5. Innovation in the business sector in Kuwait

Kuwait is facing a diversification imperative. As discussed in Chapter 2, the oil rent has enabled Kuwait to develop its economy throughout much of the past century, and attain high levels of prosperity and human development. Kuwait’s oil reserves are still abundant, and will last for another century at current production levels.

Peak oil supply is no longer widely supported, as unconventional oil sources complement classical ones (Bardi, 2019). Nevertheless, peak-oil demand seems more likely, in particular in the wake of increasing global concerns about carbon emissions, complemented by the development of renewable energy sources and alternative mobility solutions. Peak oil demand could set on anywhere between 2025 and 2040 according to different scenarios. It might also go through cycles according to price evolutions – for example US oil consumption has already peaked in 2005 and declined until 2014, but since the oil price decrease in 2014/5, it is on the rise again and may yet surpass the 2005 peak (Dale and Fattouh, 2018). Predictions about the future of oil demand are uncertain, but the shift from peak oil supply to peak oil demand is a substantial paradigm shift from a world of scarcity, which is essentially a seller’s market, to a world of abundance, which is a buyer’s market.

These prospects will thus urge Kuwait’s leadership to accelerate the transition from a rentier economy towards a knowledge-based one, where value creation, the resolution of societal challenges and the well-being of society at large will be based on the production, diffusion and implementation of knowledge.

The skills dimension is particularly critical to achieve the transition to a knowledge-based society. The skills gap in Kuwait is particularly acute, and this represents a strong hurdle which Kuwait needs to overcome. In a 2008 survey, only 32% of the surveyed chief executive officers (CEOs) said that the education system provides people with adequate skills, and 33% said those skills were provided in sufficient quantity (Mohammed Bin Rashid Al Maktoum Foundation and Price Waterhouse Coopers, 2008). This is the lowest percentage within the entire Middle East and North Africa (MENA) region (Figure 5.1). Skills required by the CEOs were most importantly, communication skills, teamwork, analytical and critical skills, initiative, language skills, and innovative and creative thinking, while memorisation skills were considered as less important. On the other hand, curricula were considered to be based on theory rather than practical knowledge (for 71% of respondents in Kuwait).

As will be argued in Section 4.2, policy intervention in the domain of business innovation is justified by market failures. Such market failures are exacerbated in Kuwait due to the small size of firms as well as small markets which are insufficiently integrated into global value chains. These features make it less attractive for foreign capital to invest in innovative projects in the country. Skills gaps, combined with brain drain, also limit the creative forces which could drive innovation. In such an environment, it is crucial to achieve the right policy mix to raise awareness and create incentives for businesses to invest more in research, development and innovation.

Going forward, the growing imperative to tackle societal challenges calls for new types of policy intervention that are able to cope with failures that go far beyond those that characterise markets and structural systems (e.g. lack of investment in infrastructures or weak “static” capabilities in firms and administrations). Addressing societal challenges raises the issue of how to cope with various types of societal transformational system failures and what role governments should have in doing so (Weber and Rohracher, 2012). Although Kuwait has not set targets to reduce emissions as part of the Paris Agreement it signed in 2016, it has set an objective to diversify its energy production. By 2030, 15% of its total energy production should be generated from renewable sources, which will call for important technological and societal changes.

The knowledge created through R&D performed by businesses, the public sector and foreign firms is a determinant of long-term productivity growth (Guellec and Van Pottelsberghe de la Potterie, 2004). Market mechanisms alone cannot ensure optimal levels of business investment in innovation. This is because innovation suffers from three market failures: 1) uncertainty (both technological and commercial), which is much higher than the risk taken in usual business situations; 2) indivisible upfront fixed costs (such as the cost of developing a prescription drug); and 3) the public good nature of innovation outputs, which makes it difficult for a firm to accrue the full benefit for itself.

Government spending on R&D is justified to overcome these market failures. It can also be justified through the high social rate of return. Social return to R&D is believed to exceed private returns by 50-100% or more (Mohnen, 2018). Innovation can also come from sources other than R&D; notably, non-technological innovation.

Science, technology and innovation (STI) policy spans the entire innovation value chain: from the creation of fundamental knowledge in basic research through applied research and technology, all the way to the provision of innovative products and services in the marketplace. While there is no natural and linear flow of knowledge and technology between these different stages, and innovation can occur with or without technological content, government policy action needs to support both public and private STI activities, and facilitate flows of knowledge between the different sectors.

Indeed, support for fundamental and applied research alone may lead to excellent scientific results, but there is no guarantee that the business actors will follow up on these results and take them to market due to the market failures mentioned above. The situation in Kuwait testifies to this, since the bulk of the support has gone to fundamental and applied research in the Kuwait Institute for Scientific Research (KISR) and Kuwait University, while R&D in business hasn’t been supported by government.

While there is a consensus about the need and justification for government intervention in favour of research, development and innovation in enterprises in order to overcome the market failures mentioned above, there is a debate over the approach to entrepreneurship vs. targeted small and medium-sized enterprise (SME) policy, as well as more general industrial policy.

Entrepreneurship policy is targeted at fostering new entrepreneurs to start their own businesses, whereas targeted SME policy helps existing SMEs grow and prosper. Support can be given in the form of financial support (grants, loans), or soft support such as training and business advisory services. Both types of policies can be justified, and also criticised.

For example, entrepreneurship policies can boost new firm creation, but such creation is not proven to increase wealth creation overall, notably due to the high failure rates. For example, an analysis of Global Entrepreneurship Monitor data on 37 countries shows that only high growth potential entrepreneurship is found to have a significant impact on economic growth (Wong, Ho and Autio, 2005). A meta-analysis also shows that entrepreneurial activity has a positive effect on growth in highly developed countries, but a negative effect in developing ones. It also concludes that developing countries need to attract multinational enterprises in order to stimulate the positive externalities on small firms (Sternberg and Wennekers, 2005). Indeed, policies incentivising entrepreneurship of any type will lead optimistic, but poorly resourced and skilled, people to start a venture and end up in a position more difficult than if they had continued to work as employees.

