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UN-ESCWAUnited Nations Economic and Social Commission for Western Asia

COMPETITIVENESS OF THE ICT SECTORIN THE ARAB REGION

INNOVATION AND INVESTMENT IMPERATIVES

United NationsNew York, 2013

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ACKNOWLEDGEMENT

The Economic and Social Commission for Western Asia (ESCWA) would like to gratefully acknowledge theinvaluable effort expanded by the two main consultants, researchers and authors of this study, Mr. Ibrahim Akoum,Associate Professor, Chairman of the Committee for Research, Promotion and Development, College of BusinessAdministration, Rafik Hariri University, Lebanon and Mr. Andrea Renda, Senior Research Fellow, Center for EuropeanPolicy Studies (CEPS) and Manager of the CEPS Digital Forum, Belgium. ESCWA would also like to thank the staff ofthe ICT Policies Section of the ICT Division at ESCWA who ably conceived the study, developed its structure andresearch plan, selected and supervised the above-named consultants as well as other unnamed contributors.

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CONTENTS PageACKNOWLEDGEMENT ............................................................................................................ III

LIST OF ACRONYMS .............................................................................................................. VII

EXECUTIVE SUMMARY .......................................................................................................... 1

I. COMPETITIVENESS OF THE ICT SECTOR AND ITS CONTRIBUTIONTO THE KNOWLEDGE ECONOMY .................................................................... 4

A. Main definitions and frameworks....................................................................................... 4

B. Contribution of the ICT Sector to the knowledge economy and to Economic growth....... 9

C. Key factors and mechanisms contributing to the competitiveness of the ICT factor ......... 12

D. main challenges impeding the development of a competitive ICT sector in emergingEconomies and its impact on the development of the knowledge economy ...................... 16

E. Case studies from selected countries .................................................................................. 26

II. ICT SECTOR IN THE ARAB REGION – AN OVERVIEW............................... 29

A. Status, characteristics and economic impact of the ICT sector .......................................... 29B. Existing ICT policies and strategies and their implementation in the region ..................... 35C. Priorities for the ICT sector in the Arab region.................................................................. 37

III. INNOVATION IN THE ICT SECTOR................................................................. 41

A. Main actors of innovation................................................................................................... 41

B. Dynamic views of ICT-enabled innovation: from the knowledge triangle to smartspecialization ...................................................................................................................... 47

C. The changing nature of innovation in the ICT sector ......................................................... 48

D. Innovation in the new ICT ecosystem ................................................................................ 54

E. Prospects for strengthening innovation in the ICT sector .................................................. 57

F. Assessment of innovation in the ICT sector at global levels.............................................. 59

G. ICT innovation in the Arab region ..................................................................................... 60

IV. INVESTMENT IN THE ICT SECTOR ............................................................... 66

A. The ICT sector as a standalone economic productive sector in national policies .............. 66B. Strategies to promote investment in the ICT sector at global level .................................... 66C. The situation of the sector in the Arab region .................................................................... 77

V. KEY ACTIONS TO PROMOTE ICT INVESTMENT AND INNOVATIONFOR GROWTH IN THE ARAB REGION........................................................... 84

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CONTENTS (Continued)

LIST OF FIGURES

1. A visual representation of the structure of this study .............................................................. 5

2. The Arab World in the Global Competitiveness Index 2011-2012 ...................................... 15

3. Global Competitiveness Index – Public and Private Institutions, selected countries .............. 16

4. Fixed broadband subscriptions per 100 inhabitants, 2005-2011 ............................................. 22

5. R&D expenditure as % of GDP, 2007-2009............................................................................ 25

6. Number of researchers per million people, 2009..................................................................... 25

7. Number of technicians per million people, 2008-2009 ........................................................... 26

8. Knowledge Economy Index by country and region .............................................................. 29

9. Knowledge Economy Index by region .................................................................................. 30

10. ICT development index by region ........................................................................................... 30

11. ICT development index (2012)................................................................................................ 31

12. ICT spending by region (base year 2003)................................................................................ 32

13. ICT spending growth (cagr 2003-2012) .................................................................................. 32

14. The “valley of death”............................................................................................................... 43

15. Venture capital investment in the ICT sector, OECD countries, 2011.................................... 45

16. Competitions launched in the UK SBRI.................................................................................. 47

17. “Open” innovation ................................................................................................................... 50

18. Modern clusters – a map.......................................................................................................... 52

19. The ecosystem of the Siyakhula living lab .............................................................................. 54

20. A simplified model of the ICT ecosystem............................................................................... 55

21. Main layers of an all-IP platform............................................................................................. 56

22. Innovation in the ICT ecosystem: Fransman’s six interactions ............................................... 56

23. Radicality of innovation, inter-layer dependence and enabling factors................................... 57

24. Layers of a cloud delivery platform......................................................................................... 58

25. Country and regional specialization in enabling technologies ................................................ 59

26. ICT innovation index 2012...................................................................................................... 60

27. Global Innovation Index rankings 2012 .................................................................................. 61

28. Share of R&D expenditure by region (2009)........................................................................... 62

29. Share of world researchers by region, 2009 ............................................................................ 62

30. Number of researchers and technicians per million people, 2009 ........................................... 63

31. Worldwide ICT spending, 2003-12 - USD billions, current prices ......................................... 66

32. Receipts from international licensing in major OECD regions (OECD Science,Technology and Industry Outlook 2006)................................................................................. 70

33. Growth in non-U.S. held patents and worldwide royalty and license revenues ...................... 71

34. Individuals using the Internet from any location by educational level, 2011 or latestavailable year ................................................................................................................................. 74

35. Venture capital investment in ICT in the United States, 1995-2012 ....................................... 76

36. Elements of a regional ICT strategy ........................................................................................ 90

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CONTENTS (Continued)

LIST OF TABLES

1. ICT in the International Standard Industrial Classification ..................................................... 072. Relative technological advantages in the ICT ecosystem, EU v. US ...................................... 603. Business development centers, incubators and technology parks ........................................... 77

LIST OF BOXES

1. ICT opportunities and challenges in Emerging Markets ......................................................... 182. Role of Government: The State of Victoria, Australia ............................................................ 193. Obstacles and Successes Behind Turkey's ICT History ........................................................ 244. Spending on ICT in the Gulf Cooperation Council member countries (GCC)........................ 325. Let’s Tweet in Arabic .............................................................................................................. 336. Dubai's ICT Outsourcing Drive ............................................................................................... 357. Qatar Advancing the Digital Agenda....................................................................................... 368. Saudi Arabia regulatory framework and current challenges.................................................... 379. OECD Overall ICT Policy priorities in the longer term.......................................................... 3810. IFC, Partners with int@j to Help Improve Skills of Young ICT Workers in Jordan .............. 3911. Small Business programs in the US, UK and the Netherlands ................................................ 4612. US, EU and Brazil: finding the right balance between competition and investment............... 75

SELECTED REFERENCES............................................................................................ 92

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LIST OF ACRONYMS

AREGNET Arab Network of Regulators

BIC Palestine Business & Innovation Centre

CAGR Compound annual growth rate

CITC Communication and Information Technology Commission

DIC Dubai Internet City

ESCWA Economic and Social Commission for Western Asia

GCC Gulf Cooperation Council

ICT Information and communication technology

IFC International Finance Corporation

IPRs Intellectual property rights

ITU International Telecommunication Union

MCIT Ministry of Communication and Information Technology

MENA Middle East and North Africa

MNCs Multinational corporations

MoICT Ministry of Information and Communications Technology

MVNO Mobile virtual network operator

OECD Organization for Economic Co-operation and Development

PE Private Equity

PICTI Palestine ICT Incubator

RPoA Regional Plan of Action

SOEs State-owned-enterprises

TIEC Technology Innovation and Entrepreneurship Center

TFFM Task Force on Financial Mechanisms for ICT for Development

UNCTAD United Nations Conference on Trade and Development

UNECE United Nations Economic Commission for Europe

UNDESA United Nations Department of Economic and Social Affairs

VC Venture capital

WEF World Economic Forum

WIPO World Intellectual Property Organization

WSIS World Summit on the Information Society

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EXECUTIVE SUMMARY

This study contains an analysis of the role of information and communication technologies (ICT) infostering the competitiveness of national economies, and focuses in particular on possible policy measuresthat could be adopted to improve the competitiveness of the ICT sector in the Arab Region. The studydiscusses the impact that a competitive ICT sector can exert on growth and productivity, and then assesseswhether Arab countries can undertake viable and valuable initiatives to simulate investment and innovationin this crucial, “enabling” field of the economy. Many developed and developing countries around theworld have focused on ICT in designing their industrial and innovation policies, especially since ICTaffects a multitude of sectors and economic activities, and most importantly makes other sectors moreproductive: specifically, ICT presents features such as (i) applicability across a broad range of uses(“pervasiveness”); (ii) wide scope for improvement, experimentation and elaboration, continuously fallingcosts (“improvement”); and (iii) facilitating further product and process innovations (“innovationspawning”), which led, i.a. the European Union to define it as an important precondition for the emergenceof key enabling technologies; and the US government to consider the development of an advanced“information technology ecosystem” as one of the building blocks of America’s strategy for innovation andgrowth.

The main research questions addressed by the study are listed below:

To what extent is ICT an important driver of productivity and economic growth in developed anddeveloping countries?

What is the contribution of ICT to the knowledge economy? What are the peculiarities of the ICT sector compared to other sectors of the economy when it comes

to crafting a successful policy? How can innovation in the ICT sector be effectively promoted? How can investment in ICT be effectively stimulated? How do Arab states fare compared to other countries in terms of innovation and investment in ICT? What are the key pillars of a successful innovation policy, with specific reference to the ICT sector? How can the knowledge triangle be effectively promoted in the Arab region? How can innovation be effectively promoted, besides the use of innovation policy instruments? What should be the priorities for the promotion of investment in ICT in the Arab region?

Below, we illustrate the main findings of the report.

ICT and its role for growth and jobs ICT is composed of both manufacturing and services: no ICT market can be said to be complete and

mature without both components;

ICT is both a very important stand-alone sector and a key driver of productivity and growth in manyother sectors of the economy, such as countries that are more advanced in ICT systematically growfaster than countries that do not invest much in ICT;

Where it flourishes, ICT markets also create jobs. Recent estimates suggest that the Internet has created2.6 new jobs for every job lost;

Key drivers of a mature ICT sector are infrastructure (computing and networking equipment, devices,fixed and wireless broadband technologies), adequate skills created by schools and university,legislation that enables the flow of information through technology transfer, intellectual propertyprotection, sound government, and well-developed financial markets;

Many developing countries are seeking to put ICT at the center of their development strategies,sometimes trying to leapfrog more developed countries by using advanced technologies (e.g. 4Gwireless communications, cloud computing) that enable a more effective use of ICT for local citizensand businesses;

Lack of adequate infrastructure and skills, together with ineffective government action often hamperthe development of the sector at the local level.

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ICT in the Arab region: the state of play Some Arab states are actively pursuing ICT developments: these include GCC countries, Jordan,

Morocco and Egypt. These countries have put ICT at the forefront of their growth agendas, have levelsof ICT spending that are comparable to the leading countries in the world, and are reaping benefitsfrom this choice;

Of this group, some (e.g. UAE) have initially focused on becoming “outsourcing hubs”, rather thanstand-alone producers of ICT products and/or services. However, even these countries are nowattaching value to SMEs as a main engine of local ICT (and broader economic) growth;

Other countries in the region are less active in the development of a comprehensive, effective ICTstrategy. Key problems encompass all major drivers of ICT development: broadband infrastructure isoften not fully in place, the number of researchers per capita is among the lowest in the world, and thegovernance of ICT innovation is often lacking or ineffective.

Innovation in ICT: main findings of the analysis Innovation is an ecosystem: if all main actors are present, it can flourish. But without any one of the

key players, it will not produce the intended effects. Main actors include entrepreneurs, large and smallcompanies, intermediaries and accelerators, venture capitalists and business angels, and government;

ICT is also internationally defined as an ecosystem: it is composed of various layers, including theinfrastructure layer, the logical layer, the applications and service layer, and the content layer;

As a result, a policy for innovation in ICT should take these two ecosystems in mind, and ensure thatall key drivers and actors of the two environments are at play;

The nature of innovation in ICT is changing very rapidly: from stand-alone innovation in devices andinfrastructure, it is now essentially a granular, modular, cooperative and distributed activity, withcollaborative ventures such as open source software, creative commons and distributed co-creation co-existing with more traditional in-house R&D;

As a consequence, the role of governments in promoting innovation is also changing: since nogovernment can dictate the direction innovation should take, policymakers can resort to “bottom-up”reforms that “facilitate” the innovation process. These include supply-side policies (e.g. buildinginfrastructure, promoting university research and technology transfer, tax credits, living labs andincubators, venture capital funds, etc.); demand-side policies (pre-commercial procurement); andoverall policies to improve the business climate (better governance, simplified and better regulation,innovation-friendly policies);

The Arab region features several good practices, but overall it suffers from the absence of a holisticapproach to ICT innovation. Focus on a world-class infrastructure and filling the skills gap, togetherwith more sophisticated regulatory governance, are key preconditions for innovation in the ICT sectorto flourish in these countries;

Also, the changing nature of innovation should inspire new policies in the Arab region, such aspromoting the integration between local entrepreneurs and global clusters and innovation hubs,including the EU living labs network, the European Innovation Partnerships and the Knowledge andInnovation Communities.

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How to promote investment in the ICT sector Promoting investment in ICT requires a suitable, fertile business environment and sound knowledge of

the ICT ecosystem;

Investors seem to place broadband connectivity and resilient energy networks at the first place, togetherwith strong rule of law and IP enforcement. However, in the future with the evolution of cloudcomputing legal certainty on key areas such as cybersecurity and data protection is expected to becomemore and more important.

Venture capital and equity financing in general require a mature financial market: this can be achievedthrough the setting up of dedicated stock exchanges, although these platforms tend to be very volatileand incorporate fluctuations that are not ICT-specific. To the contrary, IP financial markets can becomea key accelerator of ICT investment by providing platforms for exchanging information on innovativenew ventures and business opportunities, as well as complex financial transactions that help younginnovative companies (e.g. patent sale and lease-back, or securitization);

Developing countries have often focused on venture capital to boost investment in ICT: however,without adequate attention to absorptive capacity (e.g. investments in skills and education), suchinvestment is not likely to suffice for an effective investment promotion strategy in ICT;

Similarly, Arab states seem to be very attentive to venture capital, with many funds being launched:however, rule of law and broadband infrastructure should be improved to attract more capital to thebenefit of local entrepreneurs. Also, IP financial markets could be developed alongside stockexchanges to enable trading of technology and, consequently, more targeted and dynamic investment inICT.

Key proposed actions to boost innovation and investment in ICT in the Arab region1. Government commitment: put ICT at the core of a clear, long-term smart, sustainable and inclusive

growth strategy;

2. Adopt a bottom-up, holistic, “double ecosystem” view of ICT innovation;

3. Enhance legal and regulatory frameworks;

4. Develop the financial system, sources of funding of start-ups, and the proper financing modes toencourage investment in ICT activities;

5. Ensure the deployment of physical infrastructure;

6. Invest in education and skills;

7. Promote demand-side innovation policy;

8. Leapfrog in technology, and harness the potential of the cloud;

9. Smart specialization: choose the layers of the ICT ecosystem in which investment should be stimulated;

10.Seek economies of scale, preferably at the regional level.

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COMPETITIVENESS OF THE ICT SECTOR IN THE ARAB REGION

INNOVATION AND INVESTMENT IMPERATIVES

This study contains an analysis of the role of information and communication technologies (ICT) infostering the competitiveness of national economies, and focuses in particular on possible policy measuresthat could be adopted to improve the competitiveness of the ICT sector in the Arab Region. More in detail,the study discusses the impact that a competitive ICT sector can exert on growth and productivity, and thenassesses whether Arab countries can undertake viable and valuable initiatives to stimulate investment andinnovation in this crucial, “enabling” field of the economy. Many developed and developing countriesaround the world have focused on ICT in designing their industrial and innovation policies, especially sinceICT “affects a multitude of sectors and economic activities, and most importantly makes other sectors moreproductive”1,Specifically, ICT presents features such as (i) applicability across a broad range of uses(“pervasiveness”); (ii) wide scope for improvement, experimentation and elaboration, continuously fallingcosts (“improvement”); and (iii) facilitating further product and process innovations (“innovationspawning”), which led. the European Union to define it as an important precondition for the emergence of“key enabling technologies”2; and the US government to consider the development of an advanced“information technology ecosystem” as one of the building blocks of America’s strategy for innovation andgrowth3.

Methodology

The study was completed through desk research, which included the use of short case studies. Thisrequired research on different streams of literature, and in particular:

Literature on the contribution of ICT to economic growth and total factor productivity;

Literature on innovation in the ICT field;

Literature on ICT for development and specifics of innovation policy in emerging economies anddeveloping countries;

Literature on emerging applications and business models in the ICT ecosystem, with specificemphasis on cloud computing and big data.

Literature on improving the business climate;

Literature on measuring innovation;

Literature on promoting fixed and mobile broadband investment;

Literature on business model analysis;

Literature on innovation policy and smart specialization.

Case studies were selected on the basis of their relevance to the Arab region. Accordingly, the authorsselected short examples from developed countries (e.g. US, UK, EU, the Netherlands), emergingeconomies (e.g. Brasil, China, South Korea) and developing countries (e.g. Botswana, Nigeria, Tanzania),in addition to case studies from the Arab region.

1 Kretschmer, T. (2012), “Information and Communication Technologies and Productivity Growth: A Survey of theLiterature”, OECD Digital Economy Papers, No. 195, OECD Publishing, page 8.

2 See, for details on the European KET strategy, http://ec.europa.eu/enterprise/sectors/ict/key_technologies/index_en.htm.

3 See http://www.whitehouse.gov/innovation/strategy for more information and the available reports on the US innovationstrategy. The Report “A strategy for American Innovation”, 2011 is available online athttp://www.whitehouse.gov/sites/default/files/uploads/InnovationStrategy.pdf.

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Main research questions



What is the contribution of ICT to the knowledge economy?

What are the peculiarities of the ICT sector compared to other sectors of the economy when itcomes to crafting a successful policy?

How can innovation in the ICT sector be effectively promoted?

How can investment in ICT be effectively stimulated?

How do Arab states fare compared to other countries in terms of innovation and investment in ICT?

What are the key pillars of a successful innovation policy, with specific reference to the ICTsector?

How can the knowledge triangle be effectively promoted in the Arab region?

How can innovation be effectively promoted, besides the use of innovation policy instruments?

What should be the priorities for the promotion of investment in ICT in the Arab region?

Structure of the report

This study focuses on two imperatives that are functional to achieving competitiveness in the ICT sectorin the Arab region, where competitiveness is broadly defined, in line with the definition given i.a. by theEuropean Commission 2006 competitiveness report, as “maintaining and improving [a country’s] positionin the global market”. The two imperatives are innovation and investment. As shown in Figure 1 below,both imperatives are approached in this study as depending on a number of policy actions.While ICTinnovation is mostly dependent on the interaction of research, education and entrepreneurship (including,most notably, young innovative companies or “yollies”), and can be stimulated through incubators livinglabs and the interaction between local entrepreneurs and global actors through global value chains and asmart specialization approach, investment is promoted through strong protection of property rights (“Ruleof law”), a mix of public and private funding (including mature financial markets and venture capitalmarkets).However, to be sustainable over time, ICT investment promotion has to channel funds through thelayers of the ICT ecosystem in which Arab entrepreneurs have more chance to attack global markets, andthus also through both global and regional clusters and platforms. The interaction of these two forces,innovation and investment, can boost ICT competitiveness in the region.

Figure 1 – A visual representation of the structure of this study

The study is structured as follows. Section I below discusses the determinants of the competitiveness ofthe ICT sector, as well as its contribution to the knowledge economy as well as to growth and productivity

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at the global level. Section II contains an illustration of the current state of advancement of ICT in the Arabregion, and the identification of current priorities for the development of the sector in Arab states. SectionIII discusses the issue of innovation (and innovation policy) in the ICT sector, by adopting a “layered”approach aimed at separating sub-sectors of ICT which are characterised by different forms of innovation,as well as different organizational patterns; the section also discusses the current levels of ICT innovationin the Arab region against global trends. Section IV addresses the problem of investment in ICT, exploringthe main drivers of investment attractiveness at the global level, from institutional to market conditions,and discussing whether the current context in the Arab region is sufficiently conducive to adequateinvestment in ICT. Section V concludes by presenting policy implications and recommendations of theinformation and data presented in the previous sections.

As depicted in Chart 1, the conceptual framework linking all the various elements of the study suggeststhat the competitiveness of ICT sector, as a contributing sector on its own, as well as an enabler to thecompetitiveness of other sectors is key to social and economic development. As such promoting ICTsectors in the Arab region and enhancing their competitiveness hinges on the confluence of a number offactors. The first step includes encouraging the interaction and flow of knowledge and information, which,in turn, is impacted by the development of an effective ICT infrastructure. Of course, the two mainimperatives of this study, namely investment and innovation, play a decisive role in promoting ICT,supported by public-private partnerships (PPP) and adequate legal and regulatory frameworks to ensure thesector’s competitiveness. The conceptual framework acknowledges ICT as a productive sector on its own,as well as an enabling sector which promotes efficiency in other sectors, as reflected by the direct andindirect impact of ICT competitiveness on social and economic development. The rest of the study will beguided by this framework.

Chart 1. Conceptual Framework For ICT Contribution

Knowledge Information

Information & Communication

Technology (ICT)

Sectoral productive &Allocative Efficiency

InnovationInvestment

Economic & Social Development

ICT CompetitivenessPublic-Private

Partnership (PPP)Legal and

RegulatoryFramework

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I. COMPETITIVENESS OF THE ICT SECTOR AND ITS CONTRIBUTIONTO THE KNOWLEDGE ECONOMY

A. MAIN DEFINITIONS AND FRAMEWORKS

1. Information and communication technology (ICT)

The World Bank defines Information and Communication Technologies (ICT) as consisting ofthe hardware, software, networks, and media for the collection, storage, processing, transmission andpresentation of information (voice, data, text, images), as well as related services4.

Also, ICT can be split into:

o Information and Communication Infrastructure (ICI): Refers to physical telecommunicationssystems and networks (cellar, broadcast, cable, satellite, postal) and the services that utilize them(Internet, voice, mail, radio, and television);

o Information Technology (IT): Refers to the hardware and software of information collection,storage, processing, and presentation.

The ICT industry comprises both manufacturing and services. OECD follows a similar approach bydefining the ICT industry according to the revised version of the International Standard IndustryClassification (ISIC Rev3). As Table 1 below shows, OECD defines it for both the manufacturing sectorand services. Below, we will define ICT in a slightly more articulated way, as an ecosystem in whichtangible components and intangible component interact across different layers such as infrastructure,logical layer, applications services and content.

Table 1. ICT in the International Standard Industrial Classification

2. ICT ecosystem

The term “ecosystem” refers to the combined physical and biological components of an environment5.When applied to the ICT sector, as recently illustrated by Martin Fransman, this term includes differentlayers of hardware and software elements of the Internet, i.e. (i) Networked elements (including switches,

4 World Bank. 2009. ICT Glossary Guide. Global Information and Communication Technologies Department, The WorldBank 2009 [cited April 6 2009]. Available from http://go.worldbank.org/UPJ4PKMG60.

5 http://www.ecosystems.ws/ecosystem_concept.htm.

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routers, servers, PCs, phones, etc); (ii) Converged Communication and Content Distribution Networks(including mobile, fibre, copper, cable, satellite); (iii) Platforms, Content and Applications (includingInternet content & Application Providers, such as eFulusi mobile banking); and (iv) Final Consumers6.

3. Knowledge economy

The term “knowledge economy” refers to the use of knowledge to produce economic benefits. Thephrase came to prominence in New Zealand in the mid-to late-1990s as a way of referring to the manner inwhich various high-technology businesses, especially computer software, telecommunications and virtualservices, as well as educational and research institutions, can contribute to a country's economy.

4. Arab states

We consider as belonging to the Arab region 22 Member States: Algeria, Bahrain, Comoros, Djibouti,Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia,Somalia, Sudan (+ South Sudan), Syria, Tunisia, United Arab Emirates and Yemen.

5. Innovation

One easy way of defining innovation is “the process by which individuals and organizations generatenew ideas and put them into practice”7. Alternative definitions that have been frequently used in pastdecades are market-focused and customer-oriented, such as “a process by which value is created forcustomers through public and private organizations that transform new knowledge and technologies intoprofitable products and services for national and global markets”8 or “creating or improving goods,services, or methods of production”9. An authoritative scholar in this field, Joseph Schumpeter, used todefine innovation much more broadly, as “the introduction of new goods (…) new methods of production(…) the opening of new markets (…) the conquest of new sources of supply (…) and the carrying out of anew organization of any industry”10. Industrial economists tend to define innovation in terms of productiveand dynamic efficiency, i.e., the ability of a society to push the efficiency frontier outwards by finding newways to use existing resources, or creating new resources that can be added to the production mix. Overall,there seems to be growing consensus on the fact that innovation, however defined, does not relate only tonew products that come into the marketplace. Innovation may well occur in market processes and products,but also outside the marketplace, including among end users and without any need for a research anddevelopment (R&D) process. Granieri and Renda (2012) give the following definition: (a) the creation ofnew (or the efficient reallocation of existing) resources (b) which contribute to progress11. The first,ontological, element of innovation is approached in the broadest possible sense, leaving space for user-generated innovation, automated innovation, industrial R&D projects, public investment, etc. The second,teleological, element simply states that a new product is to be considered innovation only to the extent thatit contributes to social welfare in the long run, without depriving society of resources that could have beenmore usefully allocated elsewhere. In a nutshell, innovation’s main features are allocative efficiency andprogress.

