basic services, shelving diversification for later stages of development. In the current context, the focus on diversification and building knowledge economies in the region is also a political process. The impending depletion of natural resources in the Gulf has its repercussions in the diminished economic rents that the political elite can accrue and more pressingly, in its implication in reconfiguring the social contract in the Gulf. Decades of rentier arrangements in the Gulf have solidified expectations of the citizenry as beneficiaries of the state — thus in transitioning to emerging knowledge economies and societies, the profile of the citizenry has to change from one based on allocation to one of empowerment. 29 The pace of this change will depend on the reform initiatives and activities that GCC governments are willing to undertake. This may largely depend on the level of oil wealth that a country has and the urgency with which they approach economic reform. With dwindling oil reserves, Oman and Bahrain may pursue diversification and the creation of a knowledge economy more aggressively, while countries like Qatar on the other end of the resource wealth spectrum, are taking a slower more tepid approach. 30 Two core components of NSIs that require further elaboration — particularly in its adaptation and manifestation in developing countries — are the "national" and "systems" aspect of the concept. Arocena and Sutz applied the theory to countries in Latin America and state that while the NSI theory was developed based on empirical findings situated in the North — i.e. it is essentially an ex-post concept — in the context of developing countries, it applies as an ex-ante concept. In assessing the "national" dimension of NSI, Arocena and Sutz found that while there may be indications of micro-innovative strengths in developing countries, these channels of innovation hardly operate in a systemic manner that affects competitiveness on a national level. 31 Much like the Gulf — as will be discussed in the next section — this is predominantly due to socio-economic behavior that does not systemically embed or facilitate systemic innovation at a national level. 32 NSI literature highlights its relational core that puts precedence on cooperation and coordination between different actors — in essence, this is what creates a "system" of innovation rather than pockets of encapsulated and isolated knowledge creation and innovation activities. Here, the linkage between government, entrepreneurs, and academia is brought to the fore of NSIs. The concept of NSI is not socially neutral as it affects social groups in different ways, thus this relational component depends on the synergies, tensions and conflicts that exist between internal and external actors. 33 How the various channels of innovation interact with each other in Gulf countries and whether cooperation is bred and encouraged will be elaborated upon. Processes of change are influenced by a broad set of economic, political, social, cultural, scientific and technological issues that may take form as a result of purposeful action by private or public actors, or may be due to unintended outcomes related to the history of development within the state. Categorized as late-comers to the global knowledge-economy platform, Gulf states have nonetheless embedded pockets of innovation in both the manufacturing and services industries. Various innovation channels have been built up, upgraded or reformed with the aim of creating a robust innovation ecosystem. Some of the critical channels that Gulf states have targeted in their quest for economic transformation include: investment in education and skills development, in research facilities and science parks, in high-tech industries through sovereign wealth funds, and in industrial clustering to capitalize on synergies and economies of scale. They have also targeted reform of the private sector to facilitate healthy competition and to promote entrepreneurship via financial schemes and incubation facilities as well as steady restructuring of soft infrastructure. Much of the innovative output derived from enterprises in the Gulf, arises from state-owned enterprises (SOEs), which Hertog characterizes as "islands of efficiency" that emerge in Gulf rentier states. 34 SOES will be discussed in further detail in the fifth section of this paper. World Indexes and rankings that assess innovation ecosystems and the status of knowledge-economies in various countries can give a relative assessment of the GCC's standing. Published by Cornell University, Insead and the World Intellectual Property Organization (Wipo), the Global Innovation Index (GII) ranks 182 countries around the globe utilizing 81 indicators and is one of the leading indexes that assesses innovation systems. The 81 indicators of the index fall under broad categories of human capital and infrastructure,

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