Selective SME policy can, on the other hand, focus government resources on a segment of companies with a likelihood of growth and job creation. Research shows that fast-growing firms have a direct and disproportionate impact on employment and competitiveness, with some 50% of the new jobs created coming from only 4% of the firms (OECD/IDRC, 2013). The effectiveness of such support programmes has been proven through, for example, the Small Business Innovation Research (SBIR) Program in the United States (see Box 5.1). Limitations of such programmes are within the ability to select the most promising projects without rejecting good ones – a staged approach to financing such as in the SBIR allows this, with a relatively loose selection in the first phase, and helping self-select in follow-up phases.

In addition to such direct support policies, there is evidently a need to improve framework conditions, in order to decrease the burden on enterprises linked to dealing with red tape. These framework conditions were discussed in Chapter 2.

Knowledge in and of itself has little economic significance, it is its widespread adoption that unlocks productivity gains and growth. For example, the automobile was invented in 1885, but widespread adoption did not occur until the second half of the 20th century in most countries. Indeed, it is possible to correlate the lag in technology adoption with the lag in per capita income (Nobel, 2012). Innovative SMEs can become or remain competitive in the near term through technology adoption, adaptation and diffusion. Technology diffusion involves the dissemination of innovative technical information and know-how that is already in use in other firms, industries or countries.

Knowledge diffusion is a further key component, and occurs through various mechanisms, such as open publications, open data, international co-operation (such as in foreign direct investment, integration in global value chains and R&D collaborations), commercialisation of public research through spin-offs, and functioning of knowledge networks and markets (OECD, 2015b).

Diffusion is affected by the extent of trade integration in international value chains, foreign direct investment, the mobility of human capital, linkages between business and academia (including international linkages of academia which can facilitate technology transfer to the home country), the use of standards, the extent of business investment in R&D, skills, managerial capabilities, and other forms of knowledge-based capital, among others (OECD, 2017).

Hence a sound innovation ecosystem must have entities, such as technology commercialisation offices(OECD/World Bank, n.d.) or programmes, such as technology and manufacturing extension services (Box 5.2and Box 5.3), as well as various facilitator organisations, such as technology incubators, science parks, competence technology centres that serve to foster knowledge generation, technology transfer and diffusion, in addition to steering research towards industry needs. Commercialisation of inventions from universities and research institutes; know-how transfer from global knowledge stock, as well as co-creation and co-invention play an important role in greater knowledge generation and moving the technology frontier of a country along with greater use of technology for economically productive purposes.

A vibrant innovation ecosystem also has policies and instruments such as matching grants, innovation vouchers and tax credits for R&D aimed at deepening university-industry collaboration and fostering greater innovation among businesses.

Effectively transforming national R&D capabilities into an engine of innovation and growth not only requires an appropriate policy framework and research capacity, but also tools such as technology transfer offices (TTOs) and offices of contract research (OCR). Universities and research institutes are typically the greatest generators of inventions, followed by innovative industries and businesses. In major universities with prolific research and innovation, activities related to steering intellectual assets towards industry and commercialising the research are typically located in the vice presidency of economic development of the university. The standard practice is for the vice presidency to have two offices – an OCR and a TTO. Both offices, though distinct, perform complementary activities and have strong co-ordination (Box 5.4). A good practice example of such a TTO is described in Box 5.5.

In the period following the independence, Kuwait established state-owned enterprises (SOEs) as vehicles for implementing the welfare state, in particular in areas of natural monopolies, where a single-firm arrangement is seen as the most efficient arrangement, and where providing monopoly rents to a private entity would not seem appropriate. The nationalisation of the oil sector occurred in the 1970s and significantly reinforced the SOE sector. Stock market crashes in 1976-77, and another in 1982 drove further state share purchases in the banking, insurance and real estate sectors. At its peak in 1990, the state had shares in 61 of Kuwait’s largest companies, accounting for 70% of the market capitalisation of the corporate sector. Following the Iraqi invasion and the resulting strain on the budget, a wave of divestitures followed in the 1990s, through auctions and initial public offerings (Sartawi, 2012[177]).

A major feature of the Kuwaiti economy is the extreme concentration of the value added in the state-owned enterprises, with 34 SOEs (0.08% of the total in the survey)1 accounting for nearly 5% of employment and 56.4% of the value added. Specifically, it is the dominance of the state-owned industry sector which is visible not only within the industrial sector, but for the economy as a whole, as 15 establishments (0.04% of the total) account for nearly 54% of the overall gross value added. Within those, the four establishments within extraction and refining of crude petroleum represent the lion’s share (53.2% of the total). The non-oil industry is dominated by the private sector; SOEs are found in the chemicals, rubber, and food and beverages sectors, but they produce only a fraction of the gross value added of the private sector and employ few people (Table 5.1).

Due notably to the weight of the oil sector and utilities,2 the value added per employee is extremely high in the SOE sector, especially in industry (KWD 516 911/person on average, and in the oil extraction sector as high as KWD 931 150/person).

The share of services has been progressing in the Kuwaiti economy, increasing from 38.5% of the total value added in 2010 to 51.1% in 2016. The shift to services of the economy is a pattern observed in most OECD countries: after a protracted period of increase, the share of services has stabilised at about 75% of the economy, while in the resource-based Gulf Cooperation Council (GCC) countries, the share of services is still increasing, ranging from 47% in Qatar to 60% in Bahrain in 2016.

Within services, the private sector dominates, even though SOEs are present in strategic sectors such as finance, telecommunication, and air and sea transport. Kuwait Finance House and Zain (telecommunications) are Kuwaiti SOEs ranking among MENA’s 100 largest listed companies (OECD, 2019a). Kuwait Airways and Kuwait Oil Tanker Company are also very significant and strategic state-owned companies.