6 See Fransman, M. (2010), the New ICT ecosystem, Cambridge University Press.

7 See White House, A Strategy for American Innovation, supra note 3, at 7.

8 This is the definition given by the Alliance for Science & Technology Research in America.

9 Van Schewick, B. (2009), Internet Architecture and Innovation, MIT Press, Cambridge, Massachusetts.

10 Schumpeter, J.A. (1934),The theory of economic development: an inquiry into profits, capital, credit, interest, and thebusiness cycle. Harvard University Press, Cambridge, MA.

11 Granieri, M. and A. Renda (2012), Innovation Law and Policy in the European Union, Springer, Milan, 2012.

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6. Investment

The term “investment” generally refers to the allocation of a sum of money to the purchase of a good orservice, or the launch of a business activity, with the idea that such action will generate profit in the future.For the purposes of this study, we define investment in ICT as the act of financing a new business venturethat promises to generate positive returns, regardless of whether the investor is the entrepreneur that ownsthe innovative ICT solution, or a venture capitalist or business angel that believes in that idea’s potential.

7. Innovation and entrepreneurship

Given the intimate link between innovation and dynamic efficiency, innovation policy heavily relies onthe actors that commit themselves to the discovery of new ways of producing existing goods or services, orentirely new products to place on the market or any other locus where exchange can take place. Theseindividuals, in economic theory, are called “entrepreneurs”. De Soto (2009) defines entrepreneurship as the“typically human ability to recognize opportunities for profit which appear in the environment and to actaccordingly to take advantage of them”12. Based on this definition, an entrepreneur might also not be theperson that has developed an innovative idea, but an individual that is able to bring that idea to market in asuccessful way. This quality ascribed to entrepreneurs becomes very important and visible when innovativeideas and products are developed simultaneously by more than one individual. When this is the case,entrepreneurs that rely on more clever marketing techniques are more able to bring those ideas to marketthan their competitors. The importance of entrepreneurship for dynamic efficiency has been very welldescribed by authors belonging to the Austrian school, such as Hayek, Von Mises, Kirzner and Rothbard.Interestingly, the Austrian school of economics, in which the concept of entrepreneurship is fullydeveloped, related the term with the production and transmission of new information. An entrepreneurbasically generates new knowledge through his discovery and transmits it to other members of society. Thisis why innovation and information are so tightly related, and this is why in the next section we discuss therole of information and knowledge in the development of innovation.

8.Competitiveness

A consolidated, widely agreed definition of “competitiveness” has not been reached so far in theinternational community. The most common definitions focus on a country’s ability to sustain globalcompetition through enhanced efficiency, productivity and growth. For example, the EuropeanCompetitiveness Report 2010 introduces the following definition: “For an industrial sector, the maincompetitiveness criterion is maintaining and improving its position in the global market”13. In this study,we will adopt this broad definition.

B. CONTRIBUTION OF THE ICT SECTOR TO THE KNOWLEDGE ECONOMY AND TO ECONOMIC GROWTH

ICT is one of the founding pillars and the essential preconditions of the transition towards a knowledgeeconomy. To some extent, ICT can be said to provide the backbone, the basic tangible and intangibleinfrastructure, but also the applications, services and contents that flow among users in a knowledgeeconomy. Academics and international organizations have developed theoretical frameworks in which ICTcontributed to the development of the knowledge economy together with three concurring pillars:innovation, education and the quality of institutions.

12 De Soto, J.H. (2009) The Theory of Dynamic Efficiency. Routledge, London and New York, at 8.

13 See Commission Staff Working Document, European Competitiveness Report 2010, Accompanying document to theCommunication from the Commission to the European Parliament, the Council, the European Economic and Social Committee andthe Committee of the Regions, “An integrated Industrial Policy for the Globalisation Era: Putting Competitiveness andSustainability at Front Stage SEC(2010)1276, available at http://eur-lex.europa.eu/lexuriserv/lexuriserv.do?Uri=SEC:2010:1276:FIN:EN:PDF.

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1. ICT and productivity

For what concerns ICT’s contribution to macroeconomic variables such as productivity and growth, theissue has been controversial for several years, especially since the first studies in the 1980s revealed theexistence of the so-called “productivity paradox” – i.e., the absence of apparent connection between ITinvestment and productivity at the level of firms, industries or the economy as a whole14. Subsequentstudies, however, have revealed that several components of the ICT ecosystem, starting with theinfrastructure layer, are key enablers of the knowledge economy as well as of productivity and growth.Several studies have shed more light on the relationship between investments in ICT and growth15. Otherstudies have demonstrated positive and significant impacts from IT investment at the firm and countrylevel16.

Overall, this abundant literature converges on the idea that heavy investment in IT can generatesignificant productivity growth in the medium (rather than the short) run. More in detail, there is wideagreement on the fact that ICT can contribute positively to economic growth through four major channels17:

Production of ICT goods and services, which directly contributes to the aggregate value addedgenerated in an economy;

Increase in productivity of production in ICT sector, which contributes to overall productivity in aneconomy Total Factor Productivity (TFP);

Use of ICT capital as input in the production of other goods and services;

Contribution to economy-wide TFP from increase in productivity in non-ICT producing sectorsinduced by the production and use of ICT (spillover effects).

The latter two effects seem to be of increasing magnitude in several economies worldwide. Since themid-1990s, it has been clear that the main explanatory variable of the productivity gap between the US and

14 Strassman, P. A. (1990), The Business Value of Computers: An Executive’s Guide, Information Economic Press, NewCanaan, CT. Roach, S. S.(1991). “Services under siege: The restructuring imperatives”, Harvard Business Review, vol. 39, no. 2,pp. 82-92. Loveman, G. W. (1994). An assessment of the productivity impact of information technology. In T.J.Allen and M.S.Scott Morton, (eds). Information Technology and the Corporation of the 1990s: Research Studies, Cambridge: Oxford UniversityPress, U.K., pp. 84-110.

15 Oliner, S. D. and D.E. Sichel (2000) “The resurgence of growth in the later 1990s: Is information technology the story?”,Journal of Economic Perspective, vol. 14, no. 4, pp. 3-22. Oliner, S. D. and D.E. Sichel, (2002). “Information technology andproductivity: Where are we and where are we going?”, Economic Review, vol. 3, no. 3, pp. 15-41. Jorgenson, D. W. and Stiroh, K.J. 1995. Computers and growth. Econ. Innov. New Techn. 3, 4, 295–316. Jorgenson, D. W. and Stiroh, K. J. 1999. Informationtechnology and growth.American Econ. Rev. 89, 2 (May), 109–115. Jorgenson, D. W. and Stiroh, K. J. 2000. Raising the speedlimit: U.S. economic growth in the information age. Brookings Pap. Econ. Act. 1, 1, 125–211.

16 Brynjolfsson, E. 1993. The productivity paradox of information technology. Commun. ACM 36, 12, 66–77. Brynjolfsson,E. 1996. The contribution of information technology to consumer welfare. Inform. Syst. Res. 7, 3, 281–300. Brynjolfsson, E. andHitt, L. M. 1995. Information technology as a factor of production: The role of differences among firms. Econ. Innov. New Techn.3, 3, 183–199. Brynjolfsson, E. and Hitt, L. M. 1996. Paradox lost? Firm-level evidence on the returns to information systemsspending. Manage. Sci. 42, 4, 541–558. Brynjolfsson, E. and HITT, L. M. 1998. Beyond the productivity paradox: Computers arethe catalyst for bigger changes. Commun. ACM 41, 8 (Aug), 49–55. Brynjolfsson, E. and Hitt, L. M. 2000. Beyond computation:Information technology, organization transformation and business performance. J. Econ. Perspect. 14, 4, 23–48. Brynjolfsson, E.,Hitt, L. M., and Yang, S. 1998. Intangible assets: How the interaction of information systems and organizational structure affectsstock market valuation. In Proceedings of the International Conference on Information Systems (Helsinki, Finland, Aug.).Brynjolfsson, E., Hitt, L. M., and Yang, S. 2000. Beyond Computation: Information technology, organizational transformation andbusiness performance. J. Econ. Perspect. 14, 4, 23–48.Bresnahan, T. F. 1999. Computerization and wage dispersion: An analyticalreinterpretation. J. Royal Econ. Soc. 109, 456, F390–F415., Bosworth, B. P. and Triplett, J. E. 2000. What’s new about the neweconomy? IT, economic growth and productivity. Working paper. Brookings Institution, Washington, D.C.

17 Pohjola, M. 2003. The adoption and diffusion of ICT across countries: Patterns and determinants. In New EconomyHandbook, ed. D.C. Jones. San Diego: Elsevier Academic Press. Guerrieri, P., and P.C. Padoan, eds. 2007. Modelling ICT as aGeneral Purpose Technology, Collegium 35.

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the EU was indeed ICT. Tobias Kretschmer reports consistent evidence of a very significant impact of ICTon productivity growth, up to the point where consensus seems to be emerging on the “general purpose”nature of ICT18.

As recalled recently by Iammarino and Jona-Lasinio (2013), a major controversial point in the literatureregards the distinction between ICT production and ICT adoption and use. The literature normallydistinguishes between “capital-deepening” effects (i.e. the accumulation of ICT capital such as hardware,software and communication equipment); and “acceleration effects” made possible by the adoption and useof technology: but while some scholars seem to attribute to the acceleration effect the most evident impacton productivity (e.g. Stiroh, 2002; Van Ark et al., 2002), other scholars point at ICT production as the mostprominent contributor to productivity and growth (e.g. Daveri and Silva, 2004; Gordon, 2003). Iammarinoand Jona-Lasinio (2013) conclude that “more than mutually exclusive categories, ICT production and ICTadoption should be seen as complementary forces influencing productivity” and that “the degree ofinterdependence and relatedness of knowledge generation and diffusion, and of competences andcapabilities across industrial and technological structures, are all critical factors underlying productivitytrends”.19

Also, differences in productivity are found:

Within ICT sectors, and especially between hardware and software (IT) and communicationequipment (CT) production20.

Within the software industry, since differences exist between the more sophisticated applicationsimpacting on logistics and/or value chain management (e.g. software systems for integrating firms’processes) and more standardized products21.

Between traditional and highly regulated services (e.g. retail and wholesale trade, transports,telecommunications) and knowledge-intensive service activities (e.g. IT services or financial andinsurance services)22.

UNCTAD also provided a useful scheme to understand how ICT can permeate the whole economy andserve as an “enabling” or “general purpose” technology. First, ICT increases the efficiency of factor inputs(capital and labour) and, second, it fosters technological innovation as a source of total factor productivitygrowth. Labour productivity in particular grows as a result of capital deepening through incorporating ICTcapital inputs into the production process. In this case, ICT investment results in improved labourefficiency without changing the technology of production. When, in addition to capital deepening,economic agents are able to relocate resources in a way that improves technological efficiency and betterincorporates ICTs into their production processes, ICT use can result in total factor productivity gains23.

18 Kretschmer, T. (2012), “Information and Communication Technologies and Productivity Growth: A Survey of theLiterature”, OECD Digital Economy Papers, No. 195, OECD Publishing. http://dx.doi.org/10.1787/5k9bh3jllgs7-en

19 See Iammarino, S. and Jona-Lasinio. C. (2013), ICT production and labour productivity in the Italian regions, EuropeanUrban and Regional Studies, published online February 7, 2013.

20 Acconcia A, Cantabene C, Del Monte A, et al. (2008) ICT Adoption and Diffusion in Italian Manufacturing Firms.Departmental Working Papers of Economics - University ‘Roma Tre’ 0098. Department of Economics - University Roma Tre;Daveri F and Silva O (2004) Not only Nokia: what Finland tells us about new economy growth. Economic Policy 19(38): 117–163,and Iammarino S, JonaLasinio C and Mantegazza S (2004) Labour productivity, ICT and regions: the revival of the Italiandualism? SPRU SEWP no. 127, November.

21 See Acconcia et al., supranote 17.

22 Broadberry S and Ghosal S (2005) Technology, organisation and productivity performance in services: lessons from Britainand the United States since 1870. Structural Change and economic Dynamics 16(4): 437–466; and Guerrieri P and Meliciani V(2005) Technology and international competitiveness: the interdependence between manufacturing and producer services.Structural Change and Economic Dynamics 16(4): 489–502.

23 See UNCTAD Information Economy Report 2007-2008. Science and technology for development: the new paradigm ofICT, at 154.

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The World Bank also reports convincing statistics on the relationship between ICT usage by small andmedium-sized enterprises and productivity24. According to these figures, the use of ICT leads to aremarkable increase in sales growth and profitability, and also to significant increases in employment andlabor productivity (defined as value added per worker).

2. ICT, employment and growth

In this section we provide brief accounts of the contribution that ICT provides to growth in selectedcountries:

In the United States, in 2009 the ICT industry contributed $1 trillion to U.S. GDP, or 7.1% of GDP,including $600 billion from the sector itself and $400 billion in benefits to other sectors that rely onICT25. The National Research Council found that the ICT industry accounted for 25 percent of U.S.economic growth from 1995 to 2007 measured as real change in GDP. Over the last two decades, thedevelopment and use of ICT has accounted for as high as 60% of annual U.S. labor productivitygains. Estimates imply that a 1% increase in broadband deployment can create as many as 300,000new jobs;

In the European Union, the ICT sector represented in 2009 roughly 4% of EU GDP, a share that hasremained stable over the last few years26. ICT employs 6.1 million people, i.e. 2.7% of total EUemployment. The ICT sector is one of the most research-intensive sectors in the EU economy. Witha ratio of 5.3% in 2009, the R&D intensity of the ICT sector was more than four times the averageratio of 1.2% in the EU economy. A recent study by Oxford economics estimated that by 2020, ifEurope were able to increase its ICT capital stock to the same level (relative to the size of theeconomy) as that of the US, the result would be impressive: GDP would increase by 5% onaverage—equivalent to about €760 billion for the EU as a whole, or €1500 per person27;

A recent study estimated that by 2020 China’s ICT sector will account for 7.2% of the economy,contributing 8.6% of overall economic growth over the current decade28;

A recent study by Spiezia found that ICT producing industries account for no less than two-thirds oftotal factor productivity (TFP) growth in Germany, Slovenia and the UK, about 60% in the US andjust below 50% in France and the Netherlands. In Denmark, the Czech Republic and Italy, TFPincreased in the ICT producing industries whereas it decreased for the total business sector29.

C. KEY FACTORS AND MECHANISMS CONTRIBUTING TO THE COMPETITIVENESSOF THE ICT SECTOR

Over the past few years, economists have widely discussed the potential factors that determine thecompetitiveness of national ICT sectors. The underlying rationale is that, since ICT is found to be a majordriver of productivity and growth, understanding the factors that boost ICT competitiveness canautomatically translate into a key policy measure on the road to competitiveness and growth. The mostwidely acknowledged determinants of a competitive ICT environment at national level are summarized inthe sections below.

24 World Bank (2006), Information and Communications for Development: Global trends and Policies.

25 See Andersen, J.C. & Coffey, D. (2011), U.S. ICT R&D Policy Report.The United States: ICT Leader orLaggard?,National Telecommunications Industry Association White Paper.

26 Source: Joint research Center website, an in particular http://is.jrc.ec.europa.eu/pages/ISG/PREDICT/2da/1a.html

27 See Oxford Economics (2012), Capturing the ICT Dividend: Using technology to drive productivity and growth in the EU,at http://www.oxfordeconomics.com/my-oxford/projects/128841.

28 See ITU (2011), ICT and Low Carbon Growth in China, page 6. The report is available online at http://www.itu.int/ITU-D/asp/CMS/Events/2011/ITU-MIIT/ICT_LowCarbon_Growth_China.pdf.

29 Spiezia, V. (2012), “ICT investments and productivity: Measuring the contribution of ICTS to growth”, OECD Journal:Economic Studies, Vol. 2012/1.

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1. Infrastructure

While ICT in and of itself provides an infrastructure for applications and services, the ICT ecosystemrequires that a solid, resilient, affordable high-speed broadband infrastructure is in place. This, in turn,requires a resilient electricity network and/or the allocation of spectrum for emerging, high-speed mobilebroadband especially in areas that are less densely populated. Recent research has shown that:

There is a positive relationship between broadband expansion and economic growth. Thisrelationship is stronger in industries that rely more on information technology and in areas withlower population densities30;

Doubling the broadband speed for an economy increases GDP by 0.3%31;

Broadband exhibits a higher contribution to economic growth in countries that have a higheradoption of the technology (this is sometimes the “critical mass” or “return to scale” theory)32;

Broadband has a stronger productivity impact in sectors with high transaction costs, such as financialservices, or high labor intensity, such as tourism and lodging;

In less developed regions, as postulated in economic theory, broadband enables the adoption of moreefficient business processes and leads to capital-labor substitution and, therefore loss of jobs (thiscould be labeled the “productivity shock theory”);

The impact of broadband on small and medium enterprises takes longer to materialize due to theneed to restructure the firms' processes and labor organization in order to gain from adopting thetechnology (this is called “accumulation of intangible capital”);

The economic impact of broadband is higher when promotion of the technology is combined withstimulus of innovative businesses that are tied to new applications. This, in turn, implies that when itcomes to broadband deployment, the innovation and investment imperatives are inextricably linked;

Qiang and Rossotto (2009), based on data for the period 1980-2002, show that a 10% increase inbroadband penetration yields an additional 1.21% of GDP growth in high income countries, whichrises to 1.38% in low and middle income countries33.

Even more importantly, broadband is an essential precondition for the ICT ecosystem to flourish. Forexample, in the US the “App economy” was found to generate as many as 466,000 jobs already in 2011.All emerging cloud applications require a resilient, ubiquitous fixed and/or mobile broadbandinfrastructure. And the shift towards e-government services, too, requires such an infrastructure in place.This is why also developing countries such as Nigeria (see Section D.1 below) have prioritized broadbanddeployment as a precondition for speeding up growth in the coming years.

30 See Kolk. J. (2011), Does Broadband Boost Local Economic Development?, Public Policy Institute of California.

31 Estimate by Ericsson, Arthur D. Little and Chalmers University of Technology from data relative to 33 OECD countries.The study quantifies the economic impact of increases in broadband speed in a comprehensive scientific method using publiclyavailable data. The economic impact of average attained broadband speed, both fixed and mobile, has been analysed using paneldata regression analysis with quarterly data points from 2008-2010 for 33 OECD countries. The average achieved broadband speeddata was provided by Ookla. The report quantified the isolated impact of broadband speed. A 0.3 percent GDP growth (one-directional, isolated effect) in the OECD region is equivalent to USD 126 billion. The study also shows that additional doublings ofspeed can yield growth in excess of 0.3 percent (e.g. quadrupling of speed equals 0.6 percent GDP growth stimulus). Growth stemsfrom a combination of direct, indirect and induced effects. Direct and indirect effects provide a short to medium term stimulus tothe economy. The induced effect, which includes the creation of new services and businesses, is the most sustainable dimensionand could represent as much as one third of the mentioned GDP growth.

32 See International Telecommunications Union (2012), The Impact of Broadband on the Economy: Research to Date andPolicy Issues, April 2012.

33 Qiang, C. Z. and Rossotto, C. M. (2009) Economic Impacts of Broadband. In Information and Communications forDevelopment 2009: Extending Reach and Increasing Impact, 35–50.Washington, DC: World Bank.

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2. Education, skills and digital literacy

Another fundamental driver of ICT uptake and competitiveness is education, broadly intended to include ahigh-quality university system, widespread e-skills and digital literacy among both firms (in particular,SMEs) and citizens. More in detail:

A high quality secondary and tertiary education constitutes a fundamental ingredient of the so-called“knowledge triangle”: as a matter of fact, when universities produce skilled graduates and highquality basic (ICT) research, and the legal and business environment offers the chance to translatesuch research in applied research and then innovative products, then the whole sector can profit froma more dynamic flow of ideas and cross-fertilization in innovation.

Good-quality ICT education also leads to the creation of the skilled, qualified workforce that isneeded both in developed and developing countries. This includes skilled entrepreneurs, skilledresearchers, and skilled employees both in (e-) government and in the private sector (e.g., a foreignIT company might decide not to invest in data storage centers in country A because such countrydoes not possess enough skilled workers).

Digital literacy amongst youngsters is an essential precondition for creating a population of“Yollies”, i.e. young and dynamic entrepreneurs that, through start-up venture, often contribute to adynamic ICT environment and, as a result, to all the positive outcomes on competitiveness that thisentails34.

A recent report35argues that illiteracy plays a role in determining the levels of ICT penetration in theMENA region.

Bsaiso (2012), following Keller (1996), argues that skill levels of domestic workers constrain acountry’s ability to absorb and implement technologies invented abroad, emphasizing the key role ofdomestic skills in the assimilation of imported knowledge. Technology is only implementable amongskilled labour force36.

3.Institutional quality

International economic trends in the past decades have shown a positive correlation between the quality ofinstitutions (as measures, i.a. by the World Bank’s Worldwide Governance Indicators) and economicperformance at national level. This is true also for the ICT sector, especially when it comes to creating a legalenvironment conducive to innovation, and promoting investment in ICT infrastructure, applications andservices.

Key issues in this respect include the following:

A clear political vision of broadband and ICT development in the years to come, possibly developedwithin a national ICT strategy that is published and shared with all stakeholders;

Regulatory reform aimed at facilitating the protection of inventions through patent policy, as well astechnology and knowledge transfer to the benefit of local entrepreneurs;

Reformsaimed at improving the enforcement of the rule of law, as well as facilitating entrepreneurship.These include, most notably, the simplification and streamlining of legislation for starting a new business,

34 See Veugelers, R. and M. Cincera (2010), Europe’s missing yollies, Bruegel Policy Brief, Issue 2010/06.

35 See Kamli, A. K. (2012), Arab ICT Use and Social Networks Adoption Report, Madar Consulting. According to the study,at the lowest end of the scale, Morocco, Yemen and Egypt register an illiteracy rate of 43.92%, 37.61% and 33.63%, respectively.When looking at the Internet penetration of the three countries, for example, we notice that all register a penetration lower than40%. While Yemen's extremely low penetration rate can also be attributed to poor ICT infrastructure amongst other factors,countries like Morocco and Egypt, which fare far better in terms of Internet accessibility, continue to exhibit stunted growth inInternet penetration due mainly to their high illiteracy figures. To put the consequences of this into global terms and according toITU figures, only Qatar manages to make the top 20 list of the top performing countries in terms of Internet penetration, the closestsecond being Bahrain at number 27.

36 Bsaiso, Reem N., Knowledge Transfer in MENA Countries: Jordan Case Study (March 10, 2012). Available at SSRN:http://ssrn.com/abstract=2151485 or http://dx.doi.org/10.2139/ssrn.2151485

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applying for licenses where applicable, etc. and reforms aimed at fighting corruption and reducing thesize of the informal economy.

Reforms of financial regulation and company law aimed at strengthening the venture capital and businessangel market for start-up businesses.

For example, the most recent World Bank Ease of Doing Business indicators have reported a great progressmarked by Morocco, which launched a fully operational one-stop shop for obtaining construction permits, easedthe administrative burden of paying taxes for firms by enhancing electronic filing and payment of the corporateincome tax and value added tax, adopted a new law modifying the rules of procedure governing commercialproceedings37. In the recent Global Competitiveness Report of the World Economic forum, Qatar is praised dueto its high-quality institutional framework, since “low levels of corruption and undue influence on governmentdecisions, highly efficient government institutions, and high levels of security are the cornerstones of thecountry’s very solid institutional framework. These institutional attributes provide good foundations forefficiency”38. To the contrary, Egypt’s recent political turmoil will lead to greater future competitiveness only ifthrough an “investment in quality institutions, good governance, transparency, rule of law, improved domesticsecurity, a much-streamlined bureaucracy, and drastically reduced corruption”39.

Figure 2 – the Arab World in the Global Competitiveness Index 2011-2012

37 See World Bank, Doing Business in the Arab World 2012, available online athttp://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Special-Reports/DB12-ArabWorld.pdf.

38 See World economic Forum, Global Competitiveness Index 2011-2012, Geneva 2013.

39 Id.

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39 Id.

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39 Id.

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Figure 3 – Global Competitiveness Index – Public and Private Institutions, selected countries

Figures 1 and 2 show the relative ranking of the Arab region in the Global Competitiveness Index.Figure 1 shows the distance between three sub-groups of countries belonging to the Arab region (Levantinecountries, Gulf Countries, North Africa) and the EU27, showing large distances between the three Arabgroups in terms of infrastructure, higher education, technological readiness and innovation; and largedistances with the EU27 in the domains of higher education and technological readiness. Figure 2, inaddition, highlights the very uneven quality of institutions in the (available) Arab countries, with Algeriaand Yemen featuring the most evident problems.

