The Middle East, especially the Arabian Gulf, is home to many national economies that are heavily reliant on one sector: oil. For example, in Saudi Arabia oil accounts for roughly 80% of budget revenues and 90% of export earnings, whereas in Kuwait it accounts for 95% of budget revenues and 95% of export earnings. Overexposure to a commodity sector leaves the national economy highly vulnerable to fluctuations in supply, demand and pricing of the commodity, which makes planning for economic development difficult. Multiple studies including Hesse (2008) and Leiderman & Maloney (2007) have established that diversified economies in the long term perform better than mono-sector economies. One of the reasons for this phenomenon is enhanced learning, which occurs especially through manufacturing and ends up raising income and productivity levels within the economy. Hence we can say that an economy needs to have a reasonable degree of diversification if it is to achieve sustained long-term economic development. 

Countries in the Middle East have already made some efforts towards diversification. Almost by definition, one of the key requirements for economic diversification is innovation, which Peter Drucker defined as the ability to achieve change that creates a new dimension of performance - at least new to the national economy, if not new to the wider world. This does not just mean ‘invention’ or ‘R&D’, but rather the capacity to absorb, implement and exploit innovation effectively within industrial sectors in order to build competitive strength and generate added value for the economy. Governments in the region have launched and implemented various initiatives to foster innovation. However, the innovation output in the region has generally fallen short of expectations. In 2010, Google’s managing director for Southern/Eastern Europe, Middle East and Africa highlighted the lack of innovation in the Middle East by pointing to the fact that a mere 3,224 patents were filed from the Middle East and North Africa (MENA) region in the last 13 years. Japan, in 2008 alone, filed 233,000 patents.

In this article we explore the reasons for the major gaps that exist today in the region’s innovation capacity, using countries such as UAE, Saudi, Bahrain, Qatar, Kuwait, Egypt and Jordan as examples. We then go on to consider the key actions required from policy makers as well as major companies in the region for developing a comprehensive innovation system to drive economic diversification.