Kuwait has a relatively thriving stock market, with 175 listed companies and a market capitalisation equivalent to 77% of gross domestic product (GDP) in 2018, one of the highest within the GCC, and indeed within the whole MENA region. A sizable proportion of trade (40%) takes place between retail investors. Nevertheless, the market capitalisation is strongly concentrated in the banking and financial sector (57% of the total), followed by the telecommunications sector (11%). Petrochemicals represent only 1% of the market capitalisation, while in Saudi Arabia it represents 25%. MSCI classifies Kuwait as a frontier market.

MSCI Inc.3 used to classify Kuwait as a “frontier market”,4 alongside Bahrain and Jordan, while Qatar, Saudi Arabia and the United Arab Emirates were classified as emerging markets. Owing to the modernisation of the trading infrastructure, MSCI announced the upgrade of Kuwait to emerging market status as of June 2020 (Pacheco, 2019).

Worldwide, SMEs have proven to be a very efficient channel to accelerate the pace of economic and social development. Due to lower organisational and operational complexities, SMEs provide a fertile environment for training workers and developing their skills and help speed up the turnover of small amounts of invested funds. SMEs can provide valuable employment opportunities to a growing young population, improve productivity and help diversify the economy. They are also attractive because of the simplicity of their establishment and administrative structure, since usually only a relatively small amount of capital is needed for initial foundation and operation. In its most frequently chosen legal form, the limited liability allows them to exit the market with little significant impact.

SMEs account for 99% of firms in OECD countries, approximately 60% of employment and 40-60% of value added across these countries. Their share in GDP represents 49% in Austria, 42% in France, 49% in Japan, 57% in Spain and 45% in the United States (OECD, 2019b).

SMEs can also help economies and societies adapt to major transformations, such as digitalisation, globalisation, ageing and environmental pressures. The creation of new business ventures and innovation in existing SMEs are critical parts of today’s innovation process, and should have a central place in government strategies to promote innovation. The 2018 OECD Ministerial Conference on SMEs, in its Declaration on Strengthening SMEs and Entrepreneurship for Productivity and Inclusive Growth, calls for “governments to enhance SME participation in the national and global economy and enable SMEs to make the most of the digital transition. It underlines the importance of access to appropriate forms of finance; entrepreneurial opportunities for all segments of the population; entrepreneurship education and training and upskilling of entrepreneurs and workers; and multi-stakeholder dialogue on effective policies”. Although productivity in SMEs tends to be lower than in large enterprises, they are the major engine of job creation and growth (OECD, 2019b).

The role of SMEs in the Kuwaiti economy has been modest, with large companies in the oil industry and the public sector being the leading contributors to GDP. Although statistical data on SMEs are lacking due to an absence of an official definition (Box 5.6), the World Bank estimates that the number of SMEs in Kuwait amounts to 94% of the total number of enterprises, but their overall contribution to the economy is marginal: just 3% of total GDP (Abukumail, Karam and Al-Otaibi, 2016). A similar result was obtained by a recent study by KISR, which concluded that micro, small and medium-sized enterprises (MSMEs) represent 95% of all enterprises, 8.6% of non-oil GDP and about 16% of total employment.5 Moreover, the study concludes that MSMEs are stagnant, with an employment growth of just 0.5% per annum, and a real output growth of 1.1% per annum between 2003 and 2012. Only 150 MSMEs (less than 0.4% of the total number) provided any training (Ramadhan, Girgis and Al-Fulaij, 2018). Moreover, the objectives of the Kuwaitisation policy have also not been met, since the (very low) fraction of Kuwaitis employed within SMEs has further decreased, from 3.1% in 2003 to 2.5% in 2012.

Thus, the SME sector is currently not a significant contributor to achieving the Kuwaiti government’s economic diversification objectives.

UNDP estimates indicate a relatively low SME concentration of one SME per 43 nationals as compared, for example, to Saudi Arabia, which has one SME per 25 nationals (UNDP, 2011).

The Law on Commercial Companies stipulates that the majority of any business has to be owned by a Kuwaiti national (with the exception of free zones, or investments under the so-called ‘KDIPA law’ where 100% foreign ownership is permitted, but this does not apply to small and medium enterprises). This is clearly a significant barrier to enterprise creation for expatriates, who represent two-thirds of the resident population.

As regards Kuwaiti nationals, they need to forego lucrative employment in the government sector if they wish to start a company. The National Fund for SMEs can provide financing for such ventures, but only under specific rules, notably precluding equity ownership by non-Kuwaitis. This will be discussed in Section 4.6.2.

As discussed in Chapter 2, general business climate conditions are not favourable in Kuwait, and this poses a hurdle for SMEs in particular. In a World Bank survey on 502 SMEs completed in 2014, more than 35% noted that licensing, permits, labour regulation, regulatory uncertainty and corruption were the main hurdles and bottlenecks to the development of SMEs in Kuwait. About 24% of the surveyed companies also noted that they felt that the workforce was not sufficiently skilled. As noted in the survey, dealing with governmental regulations takes roughly 15% of a manager’s time, leading to another roadblock in establishing a business (Abukumail, Karam and Al-Otaibi, 2016).

Entrepreneurs fuel economic growth, as new companies bring vitality to the economy through new ideas, products and processes, and fostering “creative destruction”. As discussed in Chapter 2, incentives in favour of entrepreneurship are relatively weak, and framework conditions still unfavourable.

However, a young generation of Kuwaitis who has mostly been trained abroad is bringing new ideas and initiating a fledgling start-up ecosystem in Kuwait. Role models are Talabat and Carriage, two online services companies which have been quite successful. Their founders were able to exit their investments profitably through a sale to a foreign entity:

  • Talabat is a food-ordering platform established in 2004, and sold to the German company Rocket Internet for USD 170 million in 2015 – the largest exit in the MENA region until then.