D. MAIN CHALLENGES IMPEDING THE DEVELOPMENT OF A COMPETITIVE ICT SECTOR INEMERGING ECONOMIES AND ITS IMPACT ON THE DEVELOPMENT OF THE KNOWLEDGE ECONOMY

During the past two decades, noticeable progress has been achieved in the information andcommunications technology (ICT) uptake worldwide, and according to UNCTAD the progress in theevolution of ICT policies represents one of the remarkable success stories of global development in the pastdecade40. According to ITU, international Internet bandwidth, a key factor for providing high-speedInternet access to a growing number of Internet users, has grown exponentially over the last five years,from 11,000 Gbit/s in 2006, to close to 80,000 Gbit/s in 201141. This overall advancement, however,masks significant disparities among countries and within individual countries. These disparities reflect anumber of factors, among which the barriers or challenges impeding the development of competitive ICTsectors as enablers to other sectors of the economy and to the progression towards knowledge-basedeconomies. The challenges are overarching and intertwined to a large extent, making the job ofovercoming them one that requires government as well as private sector concerted efforts in a host ofdiffering legal, financial, and cultural aspects, and in almost all production and services sectors.

For instance, according to the World Bank, most developing countries still lack an incubation ecosystemfor technology entrepreneurship, including experienced mentors, knowledge networks, affordablebroadband, physical space, or proven financing models42. This echoes to some extent an assessment of theEuropean Union's factors that inhibited maximizing the benefits of ICT at the beginning of this millennium,such as lack of ICT knowledge in senior management, inadequate integration between different

40 UNCTAD (2010). "Financing Mechanisms for Information and Communication Technology for Development", UNCTADCurrent Studies on Science, Technology, and Innovation, Nº2. P:5).

41 ITU (2011a). “The World in 2011: ICT Facts and Figures.” p:3. http://www.itu.int/ITU-D/ict/facts/2011/material/ICTFactsFigures2011.pdf

42 World Bank (2012a). “ICT for Greater Development Impact”. P:19.http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/WBG_ICT_Strategy-2012.pdf.

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technologies in the business, cost constraints, flawed project planning or implementation, and lack of ICTskills in the workforce43. It is expedient to note though that promoting investment and innovation in theICT sector rests not only on encouraging the supply of ICT goods and services but also on enhancing thedemand side of the ICT products through creating an environment that is conducive to the efficient andeffective use of such technologies.

In other words, a holistic approach ought to be employed where all stakeholders in the process ofdeveloping ICT participate and contribute to the progression towards creating value and a knowledge-basedeconomy. In particular, while steps need to be made towards encouraging the competitive production ofICT goods and services, actions need to be taken simultaneously to facilitate the assimilation of bothinformation and communication sectors in all other sectors in the economy. Such progress and seizing theICT opportunity has been pursued in many regions, though unevenly as a result of a host of factorsincluding the level of liberalization, availability of skills and competencies, the adoption of an overall ICTnational strategy, and the stage of development of the respective regions.

Thus, the opportunity and urgency to act is not the same across markets since the opportunity isexpected to be higher in markets with higher competition. For instance, operators generally see ICT as adefensive response to threats from competitors, and as an offensive strategy to capture value from potentialrevenue pools. Operators, especially in the Middle East and Africa, however, do not yet fully capture theopportunity, as they are still in the process of developing their capabilities44.Yet, challenges facingachievements differ across countries. In Europe, examining the evidence from a number of cases aboutbarriers of European firms' innovation capacity building, a report by the European Commission identifiesthree barriers45:

Limited access to finance; Failing intellectual property rights46; ICT ecosystem failures47.

Overall, the challenges impeding the development of a competitive ICT sector include barriersintroduced by public as well as private sector enablers of this sector, such as the lack of governmentincentive programs, uneven access for poor and rural areas, inadequate ICT infrastructure, lack of level-playing fields, lack or weak regulatory environments, immature finance mechanisms, weakcompetitiveness, ICT foreign competition, economic constraints, and overall weak conditions for doingbusiness in the country. These barriers may be categorized under the following main themes:

1. Lack of government incentive programs;2. Ineffective, non-existent, or restrictive regulatory environments;3. Inadequate ICT infrastructure;4. Finance requirements and mechanisms;5. Economic constraints.

43 EIU (2004). "Reaping the benefits of ICT: Europe’s productivity challenge". P:16.http://www.ecdl.org/media/MICROSOFT_FINAL[1].pdf.

44 Garcia-Palencia, J. et. al. (2011). " ICT in emerging markets: a USD200 bln opportunity that cannot be ignored" May 2011.P:14. http://www.deltapartnersgroup.com/asset/download/612/true/ICT.pdf

45 EC (2012). “Lessons for ICT Innovative Industries: Three Experts’ Positions on Financing, IPR and IndustrialEcosystems”. European Commission. p:14.

http://ftp.jrc.es/EURdoc/JRC76458.pdf

46 The use of copyright laws to protect software is of very limited effectiveness (software can be easily imitated with adifferent programming language). The same is true for patents. As there is still no EU-wide patent, and rules and regulations varysignificantly across countries.

47 Ecosystem refers to the links between the various actors in the ICT landscape.

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Box 1. ICT opportunities and challenges in Emerging Markets

In Emerging markets, the ICT opportunity is at different stages of development:

In Southeast Asia, business process outsourcing is at the forefront of ICT services being provided. Operators are insome cases quite advanced as they started with their ICT efforts more than a decade ago;

In the Middle East, slow deregulation of the telecoms markets hinders strong development of ICT. Operators are inthe process of building their skills and they use partnerships to achieve so;

In Africa, poor fixed infrastructure also affects ICT negatively. Operators try mostly to leverage their mobile assetsto deliver ICT services;

Accelerating growth in emerging markets represents appealing potential business opportunities—but entering thesemarkets presents challenges that can make setting up ICT services difficult. Experience shows that infrastructureavailability, regulatory requirements, culture, and politics vary in every region—even within regions. In addition,conditions in every market constantly change. It is nearly impossible, and not advisable, to pursue a one-size-fits-allstrategy when deploying ICT services. The following examples demonstrate the wide range of challenges that can beencountered in emerging markets;

Strict government regulations have earned China a reputation for being a difficult market to enter;

In India, users are quite sophisticated and the number of remote workers is steadily increasing. Companies relyingon Internet service delivery must accommodate the unique mobility requirements and needs of this region, includingthe growth rate of cloud-based services, which outpaces that of more developed nations;

Some regions, such as Sub-Saharan Africa, are growing so quickly that it’s difficult to find data center space oravailable bandwidth. Data centers in Africa are plagued by the lack of reliable electricity and skilled staff. Gainingaccess to scarce resources in this region may require strong negotiation and interaction with a wide range ofgovernment officials, as well as members of the local community.

______________________

Sources: http://www.deltapartnersgroup.com/ict-in-emerging-markets-a-usd-200-bln-opportunity-that-cannot-be-ignored; “Success in EmergingMarkets: ICT as Part of a Strategic Vision”. Verizon(2010).http://www.verizonbusiness.com/resources/whitepapers/wp_keys-to-success-in-emerging-markets_en_xg.pdf

1. Lack of government incentive programs.

It is generally agreed that some major enablers of promoting innovation and investment in the ICTsector fall within the purview of government, which is entrusted with the task of establishing the suitablelegal, regulatory, and overall economic policy frameworks needed to encourage private sector activity andput in place a level-playing field that allows ICT to flourish and compete freely. Absent this effort fromgovernment, challenges to ICT development mount, hence the obligation of the specialized governmentagencies to:

Enhance legal frameworks, and investment and commercial laws; Protect intellectual property rights; Ensure enforcement of contracts; Provide adequate ICT infrastructure; Enhance labor laws.

First, unfavorable legal frameworks and investment laws stymie innovation and discourage investment,in particular foreign direct investment (FDI) which brings with it technical know-how and advancedtechnology. Research as well as anecdotal evidence presents ample cases in this respect.

Second, intellectual property rights (IPRs) is lacking in some emerging markets and developingcountries, resulting in dampened entrepreneurial spirit and low levels of innovation and research anddevelopment spending. Poor IPRs and patenting environments can become major obstacles to thedevelopment of ICT and firms are only encouraged to pursue such activity under supportive and favorableconditions. WIPO considers that this is what motivates a firm to proactively build up large patent portfolios

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to ensure its freedom to innovate and strengthen its competitiveness48. In Europe, there is widespreadcriticism of the European Patent System on the grounds of the lack of harmonization and fragmentation ofthe national legal frameworks across the EU and the lack of efficiency of the registration and enforcementsystem, often attributed to the additional translation and implementation costs due to the lack of a singleEU space for patents 49.

Third, ensuring enforcement of contracts is essential to attract foreign direct investment, foreign venturecapital, as well as domestic angel capital funds and local investment. Poor and lengthy procedures inenforcing ruling of courts and legal proceedings are major challenges facing emerging and less developedcountries. Nigeria is a case in point in that the country is seeking to attract ICT investments and become anoffshoring hub in Africa in order to diversify its sources of income and production base. Yet, despiteprogress relative to other countries in Africa, the country faces challenges in a number of aspects, includingcontract enforcement where a contract still takes more than a year to be enforced and costs 27 percent ofthe claim50.

Fourth, the provision of ICT infrastructure is widely agreed to form the backbone of ICT promotion andcompetitiveness, and the lack of it naturally deprives a nation from the basic requisites of a knowledge-based economy.

Fifth, constantly changing labor laws and restrictive labor rules represent an impediment to a country’sability to attract investment and promote innovation in the ICT sector, especially in countries where skilledtechnical labor, technicians, and researchers are not sufficient to fill the needed posts in labs, universities,and firms providing ICT goods and services. In the Middle East and North Africa region (MENA), forinstance, labor market challenges are substantial in all aspects of the development process includingproviding the ICT sector with much needed skills. It is argued that labor market mismatches in the regionhave been driven not only by the inability of the economy to create highly skilled workers but also by theinappropriate content and delivery of education. In addition, it is argued that labor regulation, as a majorconstraint to business operations, is on average the greatest in MENA51.

Box 2. Role of Government: The State of Victoria, Australia

The Government of Victoria, Australia, has a strong record of technology adoption. An increasing number of stateindustry sectors have become sophisticated users of ICT. Government has a key role in creating a supportive andstable economic environment and helping address shortcomings in the commercialisation system, particularly inhelping technology companies access finance for early stage development.

The government can also help companies address issues relating to scale and access to resources, information andmarkets. It is uniquely placed to work with industry players to broker collaboration, which includes establishingrelationships with international organizations, large companies and the research and education sectors, to facilitateknowledge sharing and the development of new capabilities.

The government can play a role in raising awareness of ICT trends or solutions. For example, the VictorianGovernment has worked closely with industry associations over the past couple of years to develop Victoria’ssustainable ICT capabilities.

_________________

“Victorian ICT Action Plan: An information and communication technology plan for Victoria’s future”. The State Government ofVictoria, 2010. p:27. http://www.ict-industry-reports.com/wp-content/uploads/2010/10/2010-VIC-ICT-Action-Plan-Oct-2010.pdf

48 WIPO (2011). “World Intellectual Property Report: The Changing Face of Innovation”. P:11.http://www.ifap.ru/pr/2011/n111115a.pdf

49 EC (2008). "Intellectual Property Rights and Competitiveness: Challenges for ICT-Producing SMEs". Study report No.08/2008. P:42.

50 Radwan, I. and Nicholas Strychacz (2010). “Developing an African Offshoring Industry—The Case of Nigeria”. TheWorld Bank, Africa Trade Policy Notes. P:5.http://siteresources.worldbank.org/INTAFRREGTOPTRADE/Resources/3ICTREDESIGN.pdf

51 Ahmed, Masood (2012). "Youth Unemployment in the MENA Region: Determinants and Challenges". InternationalMonetary Fund (IMF), June 2012. http://www.imf.org/external/np/vc/2012/061312.htm

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2. Ineffective, non-existent, or restrictive regulatory environments

It is widely reported that the implementation of an effective regulatory framework has resulted ingreater economic growth, increased investment, lower prices, better quality of service, higher penetration,and more rapid technological innovation in the ICT sector52.

In this context, experience has shown that one major impeding challenge to speeding up the ICT driveand better innovation and investment climates is that emerging and developing markets have notaccelerated the slow pace at which regulatory authorities are established. The establishing of industryregulators is expected to unleash competitive forces, and concurrently put in place proper rules as to ensurethe quality and affordability of goods and services to users as well as developers and providers of ICT.

The UN commissioned Task Force on Financial Mechanisms for ICT for Development TFFM identifiedthe key regulatory imperatives necessary to promote market-based development to include53:

Licensing procedures; Competition regulation; Interconnection regulation; and Reducing costs and risks.

In this regard, a level-playing field among state-owned-enterprises (SOEs), government units, andprivate sector enterprises must be in place, with no preferential treatment given to SOEs and governmentoperators at the expense of private sector operators, such as export subsidies and cheaper finance. Any suchprograms, if available and allowed, must treat all enterprises equally.

Further, it is central that the introduction of regulatory authorities to oversee competitive markets andthe provision of ICT goods and services must precede liberalizing markets in order to avert policy reversalsand setbacks in the process of developing the ICT sector. In this context, UNECE suggests that in sectorssuch as telecommunications, international best practice is to establish an independent regulator to overseethe competitive liberalization of the sector, which is a key infrastructure and driver behind electroniccommerce development. But UNECE purports that the challenge for effective regulatory institutions is thetask of acquiring adequate expertise and resources, which developing countries may find difficult tosupport54.

This point of view is echoed more recently by UNCTAD, which argues that the challenges associatedwith market liberalization include not only the basic steps of modifying legislation and issuing newlicenses, but the more complex demands of developing regulations where a main challenge for the newly-established regulatory authorities is to obtain the expertise and skilled personnel, as well as other resources,essential to undertake its tasks effectively55.

While many developing countries lack the needed regulatory frameworks, some developed countrieshave restrictive ones, with both systems posing challenges and constraints to innovation and investment inthe ICT sector in various markets. For instance, in Europe, the available analyses show that at the aggregateeconomy level, restrictive regulatory regimes56 for product markets hinder ICT investment and from asectoral perspective, it has a significant negative effect upon investment in IT, software and other

52 ITU (2006). "Legal and Institutional Aspects of Regulation". Module 6, ICT Regulation Toolkit. p:4.www.ictregulationtoolkit.org/en/Document.3730.pdf

53 UNCTAD (2010). “Financing Mechanisms for Information and Communication Technology for Development”, UNCTADCurrent Studies on Science, Technology, and Innovation, Nº2. p:2.

54 UNECE (2007). “Information and Communication Technology Policy and Legal Issues for Central Asia”. p:3.http://www.unece.org/fileadmin/DAM/ceci/publications/ict.pdf

55 UNCTAD (2010). "Financing Mechanisms for Information and Communication Technology for Development", UNCTADCurrent Studies on Science, Technology, and Innovation, Nº2. p:2.

56 Regulation indicators relate to state control, barriers to entrepreneurship and barriers to trade and investment.

21

machinery and equipment57. With regard to labor market regulation, the EC refers to some evidence thatemployment protection legislation may impede ICT capital accumulation and productivity since it maydiscourage enterprises from making the shift towards high-skilled workers.

Equally important to the need to establish an adequate regulatory framework at the initial stages ofencouraging the development of an ICT sector, is the keenness of governments to relax regulations once acompetitive environment has been established and all operators have a level-playing field and are treated atarms’ length.

3. Inadequate ICT infrastructure

The lack of an adequate ICT infrastructure has been a major impediment to the successful advancetowards a knowledge-based economy where information and communication goods and services contributesignificantly to the workings of other sectors in the economy, through better and more efficient allocationof resources, thereby creating synergy and adding value to social and economic activities.

For instance, IISD holds that despite the fact that growth in broadband capacity is accelerating indeveloping countries, there is a growing gap in broadband provision between industrial countries with veryrapid investment and poorer developing countries where investment is not so fast58. Some consider that thepresence of such a gap is due to one of the barriers most frequently raised and discussed in this regard,which is affordable access in developing countries to the physical infrastructure of e-commerce, includingcomputers and other types of hardware, software, telecommunications services, and Internet accessservices59.

For example, UNCTAD reveals that one of the most fundamental barriers to more rapid and efficientdevelopment of ICT in much of the developing world is the lack of available and affordable transmissioncapacity in national and international “backbone” networks60.

57 EC (2010). "European Competitiveness Report 2009. Commission staff working document SEC (2009) 1657. p:12.www.psp.cz/doc/00/06/04/00060471.doc

58 IISD (2012). "ICTs, the Internet and Sustainability: A discussion paper". The International Institute for SustainableDevelopment. May 2012. p:5. http://www.iisd.org/pdf/2012/icts_internet_sustainability.pdf

59 Wunsch-Vincent, S. (2004). “WTO, E-commerce, and Information Technologies”. p:28.http://cdm266901.cdmhost.com/cdm/singleitem/collection/p266901coll4/id/3102/rec/2


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Figure 4 – Fixed broadband subscriptions per 100 inhabitants, 2005-2011

Important as it is, the lack of infrastructure, or access to it, is not limited to physical infrastructure. Itincludes human capital, a major tributary to the utilization of and innovation in the ICT sector.Consequently, the inputs and outputs in the education system, manifested by the availability of a pool ofskilled human resources are essential. The lack of such an important ICT enabler is a main challenge in thissector. This is of particular concern in emerging and developing economies.

For example, UNDESA highlights the challenges facing countries everywhere in implementing ICT intheir education systems, contending that many local, national and regional government bodies are still notgiving this issue the attention it deserves61. UNDESA also cites financial constraints as another majorobstacle for developing countries62.

Nevertheless, it is not only emerging and developing countries that face challenges in this respect. Thecommission of the European Communities laments the growing deficit in the European Union of qualifiedskills in ICT research and development, resulting in hundreds of thousands of unfilled posts, adding thatEurope has relatively few world-recognized ICT poles of excellence which affects the attractiveness ofEurope to students and researchers63.

61 UNDESA (2009). Information & Communication Technologies (ICT) in Education for Development. p:3.http://unpan1.un.org/intradoc/groups/public/documents/gaid/unpan034975.pdf

62 Ibid. at page 8.

63 CEC (2009). "A Strategy for ICT R&D and Innovation in Europe: Raising the Game". Commission of The EuropeanCommunities. Brussels, 13.03.2009, COM (2009) 116. p:4.

0 10 20 30 40

IndiaSouth Africa

EgyptSaudi Arabia

MalaysiaBrazil

TurkeyArgentina

MexicoChina

RussiaHungary

ItalyJapan

United StatesFinland

Hong KongSwedenCanada

GermanyUnited Kingdom

BelgiumIcelandFrance

NorwayKorea

DenmarkSwitzerland

Data source: ITU statistics

Fixed Wired Broadband Subscriptions(per 100 inhabitants)

2011

2005

23

This challenge is paramount in Brazil, one of the main emerging markets, where qualified labor scarcityin the information and communication technology sector points to the largest deficit of professionals in itshistory. It is estimated that unfilled ICT sector vacancies will reach nearly 200,000 by 201364.In Africa, it is claimed that the most prevalent challenges across the continent to fully move forward in thehigh technology business areas are infrastructure, energy constraints and the ICT skills gap65.

4. Finance requirements and mechanisms

Resource mobilization is a major factor that could impede the development and competitiveness of ICT.Insufficient resources and/or inefficient allocation of available resources have a perverse effect on theability of this sector to reach its potential and contribute to other sectors in the economy.

It is this recognition that prompted the UN commissioned Task Force on Financial Mechanisms for ICTfor Development (TFFM) to pay this issue greater attention. The Task Force highlighted this challenge forICT development early on noting that traditionally, in developing countries, ICT infrastructure financingcame either from Government budgets or from donor and international financial institution programs thatsupported major capital infrastructure investments; but of late a major shift occurred in the financialstrategies towards a greater reliance on private capital66.

Financing requirements and the cost of such activity, especially in the provision of ICT basicinfrastructure is a major challenge in this area. It is very telling when UNCTAD reveals that the barriers tomore rapid development of ICT in developing countries is the lack of affordable transmission capacity in“backbone” networks since these networks invariably require the highest upfront investment in majorinfrastructure67.

The finance challenge is not limited to developing countries and emerging economies. It is an equallyimportant issue in developed countries. For instance, one major challenge in Europe is underinvestment inICT research, development and innovation noting that the state of California in the USA alone attractstwice as much venture capital as the whole of Europe68.

The innovation drive in Europe is reported to be less than that of the United States primarily because offinancing considerations. In answering the question of why it is that European firms are less present asleading innovators in new ICT sectors, the European Commission notes that the most common factor raisedin the literature to explain the differences in dynamic structure between the US and the EU is a greaterwillingness of US financial markets to fund projects in new sectors. In addition, the lower exit and re-entrycosts for firms and the greater mobility in the US labor market are factors to which the EC refers asenablers of the emergence of new industries and new firms in the US69.

64 ITDECS (2012). “State of Brazil IT: plugging the skills gap”. http://itdecs.com/2011/11/state-of-brazil-it-plugging-the-skills-gap/

65 eTransform Africa (2012). " ICT competitiveness in Africa."p:9.http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/282822-1346223280837/ICTCompetitiveness.pdf

66 WSIS (2005). "Task Force on Financial Mechanisms for ICT for Development". p:3.http://www.itu.int/wsis/docs2/pc2/off7.pdf


68 CEC (2009). "A Strategy for ICT R&D and Innovation in Europe: Raising the Game". Commission of The EuropeanCommunities. Brussels, 13.03.2009, COM (2009) 116. p:4.

69 EC (2012). “Lessons for ICT Innovative Industries: Three Experts’ Positions on Financing, IPR and IndustrialEcosystems”. European Commission. p:12. http://ftp.jrc.es/EURdoc/JRC76458.pdf

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5. Economic constraints

Economic constraints impair the process of elevating the ICT sector to a more advanced stage andfostering its competitiveness in that it represents a country's ability to garner the needed financial backingto undertake massive costly projects in the area of information and communications technology. Theacquisition of costly high technology components, such as hardware, software and knowledge, is not only achallenge to the abilities of governments and private sectors to support their plans to develop the ICTsector; low income countries face also a problem of demand of ICT goods and services, especially in ruralareas and among the poor segments of their societies, thereby weakening the demand side for such productsand markets.

In this respect, the World Bank holds that despite the efforts of mobile phone companies in mostcountries to upgrade their networks to offer broadband wireless data, gaps in access remain for the ruralpoor70. These gaps originate from both low coverage in rural areas and lack of affordability of the servicesby the poor (Peru, with 84 percent mobile phone penetration, the highlands are barely covered by mobileoperators). The Bank reveals that globally, broadband connections number around half a billion on fixedline networks and just under a billion on mobile networks, but access distribution is skewed heavily towardthe developed world where less than 1 percent of Africans have broadband access at home or on theirmobile device, and even then at generally low speeds and high prices. In this regard, studies show thataddressing direct cost challenges, in particular reducing the cost of access for mobile and broadband willrequire improving the regulatory and competitive environments for operators as well as better coordinationin developing the infrastructure71.

Another important challenge confronting some countries in their efforts to develop a competitive ICTindustry is the severe competition from the BRICs72 and other major emerging markets. For instance, in astudy on the Brazilian status of ICT development, associations in Brazil have stressed two strategicchallenges, namely specialized labor scarcity and foreign competition, especially from India and China73.

Notwithstanding all the previously mentioned challenges or barriers to establishing a competitive ICTsector, failure to promote this issue as a public policy priority is likely to decelerate the process of movingforward towards ICT development and a knowledge-based economy. As such, political leadership andownership of this ambitious undertaking is key to its success as illustrated in Box 3 below on the Turkishexperience.

Box 3. Obstacles and Successes Behind Turkey's ICT HistoryTurkey, an upper-middle-income economy, suffers from comparison with higher income EU countries. Its fixed broadbandpenetration stood at 9.4 subscriptions per 100 inhabitants in June 2010 compared to the OECD average of 24.2. Thirty fourpercent of Turkish homes had a broadband connection compared to the EU average of 61 percent in 2010.

E-government initiatives have been a major driving force for development of the broadband ecosystem. This has triggereddemand by enterprises in the ICT sector and motivated citizens to increase Internet usage.

Ensuring a shared vision among political leaders and technocrats has also been an important factor in pushing e-governmentprograms. Political leaders saw e-government as a central instrument that would support public reforms and larger changesin the political system.

70 World Bank (2012a). “ICT for Greater Development Impact”. p:22.http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/WBG_ICT_Strategy-2012.pdf

71 eTransform Africa (2012). " ICT competitiveness in Africa."p:19.http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/282822-1346223280837/ICTCompetitiveness.pdf

72 Brazil, Russia, India, and China

73 EU-LA (2011). "Status of ICT Policy Development - Country Report Brazil". p:10. http://www.pro-ideal.eu/sites/default/files/D5.2_Status_of_ICT_policy_development_Country_report_Brazil.pdf

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A central organizational structure was formulated to develop strategies and put public money into the pipeline for a set ofstrategically important projects with high value and high transaction.

