Gulf News

KNOWLEDGE ECONOMTY

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hi s i s t he l a s t a r t i c l e i n t hre e -part s e r i e s on Dubai’s knowledge economy. The first part discussed how t o c re a t e a world- c la s s e c onomy by at t ra c t i ng e l i t e workers. Part two focused on the role of education. Today we explore how a knowledge economy can promote the growth of entreprene­urship. half way around the world for the opportunit­y to get his company’s ‘story’ in front of a crowd of potential financiers.

“Angels” are another funding source, but are not part of the mainstream venture capital industry. Angels are usually highwealth individual­s who make investment­s that other venture capitalist­s shun.

In most countries, banks are not a good source for start-up capital primarily because new companies have no credit history to rely on when making the loan decision. The exception is where government­s provide some sort of guarantee to the bank if the business fails.

Islamic finance

However, here again, the Middle East may eventually create a venture capital industry that is different because of the role of Islamic banking. Under Sharia, equal risk sharing is required so that Islamic banks may end up playing a key role in venture capital whereas in non-Islamic banks typically do not.

Experts have found that the experience of venture capitalist­s themselves is an important factor in the success of their investment­s, and specifical­ly experience within the industry being funded.

A successful venture capitalist in telecommun­ications would not necessaril­y be successful at medical imaging or biotechnol­ogy.

In fact, this industry specific experience is so important, some experts say, that it overshadow­s experience as a venture capitalist per se. However, having said that, venture capitalist­s can often replicate successes from one company to the next in the same or closely-related industries.

Venture capitalist­s also tend to be very actively involved in the management of the start-up. As one expert dryly observed, “the talents needed to start a business are not necessaril­y the talents needed to manage it competentl­y.”

Venture capitalist­s also provide credibilit­y to a start-up company just as a prestigiou­s investment banking firm lends its good name to a public stock offering. The involvemen­t of successful venture capitalist­s is a signal that the start-up has received a ‘seal of approval.’

Going public

company public” — to sell stock through an initial public offering (IPO). This is where the millionair­es are made. This is also why it’s important to have a robust, healthy stock market.

Logic suggests that more start-ups eventually lead to more initial public offerings. But it doesn’t work that way. Instead, experts say, more initial public offerings create more start-ups, at least in late stages of funding. In other words, stock markets must give encouragin­g signals to venture capitalist­s.

Venture capitalist­s are not the only ones watching for these signals. Entreprene­urs and employees are often

willing to work at be- low-market wages in trade for lucrative stock options which can be worth a fortune if the company goes public. Microsoft has created four billionair­es and many millionair­e employees.

However, it’s difficult for a start-up in Dubai, for example, to go public in London or New York.

In fact, venture capitalist­s tend to be highly geographic­ally concentrat­ed and stick close to home. Because venture capital has been centred in developed countries, the issue arises of whether their methods can be cloned in developing economies.

Some observers note that there are difference­s, while others see the gradual emergence of a “universal” approach to venture capital. But in the Middle East, these issues are not so clear because no other market has had a like combinatio­n of liquidity and Islamic law.

Still, developed economies offer a starter recipe. As one wag says, “combine liberal amounts of technology, entreprene­urs, capital, and sunshine. Add one university. Stir vigorously.”

The relationsh­ips are clear. As one researcher notes, labour-force quality, not just quantity, has a consistent, stable, and strong relationsh­ip with economic growth.

Michael Porter — the Harvard guru of national competitiv­e advantage — sums up the issue by saying “Universiti­es and specialise­d research centres are the driving force behind innovation in nearly every region.

Although companies and individual­s do create a large number of innovation­s, universiti­es and research centres institutio­nalise entreprene­urship and ensure a steady flow of new ideas.” He is, of course, speaking of research-oriented universiti­es.

Even with the right ingredient­s — research, innovation, entreprene­urs, venture capital, an active IPO market and supportive infrastruc­ture — a chef may still be needed to get things cooking. There should be a challenge or a goal that drives innovation and encourage funding.

In the US, for example, President John Kennedy in 1963 challenged the US to put a man on the Moon within ten years. The Soviets had just launched the first manned spacecraft, bruising American egos. But Kennedy also wanted to spur a sluggish US economy.

The space challenge, helped by generous government funding, galvanised entreprene­urs and venture capitalist­s alike. All sorts of technologi­es were needed to go deeper into space, and many of these turned out to have lucrative commercial applicatio­ns. Going to the Moon was good for the economy.

New Zealand attacked the problem of encouragin­g innovation by creating a Ministry of Research, Science and Technology to advise the government on policy that relates to research.

This includes increasing the level of research and developmen­t, structurin­g the research system, commercial­ising results and making sure that research is responsive to environmen­tal and social issues. Again, a galvanisin­g force.

If the UAE apparently has all the ingredient­s for encouragin­g entreprene­urship, what is left to see results is to create the challenge and the need for them.

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 ?? RAMACHANDR­A BABU/Gulf News ??
RAMACHANDR­A BABU/Gulf News
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