  • Carriage is a food delivery company which started in Kuwait, and subsequently expanded to the United Arab Emirates, Bahrain, Qatar and most recently to Egypt. It was acquired by the German multinational Delivery Hero in 2018 for about USD 100 million (Hamid, 2019).

These success stories raised awareness among Kuwaitis that entrepreneurship was possible in Kuwait as well.

This triggered a wave of Internet-based start-ups launched and funded in 2017 and 2018, including: Jumla Club, a business-to-business food and beverage platform; Nalbes, a fashion retail site; COFE, a marketplace focused on coffee; InstaSalla, an e-grocery company; Tabeeby, a healthcare technology platform; and Ajar online, a fintech allowing tenants to pay rent online. COFE was the only Kuwait-based start-up listed as one of the “Top 50 Start-ups to Watch in the Arab World” by FORBES Middle East. Even more numerous are those in pre-seed stage, vying for initial financing, such as Li3ib, a sports facility management company; P5M, an app to find and select gyms; Scrrap.com, a platform for car parts; and many others.

There are few examples of entrepreneurship based on “hard” technology. One such example is Meshari oil remediation, which addresses a very specific environmental issue (Box 5.7).

Another promising area is medical technology, where a number of patents have been filed, and one has been commercialised through licensing. A group of medical doctor inventors has been mobilised by NASCO, a subsidiary of the National Technology Enterprises Company (NTEC), to create a Centre for Medical Innovation. Examples of inventions by those doctors include: a novel biodegradable balloon system used in kyphoplasty (spine surgery); an arterial internal guide needle deployment and suturing device, an innovative arterial puncture and closing device; sinus venosus atrial septal defect percutaneous treatment device enabling treatment of cardiac catheterisation without a surgical intervention. However, this initiative has not managed to rally support from the Ministry of Health.

The Berkeley Research Group published a report based on interviews with 35 Kuwaiti entrepreneurs located in Kuwait or in Dubai (Berkeley Research Group, 2017), identifying five archetypes according to present and future location:

  • “Homebound for Now”: 12 companies born in Kuwait and focused on operating in Kuwait for the time being. These companies mostly focus on the domestic market (9/12), and only 3 have regional (GCC) ambitions. They quote market opportunities, lifestyle and the “workforce support” supplement as key factors.

  • “Looking Around”: four companies born in Kuwait and considering relocating. They, too, mostly focus on the domestic market, yet discontent with the business environment, are looking elsewhere.

  • “Springboard”: seven companies born in Kuwait that split operations to grow. These companies are mostly targeting GCC markets (5/7), while two target global markets. These companies value talent and government regulation more than the previous two categories.

  • “Moving Out”: three companies born in Kuwait that relocated their headquarters. Similar to the previous category, they focus on the GCC and global markets, and value talent and government regulations above all.

  • “Born Abroad”: nine companies founded by Kuwaitis outside of Kuwait. They also target the GCC and global markets, and care about markets, lifestyle, government regulation and talent.

The businesses located in Kuwait quote market opportunities and the “workforce support”6 supplement as key supporting factors, while those who operate in Dubai quote access to regional markets, talent and the role of government as setting favourable conditions. Market opportunities score 4.6/10 for Kuwait and 7.7/10 for Dubai, while for talent Kuwait scores 3.8 and Dubai 7.3. The best Kuwaiti score is for access to finance, where Kuwait scores 6.2, still lagging Dubai at 7.3.

Interestingly, none of the entrepreneurs quoted technology and research as a decisive factor, and this dimension also scores the lowest of all dimensions (2.4 for Kuwait, 5.3 for Dubai). Similarly, intellectual property protection was not quoted as paramount, and scores very low (3.1 in Kuwait, 5.2 in Dubai).

There are a number of private sector incubator and accelerator programmes active in Kuwait, such as Reyada, Cubical, Niu, Sirdab Lab, Startup Q8 and Brilliant Lab. They typically offer co-working space, events (including networking events, boot camps and workshops), as well as mentorship services (help with business development, product-market fit, development plans and others). One of the most advanced programmes for entrepreneurs is that of Zain Great Ideas with Brilliant Lab (Box 5.8).

Entrepreneurs have a range of maturity stages – from the exploratory stage (pre-idea) through the planning stage (have an idea but need to understand customers’ needs), the building stage (have employees, looking for funding) and expansion (revenue stage, looking to grow).

Entrepreneurs that the review team interviewed were mostly young and educated in foreign countries. Their motivation is to “make history” rather than to make money, and some of them quit their well-paid government jobs to become entrepreneurs, in a quest of meaning of life.

The barriers quoted include bureaucratic hurdles to licensing (up to nine months to get a license), delays with customs clearance for imports and exports, dearth of talent (in particular software developers), and hurdles for foreign investors – even GCC nationals are not treated equal to Kuwaitis.

Interviews held by the review team with incubators in Kuwait confirm the findings of the Berkeley Research Group about entrepreneurs often starting up in Kuwait, then moving out, either to Dubai for market and regulation reasons, or to Egypt for reasons of costs and ease of hiring.

Overall, specific policies aimed at fostering entrepreneurship are non-existent, and overall entrepreneurial support ecosystem in Kuwait is weak. The National Fund for SMEs (Box 5.9) and the Industrial Bank of Kuwait (Box 5.10) are the two prime institutions financing SMEs. While the Industrial Bank of Kuwait mostly focuses on working capital7 and is not restricted to SMEs or the private sector, the SME Fund was created specifically to provide seed capital to private start-ups. The role of the National Fund for SMEs will be further discussed in section 4.7. below.

In order to understand the innovation performance of the Kuwaiti business sector, a dedicated innovation and R&D survey was conducted in Kuwait in 2018 (Box 5.11).