Nevertheless the country continues to face economic and social barriers to effectively absorb broadband technologies on alarge scale and better utilize them for leveraging overall economic competitiveness. Fixed broadband competition is limitedand dominated by ADSL technology. ICT skill gaps among small and medium enterprises and the less educated need to beadequately addressed with participation of private initiatives. The lack of a suitable national accounting framework for moredetailed analysis hinders international benchmarking in ICT and innovation.____________

Source: excerpts from http://www.infodev.org/en/Publication.1132.html

Figure 5 – R&D expenditure as % of GDP, 2007-2009

Figure 6 – Number of researchers per million people, 2009

0.0 0.5 1.0 1.5 2.0 2.5

Saudi ArabiaKuwait

EgyptJordan

Sub-Saharan AfricaLatin America & Cribbean

South AsiaEurope & Central Asia

TunisiaEast Asia & Pacific

European UnionWorld

OECD me mbers

Source of data: World Bank S&T data base

(% of GDP)

Figure X. R&D Expenditures(2007-09)

0 500 1000 1500 2000 2500 3000 3500 4000

Arab States - AsiaAfrica

Arab States -AllArab States-Africa

EgyptDeveloping countries

WorldEU

Developed countries

Data source: UNESCO database.

Figure X. Number of Researchers per million People(2009)

26

Figure 7 – Number of technicians per million people, 2008-2009

E. CASE STUDIES FROM SELECTED COUNTRIES

Below, we present a number of case studies related to the role attributed to ICT in competitivenessstrategies adopted by developed and developing countries. The case studies have been developed to showwhat ICT can do to a national economy depending on the latter’s state of advancement. Our featured storiesreveal that developing countries such as Botswana and Nigeria are capitalizing on mobile technology andon their national resources to achieve fast and sustainable growth, whereas past stories such as the IndianICT boom reveal that attracting ICT investment without investing in human capital is likely to backfire interms of sustainable growth. Other countries, such as Taiwan, have decided to invest in securing the role ofcomponent manufacturer in emerging global value chains. Brazil has decided to prioritize investment inhigh-speed broadband by introducing a 9-year “access holiday” regime, similar to what the US did in 2003-2005 for high-speed DSL and optical fiber networks. The UK and Russia are investing in attracting capitalsand ideas into would-be “Silicon Valleys”, named TechCity and Skolkovo.

1. Botswana: no sustainable growth without investment in human capital74

The economy of Botswana has traditionally suffered from a very low penetration rate of fixed-linetelecommunications, which has acted as an obstacle to growth. The advent of mobile communications hasled to a radical change in the way business is conducted. With the mobile cellular market approachingsaturation, the population has started demanding content, broadcasted via traditional media and the Internet,and value-added services. There is also increased demand for high-capacity data networks and fasterInternet connections. To support the nation’s economic activity in all sectors, from industry to health,mining, commerce, finance, tourism and agriculture, the government of Botswana has increased itsinvestment in the ICT sector, which is projected at USD10,660 million for the 2009-2016 period. Of thisamount, 7 per cent or an average of USD 107 million per year will be invested in ICT for the automation ofgovernment administration processes.

The government of Botswana, in addition, thought that simply spending money on ICT would not leadto a sustainable path of growth and development, and that investment in human capacity would be neededin order to make Botswana’s growth sustainable. In particular, the National ICT Policy emphasizes theneed to develop specialized ICT skills and on-the-job training to ensure that young graduates have a careerpath in Botswana’s emerging ICT sector. Developing internal human capacity would also reduce thesector’s dependency on expensive highly skilled consultancy and software development services hired fromother African countries and from the UK. This policy has had a positive impact on the local ICT industry.

74 Source: ITU (2011), The role of ICT in Advancing Growth in Least Developed Countries, available online athttp://www.itu.int/ITU-D/ldc/turkey/docs/The_Role_of_ICT_in_Advancing_Growth_in_LDCs_Trends_Challenges_and_Opportunities.pdf

0 500 1000 1500 2000 2500 3000

IraqWest Bank

KuwaitTunisia

MoroccoTurkey

Hong KongUnited Kingdom

SwedenDenmark


Figure X. Number of Technicians per million People(2008-09)

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Currently, many ICT companies operating in Botswana are exporting software development andconsultancy services.

2. Brazil’s ICT market: oil + data75

In Brazil the oil industry is one of the biggest drivers of the economy, and ICT is helping this sectorachieve greater levels of productivity and competitiveness. The MIT Technology Review recentlyexplained the rise of the ‘digital oil field’, in which oil companies use distributed sensors, high-speedcommunications, and data-mining techniques to monitor and fine-tune remote drilling operations. The aimis to use real-time data to make better decisions and predict glitches”. There will indeed be lots of data, asthe installed base of wireless M2M (machine-to-machine) and telemetry communications increases inapplications like monitoring and controlling of drills, wells and pipelines. One market research firmsuggests that there will be 0.43 million wireless M2M devices in the oil and gas industry by 201676.Theidea is that, as oil extraction becomes more difficult and increasingly coming from remote offshorelocations, but with global oil demand obviously still expected to increase, the oil and energy companiesneed to become smarter and mine the data they collect to understand how to make their operations moreeffective.

Excluding telecommunications, Brazil’s IT industry is now a $112 billion market, of which only $2.65billion is for exports, according to the Brazilian ICT industry association, Brasscom. So the domesticmarket forms a huge proportion of this growing sector. The industry also believes it will grow rapidly – thecountry’s revenues from information technology and communications will reach $430 billion by 2022,putting the country in the number three position globally, compared to its number five position today withrevenues of $212 billion77.

3. Mobile Broadband and growth. The case of Nigeria78

In Nigeria, as confirmed by a recent report, mobile broadband could potentially contribute over one per centof GDP (and 1.7 per cent of non-oil GDP) in 2015, and could support the diversification of the economy79.Thereport also highlighted the country’s current low broadband penetration rate, which indicated that only six percent of Nigerians have access to broadband services, and 74 per cent of those do so through their mobile phones.However there has been some increased activity in the broadband space with the arrival of marine cables such asMainone, and Glo1 and the change in focus by many operators from voice to data. Also, new operators aredeploying all IP WiMAX networks across the country with some other already muting their desires to roll outthe advanced 4G Technology, LTE. All these activities are sure to increase the broadband penetration rate andby 2015 it is expected that broadband alone will contribute at least five billion dollars to the nation’s GrossDomestic Product. For example, the country’s online retail industry could grow by 55 per cent a year to reachN44.9 billion in 2015, from N4.5 billion in 2010. On the other hand, the financial services sector could beexpected to grow by 95 per cent CAGR to N16.8 billion in 2015, up from N0.6 billion in 2010, as a result ofmobile access to bank accounts and money transfer services, according to the report. The use of the Internet andmobile devices to deliver social services, including healthcare and education, would generate growth of 70 percent CAGR, to reach N30.3 billion in 2015.

75 http://opentoexport.com/article/big-data-oil-one-example-of-an-ict-growth-area-in-brazil/

76 Berg Insight, M2M Applications in the Oil & Gas Industry, November 2012.

77 See Brasscom News, Taking the Pulse of Brazil’s ICT Sector. Available athttp://www.brasscom.org.br/brasscom/Ingles/detNoticia.php?codArea=8&codCategoria=45&codNoticia=341.

78 Source: http://www.ngrguardiannews.com/. Also http://www.worldfolio.co.uk/region/africa/nigeria/n-1954-new-ministry-pushes-ict-growth

79 See Analysis Mason (2011). “Assessment of the Economic Impact of Wireless Broadband in Nigeria.” July. Reportprepared for the GSMA. Available at http://www.gsma.com/documents/nigeria-economicimpact-of-wireless-broadband/19626/.

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SECTION I – HIGHLIGHTS

ICT is composed by both manufacturing and services: no ICT market can be said to be complete and maturewithout both components;

ICT is both a very important stand-alone sector and a key driver of productivity and growth in many othersectors of the economy, such that country that are more advanced in ICT systematically grow faster thancountries that do not invest much in ICT;

Where it flourishes, ICT markets also create jobs. Recent estimates suggest that the Internet has created 2.6new jobs for every job lost;

Key drivers of a mature ICT sector are infrastructure (computing and networking equipment, devices, fixedand wireless broadband technologies), adequate skills created by schools and university, legislation thatenables the flow of information through technology transfer, intellectual property protection, soundgovernment, and well-developed financial markets;

Many developing countries are seeking to put ICT at the center of their development strategies, sometimestrying to leapfrog more developed countries by using advanced technologies (e.g. 4G wirelesscommunications, cloud computing) that enables cost-cutting and more effective use of ICT for local citizensand businesses;

Lack of adequate infrastructure and skills, together with ineffective government action often hamper thedevelopment of the sector at the local level.

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II. ICT SECTOR IN THE ARAB REGION - AN OVERVIEW

A. STATUS, CHARACTERISTICS AND ECONOMIC IMPACT OF THE ICT SECTOR

The ICT sector in the Arab region has progressed in the past decade and important efforts have been exertednot only towards greater use of both information and technology goods and services, but also towards thedevelopment of this sector and its ability to produce ICT goods and services. The two regional conferences ofthe ESCWA member countries in Damascus in years 2004 and 2009, and the resulting process, have been avaluable tributary to the advancement made in promoting innovation and investment for developing a vibrantICT sector in the region that is capable of adding value to the region by contributing to economic growth andsocial development.

In particular, the Regional Plan of Action (RPoA) agreed in the 2004 conference and the follow-updiscussions and updating of the RPoA in the 2009 conference have paved the way for accelerating the process ofestablishing the enabling environment to promote the better use and provision of information andtelecommunications goods and services and developing the ICT sector. Such enabling factors include ensuringthe proper legal and regulatory frameworks, encouraging innovation and funding of projects, increasing researchand development spending (R&D) and facilitating access to ICT products and services, especially for remoteareas and the marginalized segments of society. But, despite the progress made, much still needs to be done onthese enabling factors.

Generally, Arab States have made significant progress when it comes to ICT uptake. The number of mobile-cellular subscriptions in the region almost tripled in five years, from 126 million in 2006, to nearly 350 millionby the end of 2011, when mobile-cellular penetration reached 97 percent - 9 percent higher than the worldaverage80. However, Internet usage, and in particular broadband Internet access, is still limited. Further, less than30 percent of the population in the region were online at the end of 2011 and fixed broadband penetration stoodat just above 2 percent, well below most other regions and the world average of around 9 percent; the region alsolags in the provision of 3G mobile-broadband services.

Overall, the Arab region is still characterized by a relatively weak performance in the ICT sector whencompared with developed countries, and even other middle income regions. Further, this overall modestshowing masks disparities among individual countries in the region themselves, where some countries haveperformed better than others in many aspects related to promoting the ICT sector in their respective countries.For instance, the Knowledge Economy Index (KEI) constructed by the World Bank demonstrates this modestperformance at the regional level, notwithstanding country differences.

Figure 8 – Knowledge Economy Index by country and region

80 ITU (2012a). "ICT adoption and prospects in the Arab Region 2012". p:iii. http://www.itu.int/dms_pub/itu-d/opb/ind/D-IND-AR-2012-PDF-E.pdf

0 2 4 6

DjiboutiSudan

MauritaniaYemen

SyriaMorocco

EgyptAlgeria

LebanonTunisiaMENA

JordanKuwait

QatarSaudi Arabia

OmanBahrain

UAE

Source of Data: World Bank KAM database

Figure X. Knowledge Economy Index (2012 )

30

Figure 9 – Knowledge Economy Index by region

In particular, as shown in Figures 9 and 10, the MENA region as a country grouping ranks lower thanthe world average with respect to its preparedness to compete in the knowledge economy. Out of the 146countries ranked, the United Arab Emirates (UAE) and Bahrain ranked 42 and 43, respectively, followedby Oman (46), Saudi Arabia (50), Qatar (54), and Kuwait (64). Jordan is the only country other than thesix Gulf Cooperation Council member countries (GCC)81that ranked above the region's overall averagewith a rank of (75). Mauritania, Sudan, and Djibouti came in at the bottom of the lists ranking 134, 138,and 139, respectively.

Yet, it is important to note that Saudi Arabia has made the most progress in all of the 146 countriesmoving from rank 75 in 2000 to rank 50 in 2012. In addition, Oman has made significant improvements inthe innovation, education, and ICT pillars during the same period moving up 18 spots in the KEI rankings,to 47th place, which is the second largest improvement. Tunisia has also made some progress. However,Kuwait and Jordan witnessed deterioration in their overall KEI rankings during the same period.

Figure 10 – ICT development index by region

As for the ICT development sub-index82, Figure 10 shows that the MENA region's ICT performance hasnot fared well in comparison with other regions, except for the relatively low per capita income regions,namely South Asia and Africa. On average, the Arab region as a grouping ranks lower than the worldaverage in the ICT Development Index which reflects the nations' comparative performance with regard toICT infrastructure and uptake.

81 The GCC member countries comprise of Saudi Arabia, Kuwait, Oman, Qatar, Bahrain and the United Arab Emirates(UAE).

82The index includes 11 indicators grouped by the three sub-indices, namely access, use, and skills.

0 5 10

AfricaSouth Asia

MENAWorld

Latin AmericaEast Asia & the PacificEurope & Central Asia

North America

Source of data: World Bank KAM database

Figure X. Knowledge Economy Indexby Region (2012 )

0.0 2.0 4.0 6.0 8.0 10.0

Africa

South Asia

World

MENA

East Asia & the Pacific

Latin America

Europe & Central Asia

North America


Figure X. ICT Development Indexby Region (2012)

31

Figure 11 – ICT Development Index (2012)

However, the overall Arab region’s ICT development index conceals strikingly different performancelevels among the countries themselves in the region, where the GCC countries come at the top of the list ofthe Arab countries and rank significantly higher than the region's overall average. As Figure 11 shows,Bahrain is the first in the region in ICT access, use, and skills sub-indicators with an index of 9.54,compared with Yemen which ranks last with an index of nearly 1.2 only. As a matter of fact, Bahrainranked first in the world with regard to the ICT index soaring from 40th in 2000 to the first position in2012.

The general global improvement, though at uneven magnitudes among developed and developingcountries, reflects the continuing enhanced connectivity worldwide, and the mixed performance amongArab countries where GCC countries once again performed noticeably better than other countries in theregion (Figure 12). For instance, Qatar, Saudi Arabia, Oman, and the UAE scored higher than emergingmarkets and even than some developed countries with regard to the mobile broadband subscription. On thisindicator, as well, the Arab region scores lower than the world average.

Overall, the Arab region not only lags behind when it comes to the performance of the ICTDevelopment Index, but also with regard to the new benchmark introduced by the InternationalTelecommunication Union (ITU), that is the ICT Price Basket (IPB), which tracks and compares the costand affordability of ICT services.83 According to ITU, a regional comparison of the IPB during the period2008-2011 shows that while the price of ICT services fell in all regions of the world, services remain muchmore affordable in some regions compared to others84. With regard to the Arab region, the large disparitiesin IPB values and global rankings reflect the region’s diversity in terms of income and development levels,with ICT services relatively being more affordable in high income economies. By and large, analysis of thefixed-telephony, mobile-cellular-telephony, and fixed-broadband Internet suggests that prices in the ArabStates as a whole are relatively expensive85.

83 The IPB is composed of three distinct prices – for fixed-telephone, mobile-cellular and fixed-broadband services.

84 ITU (2012b). "Measuring the ICT Development Index". p:90.

http://www.itu.int/ITU-D/ict/publications/idi/material/2012/MIS2012_without_Annex_4.pdf

85 ITU (2012a). "ICT adoption and prospects in the Arab Region 2012". p:20. http://www.itu.int/dms_pub/itu-d/opb/ind/D-IND-AR-2012-PDF-E.pdf

0 2 4 6 8 10

Yemen

Djibouti

Mauritania

Sudan

Egypt

Syria

Lebanon

MENA

Algeria

Jordan

Tunisia

Oman

Kuwait

Qatar

Saudi Arabia

UAE

Bahrain


Figure X. ICT Development Index (2012)

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With regard to ICT spending, an indicator of the growth of the ICT sector, it is estimated that totalworldwide spending amounts to $4,406 billion in 2012, of which 58 percent is spent on communicationsservices and equipment, 21 percent on computer services, 12 percent on computer hardware, and 9 percenton software86. As shown in Figure 12, the Middle East region has registered a higher rate of ICT spendingthan the world's average; the annual average increase of ICT spending in the region during the period 2010-2012 was about 10 percent, compared with about 8 percent for the world.

It is notable here that this regional growth has resulted mainly from relatively high growth rates in fourcountries in the region, namely Morocco, Egypt, Saudi Arabia, and the United Arab Emirates which rankedamong the top 20 countries worldwide that registered the fastest compound annual growth rates during thepast decade (Figure 12).

Figure 12 – ICT spending by region (base year 2003)

Source: OECD Internet Economy Outlook 2012 (OECD 2012a)

Figure 13 – ICT spending growth (CAGR 2003-2012)

Box 4. Spending on ICT in the Gulf Cooperation Council member countries (GCC)

Spending on information & communications Technology (ICT) in the GCC has been growing at a healthy rate and is likely to reachnearly $180 billion over the next three years. IT spending in the region is expected to grow 8-10 percent driven by Saudi Arabiaand the UAE, which account for 50 percent and 25 percent, respectively, of total GCC ICT spending.

In Saudi Arabia, ICT spending grew 17 percent year-on-year in 2008 to $24 billion, over 75 percent of which was forcommunication spending. This is expected to have decelerated sharply to a 4 percent growth in 2009. ICT spending is forecasted togrow at a three-year CAGR of 8 percent to $32 billion by 2012, versus the 17 percent CAGR it clocked over the past five years.“The upgrading of the telecommunications networks is likely to be a major driver of infrastructure spending. Saudi Arabia isexpected to account for more than 50 percent of spending on ICT in the GCC over the next three years. Of the nearly $90 billionexpected to be spent on ICT infrastructure by 2012, $22 billion is likely to be spent on IT and $67 billion on telecommunications.

In the UAE, the second biggest market, spending on IT infrastructure has grown at a CAGR of 18 percent over the past five yearsto nearly $12 billion, about 75 percent of which is for communications. The growth is expected to moderate over the next threeyears with a CAGR of 10 percent to $16.5 billion by 2012. In 2008, ICT spending grew 23 percent before decelerating sharply to a5 per cent estimated annual growth in 2009.

86 OECD (2012a). "OECD Internet Economy Outlook 2012". OECD Publishing. p:55.http://www.keepeek.com/oecd/media/science-and-technology/oecd-internet-economy-outlook-2012_9789264086463-en

20.5% 18.8%17% 15.3%

0.05.0

10.015.020.025.0

Morocco Egypt UAE SaudiArabia

Data source: OECD 2012a

Figure X. ICT Spending Growth(CAGR 2003-2012)

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20.5% 18.8%17% 15.3%

0.05.0

10.015.020.025.0

Morocco Egypt UAE SaudiArabia

Data source: OECD 2012a

Figure X. ICT Spending Growth(CAGR 2003-2012)

32











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The majority of ICT spending in the UAE is on the consumer segment at about 50 percent, while about 7 to 8 percent is spent oneach of the energy and utilities, government and services sectors, said the report. Spending on IT – which includes capitalexpenditure on hardware and software – in the UAE has at 18 percent led by the expansion in industry. Over the next three years,IT spending is expected to at more moderate rates, growing by 10 percent to a total of $45.8 billion. The majority of the spending,$36.4 billion, is expected to go to communications, while the remainder is for the IT segment.

In Kuwait, around $16.5 billion is likely to be spent on ICT infrastructure over the next three years. More than $12.7 billion isexpected to be spent on the communication segment.

Bahrain is expected to spend $5 billion on ICT infrastructure over the next three years.________________

Source: http://www.a1saudiarabia.com/16166-kingdom-ict-spending-to-grow-8-to-32b-by-2012/

Further, in order to encourage ICT development and enable broader participation in the informationsociety, efforts have also been exerted to enhance the digital content in the region's portals. For instance,according to ITU, the region has witnessed significant growth in the supply of digital Arabic content in theform of online portals and applications, and ESCWA with partners have also facilitated this progress inestablishing Arabic domain names, which would promote local content and language87.

As for the impact of ICT on Arab economies, an assessment can only be as good as the tools andmechanisms available globally to measure the impact of ICT activities on the overall economicperformance. In this regard, a host of challenges have been identified by the international communitywhich makes this undertaking a difficult one resulting from conceptual, methodological, as well asstatistical issues. On the one hand, ICT is diverse and multifaceted ranging from hardware to software,along with both information as well as telecommunications services.

On the other hand, the economic impact of ICT on various applications is not homogenous. Forinstance, the impact of ICT on e-government, e-business, e-education or e-health suffers from conceptualdifficulties and may not be easily observed and assessed. In addition, the macro impact (i.e. povertyreduction, growth, and/or employment) may require different methodologies and data requirements of theimpact at the micro level (i.e. firms and industry's performance). These challenges are more obvious indeveloping countries, including the Arab region, as these countries generally have less technicalcapabilities to gather data on the required economic and ICT indicators than those of advanced economies.

Box 5. Let’s Tweet in Arabic

In May 2011, a 17-year-old Qatari student residing in the United States who was looking for more social networking opportunitiesin her native tongue started a call to action, via the #letstweetinarabichashtag. With the support of ictQATAR, which helpedgenerate awareness and attention, the movement quickly became more established and extended far beyond Qatar.Today #letstweetinarabic is entirely independent and widely recognized as a powerful regional effort to foster Arabic e-content.With more than 52,000 Twitter followers from across the Middle East, the initiative is one of the region’s most influential Twitteraccounts, and its community represents a clear example of the power of Arab users to inspire change in the digital realm.

The group holds regular tweetups around a range of topics, and then shares the curated tweets via the social platform Storify. Thegroup also recently partnered directly with Twitter to help translate the Twitter Web interface into Arabic.

_________________

Source: ictQatar.com. http://www.ictqatar.qa/sites/default/files/documents/Annual_Report_11_EN_0.pdf

Barring these challenges, the positive impact of ICT has not been contested. For instance, in a review ofresearch on the macroeconomic impact of ICT, UNCTAD reports evidence of productivity gains indeveloping countries and that the development of a strong ICT sector has generally shown a positive linkwith GDP growth and poverty reduction88. At the micro or firm-level in developed countries, studiesgenerally found that the use of computers, the Internet and broadband have a positive relationship withproductivity with varying outcomes among individual businesses, based on firm-specific skills andinnovation.


88 UNCTAD (2011). "Measuring the Impacts of Information and Communication Technology for Development", UNCTADCurrent Studies on Science, Technology, and Innovation, Nº3.pp:10-11.

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It is widely agreed that knowledge and innovation have become main drivers of economic growth, andthat the traditional production function consisting of capital and labor is no longer adequate enough toexplain changes in output and the levels of growth. According to the new growth theory, knowledge,technology, and innovation have been assuming greater importance in explaining growth through increasesin total factor productivity (TFP) and human capital.

For example, the MENA region, during the four decades from 1960 to 2000, scored second-lowest (afterSub-Saharan Africa) in terms of annual change in TFP; however, during the past decade the MENA regionhas witnessed an acceleration of growth explained partly by productivity gains. In particular, TFP gainswere achieved in Egypt, Libya, Tunisia, Jordan and Morocco. It has been estimated that a one-unit increasein the Knowledge Economy Index (KEI) adds between 0.6 and 0.9 percentage point to annual GDP growthper worker over five years89.

Some more recent estimates claim that the rapid pace of mobile adoption has delivered substantialeconomic benefits for the region, directly contributing $132 billion to the economies of the Arab States, orapproximately 5.5 percent of total GDP, in 2011.90

In the UAE, for instance, the telecommunication sector plays an extremely important role in thecountry's economy as it contributed nearly 5 percent to national output in 2011; the sector generatedemployment for 10,798 people and 36 percent of the total work force hired were UAE nationals91.

In Saudi Arabia, according to CITC estimates, the contribution of the ICT sector to the national GDP isaround 3 percent in 2011 and has been rising over the past three years, but this share rises to up to 6 percentif the oil and mining sector components of the GDP are excluded92.

In Qatar, the government’s goal is to create a competitive knowledge-based economy through broadfive-year National ICT Plan, which aims to double the ICT workforce and the ICT sector’s contribution tothe GDP; in total, the government will invest more than $1.7 billion to advance this digital agenda by201593.

In OECD countries, the share of value added attributed to the ICT sector was 8.6 percent in 2009 upfrom 7.8 percent in 199594.

It is expedient to note at this point that the innovation and knowledge economy indices mentionedearlier reflect a country’s or a region’s ability to further develop its ICT sector. Put simply, the broader andmore efficient use of ICT is a major driving force in modern economies as it facilitates wider transmissionof knowledge, higher total factor productivity (TFP), and advancement in establishing knowledge-basedeconomies. This, in turn, is an enabling factor to move closer towards adoption of national and regionalpolicies to nurture and support the ICT sector and boost its contribution to national output. On this front,too, the Arab region has to exert concerted efforts to prepare this sector not only to increase its own valueadded in the gross domestic product but also create synergy with other productive sectors to increaseproductivity of the other sectors. It is within this context that we assess and highlight the contribution of theICT sector to economic progress in the Arab region and the policies and strategies to promote investmentand innovation in this sector.

89 World Bank (2012b). "From Political to Economic Awakening in the Arab World: The Path of Economic Integration". May2012. pp:145-146.

90 http://gulfnews.com/business/technology/arab-states-need-more-mobile-broadband-spectrum-allocation-1.1145632.

