R&D potential could be key to spark Saudi economy

The impact of COVID-19 and low oil prices has led to even further expected declines in Saudi Arabia's gross domestic product, but research and development could hold the key to an economic reset.

al-monitor A billboard displaying an advertisement for Saudi Aramco, which has ramped up spending on technological innovation while its rivals cut back amid soft oil prices, is pictured in the Saudi capital Riyadh on Nov. 10, 2019. Photo by FAYEZ NURELDINE/AFP via Getty Images.

Jul 9, 2020

In most countries, research and development (R&D) plays a significant role in sustained economic growth, as it provides a platform for creativity and innovation through the development of new knowledge and job creation.

Yet, many countries undervalue R&D. While some analysts say this is currently the case for a country like Saudi Arabia, there is still hope for the world’s largest oil exporter to transition from being a “rentier state,” or extraction-based economy, to one that leads by example.

Historically, Saudi Arabia has overlooked structural economic reforms that could have helped it claim its much sought-after leadership role in the Arab world. Investments in solar energy could boost energy efficiency and food production to lower spending on imports — two major issues that could have been addressed if R&D became an integral part of the kingdom’s business agendas.

“There are tons of areas we should be focused on, including water purification, sustainable farming and building cooling. These are all areas where we have domestic use cases for innovative solutions,” said Ali Al-Salim, a Gulf-based investor, adviser and co-founder of Arkan Partners, a consulting company.

Timing is everything

In 2016, Saudi Arabia started putting forth an ambitious reform plan — Vision 2030 — in an effort to diversify its economy beyond traditional means. These reforms, which some say were too little, too late, were ushered in due to weak demand for oil and a global supply glut. Today, Brent crude is at $40 a barrel from about $60 in January 2020.

The reforms included allowing women to drive, introducing an entertainment sector and opening up the Saudi Stock Exchange as well as welcoming tourists and foreign investors to the country for the first time. But that was all before the COVID-19 pandemic and weaker oil prices started to put the country’s economic diversification efforts to the test.

In late June, the International Monetary Fund said it expects Saudi Arabia’s economy to shrink by 6.8% this year, a sharper decline than the 2.3% estimated in April due to low oil prices and the pandemic.

Despite the setbacks, the pandemic has brought forth an opportunity to reflect on the progress as well as the sustainability of the kingdom’s reforms. However, a country often troubled by bureaucracy and haphazard planning could miss the opportunity for long-term structural reforms through R&D investments.

According to Al-Salim, these problems are not unique to Saudi Arabia. Still, the kingdom is home to many sectors that could stand to benefit from such investment initiatives.

“Aside from Israel, the MENA region doesn't hold any significant R&D leadership positions. Even in oil and gas, most of the intellectual property that Gulf entities own was developed abroad. That needs to change; we need to develop a capacity to solve our existential challenges — water, climate and energy — for ourselves and then export our solutions to others that also need them,” he told Al-Monitor.

Post-covid economic crisis

During the coronavirus pandemic, Saudi Arabia joined governments around the world in closing borders and shutting down most sectors of its economy in order to cope with the rising numbers of COVID-19 cases. In the latest measures, the kingdom even announced hajj restrictions. The virus meant that the kingdom’s entertainment scene, which was just starting to blossom, also had to move to the back burner. Concerts were canceled, many hotels around the kingdom were shut down and travel came to a complete halt.

While opportunities in the hospitality and entertainment sectors are real, the private sector and small and medium enterprises should be encouraged to drive economic growth and innovation. Instead, since the COVID-19 crisis began, the kingdom has resorted to old ways to deal with new and ongoing economic problems.

This reversion became especially apparent when the government arbitrarily decided to triple its value-added tax from 5% to 15% to cope with the post-covid economic crisis, shocking much of the business community across the Gulf Cooperation Council. One Saudi-based finance executive who asked not to be named due to the sensitivity of criticizing government decisions said the move was “counterproductive” and a “catastrophic decision.”

R&D still not on the agenda

In April, Saudi Arabia’s net foreign reserves fell by about $20.9 billion after Riyadh transferred billions of dollars to its sovereign wealth fund to finance an overseas spending spree.

The drop was anticipated after Finance minister Mohammed al-Jadaan said that $40 billion in foreign reserves would be transferred to the Public Investment Fund to finance stakes in US and European blue-chip stocks as it looks to take advantage of the COVID-19 pandemic to buy cheap assets.

The decision to use reserves to finance these investments was controversial as the kingdom faces its worst economic crisis yet due to the shock of the coronavirus and weak oil prices, analysts say.

Still, even in a post-covid world, the kingdom doesn’t seem to have plans to enact deeper structural reforms by exploring R&D investments at home anytime soon.

When it comes to innovation and development, there are no quick wins. R&D takes time to develop competencies, processes and ecosystems. Not only does the kingdom still need to identify local sectors to focus upon, investments toward R&D need to be sustained and committed in order to produce much-needed value in the country.

“While Aramco and SABIC lead in R&D funding, it seems this funding and capabilities are in their global locations and outside Saudi Arabia,” said Tharwat Amer, chief financial officer of the Riyad-based Saudi Economic Development Co.

“The US model is providing R&D grants to support universities and encourage US corporations with very generous incentives. So the question is, what programs are available in the region to encourage the private sectors to spend on R&D? I haven’t seen any programs yet,” he added.

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