Overall, 43% of Kuwaiti companies confirm having innovated in either product, process, marketing or organisational structure in the three years from 2015 to 2017. The propensity to innovate strongly depends on size, as shown in Figure 5.3.

Partially or totally state-owned enterprises report a higher rate of innovation (respectively 61% and 53%) than privately owned ones (42%). This difference can partly be attributed to the size, since SOEs are large enterprises.

Conversely, when asked about the share of turnover from innovative products, SOEs report a smaller fraction (47%) than mixed ownership companies (62%) and private companies (61.5%). This would suggest that SOEs do have innovation activity, but that the market impact of it is less than in the private sector.

Sectoral analysis shows strong innovation performance in the mining and quarrying sector (100% of a sample of three companies innovate). Significant R&D activity exists in Kuwait Petroleum Corporation (KPC) and its subsidiaries8 (in particular, Kuwait Oil Company), based on co-operation with external partners such as Schlumberger, as well as KISR (Box 5.12). The KPC is aiming to establish its own fully-fledged R&D centre by 2023. Other innovative sectors in industry include food, chemicals, utilities and construction, with more than 40% of innovative companies (Figure 5.4).

Among the services sectors, the most innovative is health (75% of a sample of 16), followed by education (62% of a sample of 60), as well as community and social (56% of a sample of 41).

Among other expenditures, the most common ones were the acquisition of machinery and equipment (35% of the businesses), design (18%), training (17%), and the acquisition of knowledge (10%).

Only 31 companies (representing 3.1% of the innovating companies) have received external financial support for innovation activities. Of these, 13 have been supported by KFAS, 9 by the Public Authority for Industry for customs exemptions and 4 from the Industrial Bank of Kuwait. Only one company mentioned the National Fund as a source of support.9

However, due to the business demography, innovating enterprises are more numerous in wholesale and retail trade (26%), construction (16% together), and finance real estate (10%). Other sectors represented include education, food, wood and paper, chemicals, basic metals, textile, manufacturing n.e.c., machinery, and mining and petrochemicals (the latter sector has few very large corporations).

Innovation in the banking sector is strongly encouraged:

  • In a circular sent to banks in October 2019, the Central Bank of Kuwait instructed all banks to prepare their 'shaping the future' strategies clearly specifying how do they intend to face the challenges (including technological developments ones), include how they will invest in better understanding of their customers expectations and needs during the next 3-5 years. It also asks the banks to establish a department concerned with fintech and innovation, in addition to a department for strategic planning.

  • The Central Bank also created a sandbox which allows for fintech experimentation, as well as a Centre of Excellence to foster innovation within the Central Bank itself.

  • The Institute of Banking Studies (IBS) encourages research (along with the CBK) by having a yearly award for best research paper with the “Kuwaiti Economic Researcher Award” and the “Kuwaiti Economic Student Award.”

About 22% of innovating companies have developed goods innovations, and 41% have developed services innovations, while 32% have developed both goods and services innovations. Unsurprisingly, industrial sectors are more inclined to innovate in goods, while service sectors innovate in services. However, a large proportion of industrial companies are also innovating in services, as well as a number of firms in the services sectors innovating in goods (Figure 5.5).

Companies which do not innovate report several reasons for not doing so, such as the lack of specific government support, the absence of government standards and regulations that necessitate innovation, lack of transparency, insufficient intellectual property protection, and competition policy (Figure 5.6). Interestingly, small companies seem to be more concerned about competition policy than large ones.

Overall, innovation activity in the business sector seems to be quite dynamic in Kuwait, with a significant proportion of innovating businesses, especially the medium and large ones. In the smaller companies, cost and knowledge factors are hampering innovation, and clearly there is very little support for innovation, since only 3% of innovating companies receive any kind of support for this activity.

Research and development is less widespread than innovation, and only 17.6% of all enterprises report at least one R&D employee; this percentage varies from less than 8% for micro enterprises to nearly 36% for large enterprises (Table 5.2). On average, those companies that do have R&D employees have 5.8 R&D employees, ranging from less than 3 in micro enterprises to about 10 in large companies. Average spending on R&D per company is about KWD 46 000 (USD 150 000), ranging from KWD 4 400 (USD 15 000) in micro to KWD 115 500 (USD 380 000) in large companies.

Large disparities are found according to sector (Figure 5.7). The sectors with the most R&D activity are health, followed by mining, quarrying and petrochemicals, machinery and equipment, education, and chemicals.

Even the large oil companies are still in the process of establishing R&D units capable of creating original research. Kuwait Petroleum Corporation is aiming to set up a fully-fledged R&D centre by 2023 (Box 5.12). The projected R&D centre with 400 staff would largely exceed all other R&D set-ups in Kuwaiti commercial entities.

The role of intellectual property is marginal. Only 15 companies (less than 1% of the total) reported a patent application.

A series of interviews and a focus group with Kuwaiti companies enabled us to better understand the R&D activity within companies. Many of the companies performing R&D are multinationals, and their Kuwaiti operations usually perform R&D which adapts the product or service to local standards and legislation. More elaborate R&D involving new product development is not commonly carried out in Kuwait. This is due to a combination of factors, including lack of skilled personnel (especially in the IT field), as well as risk aversion in the market itself: Kuwaiti regulators and consumers tend to prefer products which have been tested and proven in other markets before adopting them in Kuwait.

In some countries, SOEs are used as motors for development and the creation of R&D capacity, for example via procurement and their participation in national development projects in key industries. They, however, generally suffer from a lack of innovation culture and capabilities and require specific actions to engage them in R&D activities. Malaysia is an interesting example of a country which strives to make its SOEs more innovative through dedicated communication and review of their capabilities (Box 5.13).