91 GulfBase (2012). "Telecoms added nearly 5% to GDP in 2011". http://www.gulfbase.com/news/telecoms-added-nearly-5-to-gdp-in-2011-tra/210811

92 CITC (2011). Annual Report 2011, Communication and Information Technology Commission. Saudi Arabia. p:21.http://www.citc.gov.sa/English/MediaCenter/Annualreport/Documents/PR_REP_007eng.pdf

93 ictQatar (2013). “Qatar’s ICT Landscape 2013 ”. p:1.http://www.ictqatar.qa/sites/default/files/documents/Qatar%20ICT%20Landscape_EN.pdf


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B. EXISTING ICT POLICIES AND STRATEGIES AND THEIR IMPLEMENTATION IN THE REGION

As discussed earlier, some Arab countries have made noticeable progress towards developing the ICTsector, along with other sectors in order to diversify their production base as well as their sources ofnational income. To that end, national ICT strategies have been crafted, initiatives have been taken, andmeasures have been implemented in order to create an enabling environment for ICT to develop andcontribute to the building of knowledge-based economies and information societies in the region.

In the early 2000s, several countries in the region adopted ICT-related strategies and started setting thestage for launching this sector. Oman announced its Digital Government Strategy in 2003, and wasfollowed in 2004 by Syria with the ICT Strategy for Economic and Social Development and Palestine withthe National ICT Strategy, respectively. Many other countries followed suit in line with WSISrecommendations95, Yemen being the last to adopt the Information Technology Master Plan for Yemen inearly 2011. Iraq is the only Arab state that has not finalized and adopted an ICT strategy. But while thepace of implementation of ICT strategies has been excellent in a number of countries, namely Bahrain,Qatar, and the UAE, limited achievements have been witnessed in other countries, namely Lebanon andPalestine96.

In addition to national ICT strategies, sectoral e-strategies have been also developed by some countriesin the region. ITU notes that e-Government strategies are the most common type of sectoral e-strategies97.Nevertheless, national e-strategies in the region have developed in the past few years where increasinglymore sectors are being involved and more sectoral e-strategies are being pursued, including e-educationand e-health sectoral strategies.

For instance, Abu Dhabi's ICT strategy aims at developing a world-class customer experience for usersof government services and driving government modernization with its positioning as a customer-focusedservice provider. Also in the UAE, Dubai seeks to become a leading ICT services outsourcing center thatgoes well beyond the simple provision of helpdesk support for companies, to encompass IT operations andinfrastructure management, server consolidation, and internet services.

Box 6. Dubai's ICT Outsourcing Drive

Dubai is seeking to become a leading ICT services outsourcing centre, reaching far beyond the simple answering of phones andprovision of helpdesk support for companies, and encompass IT operations and infrastructure management, server consolidationand Internet services.

One of the cornerstones of Dubai's drive to capture a large segment of the outsourcing market is the Dubai Outsource Zone (DOZ).Initially launched in 2004 and having begun operations in late 2006, DOZ now hosts more than 100 firms that employ some 7000staff.DOZ offers tax-exempt status, allows for full ownership of their business, 100% repatriation of capital and no currency restrictions.It also has the advantage of being integrated with Dubai Internet City (DIC) and other state-backed developments aimed atsupporting the ICT industry at all levels.________________

Source: http://www.oxfordbusinessgroup.com/economic_updates/it-source

Other countries, namely Egypt, have broadened the policy scope and revised their strategies to go beyond the localdimension of their ICT strategies and to seek a regional and international role as stated in the Technology Innovationand Entrepreneurship Strategy 2011-2014.MCIT holds that Egypt decided to move to the next level to enhance theglobal competitiveness position and become the primary regional hub for innovation by year 202098.

95 Paragraph 85 of the 2005 Tunis Agenda for the Information Society encourages governments to elaborate and adoptappropriate, comprehensive, forward-looking and sustainable national e-strategies.

96 ESCWA (2011). Regional Profile of the Information Society 2011. p:4.http://www.escwa.un.org/information/publications/edit/upload/E_ESCWA_ICTD_11_4_e.pdf

97 ITU (2010). “National e-Strategies for Development Global Status and Perspectives". p:17. http://www.itu.int/ITU-D/cyb/app/docs/National_estrategies_for_development_2010.pdf

98 MCIT (2011). "Technology Innovation and Entrepreneurship Strategy 2011-2014". p:2.http://mcit.gov.eg/Upcont/Documents/Innovation701072011.pdf

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Further yet, others have revised their policies seeking a greater level of local capacity building, asopposed to simply attracting foreign direct investment and transnational corporations. A case in point isDubai's drive to encourage start-ups as a source of growth and national income: “Dubai Internet City (DIC)is to focus on nurturing and attracting local start-ups for future growth instead of multinational companies;to sustain an ICT ecosystem, DIC is in need of start-ups and small entrepreneurs”, the managing director atDIC and Dubai Outsource Zone asserts in December 201299.

In Jordan, efforts to devise a comprehensive framework and strategy for the country's ICT sector startedin 1999 resulting in the REACH initiative (1999–2005) which is a national blueprint for nurturing anexport-oriented and internationally competitive ICT sector, and involved developing a regulatoryframework. In 2007, some policies included in the REACH initiative were revised and the National ICTStrategy NIS (2007-2011) was launched. The National ICT Strategy defines three high-level strategicobjectives to be achieved by the end of 2011, which involve: (a) increasing internet penetration from 11percent to 50 percent; (b) raising the number of workers in the ICT industry from 16,000 to 35,000; and (c)increasing the ICT sector's revenue threefold to $3 billion. The NIS also focused on eliminating regulatorychallenges to business and advocating the interest of ICT companies to ensure continued sector growth. Tosupport the ICT industry, the government sought to relax investment requirements, enhance ICT education,and pass legislation to protect intellectual property rights100.

In addition, and as part of their strategies to enhance the status of the ICT sector, most countries in theregion have established separate regulatory authorities to organize and regulate this sector. The onlycountries that have not established such entities are Kuwait, Syria and Yemen. In these countries theministries of communications and information assume the role of regulators.

Overall, according to ITU, the regulatory framework of key telecommunication services in the ArabStates demonstrates that there are important differences among countries in terms of the liberalization ofservices, as well as in the number of service providers operating each service. Further, ITU notes that themost liberalized ICT services in the region are the mobile-cellular markets, while Comoros and Djiboutiremain the only two countries with only one mobile-cellular operator101.

Box 7. Qatar Advancing the Digital Agenda

In 2011 ictQATAR developed a strategic roadmap that will both guide and set the pace for carrying out the plan, including keymetrics and performance measures for each year until completion. This roadmap, which covers a total of 11 different programscomprising 56 projects, is helping to ensure that the plan’s ambitious objectives are realized. Expanding on the solid foundationbuilt since ictQATAR’s establishment in 2004, the plan has five clear, measurable goals:

Double the ICT sector’s contribution to GDP to USD 3 billion;

Double the ICT workforce to 40,000;

Achieve ubiquitous high-speed broadband access for households and businesses, with 95 percent coverage;

Achieve mass ICT and Internet adoption (90 percent) by all segments of society;

Achieve wide accessibility and effectiveness of all key government services, with a target of 160 online services.____________________

Source: ictQatar.com. http://www.ictqatar.qa/sites/default/files/documents/Annual_Report_11_EN_0.pdf

99 DIC (2012). ‘The Role of Entrepreneurship and Small and Medium Enterprises (SME) in the Development of the ICTIndustry." Dubai Internet City. http://www.me-newswire.net/news/6261/en

100 http://www.intaj.net/node/64


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Box 8. Saudi Arabia Regulatory Framework and current challenges

2001: The Telecom Act was enacted.

2002: Bylaws of the Telecom Act were issued to provide the basis for the regulatory framework.

The Act lists a number of objectives for CITC including:

providing advanced and adequate telecommunications services at affordable prices;

ensuring the creation of a favorable atmosphere to promote and encourage fair competition in all fields of telecommunications;

ensure effective and interference-free usage of frequencies;

ensuring transfer and migration of telecommunications technology to keep pace with its development;

ensuring clarity and transparency of procedures;

ensuring principles of equality and non-discrimination;

safeguarding public interest and user interest as well as maintaining the confidentiality and security of telecommunicationsinformation.

2002: Communication and Information Technology Commission (CITC) established as the telecommunications regulator.

2003: The regulatory role broadened to include information technology services as well as telecommunications.

2004: The Rules of Procedures detailed the steps which operators and CITC need to follow for the timely resolution of issuesaddressed to CITC.

2011: CITC continued to review and develop its regulatory framework and to conduct a number of public consultations during2011. The following regulatory framework documents and guidelines were published in 2011:

Procedures for facilitating the establishment and cancellation of postpaid services.

A fair usage policy for the Jood Plus family of services.

Mechanism for determining the number of subscriber identity module (SIM) cards registered to a user.

Regulations for issuing and transferring prepaid credits.

Regulations for promotional offers for mobile services.

Though much remains to be done, particularly in the areas of fixed services competition and broadband penetration, the ICT sectorhas become more mature in the last decade. There is now a clear need to focus less on issuing infrastructure licenses and more onmanaging competition, consumer protection and awareness, strategic planning in consultation with all stakeholders, and moreeffective enforcement to ensure stability in the markets and to attract more investment.

In order to focus better on these areas, CITC implemented in 2011its first major organizational restructuring since it was created in2002._______________Source: CITC Annual Report (2011)

C. PRIORITIES FOR THE ICT SECTOR IN THE ARAB REGION

As stressed earlier, the development of the information and communications technology sector is not a goalby itself, but rather a means and a contributor to the overall national social and economic development process,hence the need to identify the appropriate priorities of this sector.

However, the success of the policies and strategies to develop the ICT sector as well as enhance itscontributions to achieving developmental goals rests on adopting applicable country and regional-specificprograms and setting both long-term and short term priorities.

The OECD’s top ICT policy priorities, for instance, as shown in Box 9, reflect the member countries'priorities in light of the stage of development these economies has reached. Longer term priorities for thesecountries, generally speaking, lie in enacting structural reforms, coming to grips with their fiscal positions, andaddressing environmental concerns. With regard to ICT priorities in 2012, the list includes information securityissues, digital content, ICT skills, and research and development, among others.

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Box 9. OECD Overall ICT Policy Priorities in the Longer TermThe top ICT policy priorities of OECD countries in the longer term are structural reforms, preserving social cohesion, moving tomore sustainable fiscal positions, tackling environmental concerns and enhancing confidence and trust. Top policy long-termpriorities in 2012 were broadband, ICT skills and employment, government online, and the security of information systems andnetworks. Also ranking highly were R&D programmes, technology diffusion to business, electronic settlement/payment and digitalcontent. The security of information systems and networks is an increasingly high priority of governments. This can be explainedby the ubiquity of ICT in OECD economies and the high uptake rates among individuals and organizations. Governments areincreasingly aware of the potential risks of greater reliance on Internet infrastructures by the economy and society.

Overall ICT policy priority areas

Source: Delta Partners http://dx.doi.org/10.1787/888932694785

Likewise, in the Arab region ICT priorities ought to mirror the region and respective countries’developmental needs both in the immediate as well as longer term. As such these priorities can be classifiedunder the main primary categories:

Enhancing competitive advantage of the ICT sector to help access new markets and promote exports; Advancing the social dimensions of the Millennium Development Goals (MDGs) for the Arab

region; Creating job opportunities in the region where unemployment rates are considered very high.

Many countries in the region have outlined their ICT priorities as part of their strategies for the ICTsector. For instance, in Morocco, the programMaroc Numeric 2013102 has been developed as part of thegovernment’s National Strategy for Information Society and Digital Economy and it is based on fourstrategic priorities: (a) providing citizens with high-speed Internet; (b) connecting users and governmentagencies; (c) encouraging the computerization of SMEs, and (d) developing national digital content103. Thisis hoped to contribute to developing the ICT sector itself, make it more accessible to users and othersectors, and thereby boost the overall development process.

In Jordan, according to the Ministry of Information and Communications Technology (MoICT), amongthe top priorities for the information technology sector is a reliable supply of human resources. ITU notesthat the MoICT identified a number of major national cybersecurity priorities, which collectively contributeto achieving the strategic objectives and help prevent, deter, and protect national infrastructures againstdamage or attacks and minimize damage and recovery time from attacks104. These priorities include areasof risk management, legal and regulatory regime, national encryption, security awareness, capacitybuilding, information security standards and policies, and national infrastructure protection.

102 http://www.egov.ma/Documents/Maroc%20Numeric%202013.pdf


104 ibid p:60.

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104 ibid p:60.

38











104 ibid p:60.

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Further, the Arab region is saddled with a number of social and economic challenges for which theregion needs to draw up plans and devise effective remedies. In particular, a main priority for the region isto make better use of the ICT sector for development and achieving MDGs priorities.

For instance, the World Bank highlights the need for reorienting the education output in the region tocreate a better match between the region workers’ skills and private sector needs105. The Bank laments theeducation systems in the region as generally skewed toward the humanities and social sciences at theexpense of technical, scientific, and business training, which is what matters most for innovation andknowledge creation. The World Bank also cites evidence that higher education systems do not develop thecritical skills needed for innovation in the knowledge economy.

Box 10. IFC, Partners with int@j to Help Improve Skills of Young ICT Workers in Jordan

The International Finance Corporation (IFC), a member of the World Bank Group, is helping develop new standards forinformation and communication technology (ICT) professionals in Jordan, part of an effort to help young people find work in thefast-growing sector.

IFC today signed a partnership agreement with Int@j, Jordan’s leading ICT industry association. The accord will see the twoorganizations design international-caliber certification standards for the sector, which while growing quickly is suffering from ashortage of skilled workers. Universities, training providers, and professional associations will be encouraged to adopt thestandards, which would ensure that graduating students have the skills necessary to find work in the ICT sector. That is importantin a country where 27 percent of young people are unemployed._____________________

Source: http://www.intaj.net/content/ifc-partners-intj-help-improve-skills-young-ict-workers-jordan

ESCWA, through its ICT division (ICTD), has been involved in ICT investment and innovationactivities in many of its member countries and initiated numerous efforts to assist these countries inpromoting ICT competitiveness. These activities included, among other projects, initiatives to promotedigital Arabic content, encourage ICT partnerships in the region, help entrepreneurs obtain projectfinancing, and foster ICT innovation activities.

For instance, ESCWA exerted concerted efforts towards establishing the ESCWA Technology Centrefor Development in Jordan with the aim of promoting the ICT sector. In 2007, ESCWA, in collaborationwith the Royal Scientific Society (RSS), held an Expert Consultation Meeting to discuss this issue. Inparticular, participating experts discussed the various organizational, administrative and financial aspects ofsetting-up the Centre and concluded that such a Centre is relevant and necessaryfor the socio-economicdevelopment of the ESCWA member countries and the region given the increasing globalization and worldcompetitiveness106.

ESCWA also launched in 2007 a project on “Promotion of the Digital Arabic Content Industry throughIncubation”. In addition to providing opportunities for investment in the Arab region, the digital contentindustry encourages and facilitates access to ICT and contributes to the growth of the overall ICT industry.Throughout the project, ESCWA prepared several studies to assess the current status of the DAC industryand partnered with a number of incubators in the region to implement selected projects and develop modelsand modalities for the implementation of future DAC projects107.

In December 2009, a final meeting of the project on "Promotion of the Digital Arabic Content Industrythrough Incubation" was held, in continuation of efforts that had started in 2003 to promote the DigitalArabic Content initiative. The meeting provided a platform for sharing experiences and best practices,discussing the main challenges facing the implementation of DAC projects, and setting the requirementsfor improving this sector in the region108.

105 World Bank (2012b). "From Political to Economic Awakening in the Arab World: The Path of Economic Integration". May2012. p:89.

106http://www.ijma3.org/news/newsDetail.aspx?ControlNum=2&newsId=585

107http://www.escwa.un.org/divisions/projects/dac/about.asp

108www.escwa.un.org/divisions/projects/dac/index.asp

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In 2012, ESCWA organized an Expert Meeting to further its efforts on ESCWA Initiative for Promotingthe Digital Arabic Content Industry through Technology Incubators. The meeting highlighted the principlesthat ESCWA will adopt while implementing the initiative; namely, (1) partnering with various stakeholdersinvolved in the DAC industry such as government agencies, technology incubators, and innovation supportinstitutions, (2) focusing on new technology trends such as smart phone applications, and (3) customizingthe initiatives to match national DAC priorities109.

In an effort to exploit the innovation and investment potential of the Arab region through connectingentrepreneurs seeking finance and partnership and investors in ICT, ESCWA posed, as a part of 2012action plan, to organize an Investment Tour in Technology. The tour intended to take place in fivecountries (Saudi Arabia, Lebanon, Egypt, Jordan, and Palestine) during November 2012. The initiative wasdivided into three main and integrated phases: Planning, Marketing and Outreach, and Implementation.This initiative revealed the importance of regional cooperation in this field and that the ICT sector(Internet, Software, Telecom and Mobile) represents the largest and most dynamic sector for startupcompanies in the countries involved110.

SECTION II – HIGHLIGHTS

Some Arab states are actively pursuing ICT developments: these include GCC countries, Jordan,Morocco and Egypt. These countries have put ICT at the forefront of their growth agendas, have levelsof ICT spending that are comparable to the leading countries in the world, and seem to be reapingbenefits from this choice.

Of this group active countries, some (e.g. UAE) have initially focused on becoming “outsourcinghubs”, rather than stand-alone producer of ICT products and/or services. However, even these countriesare now attaching value to SMEs as a main engine of local ICT (and broader economic) growth.

Other countries in the region seem to be way less active in the development of a comprehensive,effective ICT strategy. Key problems encompass all major drivers of ICT development: broadbandinfrastructure is often not fully in place, the number of researchers per capita is among the lowest in theworld, and the governance of ICT innovation is often lacking or ineffective.

109http://www.escwa.un.org/information/meetingdetails.asp?referenceNum=1901E

110http://www.comm-tour.com/images/CommTour%202012%20-%20Short%20Report%2001212003.pdf

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III. INNOVATION IN THE ICT SECTOR

A. MAIN ACTORS OF INNOVATION

An innovation ecosystem requires the simultaneous existence of several actors, each with a differentrole to play. In academic literature, the concept of a National Innovation System (NIS) emerged in the1980s and is normally referred to as “the set of public and private actors involved in the exploitation andcommercialization of new knowledge originating from the science and technology base and the interactionsin between them”111. This concept has been operationalized by several academics including, among others,Porter and Stern112 and Archibugi et al.113, who develop indexes of national innovative capacity that relyheavily on the specific role played by each of the main actors that shape innovation patterns and success ina given country. These actors are mostly large businesses and SMEs, university and research institutes,venture capitalists and business angels, and government.

1. Entrepreneurs in the ICT sector

Innovation in ICT requires entrepreneurs in the broadest sense of the word. A term thoroughly exploredand researched by Austrian School economists. As illustrated by, among others, De Soto114, the concept ofentrepreneurship implies creativity and capacity to organize knowledge in a way that generates innovativecommercialized products. Entrepreneurs are defined as those individuals that possess the ability to detectprofit opportunity offered by the environment in which they operate. This is why the concept ofentrepreneurship implies vigilance and alertness. In a recent publication the OECD defined entrepreneursas the principal actors in innovation, since they “bring about change in an economy by providing ‘newcombinations’: new or improved goods, methods of production, markets, sources of supply of inputs,organization of an industry, or management processes within a firm”.115 Entrepreneurs are defined asopportunity identifiers, risk takers, resource shifters and breakthrough innovators116.

In other words, entrepreneurs are the engine of a national innovation system. They are the main actors incharge of detecting potential opportunities for profitable innovation that matches existing, potential orfuture market demand. In doing so they combine available information and knowledge to produce anddisseminate new information in the form of new products and possibilities for consumption and production.It is important to clarify that entrepreneurs can also be the end users of innovation. They do not need to beproducers of knowledge themselves: they can use knowledge produced in universities, R&D labs andanywhere else to develop new products and services.

Of course, entrepreneurs have limited information: this means that the greater the contribution of otheractors to the production and dissemination of knowledge and the creation of innovative skills, the easier itwill be for them to perform their crucial task for the achievement of progress and prosperity within anational innovation system.

111 See the definition given by the European Commission, at the following linkhttp://ec.europa.eu/enterprise/glossary/national-innovation-system_en.htm

112 Porter ME, Stern S (2002) National innovative capacity. In: World Economic Forum, The Global Competitiveness Report2001–2002. Oxford University Press, New York.

113 Archibugi D, Denni M, Filippetti A (2009) The Global Innovation Scoreboard 2008: the dynamics of the innovativeperformances of countries. http://ssrn.com/abstract=1958833.

114 De Soto JH (2009) The theory of dynamic efficiency. Routledge, London and New York.

115 OECD (2010), SMEs, Entrepreneurship and innovation, OECD: Paris, 2010, at page 32.

116 See Kirzner I (1997) Entrepreneurial discovery and the competitive market process: an Austrian aApproach. Journal ofEconomic Econ Literature Lit 35:60–85; and Kirzner I (1973) Competition and eEntrepreneurship. The University of ChicagoPress, Chicago.

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2. Large firms in ICT

When referring to large firms in the ICT sector, it is worth mentioning a key difference between themanufacturing part of ICT (mostly, equipment and device manufacturers and telecom companies) and theservices part. In the former domain, large companies take the form of consolidated player (in manycountries, former state-owned enterprises) that possess the scale, size, technology to carry out R&Dactivities and develop a large patent portfolio, Such companies are mostly located in developed countriesand include, i.a. device or component manufacturers (Siemens, Ericsson, Nokia, Philips, Qualcomm,Huawei, IBM, Cisco, Oracle, etc.), large telcos (AT&T, Verizon, BT, FT, DT, Telefonica, Vodafone,Telecom Italia, NTT DoCoMo) and cablecos (Comcast, Sprint). These companies were born as largecompanies, and the ones that exist today are often the heritage of previous national champions (the oldAT&T broken up in the US in 1984, of Europe’s Bull, Nixdorf, Olivetti). These companies have a long-standing tradition of innovation, but the pace of innovation in ICT and the advent of the Internet have mademany of them incapable of following the pace of innovative activities. Accordingly, today these companiesact mostly as brokers of innovation, mobilizing resources for innovative SMEs that cooperate with them inthe development of new technological solutions.

To the contrary, in the domain of ICT services, large companies are rather young, and originated as verysmall companies. This is the example of successful software houses such as Microsoft or SunMicrosystems, but also application layer champions such as Facebook, Yahoo!, Amazon, and others. Manyof these companies are evolving into platforms for application and cloud environments, thus creating newopportunities and lowering barriers to entry for smaller companies wishing to enter the ICT market in theapplication and service layers of the ICT ecosystem. An intermediate form of large company that isemerging in the ICT world is that of “vertically integrated producers”, i.e. companies such as Apple,Samsung and Google, who produce almost everything from the infrastructure layer (including devices) tooperating systems, middleware products (e.g. browsers), application and services, and finally even content(media). For example, Google has not only been investing in search engine technologies in the past fewyears, but also in productivity applications (e.g. Google doc), in operating systems (Android), mediadistribution (Youtube),broadband over power lines, Wi-Fi networks, and in devices such as theChromebook and the Google Goggles (3D glasses).

3. Innovation and small firms

Given their superior flexibility and the reduced importance of economies of scale in the Internet age,SMEs are increasingly defined as the perfect candidates to play the role of entrepreneurs in a nationalinnovation system. Scholars like William Baumol refer to a functional combination and coordination oflarge and small firms as the optimal environment in which innovation can flourish. To be sure, SMEs areuniversally acknowledged as the real engine of modern economies, where they represent the overwhelmingmajority of firms.

Against this background, SMEs are targeted by specific policies for entrepreneurship and innovation allover the world. In order to fully unleash their potential, they need to be supported in the search for fundsand in the establishment of valuable partnerships for the realisation of their ideas and the creation of newproducts in a market. This is why in most industrialised countries innovation policy reserves a key role forthe provision of equity funds and borrowed capital to SMEs that wish to pursue high-risk, high-potentialresearch and development activities aimed at the production of innovative products. Otherwise, SMEs riskremaining stuck in the “valley of death”, i.e.,the phase in which SMEs are still to fully exploit the potentialof their innovative ideas, and yet financial markets cannot fully appraise the merit of those ideas, andaccordingly are not willing to blindly finance any innovative project. Figure 13 below graphicallyillustrates this problem.

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Figure 14 – The “valley of death”

Source: Granieri and Renda (2012)

The problem of the valley of death is a direct consequence of the intimate link between innovation andinformation, as well as of the economic peculiarities of information as a good in itself. First, it is oftenimpossible to communicate the full value of an innovative product without conveying information topotential funders and customers about how the product is created, designed and implemented. Second, thislatter communication automatically transfers information about the idea that underlies the innovativeproduct, as well as the technology behind the commercialised product. This, in turn, makes informationeasily appropriable, which is of course an undesirable outcome for entrepreneurs.

In this respect, SMEs can play a paramount role in the creation of innovation both in sectors in whichinnovation is essentially disruptive, as well as in sectors dominated by incremental, follow-on innovation.Regarding disruptive innovation, most often large firms lack the flexibility and adaptability needed for thedevelopment of entirely new products. Also, large firms that have consolidated positions in their marketsnormally have more to lose from a disruptive innovation, as they derive revenues from an already existingproduct. This is why SMEs are often better positioned for the development of high-risk, high-potentialinnovation, provided that they can convince financial markets of the viability of their projects. Christensenand Bower confirm that large firms are often likely to dismiss disruptive innovation exactly for thesereasons117.