In Kuwait, the state’s major industrial holdings are in the KPC and its subsidiaries. These have significant R&D activities, but currently, most oil research is performed in KISR under the umbrella of a memorandum of understanding with the KPC. The bulk of the staff in the R&D department are managers, managing the linkages with KISR and other external (foreign) research partners (including the Q8 Research & Technology Centre, the KPC’s research subsidiary located in the Netherlands). The R&T Department10 remains confined to testing new technologies acquired externally. The KPC has prepared an ambitious plan for the creation of an International Petroleum Research Centre. However, this plan has already been significantly downsized (the budget has been reduced from KWD 500 million to KWD 100 million, with a significant portion reserved for the building) and is yet to be realised.

Kuwait also has a small number of state-owned companies outside the oil sector, for instance the Kuwait Flour Mill and Bakeries Company (under the Ministry of Commerce and Industry), as well as utilities and public transport companies. These may have some opportunities to increase absorptive capacity and innovation, providing exemplars for other companies.

Among the innovating companies, about 14% have co-operated with an external partner, most often a partner located in Kuwait, and the partner is (in decreasing order of frequency): an enterprise within the enterprise group, a supplier, a client from the private sector, a client from the public sector, a consultant, a competitor, an academic partner from university, or an academic from a public research institute. As far as foreign partners are concerned, they are most often suppliers from Europe or the People’s Republic of China, an enterprise group enterprise in Europe or the GCC, or a client partner from the GCC. The most valued partners are suppliers (35%), enterprises from the same group (31%) and private sector clients (14%), followed by consultants (8%) and very rarely academic partners (4%). Collaboration with universities is very rare. Practitioners and observers cite the main reason as a lack of requisite expertise at Kuwaiti research institutes and universities.

Collaboration on innovation activities as such is much lower, and only 140 (13.8% of the innovating companies) enterprises have actually co-operated on innovation activities. This percentage varies from 4% for micro companies, 9% for small companies, 18% for medium-sized ones and 22% for large companies. At the sector level, the highest propensity to co-operate is in food (24%) followed by education (22%), transport and storage (21%), finance and real estate (19%), and chemicals (18%).

Co-operation predominantly occurs within national borders (58% of all occurrences). International co-operation is fragmented, occurring preferentially with Europe, followed by GCC neighbours, Asia, and then the United States.

Co-operation also occurs along the full spectrum of potential partners, with an emphasis on co-operation with suppliers, enterprise group partners and clients, and the public sector. Co-operation with academia also occurs, but is more international in nature. Some international co-operation also occurs with enterprise group partners (Figure 5.8).

When asked about the most valuable type of co-operation, companies put forward co-operation with companies within the same group, and with suppliers, followed by co-operation with clients, the public sector and consultants.

The objective of the Kuwaiti government is to boost the private sector and enhance entrepreneurship; in particular, to boost employment of Kuwaiti nationals in the private sector. It is also trying to stem the rapid increase of the wage bill in the government sector.

Kuwait has a legacy of SME support, starting in 1996 with the Kuwait Small Projects Development Company (KSPDC) set up by the Kuwait Investment Authority, with a fund of KWD 100 million for SME support. It provided loans with very high default rates of borrowers. By 2008, it switched to equity financing, for projects up to KWD 500 000. However, there were difficulties in identifying good projects to invest in. In addition, the overall impact was seen as contributing to job creation mostly for non-Kuwaitis, an outcome not deemed desirable. Indeed, by 2003, 819 jobs had been created, 761 of which were held by non-Kuwaitis (Ezell and Atkinson, 2011).

In 2013, the National Fund for SMEs was set up as the main policy vehicle to achieve that objective. It has been launched with a much larger scale than the KSPDC (capital of KWD 2 billion), with a clear focus on Kuwaiti employment (Box 5.9).

The National Fund is conceived as a “one-stop shop” for entrepreneurs, who should be able to get both finance and training to create successful ventures. The National Fund experienced some operational issues in its first years of operations and few loans were disbursed.

Overall, the initial design of the National Fund loans with a high projected default rate and no upside for the fund would suggest that entrepreneurial job creation would come at a very high projected cost to the government, which could be comparable to providing a government job.

Some of the regulations of the National Fund are difficult to accept for technology start-up firms with high-growth potential:

  • The ban on equity ownership by non-Kuwaitis in companies sponsored by the National Fund. In the technology start-up sector, talented human capital can only be attracted through equity participation. Since very often such talents need to be attracted from outside, National Fund financing is seen as inappropriate.

  • No second-round financing for successful entrepreneurs who wish to grow their enterprise is foreseen.

  • An entrepreneur who fails once will not be supported again – there is no “second chance”.

  • Legal liability for entrepreneurs who cannot pay back.

  • Lack of transparency in the selection process was reported by several entrepreneurs.

In addition, most technology entrepreneurs in Kuwait are non-Kuwaiti themselves, and therefore not eligible for National Fund financing. Such entrepreneurs can only count on very rare private funds such as Faith Capital, founded by successful technology entrepreneur Mohammad Jaffar, founder of Talabat, who created a venture fund with the proceeds of the sale of Talabat. Finally, the frequent changes in the National Fund structure and rules are a factor of instability.

The 2018 Law on the National Fund foresees equity investments in SMEs. The ambition of the new management of the National Fund is for it to be more than a funder: it is to become an enabler. It will provide mentoring, help with licensing, as well as working spaces, retail outlets in state-owned “co-op” supermarkets. It remains to be seen if this attempt will be more successful than the previous experience of the KSPDC.

An announcement was made in January 2019 about the creation of a USD 200 million technology fund for technology in Arab countries (Arab Times, 2019).

Efforts in favour of existing companies are deployed essentially in two areas:

  1. 1. Regulatory simplification efforts focused on the improvement of the framework conditions, which have resulted in the improved ranking of Kuwait in the major indices such as World Bank’s Doing Business and the World Economic Forum’s Global Competitiveness Index.

  2. 2. Infrastructure provision, such as the creation of new industrial zones (see Box 5.14).

The regulatory efforts have been discussed at length in Chapter 2 and the OECD acknowledges progress that has been made.

Infrastructure projects are needed, in particular because of the specific issues with the provision of land, which is highly regulated in Kuwait. Land is provided by the Public Authority for Industry under very strict criteria, and in the form of leases. Provision of land is seen as one of the hurdles to doing business, since demand exceeds supply of fully serviced land. This is why projects such as the Shadadiya industrial area (see Box 5.14) are important. An alternative solution would be to allow companies to buy land and build their own utilities, but this solution is not allowed under present Kuwaiti regulations.

However, existing companies have very little direct support from the government. Out of 1 008 innovative enterprises surveyed in the Innovation Survey, only 31 mentioned receiving any support. Among those, very few cited government support per se, with only nine companies mentioning support from the Public Authority for Industry, mostly as customs exemptions.

In the absence of governmental instruments, KFAS is playing a role to support business innovation within its Innovation and Enterprise Directorate (see Box 5.15). This is important work, but the scale is clearly insufficient, since only about 20 companies are concerned in total.

The Industrial Bank of Kuwait provides loans for companies, and some companies have quoted this as support to innovation. However, those loans are exclusively for the purchase of physical assets (typically equipment), and cannot be used for working capital (see Box 5.10).

Technology absorption from abroad is the main tool which should enable Kuwait to move away from its dependence on income from natural resources over time. It is critical for Kuwait to maintain connections with international sources of knowledge and intellectual property policy should foster foreign direct investment and global collaborative research alliances that bring new know-how.

Strong collaboration between various intermediary organisations is the hallmark of a sound innovation ecosystem, and Kuwait could benefit from strengthening these intermediaries and exploring measures to foster greater co-operation among them. Most significantly, most of these entities do not seem demand-driven, and observers in general point to cumbersome procedures in these organisations that stifle innovation. Hence, the creation of a robust pipeline of inventions and strengthening linkages between the intermediaries should be a key priority for the government.

Currently, intellectual property creation and monetisation is supported by the Sabah Al-Ahmad Centre for Giftedness and Creativity (see Box 5.16), which provides monetary and non-monetary support for patenting and commercialisation. Intellectual property (IP) protection and monetisation efforts at other institutions such as KISR, KU, etc. are nascent, though their attempts to create IP programmes are a step in the right direction (see Box 5.17).

Technology transfer has been partly achieved in the oil sector where collaboration with BP, Shell, JPPC, Halliburton, Schlumberger, Baker Hughes and other international suppliers has brought foreign technology to Kuwait. However, this has mostly occurred through adoption of existing technology with minimal adaptation, and insufficient build-up of human capital in Kuwait (see Box 5.12).

Beyond the oil sector, some efforts have been made in this sense by NTEC (see Box 5.18), which was originally set up with the objective of investing in foreign technology firms and creating spill-overs in Kuwait. Through scouting local and regional markets, NTEC identifies market needs and potential business opportunities in both the private and the government sectors, then reacts via its various business models and the capabilities of its fully owned subsidiaries, to address such needs and opportunities in a manner that suffices its main objective to absorb technology into the Kuwaiti ecosystem.

NTEC experienced a challenging period following the resignation of its board in 2008 caused by the decision to reduce the paid-up capital by half. This caused a considerable slowdown in the period 2008-12. Since then, NTEC’s capital has been increased again; however, the loss of institutional memory and disruption inevitably caused a slowdown.

Additional hurdles faced by NTEC include:

  • public procurement rules which rely on the lowest cost to win the tender, making it difficult for innovative solutions to be adopted;

  • profitability is a more important objective than technology transfer;

  • interference of auditors in investment decisions (force exit when the stock market falls);

  • Kuwaitisation rules –NTEC’s initiatives to bring in foreign technology can be overturned by auditors (or parliament) who ask for a tender to give an opportunity to Kuwaiti companies to compete, even when there is clearly no domestic supplier of the technology.

The 2007 Blue Ribbon report called for NTEC to engage more deeply with KISR. NTEC did attempt to generate a more robust pipeline from KISR; however, these attempts had limited success due to numerous challenges at KISR including, but not limited to, restrictions of non-KISR researchers to access KISR’s resources, KISR’s IP policies, impossibility to make secondment arrangements for KISR researchers with guaranteed return to KISR, etc. Deeper engagement between the two entities was called for in the Blue Ribbon report, but such deeper engagement has yet to materialise. There have been indications that NTEC has started collaborating with the SAC helping to scale up the SAC’s inventions, but the OECD has been unable to get confirmation of this collaboration.

Attracting foreign investment with the objective of technology spill-over is also within the mandate of the Kuwait Development and Investment Promotion Agency. One result of these efforts is the establishment of the GE Knowledge Technology Centre (see Box 5.19).

However, interviews with international technology companies revealed relatively limited appeal of Kuwait as a destination for the establishment of R&D facilities. Investments in Kuwait mostly concern sales and aftersales, as well as training facilities. The main barriers to R&D in Kuwait were quoted as:

  • lack of qualified workforce for R&D locally, high labour costs and barriers to hiring expatriates;

  • conservative culture – Kuwaiti legislators and consumers alike do not want to test innovations; rather, they prefer adopting products which have been proven and tested elsewhere;

  • small size of the Kuwaiti market, and remaining barriers to do business within the GCC region, which does not function as a single market.

Strong intellectual property protection positively influences a firm’s propensity to invest in innovation (Allred and Park, 2007).

In the case of Kuwait, IP priorities could underpin the government’s efforts in economic diversification and building technology-based entrepreneurship, human capital and digital skills. For instance, the WIPO Performances and Phonograms Treaty (WPPT) and the WIPO Copyright Treaty (WCT)11 set up a comprehensive copyright and related rights management and enforcement model system for the digital age, and encourages digital entrepreneurship that relies on creative content. Similarly, strong trade secrets legislation provides a trustful environment to invest and provide knowledge spill overs.