In the case of incremental follow-on innovation, SMEs also have enormous and growing opportunities.In particular, SMEs can specialize in: a) the development of components of existing system goods; b)selling innovative services that rely on products that are widely used in the market; or c) developingapplications for existing platforms118. Moreover, in an age of open innovation, SMEs can easily becomeinterconnected with the emerging world of intermediaries that facilitate the emergence of collaborativesolutions119.

There are several challenges faced by SMEs on the way to becoming real entrepreneurs. Besides theproblem of funding and the valley of death, SMEs have problems in developing and attracting keyinnovation skills that allow them to control and manage innovation internally. Investing in human resourcesand skills also means helping SMEs achieve more absorptive capacity, defined as a firm’s “ability to

117 Christensen CM, Bower JL (1996) Customer power, strategic investment, and the failure of leading firms. Strategic ManagJ 17:197–218

118 Gawer, A. (2009), Platforms, Markets and Innovation, Edward Elgar, Cheltenham, UK.

119 Brunswicker S, Vanhaverbeke W (2011) Beyond open innovation in large enterprises: how do small and medium-sizedenterprises (SMEs) open up to external innovation sources? Available at http://ssrn.com/abstract=1925185

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recognise the value of new information, assimilate it, and apply it to commercial ends”120. At the sametime, SMEs often have difficulties in identifying potential partners for collaborative innovation, as well asopportunities to signal their skills and competences to potential business angels, incubators and openinnovation accelerators.

4. Universities and research institutes

The role of universities in national and regional innovation systems has been widely researched in theliterature on innovation121. Most often, the identified role of universities is that of institutions in charge ofproducing basic research and new knowledge, which will then be converted into applied research and newproducts. This is certainly a major impact of universities. However, in recent years, universities andresearch centres have increasingly played another role, that of facilitators of knowledge transfers, openinnovation and co-innovation, up to the point that many of them have indeed become platforms and hubs inwhich innovation is created, coordinated, managed and steered towards societal needs122.

In summary, the role of universities in modern innovation systems is intimately related to the concept ofknowledge creation, transfer and management. This includes, of course, basic research: currently in theUSA, universities perform 56% of all basic research, compared to 38% in 1960123. At the same time, theneed for universities to become more intimately commingled with the other actors of innovation within abroader eco-system has led to the development of the concept of “entrepreneurial university”, whichmerges the concept of entrepreneur with that of traditionally more static institutions, such as universities,which are now called to enter the world of commercialization of innovation through emerging practicessuch as technology transfer124.

5.Venture capitalists and business angels

Entrepreneurs do not always possess the necessary funds to implement the ideas they have tosuccessfully innovate. Venture capitalists can provide the necessary equity funding for SMEs, which in turnallows SMEs to leverage more borrowed capital and reach a sufficient endowment of capital to be able toeffectively implement, promote and commercialize innovation. Venture capital can be defined as financialcapital provided to early-stage, high-potential, high-risk, high-growth start-up companies. Venturecapitalists must be, entrepreneurs in the sense that they should be able to identify profit opportunities bylooking at existing small enterprises and individual inventors who have ideas that can successfully reachthe market. In the USA, venture capital accounts for a remarkable percentage of total wealth and growth.According to the National Venture Capital Association of the United States, 11% of private sector jobscome from venture-backed companies and venture-backed revenue accounts for 21% of US GDP.

Together with venture capitalists, a key role is also played by business angels (BAs), defined as“individuals, acting alone or in a formal or informal syndicate, who invest their own money directly in anunquoted business in which there is no family connection, and who, after making the investment, take anactive involvement in the business, for example as an advisor or a member of the board of directors”125.

120 Cohen WM, Levinthal DA (1990) Absorptive capacity: A new perspective on learning and innovation. AdministrativeScience Quarterly Q 35:128–152

121 For an introduction to the literature, see Kroll, H., E. Baier and T. Stahlecker (2012), The Role of Universities for RegionalInnovation Strategiesm Regional Innovation Monitor, Fraunhofer ISI, available online at http://www.rim-europa.eu/index.cfm?q=p.file&r=1c7969e4de47ce0bf75b93e1091a9b1f.

122 Co-innovation is a termed used to indicate the joint creation of innovative products by more than one party, normallyincluding producers and users/customers.

123 See Atkinson RD, Stewart LA (2011) University research funding: the United States is behind and falling, ITIF report, athttp://www.itif.org/files/2011-university-research-funding.pdf.

124 See Clark BR (1998) Creating entrepreneurial universities. Organisational pathways of transformation. IAU Press,Pergamon; and Clark BR (2004) Sustaining change in universities. Society for Research into Higher Education. Open UniversityPress, Maidenhead, England

125 Mason CM, Harrison RT (2008) Measuring business angel investment activity in the United Kingdom: a review ofpotential data sources. Venture Capital: an international journal of entrepreneurial finance 10:309–330

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Well-known business angels include Sir Richard Branson, the owner and proprietor of the Virgin group ofcompanies that started his first business venture of a magazine called Student at the young age of 16, andended up creating a business empire spanning airlines, music records, mobile networks and much more;and Jeff Bezos, who invested in a large number of start-ups over the past two decades and, mostimportantly, recognized the value of the idea launched by Sergey Brin and Larry Page, the creators ofGoogle, and ended up founding and chairing the online retail giant Amazon.

The European Business Angel Network (EBAN, see www.eban.org)) defines BAs as follows: “anindividual investor (qualified as defined by some national regulations) that invests directly (or through theirpersonal holding) their own money predominantly in seed or startup companies with no familyrelationships. Business angels make their own (final) investment decisions and are financially independent,i.e. a possible total loss of their business angel investments will not significantly change the economicsituation of their assets. BAs invest with a medium to long term set time-frame and are ready to provide, ontop of their individual investment, follow-up strategic support to entrepreneurs from investment to exit.They respect a code of ethics including rules for confidentiality and fairness of treatment (vis-à-visentrepreneurs and other BAs), and compliance to anti-money-laundering”.

Importantly, business angels normally commit their own funds, whereas venture capitalists commitfunds borrowed from other sources. Business angels are acknowledged as being the most importantproviders of venture capital together with seed funds. Mason and Harrison observe that business angelsface lower transaction costs compared to venture capitalists and are able to launch smaller investments126.This causes the informal venture capital market to be the largest external source of early-stage risk capital,dwarfing the institutional venture capital market. OECD data confirm these trends: figure 14 shows thelevel of venture capital investment in the ICT sector across OECD countries.

Figure 15 – Venture capital investment in the ICT sector, OECD countries, 2011

Source: OECD Internet Economy Outlook 2012, p. 52.

6. The role of government in innovation policy

Governments are key actors in innovation. As is becoming increasingly clear, markets alone presentimperfections, which make it difficult to reach socially optimal levels of innovation. These include, amongother things, transaction costs, imperfections in the dissemination and sharing of key information related toinnovative products and ideas, general imperfections in the “marketplace of ideas”, imperfections infinancial markets and rational biases in consumer demand. All these frictions and imperfections in marketsdetermine the need for government intervention.

126 Mason, C. and R. Harrison (2008). Measuring business angel investment activity in the United Kingdom: a review ofpotential data sources. Venture Capital, 10(4), 309-330.

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Moreover, over recent years it has become clear that governments can act in several ways to promoteinnovation:

Direct intervention. This includes state aids and subsidies for innovation, and industrial policy topromote innovation in specific sectors of the economy (e.g., space policy, tourism policy)127.

Regulation. Governments can intervene with legal rules to facilitate private bargaining overcollaborative innovations. The paramount example of this form of intervention is intellectual propertylaw and legislation on technology and knowledge transfer, but also standardisation policy that reducestransaction costs in the development of industrial innovation.

Supply-side policies in innovation. They include: (a) public expenditure to support R&D throughgrants, tax incentives, public provision of equity funding and public venture capital; (b) thedevelopment of research infrastructures and institutions, from patent offices to university funding toinvestment in enabling technologies such as ICT technologies, and the provision of training, lifelonglearning, and mobility programmes for researchers; (c) information and brokerage services such as theproduction of data and the development of patent databases and portals for innovating firms; and (d)networking measures such as the creation of science parks in collaboration with universities, thecreation of incubators and open innovation accelerators, support for cluster policies, etc.

Demand-side policies. They include the promotion of user-driven innovation, the use of pre-commercial procurement and green public procurement, support for private demand for innovativeproducts, etc.

Infrastructure policies and digital agendas. These facilitate the development of online collaborativepartnerships for innovation as well as innovation hubs and platforms.

Box 11. Small Business programs in the US, UK and the Netherlands

In the 1980s, the USA launched the Small Business Innovation Research (SBIR) and Small Business ResearchInitiative (SBRI), which focus on using the procurement of public authorities to foster R&D and innovation. The mainobjectives are to stimulate technological innovation, to use small business to meet federal R&D needs, to foster andencourage participation in technological innovation by minorities and disadvantaged persons, and to increase privatesector commercialization of innovation derived from federal R&D. These initiatives are especially meant for SMEsand offer a way of connecting innovative new enterprises with public authorities to explore new ideas and bringforward technologies and services. Public authorities run a competition for innovative ideas and winning enterprisesreceive contracts (not grants) for R&D. The UK and the Netherlands developed SBIR/SBRI initiatives based on theUS SBIR policy, which has the longest history.

Since 1982, 17,500 enterprises have been involved with US SBIR for an amount of US$27 billion. The projects haveresulted in 68,000 patents and more than US$36.5 billion of additional equity. Almost half of the SBIR projects thatpassed through the two phases of the selection have reached the market.

In 1999, Joshua Lerner of Harvard Business School compared 500 companies that had received SBIR contracts with900 matched companies which hadn’t, and concluded that the SBIR firms had created five times as many jobs over aten-year period. In regions with high levels of entrepreneurial activities, such as Silicon Valley and Boston, thedifference was seventeen times. An analysis of companies receiving National Science Foundation contracts tells asimilar story.

In the UK, a similar initiative was established in 2001 and had a very slow start because only a few departmentsadopted it. In fact, the SBRI was not successful in the period 2001–2008 for a number of reasons, including lack offocus on innovation in spending departments, but also lack of legal certainty as regards the need to apply Europeanprocurement or state aid legislation. In 2008 the UK SBRI was remodeled in a way that resembles the US SBIR moreclosely.

127 Aghion P, Dewatripont M, Du L, Harrison A, Legros P (2011) Industrial policy and competition. GRASP Working Paper17.

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Figure 16 - Competitions launched in the UK SBRI

The Netherlands introduced a twofold SBIR-like scheme, one departmental SBIR and one managed by the TNO. Eighty projectideas from TNO have been put forward within the Dutch SBIR, which resulted in 299 requests for background information. Intotal, 142 proposals for feasibility studies were submitted, of which 27 were carried out and 10 successfully moved on to the nextphase of R&D. So far, only four have been completed. Out of the total number of companies that put forward a proposal, 95% wereSMEs. In 2010 a first evaluation of the Dutch SBIR was carried out, mostly as regards the project selection process, with overallpositive and reassuring results._____________

Source: Granieri and Renda (2012), at 38-39.

B. DYNAMIC VIEWS OF ICT-ENABLED INNOVATION:FROM THE KNOWLEDGE TRIANGLE TO SMART SPECIALIZATION

All the trends illustrated in the previous section, together with advancements in the economics literature,have led to a different way of looking at innovation, which is much broader than the traditional approach toinnovation policy as essentially an intramural business decision that can be, at the margin, affected byexternal conditions such as market demand and public policy measures on intellectual property. To thecontrary, what is emerging today is the need to develop a holistic view of innovation policy, whichconsiders entrepreneurs (firms, universities, investors, even users) as actors in a wider ecosystem composedof several ingredients, from the availability of capital markets and human resources to the quality ofinfrastructure, the cost of labor, the flexibility of intellectual property laws, the dynamism of rivals,complementor producers, end users and customers, and even the quality of the long-term goals set bypolicymakers, including “green growth” goals. The US Strategy for American Innovation and the EuropeanInnovation Union both take this “eco-systemic” view, which–if properly implemented–might lead to afaster achievement of progress to the benefit of these regions’ citizens. In the economic literature oninnovation, as well as in the work of international organizations such as the OECD, the need for a systemicview of innovation–what the OECD terms “a coordinated, coherent, ‘whole-of-government’ approach”–hasvisibly emerged in the past decade.

The current “frontier” in the study of innovation and innovation policy is heavily reliant on the conceptsof “smart specialisation”, Smart Cities and Regional Innovation ecosystems. Originally developed byDominique Foray and Bart van Ark, and subsequently developed along with co-authors such as Paul Davidand Bronwyn Hall, the concept of “Smart Specialisation” fundamentally relies on two core pillars: Knowledge ecology. This assumes that “context matters” for the potential technological evolution of an

innovation system. In other words the potential evolutionary pathways of an innovation system depend

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on the inherited structures and existing dynamics including the adaptation or even radical transformationof the system;

Identification of knowledge-intensive areas as those areas that feature the highest presence of keyplayers in the innovation eco-system. Players such as researchers, suppliers, manufacturers and serviceproviders, entrepreneurs and users use their entrepreneurial skills to acquire and disseminate knowledgeand detect existing profit opportunities, and ultimately act as catalysts for driving the emergingtransformation of the economy.

Although the original concept of smart specialization was more sectoral than geographical, the conceptis applied mostly in the concept of regional innovation today. Regions can adopt a smart specializationapproach only after a thorough reconsideration of their fundamentals in terms of knowledge assets,capabilities and competences; as well as a detailed mapping of the relative strength and development of themain actors of innovation. According to McCann and Ortega-Argilés(2011), translating smartspecialization into regional policy requires a careful analysis of the role of the entrepreneurial agents andcatalysts, the relationships between the generation, acquisition and transmission of knowledge and ideas atthe geographical level, the regional systems of innovation, and the institutional and multi-level governanceframeworks within which such systems operate128. In addition, the issues of externalities andinterdependency between the region and the rest of the world must be solved. Finally, indicators must stillbe developed in order to link inputs, outputs and outcomes of the bottom-up activities taking place withinthe smart specialization approach to regional innovation policy.

The smart specialization approach appears as an evolution of the slightly older concept of “regionalinnovation systems”, which argues that “firm-specific competencies and learning processes can lead toregional competitive advantages if they are based on localized capabilities such as specialized resources,skills, institutions and share of common social and cultural values”129. As observed by Doloreux and Parto(2005), among others, the theoretical model of regional innovation systems mostly looks at the mainingredients that explain the difference in the performance of regions based on the availability of keyelements such as human resources, infrastructure and learning processes through the interaction of differentactors130. However, the fact that defining a region has proven quite controversial so far does not allow for aprecise categorization and measurement of innovation across regions.

In this respect, part of the literature observed that, rather than regions as a whole, it is metropolitan areasthat are the best location for innovation because they offer firms spatial, technological and institutionalproximity and specific resources131. In addition, more concentrated areas allow for a better implementationof emerging concepts such as that of industrial ecology. The natural evolution of these latter contributionsis the development of approaches that tend to favor the development of “smart cities”132.

C. THE CHANGING NATURE OF INNOVATION IN THE ICT SECTOR

Capturing the evolution of innovation approaches is almost impossible, given the variety, diversity andheterogeneity of terminologies and the theoretical backgrounds that populate the world of innovationstudies. The past years have marked a sea change in the way innovation occurs in various sectors. This is

128 Philip McCann& Raquel Ortega-Argilés, 2011. "Smart specialisation, regional growth and applications to EU cohesionpolicy," Working Papers 2011/14, Institutd'Economia de Barcelona (IEB).

129 See Malmberg A, Maskell P (1997) Towards an explanation of regional specialization and industrial agglomeration.European Planning Studies Stud 5:25–41; and Maskell P, Malmberg A (1999) Localized Learning and industrial Competitiveness.Cambridge Journal of Economics 23:167–185.

130 DOLOREUX, D. & S. PARTO (2005) Regional innovation systems: Current discourse and unresolved issues. Technologyin Society 27, 133-153.

131 See Audretsch DB, Feldman MP (1996) R&D spillovers and the geography of innovation and production. Am Econ Rev86:630–640; and also Maskell and Malmberg (1999), supra note 119.

132 Caragliu A, Del Bo C, Nijkamp P (2009) Smart cities in Europe. VU University Amsterdam, Faculty of Economics,Business Administration and Econometrics, Series Research Memoranda 0048/2009; and Komninos N (2009) Intelligent cities:towards interactive and global innovation environments. Int J Innov Regional Dev 1:337–355.

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even more true for the ICT sector, where the intangible nature of most product and system componentsmake it possible to obtain innovative products through collaborative efforts distributed throughout theglobe. At least four major trends can be highlighted:

From single-firm to systemic, to collaborative. Modes of innovation and production have shiftedfrom in-house models based on a proprietary control of the value chain, to the exploitation ofnetwork externalities and system effects and the increased customisation of products. Today,innovation is increasingly a collaborative, collective effort, rather than the product of a single brainin an R&D lab. Forms of collaboration give rise to new conglomerates governed mostly by weakproperty rules or even liability rules: the typical examples are “copyleft” rules in open-sourcesoftware, and FRAND licensing agreements in patent pools and royalty-free cross-licensingagreements.133

From proprietary to modular, to granular. The modularity of products has been on the rise in recentdecades, as testified by the pioneering work of Richard Langlois.134 Increasingly, modularitydetermines the need for collaboration between producers of complementors, and intellectual propertyis being (or should be) redesigned to facilitate these forms of cooperation. In cyberspace, modularitybecomes granularity and even tiny pieces of the production chain can be provided by individualprogrammers or producers, to be then integrated into a single, constantly evolving product such asopen source software or similar collective intelligence efforts.

From supply-led innovation to co-innovation, to user innovation. The original paradigm of“technology push, demand pull” in innovation belongs to the history channel today. Co-innovation isbecoming more widespread, especially in the IT world, but also in other technology-intensive sectorssuch as pharmaceuticals and biotech. In emerging economic sectors, especially in the digitalenvironment, co-innovation is being replaced or complemented by user innovation, in which userstake the lead in developing new solutions that match their industry needs.

From closed to semi-open, to (almost fully) open. As collaboration and granularity become morewidespread, product architectures also become less proprietary and are gradually replaced by semi-open and fully open models of production. The need for quality control along the value chain stillmakes fully open models less viable than semi-open ones. For example, in modern broadbandcommunications platforms such as those found on our smartphones and personal computers,proprietary models such as those adopted by Apple in the 1980s have been supplanted by semi-openmodels such as the one coordinated by Microsoft, which tried to maximise two-sided market effectsby stimulating the widespread development of applications that would be Windows-compatible.Since then, more open models (partly) based on open-source software have become more important.However, especially in the Smartphone and mobile broadband sector the business models thatprevail (e.g., Android and Apple’s iOS) are still semi-open and not fully open135. This is due to twomain reasons: the need to preserve control of the value chain and the need to reap revenues by thecreation of modern platforms. As a matter of fact, a fully open and interoperable model in mostcases does not guarantee any revenues to its creator, and basically belongs to the public domain.

133 See the extensive article of Merges RP (1996) Contracting into liability rules: intellectual property rights and collectiverights organizations. Calif Law Rev 84:1293–1393. FRAND stands for Fair, Reasonable and Non-Discriminatory. See also GeradinD (2006) Standardization and technological innovation: some reflections on ex-ante licensing, FRAND, and the proper means toreward innovators. TILEC Discussion Paper No. 2006-017.

134 Langlois RN (1992) External economies and economic progress: the case of the microcomputer industry. Business HistoryRev 66:1–50, See also Chesbrough H (2004) Towards a dynamics of modularity: a cyclical model of technical advance. In:Prencipe A, Hobday M (eds) The business of systems integration. Oxford University Press, Oxford, pp. 174–1-98; and ChesbroughH (2003) Open Innovation. Free Press, New York.

135 Boston Consulting Group (2011) The new rules of openness. http://www.lgi.com/PDF/New_Rules_%20of_Openness6-EN.pdf.

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Below, we explore in more details some of the new forms of innovation that have emerged in the pastfew years, such as frugal innovation, living labs, and distributed co-creation, and their application in theICT world.

1. Open innovation

As recently reported also by the OECD, “the organisation of innovative activities (technological as wellas non-technological) across firm boundaries is clearly on the increase, with more balance between internaland external sources of innovation ... Industries such as chemicals, pharmaceuticals and information andcommunication technology (ICT) typically show high levels of open innovation”.136 Open innovationimplies, inter alia, the use of internal and external R&D sources; openness to external business models, avariety of IP generators and collaborations (SMEs, academics, etc.), and a proactive IP asset management.This is leading to an increase in the number of companies collaborating in innovative activities. Figure 16below shows the changing mode of innovation from traditional to “open”.

In the world of the academic that coined the term, open innovation is a paradigm that assumes that firmscan and should use external ideas as well as internal ideas, and internal and external paths to market, asfirms look to advance their technology137. Open innovations are not only concerned with sourcing ofexternal knowledge into the firm (“outside-in”) but also with exploring new channels of revenuegeneration by granting usage rights (joint ventures, licensing or outright sale) of in-house developments toother firms (“inside-out”), “especially when the technology has future potential but is not part of the firm’score strategy”138. While the original perspective of innovation primarily focused on research anddevelopment of firms, open innovation has outgrown this narrow view and today integrates more anddifferent streams and perspectives139. One of these “new” streams contributing to open innovation and viceversa includes globalization of innovation and in this realm the context and aspects of frugal innovation140.

Figure 17 – “Open” innovation

Source: Chesbrough (2003)

2. Frugal innovation

Frugal innovation is a distinctive approach to innovation, which minimizes the use of resources in thedevelopment, production and delivery of innovative products, thus resulting in low-cost innovation that can

136 OECD (2008) Open innovation in global networks. OECD, Paris

137 Chesbrough, H.W., West, J. and Vanhaverbeke, W. (2006) Open Innovation: Researching a New Paradigm. Oxford:Oxford University Press.

138 OECD (2008), supra note 126, at 11.

139 Gassmann, O., Enkel, E., Chesbrough, H.W., 2010. The future of open innovation. R&D Management 40 (3), 213–221.

140 See Tiwari and Herstatt (2011), Open Global Innovation Networks as Enablers of Frugal Innovation: Propositions Basedon Evidence from India, Hamburg University of technology, Working Paper n. 72, December 2012.

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1. Open innovation












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become a driver of growth especially in developing countries. The four main features of frugal innovationare141:

Not just cost-reduction: the focus is on making better things, not just cheaper things;

Not just products, only (and often mostly) services;

Not just down-grading existing innovation: rather remodeling goods and services;

Not just low cost, but also high tech.

More in detail, frugal innovation refers to innovative products and services that “seek to minimize theuse of material and financial resources in the complete value chain (development, manufacturing,distribution, consumption, and disposal) with the objective of reducing the cost of ownership whilefulfilling or even exceeding certain pre-defined criteria of acceptable quality standards” (Tiwari andHerstatt, 2012)142.

India has pioneered this approach to innovation in several sectors. Examples are manifold:

Kerala’s Neighbourhood Network in Palliative Care involved an entire rethink of the delivery systemfor social care;

Tata Motors managed to develop the cheapest car even (the Nano) by working with German giantBosch to develop a new engine management system, with two Italian companies I.DE.A Institute andTrilix) to upgrade its styling and interior design, with Japanese company Toyo for the engine coolingmodule, with Germany’s Behr for the heating, ventilating and air conditioning system, with India’sMadras rubber factory for tough rear tyres, etc.;

SELCO is making solar power a feasible option for the rural poor;

Vortex has worked to boost financial inclusion in rural areas;

Even a global giant such as General Electric managed to take a $5.4 million Electrocardiograph(ECG) machine and re-engineered it to reach a $1,500 product (the MAC 400);

“ChotuKool” is a compact and portable low-cost cooling solution of the firm Godrej & Boyce andwas commercially launched in 2010 for a price tag of approx. $75.

Despite these numerous examples, the current evidence in support of the potential for frugal innovationis mixed, and according to some scholars the frugal innovation model has not fully shown its ability tobring development and realize truly “inclusive innovation”.

Based on existing evidence, however, it seems fair to observe that emerging economies can capitalizeon a smart combination of open and frugal innovation, in particular in the ICT sector, especially ifcountries foster the participation of local entrepreneurs to globally interconnected ICT clusters andtechnology platforms. It is to this concept that we now turn.

3. Clusters, hubs, and platforms

As observed above, the market economy has determined the emergence of complex, internalised valuechains in which the R&D activity of firms took place mostly as an intramural set of tasks. The need topreserve trade secrets or the technical information and tacit knowledge embedded in patented products hasbeen the driving force of this development, with businesses replacing the risks and transaction costs ofmarket exchanges with hierarchies in which information and knowledge was kept within the boundaries ofthe firm [1985].

Alternative governance mechanisms that have emerged in the past century could also entail theparticipation of a multitude of firms. However, this was mostly a “one-to-many” type of governance, with a

141 NESTA (2012), OUR FRUGAL FUTURE: Lessons from India’s innovation system. Available online athttp://www.nesta.org.uk/library/documents/OurFrugFuture.pdf.