On the other hand, providing for safe harbours and patent exemptions for experimentation purposes might lead to attracting R&D spill overs and R&D centres in biotechnology and medical sciences. Such measures have been successful in many countries, such as in the United Kingdom. Moreover, the possibility of creating IP assets in emerging technologies of the Fourth Industrial Revolution (such as artificial intelligence, blockchain, 3D printing, the Internet of Things, augmented and virtual reality, Internet of Energy) should be explored.

Kuwait is a member of the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO), and also signatory of the WTO TRIPS Agreement, the Arab Convention for the Protection of Authors Rights, the Berne Convention for Protection of Literary and Arbitrary Works, and the TRIPS Agreement. According to the World Economic Forum’s Global Competitiveness Report 2019 (Schwab, 2019), Kuwait was ranked 71st out of 141 countries in terms of intellectual property protection, up from 80th in 2017/18, but still far behind the United Arab Emirates, ranked 19th, Qatar 23rd and Saudi Arabia 27th.

In May 2016, Kuwait’s National Assembly passed the new Copyright and Related Rights Law. This law will help Kuwait accede to the WPPT. Kuwait has not acceded to either the WPPT or the WCT; however, it is in the process of drafting implementing regulations that have the opportunity to bring its regime in line with international standards and with the WPPT. The development of the creative industry in Kuwait will also benefit from strengthened copyright protection.

Patent protection in Kuwait used to work exclusively via the GCC Patent Office. Kuwait is one of the six member countries of the GCC, a regional organisation which also includes Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates. In April 2016, the Kuwaiti Ministry of Commerce and Industry started regulating patent protection in Kuwait via Law 115/2016, implementing the previously issued Patent Law (No. 71/2013) to approve and implement the regional GCC Patent Law declared in 1999. Since then, the Kuwait Patent Office stopped accepting applications, and instructed interested parties to seek protection through the GCC Patent Office in Riyadh, Saudi Arabia. However, in 2017, Kuwait reinstituted the national IP office for examining patents.

Kuwait joined the WIPO Patent Cooperation Treaty (PCT) in 2016, as the 149th member and the 6th and final GCC member state to accede to the PCT.

Nevertheless, few inventors choose the domestic patent followed by the PCT procedure, the overwhelming majority applies to the United States Patent and Trademark Office (USPTO), and a minority goes to the European Patent Office and the Japan Patent Office (JPO). One reason for this is the perceived prestige of having obtained a US patent, despite having meagre prospects for technology commercialisation and product/service placement in the United States.

Patents originated in Kuwait granted by the USPTO for the period of 2005-16 show that the highest number of patents issued by the USPTO is in the field of medical technology, followed by furniture, games, transport and civil engineering.

However, there is increased realisation that merely obtaining a patent is no guarantee of the commercial success of an invention and the SAC, which supports patenting efforts in the country, has created more rigorous standards for applicants to obtain support for their patenting endeavours.

The overall IP regime in Kuwait suffers from the lack of trained IP professionals skilled in IP management, valuation and monetisation. This could be improved by organising IP and technology transfer trainings and programmes that target these stakeholders specifically.

Kuwait does not have a separate statute that regulates the trade secrets law exclusively. Firms therefore use robust and strong contractual provisions as a strategy for protecting trade secrets. This is especially true of foreign firms wanting to protect their IP in Kuwait. However, the recent “Kuwaitisation” movement has made authorities reluctant to enforce strong IP provisions and contracts that protect the trade secrets of foreign firms. This has led to the inability to use robust contractual provisions (which was hitherto the practice) for IP protection. While hard data are unavailable, observers believe that this could impact knowledge transfer to Kuwait, as foreign firms may balk at sharing vital technologies if they have few mechanisms to protect IP. A strong trade secrets law could be instrumental in better IP protection and monetisation, as a lot of IP (especially process-related and business practice related) is not typically protected through patents or copyrights.

Kuwait took steps to strengthen its intellectual property laws by implementing the GCC-wide Trademark Law in December 2015. Trademark applications can be filed at the Kuwaiti Trademark Office, organised under the Ministry of Commerce and Industry.

Formulating an adequate national IP strategy and legal and regulatory framework is dependent on the technological growth trajectory of Kuwait and will underpin the projected diversification efforts. Public policies in the field of IP will need to be complemented with adequate policies in the field of technology law, labour law, higher education law, access to research results, data and instruments, awareness raising, training, and creating links between PRIs, HEIs and firms.

In addition to legislative reform for building an adequate IP system, other government policy instruments can be deployed as well, such as “codes of practice” or general guidelines on IP ownership and management. The Kuwaiti government attempted to adopt a new decree (No. 29 of 2016) for the establishment of the Kuwaiti Association for the Support of Inventors in order to provide support for Kuwaiti inventors to enable them to excel and develop more inventions and to increase the volume of Kuwaiti inventors within the innovation sector.


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← 1. In reality, significantly less than that, since the survey does not cover small enterprises with less than ten employees.

← 2. Traditionally very capital-intensive sectors with little labour.

← 3. Formerly Morgan Stanley Capital International.

← 4. Frontier markets are seen as more developed than the group of “least developed countries”, but considered too small, risky and illiquid to be classified as emerging markets.

← 5. Excluding personal household employment, for international comparability purposes.

← 6. A government subsidy paid to Kuwaiti nationals accepting employment in the private sector, as compensation for the wage differential between the public and private sectors.

← 7. www.ibkuwt.com/export/sites/default/web/en/attachments/annual_report/Annual_Report_2016.pdf.

← 8. Please note that these companies did not participate in the survey.

← 9. This is not surprising, since the sample did not include micro companies, which are the typical the target of the National Fund.

← 10. R&T is distinct from R&D.

← 11. The WPP and the WCT are also known as the WIPO Internet treaties.

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