142 Tiwari and Herstatt (2011), supra note 130.

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single undertaking retaining control over the whole value chain and related industrial results. Even in ITindustries, at the outset, prevailing business models were based on the externalisation of certain functions,but always tied to non-disclosure agreements.

Today, the development of new technologies, the prominent role of network externalities in manyinnovation markets, the advent of Web 2.0, and the increasing sophistication of industrial customers andhouseholds have made those business models obsolete. Even in traditional innovation-intensive and patent-intensive sectors such as pharmaceuticals, companies have embarked on a radical transformation of theirbusiness models. And the role of the government, from that of regulator and enforcer, has becomeincreasingly one of “facilitator” and “co-innovator”.

In order to fully exploit the potential of new technologies, it is indeed necessary to move from a conceptof market to a more value-chain-oriented approach. Economic theory began to move away from theconcept of market when Michael Porter introduced the idea of “cluster policy”, drawing also on existingindustrial realities, like that of industrial districts in 20th-century Italy. Porter’s ideas were groundbreakingfor innovation economics and policy: today, it is widely acknowledged that the cluster form has a veryimportant impact on transaction costs and knowledge-sharing, and can prove very important for innovationand competitiveness, skill formation and information, growth and long-term business dynamics.

A recent study by McKinsey has tried to map the birth and evolution of clusters around the world,distinguishing between clusters that emerge as: (a) dynamic oceans, i.e., large and vibrant innovationecosystems with continuous creation and destruction of new businesses; (b) silent lakes, i.e., slow-growinginnovation ecosystems backed by a narrow range of very large established companies that operate in ahandful of sectors; and (c) shrinking pools, i.e., innovation hubs that are unable to broaden their areas ofactivity or increase their lists of innovators and so find themselves slowly migrating down the value chain,as their narrow sector becomes less innovation driven and increasingly commoditised. Figure 17 showsMcKinsey’s Heat Map, which highlights the geographical location of the three different types of clusters.

Figure 18 – Modern clusters – a map

Source: Thomson Reuters; Juan Alcacer (Harvard University); McKinsey (2009)

As a matter of fact, economists and industry experts seem to agree on one fact: geographical proximitybelongs to the past of cluster policy, while modern clusters are community-driven, not geography-based.As reported in a recent study by Cisco, modern clusters and so-called “innovation hubs” should becharacterized as “digital communities of interest, cohering through close intellectual proximity, and not

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solely through geographic proximity”, also due to the growing power of online social networks andcollaboration tools in the business sphere143.

The consequences of the changing nature of clusters policy are dramatic. Several governments havealready understood the potential of creating communities conducive to joint innovation and sharing of ideason priorities and technological solutions by government, industry, clients, academia and citizens. In theUK, the Technology Strategy Board (TSB) was established at the end of 2004 to ensure the technology andinnovation priorities for the UK reflected business needs and had a clear market focus leading to wealthcreation. To support this approach, in November 2005 the TSB introduced the concept of InnovationPlatforms, i.e., a new way of working for government and business that is seen as an opportunity togenerate more innovative solutions to major policy and societal challenges. The TSB is currently investing,along with business and public sector partners, in five Innovation Platforms: (a) assisted living; (b) low-carbon vehicles; (c) intelligent transport systems and services; (d) low impact buildings; and (e) networksecurity. Over the next three years the UK government plans to introduce a further five InnovationPlatforms, in areas that address other major societal challenges. In the USA, the concept of innovationplatforms has been put at the centre of the new innovation strategy of the Obama administration. The 2011Strategy for American Innovation mentions specifically the need to “catalyze innovation hubs andencourage development of entrepreneurial ecosystems”, looking for new opportunities to bring talentedscientists and entrepreneurs together to support innovation in cutting edge areas. This concept underlies theDepartment of Energy’s Energy Innovation Hubs program and is also driving the Startup Americainitiative’s focus on building connections between established and new entrepreneurs, including thosemaking the leap from lab to industry.144

4. Living labs

A Living Lab is a method for user-centric innovation by providing the testing facility in a real life userenvironment, able to feed back all essential customer experience and make appropriate decisions about thefinal go to market or even to detect an shape new opportunities. A Living lab operates as an openinnovation platform for all economic players in the field, transcending systematic failures thanks tocontinuous and iterative user feedback. Living Labs are widely applicable for all applications in need ofwide and truly user feedback, taking into account all stakeholders.

The distinctive feature of living labs are the fact that users are placed at the core of the innovationprocess and at a very early stage of the process. In this real living environment, the user co‐designs andco‐creates, experiments and test ideas, products and services with researchers, business and publicauthorities.

Examples of living labs include:

Mediterranean Living Lab for Territorial Innovation. MedLab’s objective is to apply the Living Labapproach from the demand side of regional policy, building on concrete pilot projects to construct agovernance network that brings economies of R&D scope, social innovation and policy coherence toall levels, from the local community to the transnational scale. MedLab networks several partners fromdifferent Mediterranean countries: Greece, Cyprus, Slovenia, Italy, France and Spain. MedLab has a24-month workplan in which transnational R&D and local strategies to meet specific developmentneeds are linked. All the partners apply and validate the Living Lab approach in the fields of inno-SMEnetworks, rural development, coastal zone management, participatory strategic planning and tourism.The aim is to test roles in articulating “innovation demand”, involve local citizens and businesses in co-design processes, and identify R&D priorities. Starting from a transnational pilot partnership, MedLabdeveloped into a permanent trans-Mediterranean governance structure that increases thecompetitiveness of the area.

143 Lange A, Handler D, Vila J (2010) Next-generation clusters: creating innovation hubs to boost economic growth. CiscoWhite Paper. http://www.cisco.com/web/about/ac79/docs/pov/Clusters_Innovation_Hubs_FINAL.pdf

144 On this topic the National Economic Council, the Council of Economic Advisors and the Office of Science and TechnologyPolicy in the USA issued a report in 2011 titled “A Strategy for American Innovation: Securing Our Economic Growth andProsperity”.

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Living Labs in the North (LILAN). Nordic countries have been a place for many global companies totest and evaluate their products and services, because Nordic citizens are known to be early adoptersand quick to start and follow trends. The Baltic countries have been following (and partly surpassing)the Nordic countries in this matter [6]. For this reason, a Living Lab established in one of suchcountries can benefit from a greater response from the local community. The “Nordic-Baltic LivingLabs – the creation of a Nordic-Baltic Programme” started in 2007 and is financed by NordForsk underthe NORIA-net programme. The project, led by VINNOVA with the collaboration of partners fromseven Baltic countries (Denmark, Finland, Iceland, Latvia, Lithuania, Norway and Sweden), hasadopted the acronym LILAN (Living Lab in the North).

The Siyakhula Project. The Living Lab methodology is well exemplified by the Siyakhula Project (SP)in South Africa. The Siyakhula Project (SP) was launched in 2005 as a large collaborative projectbetween Rhodes University (RU), the University of Fort Hare (UFH), industry, government andcommunity. This work was a result of a classical Triple Helix initiative by Telkom South (TBD) Africain the constitution of a network of Centres of Excellence (CoE) which brought together industry,academia and government through the Department of Trade and Industry. An existing relationship withresearchers in the Anthropology Department at RU provided a connection and entry into the Dwesacommunity, a marginalised rural community in the Eastern Cape Province of South Africa withapproximately 20,000 inhabitants.In 2009, the SP adopted decided to adopt the Living Lab approach,and has since been referred to as the SLL. As shown in figure 18 below, the living lab project led to thecreation of an ecosystem, in which various stakeholders interact through the Centers of Excellenceestablished at Rhodes University and University of Fort Hare.

Figure 19 – The ecosystem of the Siyakhula living lab

A very interesting feature of the SLL is that is gradually integrated into the international living labscommunity. The Cooperation Framework on Innovation Systems between Finland and South Africa(COFISA) has facilitated the process of integrating the SLL into the European Network of Living Labs in2008. This over time has also triggered important innovations in the governance of the SLL, such as thecreation of a dedicated and adequately staffed management structure.

D. INNOVATION IN THE NEW ICT ECOSYSTEM

The past decade has witnessed a transition in the telecoms and IT fields, which can be described as amultiple convergence scenario, including a blurring of the boundaries (and increased competition) betweenfixed and mobile communications, but also convergence between the telecommunications and the IT andmedia domains, and convergence between the infrastructure layer and higher layers of all-IP networks.More in detail:

Convergence between fixed and mobile telecommunications is finally becoming a reality. The use offemtocells and the remarkable speed of imminent 4G networks suggest that the substitutabilitybetween fixed and mobile broadband access will be on the increase in the months to come;

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Convergence between telecommunications and IT is fully realized by the migration towards an all-IPinfrastructure, which is bringing new business models, the creation of multi-layered platforms whereapplications and services dominate user experience, and constantly changing competitive dynamics.Not only fixed broadband platforms are increasingly integrated into the Internet, but cloudcomputing is shifting most of the computing capacity into centralized storage servers, which will bemade accessible from both fixed and mobile devices;

Convergence between the media world and the Internet world is disrupting traditional businessmodels in the content industry, leading to a growing unbundling and re-aggregation of content indifferent formats and in more online-user-friendly ways. This has led to a significant shift of users’attention from traditional media to Internet-published news, which in turn shifted advertisinginvestment and market power to online content aggregators.

As stated, i.a. in OECD (2009), with convergence broadband platforms become much more than simplecommunications networks, and can be considered as ecosystems that comprise “different elements that usehigh-speed connectivity to interact in different ways”145. The term “ecosystem” refers to the combinedphysical and biological components of an environment146. When applied to the Internet, this term refers toall the hardware and software that composes the Internet, plus the various players that populate the Internetenvironment and the complex web of rules and relations that affect them. This also means that the Internetecosystem includes both the physical architecture and cyberspace. Perhaps one of the most potentialtheoretical concepts developed to analyze and advance ICT and information society is the concept of TheNew ICT Ecosystem, pioneered by Martin Fransman (see figure 19 below).

Figure 20 – A simplified model of the ICT ecosystem

FinancialMarkets Regulation

Layer 1

Output of innovative goods and services (from all three layers)

A Simplified Model of the New ICT Ecosystem

Cont. & App. Providers

Converged Networks

Finalconsumer

StandardisationGlobal trade

Global trade

Layer 3

Layer 2

Networked elements

Source: Fransman (2010)

Although originally built upon originally technical layer model, the New ICT Ecosystem model includessocial, economic and technological aspects and describes how they relate to each other. It is modular,hierarchically-layered system that consists of four layers, which are over-lapping and inter-dependent andare:

145 See Tim Kelly, Victor Mulas, Siddhartha Raja, Christine Zhen-Wei Qiang and Mark Williams (2009), What role shouldgovernments play in broadband deployment?, World Bank Paper prepared for infoDev/OECD workshop on “Policy Coherence inICT for Development”, Paris, 10-11 September 2009.

146 http://www.ecosystems.ws/ecosystem_concept.htm.

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Layer 1. Networked elements (including switches, routers, servers, PCs, phones, etc)

Layer 2. Converged Communication and Content Distribution Networks (including mobile, fibre, copper,cable, satellite)

Layer 3. Platforms, Content and Applications (including Internet content & Application Providers, such aseFulusi mobile banking)

Layer 4. Final Consumers.

One of the most important features of the Internet ecosystem is its layered architecture, which exists since theearly days of ARPANET, which later evolved into the Internet as we know it today. Figure 20 below shows thevarious layers of the Internet ecosystem in the classical OSI form. In economics, it is widely acknowledged thatmodern broadband platforms exhibit the features of two-sided, or better multi-sided markets.

Figure 21. Main layers of an all-IP platformADDING EVEN MORE COMPLEXITY

11

Physical (transport) layer(e.g. coaxial cable, backbones, routers, servers)Physical (transport) layer

(e.g. coaxial cable, backbones, routers, servers)

FixedFixed MobileMobile OtherOther

Logical layer(e.g. TCP/IP, domain names, telephone numbering systems, etc.)

Logical layer(e.g. TCP/IP, domain names, telephone numbering systems, etc.)

Application layer(e.g. web browsing, streaming media, email, VoIP, database services)

Application layer(e.g. web browsing, streaming media, email, VoIP, database services)

Content layer(e.g. web pages, audiovisual content, Voice calls)

Content layer(e.g. web pages, audiovisual content, Voice calls)

Market power and enduring bottlenecks can emerge at alllayers. Legacy market power in the physical network canbe challenged by killer apps, logical layer champions and

premium content providers

OS,middleware

DRM

Source: Renda (2008)

Understanding the economics of cyberspace is made more difficult by the fact that the architecture andbusiness models that prevail in this fluid world change constantly. And, as the attention of end users shiftsupwards towards less tangible uses, the sources of market power also shift upward in the value chain, with thecreation of more filters and gateways that help end users reach the application and content they want in thecheapest and most effective way they can. All this, together with the development of communicationtechnologies and broadband platforms, has led to the emergence of clouds of applications, which anticipate whatwill soon become the dominant paradigm of cloud computing.

1.Innovation in the ICT ecosystem: from Fransman to Bauer

According to Martin Fransman (2010), innovation in the ICT ecosystem is generated by six main symbioticrelationships between the four groups of players in the New ICT Ecosystem: the network element providers, thenetwork operators, the content and applications providers, and the final consumers.

Figure 22. Innovation in the ICT ecosystem: Fransman’s six interactions

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6 symbiotic relationships in the New ICTEcosystem

3. PLATFORM, CONTENT &APPLICATIONS PROVIDERS

2. NETWORKOPERATORS

1. NETWORKED ELEMENTPROVIDERS

CONSUMERS

CONSUMERS

CONSUMERS

4

1

2

3

5 6

Source: Fransman (2009)

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Fransman also explains that each of those six relationships carried three main dimensions:

Financial flow, emerging from the buyer-seller relationship. This creates financial incentives forknowledge-creation;

Information flow, as creators and users get to know more about each other;

Material flow, as the creators provide inputs (atoms or bits) for their users.

In this respect, the combination of relationships 1, 4 and 6 depict a more “traditional” or “closed”innovation system, with a vertical value chain from content to network to (normally passive) end users; tothe contrary, relationships 2, 3 and 5 portray a more open, modern innovation model, with consumersengaging with the whole value chain and becoming themselves actors of innovation (as in co-creation).

The consequences for innovation policymakers stemming from this view of the emerging ICTecosystem are significant. Fransman states that governments:

Should establish prioritized outcome objectives for their national ICT systems;

They should establish performance indicators in the prioritized areas and use them to benchmarktheir system against a) the global leaders and b) several comparable countries;

On the basis of the indicators they should identify the strengths and weaknesses of their nationalsystem;

They should propose action to be taken by identified players in the national system to improveperformance.

Another interesting, and related view on ICT innovation is offered by Johannes Bauer of MichiganUniversity, who sees the advent of an innovation panarchy, i.e. an interlinked system of systems in whichhierarchical and non-hierarchical elements are linked in continual motion of innovation, growth,adaptation, and renewal, and which entails a constant interplay between “change and persistence, betweenthe predictable and unpredictable” (Gunderson &Holling, 2002).

This leads Bauer to build a matrix aimed at locating types of innovators on the ICT ecosystem, as shownin figure 22 below.

Figure 23. Radicality of innovation, inter-layer dependence and enabling factors

Source: Bauer (2012)

Bauer’s approach bear very important consequences for the formulation of specific national strategies tostimulate innovation in the ICT sector, as will be explained in more detail in section 5 below.

E. PROSPECTS FOR STRENGTHENING INNOVATION IN THE ICT SECTOR AT LARGE (GLOBALLY)

In the coming years, innovation in the ICT sector might profit from a number of disruptive changes thatare taking place in the ICT ecosystem. Below, we illustrate the new “cloud” ecosystem, the prospects forbig data and machine-to-machine communication, and the emergence of distributed co-creation as thedominant innovation paradigm in ICT.

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1. Harnessing the cloud

Compared to the layered architecture shown in figure 23 above, cloud computing proposes a systemdesign that shifts computing resources and software applications to the network and data storage centres,and organises delivery along different modalities, which entail different degrees of control by the customer.The provision of platform as a service (PaaS), for example, leaves more control of the configuration to theclient that mere application as a service (AaaS) or software as a service (SaaS) modes147. At the same time,private clouds are certainly more customized to the client’s needs than hybrid or public clouds, whichhowever enjoy clear economies of scale.

Figure 24. Layers of a cloud delivery platform

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Physical (transport) layer(e.g. coaxial cable, backbones, routers, servers)

Fixed(xDSL, Cable, Fiber)

System resources(network, server, storage)

Virtualized resources(Virtual network, server, storage)

Cloud platform(Operational and business support services)

Cloud delivered services(SaaS, PaaS, AaaS, IaaS)

Mobile(LTE, WiMax, etc.)

Other(eReaders, PDAs)

Cloudplatform

CloudDeliveredServices

Source: author’s elaboration based on Renda (2009) and IBM (2009)

There is no doubt that enhanced Internet connectivity and cloud managed services will become, in thecoming years, an even more important driver of innovation than they are today. Suffice it to recall that,according to a recent research, the emerging “App economy” has generating something like 466,000 newjobs in the United States in the past four years. Statistics for other regions are not comparable to this figure.The App economy increasingly depends on the use of GPS-enabled services for all sorts of purposes, anarea in which the United States lead thanks to an own commercial space policy. At the same time, the cloudecosystem will further reduce the need for geographical proximity in the formation of clusters, and mightdramatically reduce the costs of the acquisition and sharing of information between researchers andinventors. We will get back to this issue at the end of this report.

2. Big data and the wireless revolution

In the information revolution, competition and innovation will increasingly take place through the useand elaboration of big data generated by human beings, and devices. The largely uncontrolled expansion ofthe generation and storage of data generated by individual interaction and transactions on the Internet isnow posed to skyrocket due to the development of the internet of things. Machine to machine interactionand data exchange will create new sources of competitive advantage for industry players: those that willpossess more information will have an edge over others in cyberspace and beyond. The OECD recentlyestimated that there will be up to 50 billion connected devices around the world by the end of this decade:this will change again the way businesses compete, innovate, and organize R&D.

147 Renda, A. (2012), Competition, Neutrality and Diversity in the Cloud, Communications & Strategies, No. 85, 1st Quarter2012, pp. 23-44.

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3. Distributed co-creation

In last year’s report, we have extensively described the evolution of innovation patterns towards openinnovation. Today, scholars agree that next generation innovation will take an even more open form, called“distributed co-creation”. This practice mostly consists in organizing R&D along a number of independentgroups working on parallel and complementary streams of research, and composed by both providers andcustomers looking for tailored solutions. One again, this will require a cocktail of new talents, researchersand users that are always online, and clear and transparent rules on revenue-sharing and IPR management.

The potential developments that will emerge from the combination of big data, machine to machinecommunication and distributed co-creation are very hard to predict as of today – think about the currenthype created by 3D printing and its several applications in industrial prototyping and – maybe – alsofashion and the whole retail sector; or, think about face profiling and the new opportunities for retailers touse data to customize your supermarket experience. But one thing is certain: countries that will be able towin the standards race in these emerging domain will have a chance to assure the healthy survival of manyindustrial sectors for the next decade or so.

F. ASSESSMENT OF INNOVATION IN THE ICT SECTOR AT GLOBAL LEVELS

In this section, we take stock of current innovation efforts at the global level, as well as the relativespecialization of countries in the different layers of the ICT ecosystem, adopting the same frameworkdeveloped by Martin Fransman (2010) that we have used in the previous sections. Figure 24 below showsthe degree of specialization of different world regions in enabling technologies, including ICT, according toOECD (2012).

Figure 25 – Country and regional specialization in enabling technologies

Source: OECD(2012)

The relative technological advantage (RTA) methodology has been applied more specifically to thecomparison between EU and US by layer of Fransman’s architecture, as shown in Table 2 below. Asshown in the table, Europe is way more specialized than the US in Layer 2 technologies, i.e. those relatedto telecommunications networks, where the percentage of young companies is only 20% (and is 0 in theUS, where companies like AT&T and Verizon monopolize the market). Europe’s weakness is indeed in thelayer in which “everything is happening”, i.e. layer III, which counts only 14 EU companies against 50 inthe US, and an overwhelming majority of “Yollies”, that is young, innovative companies.

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Source: OECD(2012)


59







Source: OECD(2012)


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Table 2. Relative technological advantages in the ICT ecosystem, EU v. US

Source: Veugelers et al. (2010)

G. ICT INNOVATION IN THE ARAB REGION

Despite the broad agreement that innovation is key for enhancing total factor productivity and anintegral part of the development progress in modern economies, many highlight the fact that “it isextremely difficult to measure given its constantly changing nature and environment”148.Yet, concertedefforts have been made by the international community and specialized agencies to construct measures andindices of innovation to be used as benchmarks to assess a country's progress in adopting and spawninginnovation, and compare innovation levels among countries and regions.

Figure 26– ICT innovation index 2012

According to these indices, the Arab region exhibitscomparatively low levels of innovation in the ICT sector. Figure34 reveals that the ICT Innovation Index of the region as well asthat of its individual countries are below the world average andmost other regions. This index is a sub-index of the KnowledgeIndex (KI) and reflects performance and developments invariables related to innovation, namely royalty payments andreceipts, patents count and journal articles.This relatively low ranking in innovation performance is depictedalso in the WIPO Global Innovation Index of 2012 comprising141 countries.149

As shown in Figure 25, Qatar ranks 33rdglobally and is thehighest ranking Arab country. Sudan comes at the bottom of thelist of all the countries included in the WIPO ranking. Yemen,Syria, Algeria, Egypt, and Morocco also rank very low in the list.

This weak performance stems primarily from the region beinga late-mover with regard to innovative activities. The WorldBank notes that innovation policies are embryonic in the region,

148 http://www.uis.unesco.org/ScienceTechnology/Pages/innovation-statistics.aspx

149 http://www.wipo.int/econ_stat/en/economics/gii/index.html

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0 5 10

SudanDjibouti

MauritaniaYemen

SyriaAlgeria

MoroccoAfrica

JordanEgypt

Saudi ArabiaSouth Asia

BahrainLebanon

TunisiaKuwait

Latin AmericaOmanMENAQatar

UAEEast Asia & the Pacific

WorldEurope & Central Asia

North America

Data collected from World Bank KAM databses

Figure X. ICT Innovation Index(2012)

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0 5 10

SudanDjibouti

MauritaniaYemen

SyriaAlgeria

MoroccoAfrica

JordanEgypt

Saudi ArabiaSouth Asia

BahrainLebanon

TunisiaKuwait

Latin AmericaOmanMENAQatar

UAEEast Asia & the Pacific

WorldEurope & Central Asia

North America

Data collected from World Bank KAM databses

Figure X. ICT Innovation Index(2012)

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and as such outcomes are still modest in terms of both R&D results and growth of innovative businesses150.

Nevertheless, the number of start-ups in the MENA region increased eight times in 2011 as compared to2005. Jordan, Lebanon, Egypt and the UAE attracted most early stage investments in the same period, withthe UAE attracting 17 percent of these start-ups during 2011. The reasons behind the surge in the small andmedium-sized enterprise (SME) sector included the government-backed initiatives to encourageentrepreneurship and the development of universities offering programmes for entrepreneurs and investors,technology parks, and incubation centers.151

Figure 27 – Global Innovation Index rankings 2012

Only few countries in the region such as Egypt, Jordan,Saudi Arabia, and the UAE are reportedly investing ininnovation through various incubation programs andfunding tie-ups with international governments and privateequity (PE) firms. With regard to PE transactions, the UAEis the largest investor in innovation152.

According to ITU, Saudi Arabia seeks to “encouragedomestic companies to build local ICT industries” byestablishing Free Zones, which are expected to function asincubators for SMEs in the ICT sector. The country alsointends to set regulations on e-transactions for both thepublic and private sectors in order to enhance the use ofICT for business transactions and government services153.

Morocco has set up 22 integrated industrial platforms,including the Tangiers automotive city and the Nouasseraerospace city, and has been able to attract foreign directinvestment from major companies such as Renault inTangiers, Boeing and Safran in Nouasser154.

Nevertheless, with respect to innovation infrastructure and the region's activities to create anenvironment conducive to promoting innovation, the region still falls short of other regions. As shown inFigure 27, research and development expenditures of all Arab states are a mere 0.5 percent of total worldR&D expenditures, while their population is about 5 percent of world population. Brazil's share alone isnearly 2 percent of total R&D spending, that is 4 times that of the entire Arab region. Japan, with apopulation less than half that of the Arab region, commands a 10 percent share of total world R&Dexpenditures.


151 http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20121018139974

152 DIC (2012). ‘The Role of Entrepreneurship and Small and Medium Enterprises (SME) in the Development of the ICTIndustry." Dubai Internet City. http://www.me-newswire.net/news/6261/en

153 ITU (2010). “National e-Strategies for Development Global Status and Perspectives". p:11. http://www.itu.int/ITU-D/cyb/app/docs/National_estrategies_for_development_2010.pdf.


141139

132124

10388

6159

5655

4847

4137

33

0 50 100 150

SudanYemen

SyriaAlgeria

EgyptMoroccoLebanon

TunisiaJordanKuwait

Saudi ArabiaOman

BahrainUAE

Qatar

Source of data: www.wipo.int

Figure X. Global Innovation IndexRankings 2012

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Figure 28. Share of R&D expenditure by region (2009)

Data source: UNESCO science & technology database

In addition, the Arab region's share of total world researchers is also very low and stood at about 1.4percent in 2009. As shown in Figure 28, the Arab states in Asia have only 0.2 percent of world researchers,while Arab states in Africa have 1.2 percent. Japan alone has about 9.4 percent.

Figure 29. Share of world researchers by region, 2009


As for researchers per a million inhabitants, the region ranks below developed as well asdeveloping countries. Figure 29(a) shows that the region has about 300 researchers per a millioninhabitant, compared with a world average of 1027 researchers and 521 researchers for developingcountries. Korea has nearly 4950 researchers per a million inhabitants, which is more than 16 times ofthat of the Arab region. Likewise, the number of technicians per a million inhabitants in the region iscomparatively very low. As depicted in Figure 29(b), there exists a strikingly big difference among thecountries of the region and other countries.

Arab States0.5%

Europe 28.5%

Africa 0.6%

Japan 10.7%

China 12.1%

NorthAmerica

32.7%

Latin America& Caribbean

3.1%

Other 11.8%

Figure X. Share of R&D Expenditure by Region(2009)

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Arab States0.5%

Europe 28.5%

Africa 0.6%

Japan 10.7%

China 12.1%

NorthAmerica

32.7%


3.1%

Other 11.8%


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Arab States0.5%

Europe 28.5%

Africa 0.6%

Japan 10.7%

China 12.1%

NorthAmerica

32.7%


3.1%

Other 11.8%


63

Figure 30. Number of researchers and technicians per million people, 2009

(a) Researchers (b) technicians

In Qatar, the Digital Innovation Center (DIC) was established to spur the growth of a Digital ContentIndustry and aim to encourage young entrepreneurs to start their own businesses, specifically in the realmof digital content. DIC can provide the infrastructure, intellectual support, administrative assistance,financial advice, development opportunities and practical business strategies for entrepreneurs. In additionto the sections at DIC which provides services in innovation and entrepreneurship, strategy and businessdevelopment, national digitization, incubation services, the center has the Incubation Services section toprovide the logistical and facility-related services for the incubated companies. Services offered includeprovision of office space, telecom/IT setup, legal and accounting services, business and intellectualproperty consulting, and access to research and development labs.155 DIC touts a number of success storiessuch as the Innovation Theater 2012.

In Egypt, the government announced in January 2010 the establishment of an innovation center in theSmart Village in an ambitious drive to position the country as a world-class hub for ICT-based innovationand entrepreneurship. In late 2010 the Technology Innovation and Entrepreneurship Center (TIEC) waslaunched to act as the main vehicle to enable Egypt to be a major regional and international player. TheTechnology Innovation and Entrepreneurship Strategy (2011-2014) was also adopted and focused on themain goals of branding Egypt as a regional hub and encouraging the establishment of ICT companies withthe engagement of all stakeholders.

In Palestine, the Palestine ICT Incubator (PICTI), and the Palestine Business & Innovation Centre (BIC)introduced the Palestine Innovation Initiative (PI2) aimed at supporting entrepreneurs in establishingstartup companies, commercializing their ideas, and create jobs. According to PI2, an average amount of$3,000 will be allocated as a Seed Fund for each selected project and cash will be spent based on theperformance, deliverables and milestones and on monthly basis, and entrepreneurs will receive businessdevelopment, networking and mentoring services during the acceleration agreement period.156

For innovation to take roots in the Arab region, it is incumbent upon member countries to enhance thelegal, regulatory, and business environments. It is essential in this regard that sectoral strategies, includingthe ICT sector development strategy, be consistent and an integral part of the overall national developmentstrategy. Divergence of strategies would ultimately result in perverse outcomes. At the outset, based on acountry's strengths and weaknesses, the sectors in which innovation is needed to complement the nationalstrategy are to be identified, followed by setting specific objectives and a strategy to achieve the agreedobjectives.

According to Booz & Company, to foster innovation, governments in the Arab region, in conjunctionwith private-sector ICT players, ought to collaborate and act on five core elements: identifying key focusareas, establishing innovation-friendly policies and regulations, making funding more widely available,improving ICT infrastructure, and developing the local talent pool157.

155 http://www.ictqatar.qa/en/innovation-center/about-us

156 http://www.picti.ps/programs-projects/pi2

157 Booz & Co. (2011). "Stimulating Innovation Building the Digital Advantage for MENA Countries". p:1.http://www.booz.com/media/uploads/BoozCo-Stimulating-Innovation-Digital-Advantage-MENA.pdf

0 500 1000 1500 2000 2500 3000 3500 4000

Arab States - AsiaAfrica

Arab States -AllArab States-Africa

EgyptDeveloping countries

WorldEU

Developed countries


Figure X. Number of Researchers per million People(2009)

0 500 1000 1500 2000 2500 3000

IraqWest Bank

KuwaitTunisia

MoroccoTurkey

Hong KongUnited Kingdom

SwedenDenmark


Figure X. Number of Technicians per million People(2008-09)

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This undertaking must be given the importance and commitment it deserves, which requires efforts in ahost of areas that go way beyond the technical field, to include finance, human capital, institutionalframeworks, and political commitment. These requirements seem to be lacking in developing countries.

For instance, the World Bank argues that most developing countries still lack an incubation ecosystem fortechnology entrepreneurship and local business incubators. As such, providing business services, training,mentoring, reasonably priced space, connections to industry and academia, and introductions to potentialinvestors remain weak, with poor links to global markets158.

1. Case studies from specific countries

Qatar’s innovation theater 2012

The Innovation Theater is an inclusive hub for entrepreneurial activities focusing on women, youth andtalented individuals who seek to promote and develop business ventures in the areas of web, mobile, media,gaming and Arabic content159.The Innovation Theater 2012 competition is the second competition afterInnovation Theater 2011 competition, which are a collaborative hub for developing Arabic digital contentand motivate youth and women entrepreneurs to attain their goals. Established startups also get theopportunity to present their businesses to venture capitalists and investors. Among the 130 contestants whoproceeded to the Innovation Theater 2012 competition there were three winners. First place went to PrayerGarden, a mobile app that encourages people to pray and to track their progress in the prayers. Secondplace went to Alif, a hub for creating documentaries that are relevant to local communities, and third placewent to Qat Lab, which aims to be the gaming incubator of the region, creating ‘edutainment’ games for theArabic and Muslim communities. Two hundred and fifty delegates actively attended sessions andpresentations which focused on digital opportunities for women entrepreneurs, gaming andanimation.Strategic partners such as Yahoo, WAMDA, Roudha, AIESEC, Bedaya, Vodafone, Textello andSago joined the initiative. Other collaborators to the event included judges from DFI, Angelsden, QDB andEricsson and also speakers from Endeavor Global, Intel and AUB.

Abu Dhabi: Partnership to Innovate Through Research

Ebtic is an Abu Dhabi-based centre for research and innovation excellence that was established in 2008by Etisalat, British Telecom and Khalifa University. Ebtic’s research and innovation projects, includingsome applications that have international patents pending, were presented to Ebtic board members recently.The demonstrations illustrate the work of Ebtic’s researchers and innovators in NGN and NGN-enabledICT services, which support the UAE’s development and enablement of the digital network economy. Thedemonstrations covered ICT-enabled application advancements in education, healthcare, energy efficiency,cloud computing, enterprise applications and networking technologies. Senior vice-president forTechnology Strategy at the Etisalat Group and board member of Ebtic, said that etisalat’s contribution toEbtic continues its commitment to technology innovation. “Our long-term investment in Ebtic, inconjunction with respected partners BT and Khalifa University, is designed to not only develop world-leading technologies but to encourage innovation through research in the UAE and provide talentedEmiratis with a platform to showcase their skills and entrepreneurship.”160

158 World Bank (2012a). “ICT for Greater Development Impact”. p:19.

http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/WBG_ICT_Strategy-2012.pdf

159 Source: http://www.ictqatar.qa/en/incubation-center/success-stories

160 Source:http://www.khaleejtimes.com/biz/inside.asp?section=uaebusiness&xfile=/data/uaebusiness/2012/december/uaebusiness_december284.xml

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Egypt: Promoting innovation and entrepreneurship

By carefully studying Egypt's competitive position, performing strengths, weaknesses, opportunities,and threats (SWOT) analysis, and accounting for best practices in countries that succeeded in innovationand entrepreneurship, the developed strategy is based on a "six-pillar" model. The respective pillars are161:

Stimulating a culture of innovation at the national and firm level;

Branding Egypt's ICT sector as well as celebrating innovation and entrepreneurship;

Facilitating intellectual property management and enabling the exchange of intellectual property;

Establishing innovation clusters and offering common infrastructure;

Creating a business environment that facilitates innovation and entrepreneurship practices;

Capitalizing on and improving resources.

SECTION III – HIGHLIGHTS

Innovation is an ecosystem: if all main actors are present, if can flourish. But without any one of the keyplayers, it will not produce the intended effects. Main actors include entrepreneurs, large and smallcompanies, intermediaries and accelerators, venture capitalists and business angels, and government.

ICT is also internationally defined as an ecosystem: it is composed of various layers, including theinfrastructure layer, the logical layer, the applications and service layer, and the content layer.

A policy for innovation in ICT should keep the innovation and the ICT ecosystems in mind, and ensureall key drivers and actors of the two environments are at play.

The nature of innovation in ICT is changing very rapidly: from stand-alone innovation in devices andinfrastructure, it is now essentially a granular, modular, cooperative and distributed activity, withcollaborative ventures such as open source software, creative commons and distributed co-creation co-existing with more traditional in-house R&D.

The role of governments in promoting innovation is changing: since no government can dictate thedirection innovation should take, policymakers can resort to “bottom-up” reforms that “facilitate” theinnovation process. These include supply-side policies (e.g. building infrastructure, promotinguniversity research and technology transfer, tax credits, living labs and incubators, venture capital funds,etc.); demand-side policies (pre-commercial procurement); and overall policies to improve the businessclimate (better governance, simplified and better regulation, innovation-friendly policies).

The Arab region features several good practices, but suffers from the absence of a holistic approach toICT innovation. Focus on a world-class infrastructure and filling the skills gap, together with moresophisticated regulatory governance, are key preconditions for innovation in the ICT sector to flourishin these countries.

The changing nature of innovation should inspire new policies in the Arab region, such as promoting theintegration between local entrepreneurs and global clusters and innovation hubs.Examples includetheEU living labs network, the European Innovation Partnerships and the Knowledge and InnovationCommunities.

161 Source: MCIT (2012).

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IV. INVESTMENT IN THE ICT SECTOR

A. THE ICT SECTOR AS A STANDALONE ECONOMIC PRODUCTIVE SECTORIN NATIONAL POLICIES

The information and communication technology sector is a very important sector of the world economy,although its weight on domestic economies varies significantly. OECD estimates that total worldwide ICTspending will reach USD 4,406 billion in 2012, of which 58% is on communications services andequipment, 21% on computer services, 12% on computer hardware and 9% on software. As shown in thepicture, the North American market is the largest ICT market in the world, slightly largerthat that of Europeand Asia-Pacific. Emerging economies are expected to contribute significantly to ICT investments in theyears to come, especially due to the rise of Brazil, China, India and the Russian Federation.

Figure 31. Worldwide ICT spending, 2003-12 - USD billions, current prices

Source: OECD 2012, based on data published by World Information Technology and Services Alliance (WITSA), based on research conducted by Global Insight, Inc.December 2010.

Looking at future investment, it is clear that stand-alone ICT applications will focus increasingly on:

Infrastructure, due to the capital intensive nature of Layer II and the need to upgrade both fixed andwireless telecommunications networks to new high-speed technologies such as FTTx (fiber),DOCSIS 3.0 (cable) and LTE (4G mobile communication);

Layer III, in which platform competition is still raging, especially between established platformoperators Apple (iOS) and Google (Android) and old/new competitors (theMicrosoft/Facebook/Skype conglomerate and Amazon), especially for what concerns cloudapplications; and

Stand-alone or complementary technologies such as smart cards, RFID-enabled devices, machine-to-machine communication, smart networks, e-health applications, and geo-locational services.

B. STRATEGIES TO PROMOTE INVESTMENT IN THE ICT SECTOR AT GLOBAL LEVEL

Promoting investment in ICT is a complex goal for a policymaker, which can be approach in at twostages. First, the essential preconditions to attract and stimulate private investment in the economy as a holehave to be in place. Second, once the first step has been accomplished, dedicated strategies to invest in allor part of the layers of the ICT ecosystem have to be devised in order the ensure that a domestic economycompetes effectively on promoting ICT investment. Below, we illustrate both issues as part of a singlerecipe for effective investment policy.

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1. Enabling investment in general

The attractiveness of a given country for domestic and international investors depends on a number ofconcurring factors, only imperfectly reflected in the widely used Ease of Doing Business indicators.Although a full description of those factors would go beyond the scope of this study, it is worth mentioningthese factors briefly, in order to account for these important features of a national economy in developingpolicy recommendations for the Arab region (section 5 below). The main drivers of (foreign and domesticprivate) investment include:

Macroeconomic and political stability are of course positive determinants of investment, sinceinvestors care about the level of risk associated with investing in a given country, and needreasonable certainty that there will not be major disruptions in the economic and political system of agiven country in the medium- to long-term.

The rule of law and the quality of institutions. Competitiveness-related indicators at the global levelare way more correlated with governance indicators such as Kaufmann’s WGI indicators than theyare with World Bank Ease of Doing Business indicators. This means that government stability,institutional quality, reliability of courts, strengths of legal enforcement and absence of corruptionare decisive factors for a company that is deciding whether to invest or not in a lawful andproductive activity in a given country.

Openness of the economy. The more an economy is open to international trade, the more a countrycan act as a hub for trade with the rest of the world. This is particularly important in globallyinterconnected industries that belong to global value chains (GVCs), or globally interconnectedclusters such as those existing in the ICT sector (see Section 3 above). Countries that apply tariff-and non-tariff measures to isolate themselves from international trade are less likely to be interestingfor an investor, with the exception of those investors looking for a safe “niche” in which to prosperwithout integrating themselves (and the country= into the global economy. Political openness (so-called “voice”) is also a factor that is positively correlated with foreign direct investment.

Market size. Of course, the larger the market, the more an entrepreneur will decide to invest itsmoney into the local economy.

Investment-friendly tax system. The more governments establish a taxation regime that is not tooharsh on investment, the more investors will consider the opportunity to invest in a given country.

Quality of infrastructure. Depending on the type of investment project, the quality of a country’sinfrastructure can be essential for securing a good return on investment. We will get back to thisissue below.

2. Promoting venture capital

In addition to the factors listed above, some factors are specific to the promotion of private equityfinancing of high-risk, high-reward entrepreneurs. The venture capital market looks in particular at thedepth of capital markets as an essential ingredient of the right “cocktail” needed to trigger investment. Inthe literature, Black and Gilson (1998) discuss major differences between bank-centered and stock market-centered capital markets, and argue that well-developed stock markets, which allow general partners to exitvia IPOs, are crucial for the establishment of vibrant venture capital and private equity markets. Jeng andWells (2000) stress that IPO activity is the main force behind cyclical swings because it directly reflects thereturns to the venture capital and private equity funds. Kaplan and Schoar (2005) confirm this notion.Similar to Black and Gilson (1998), Gompers and Lerner (2000) point out that risk capital flourishes incountries with deep and liquid stock markets.

Likewise, Schertler (2003) uses either the capitalization of stock markets or the number of listedcompanies as a measure for stock market liquidity and finds that it has a significant impact on VC and PEinvestments. Alongside the disadvantages of bank-centered capital markets, Greene (1998) emphasizes thatlow availability of debt financing is an obstacle for start -ups in many countries. Entrepreneurs need to findbackers — whether banks or VC/PE funds — who are willing to bear risk. Cetorelli and Gambera (2001)

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provide evidence that bank concentration promotes the growth of those industrial sectors that have a higherneed for external finance by facilitating credit access to younger companies 162.

Other key issues listed as decisive factors in attracting specifically venture capital are taxation(especially if ad hoc schemes are in place), investor protection and corporate governance (also included inthe Ease of Doing Business, though with a rather narrow focus) and, more importantly, the entrepreneurialculture of a given country.

Europe is a good example of the latter problem. Faced with a lack of entrepreneurs and young leadingcompanies, the European Commission has decided to launch a new initiative in January 2013, which willarguably tackle the issue by re-igniting entrepreneurial spirit in Europe. The strategy is based on threepillars, with action to be taken at each level, European and national: (I) entrepreneurial education; (II)removing the obstacles to business activity; (III) better opportunities for women, young people, olderpeople and migrants. The new Entrepreneurship 2020 Action Plan introduces a number of reforms in thefollowing areas:

improving access to finance, creating a European market for small loans, simplifying tax rules fordirect private investments;

including entrepreneurship education and experience in school curricula – young people should haveat least one entrepreneurial experience before leaving secondary school;

reducing the time it takes to start up a business and obtain the necessary licenses and permits;

creating mentoring, advice and support schemes for women, seniors, immigrants, unemployedpeople and other potential entrepreneurs;

providing start-ups with management training and coaching, networking with peers, potentialsuppliers and clients;

supporting web-based start-ups by removing barriers to cross-border sales online;

making it easier to start, sell, hand on, or re-start a business;

helping start-ups overcome short-term financial difficulties and giving honest entrepreneurs a secondchance after bankruptcy – 'second starters' are more successful.

The strategy is focused on ICT, as stated by Enterprise Commissioner Tajani in presenting the newstrategy, “SMEs that use information and communication technologies (ICT) in their business grow two tothree times more quickly than other companies”163. To increase the number of entrepreneurs takingadvantage of the new opportunities offered by the Internet, the Commission will provide support to makepotential entrepreneurs aware of market trends. IT skills in SMEs must also be promoted.

3. The role of capital markets and stock exchanges for ICT innovation

The availability of mature financial institutions and a well-developed capital market is an essentialprecondition for the development of a sustainable, innovative ICT sector. In the late 1960s, the famouseconomist John Hicks observed on the basis of both economic history and theory that Britain's industrialrevolution was only made possible by the development of financial institutions: technology existed longbefore the industrial revolution, but its large-scale capital requirements could only be met by thedevelopment of capital market institutions that permitted the pooling of small individual savings into largefunds for industrial development164. Likewise, famous economist Joan Robinson argued that the causationis rather the other way around, i.e. finance follows where enterprise leads (financial institutionsspontaneously develop and evolve where there is demand for capital)165.

162 From http://www.iese.edu/research/pdfs/estudio-143-e.pdf

163 European Commission COM (2012) 975 final, 9 January 2013.

164 Hicks, J. 1969. A Theory of Economic History. Oxford: Clarendon Press.

165 Robinson, J. 1952. “The Generalization of the General Theory”, in The Rate of Interest and Other Essays. London:Macmillan, pp.67-142.

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All in all, what can be observed with no doubt is that well-developed financial markets accompany andfacilitate the emergence of new ventures , and this is even more true in the case of the New Economy,which is mostly based on the ICT sector. More specifically, two major models have emerged on aworldwide basis: the US model based on a dedicated stock exchange (the NASDAQ); and models based onbanks (so-called German/Japanese model)166. In the US, the stock market-based financial system hasenabled the widespread use of stock options as a means of payment to those who work for new technologycompanies. This helps to align the interest of the employees with those of shareholders leading both togreater social efficiency and greater reward for innovations. The latter derives in part from the existence ofan exit mechanism which the US financial system provides in the form of IPOs and take-overs. Both theseavenues are thought to improve enormously the rewards for innovations (compared with other financialsystems that do not have such mechanisms). Last, but not least, the take-over mechanism in the U.S.financial market which allows for hostile acquisitions is regarded as being particularly helpful in theselection process, i.e. in being able to discriminate between useful technologies which benefit society byincreasing shareholder value and those which do not.

However, the debate is far from being over. First and foremost it will be observed that the above virtuesof the stock market system depend crucially on the nature of the stock market pricing process. If shareprices always accurately and exclusively reflected the true long term expected profitability of firms, thecase for the virtues of the stock market system will have a more solid basis. Orthodox financial economistsbelieve this would indeed be the end result of a pricing process based on rational expectations of investorsand that their similar beliefs about the future prospects of companies. However, the prices may well begenerated by altogether different processes where investors base their decisions on irrational exuberanceand are motivated by speculative profits.

In terms of this critical analysis, the nature of the relationship between the new economy and the stockmarket, rather than being regarded as a virtue of the American financial system in facilitating the arrival ofthe new economy, becomes, instead, a cause for concern. There is important evidence that suggests thattechnology stocks are grossly overpriced. If Dow Jones is regarded as representing mainly the old economyand Nasdaq as the representative index for the new economy, the price-earnings ratio of the average neweconomy stock in April 2000 was 62 compared to 23 for the old economy. This was so despite the fact thatthe Nasdaq index had fallen by about 15 per cent between March and April 2000. Most economists regardsuch valuations of technology stocks to be unrealistic and as representing a classic case of a stock marketbubble. This is perhaps brought home more clearly by taking a closer look at some of the individual stocksrather than the market averages.

As regards developing countries, the unavailability of a well-developed capital market can oftenrepresent a key disadvantage for the development of an effective ICT strategy. But ICT can also be a driverof better capital markets, for example in the setting up of stock exchanges. For example, in Nigeria thestock exchange is a real hub of the capital market in the region, and even Indian ICT companies are beinglisted on it to be able to develop their operations in the region167. The meeting of supply and demand cantake place more easily through a stock exchange, although stock values are also affected by fluctuatingexpectations and global phenomena168.

For what concerns the Arab region, the fact that some Arab countries possess an undoubtedly well-developed capital market can represent a key strength for the development of a sustainable ICT strategy interms of innovation and investment (see Section VI below). That said, financial markets alone cannot playthe role of innovation accelerators, intermediaries and aggregators: it is important that, along with a well-developed financial market (and, if possible, venture capital market), governments design an ICT strategythat relies on existing platforms and technologies to boost development of layer 2 and 3 firms (see SectionVI below).

166 See Singh, A., Glen, J., Zammit, A., De Hoyos, R., Singh, A. and Weisse, B. (2005) "Shareholder value maximisation,stock market and new technology: should the US corporate model be the universal standard?" International Review of AppliedEconomics, 19(4): 419-437.

167 http://www.moneycontrol.com/news/business/indian-ict-firms-passionate-about-nigerian-market_787843.html

168 http://www.nigeriacommunicationsweek.com.ng/e-financial/nse-urges-ict-firms-to-explore-the-capital-market

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4. Creating IP financial markets

As already noted, the traditional model of organizing innovation, where R&D and the complementaryassets required for innovation are largely integrated within the firm has become obsolete in manyindustries, and in particular in the ICT sector. Given technological progress, the dispersion of usefulknowledge and, as consequence, the dynamics and changing nature of the competitive arena, firms areincreasingly relying on external source of knowledge and complementary assets. The self-reliance principleseems to be replaced by the openness logic that embraces external ideas and knowledge in conjunction withinternal R&D. This leads to a new division of innovative work which underpins the recent diffusion ofmarkets for technology.

The definition of markets for technology refer to “transactions for the use, diffusion and creation oftechnology”, representing the ideal place in which the supply and the demand of technologies meet eachother. Among other mechanisms, licensing accounts for the lion’s share of exchange of technology thattakes place. Technology licensing thereby plays a lead role in the diffusion of markets for technology. Bylaw, a license agreement is an arm’s length contract for the transfer of IPRs encompassing patentscopyrights, trademarks and trade secrets. It represents the leading mechanism in trading patents, eventhough the transfer of the patent itself might not be sufficient to enable to use of the technology by thirdparties, especially when absorptive capacity is limited. Clearly defined and enforceable patents facilitatelicensing and hence dissemination. In this way, patents have become an important currency that allows forknowledge trade to an extent that has not been previously experienced in the markets.

The emergence of markets for technology and thus the diffusion of licensing agreements have mainlytwo types of implications: strategic and financial. First, they enhance firms’ strategic flexibility in terms ofthe number of available options for shaping corporate strategy. Firms focus on what they do best atdifferent stages of the value chain and then sell in the downstream market. Or conversely, they buy otherfirms’ technologies, integrate them into product and sell in the product market. Hence, markets fortechnology affect both innovators and users of technology and, consequently, both large and small firms.Large companies may sell or license out their non-core technology but at the same time they may exploitthe innovative capacity of specialized firms (e.g., biotech) to fill the missing spots of their innovationpipeline. Small firms, instead, may either focus on technologies for which they have developed specializedskills and sell or license them out, or rely on other firms’ knowledge base to fill the gap of their innovationroadmap.

Available information suggests that markets for technologies are recently growing at an increasing pace.Rough estimates of the size and scope of such markets are: the annual amount of patents filed by firms andthe total amount of licensing receipts (royalty and revenues) (see figure 31 and 32).

Figure 32. Receipts from international licensing in major OECD regions (OECD Science, Technology and Industry Outlook 2006)

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Figure 33. Growth in non-U.S. held patents and worldwide royalty and license revenues

Success and failures of markets for technology are tightly tied to the emergence of new types of IPRtransactions and new ways of developing and sourcing IPRs. On the one hand, successful cases emphasizethe renting potential of IPRs and, thus, stimulate (mostly, even though not exclusively) private actors todesign new IPR-based models of exploitation (e.g., patent pools). On the other hand, failure cases providespace for market-making firms by highlighting the increasingly relevant role of intermediaries (e.g., patentbrokers). The CEO of Yet2.com – one of the online market-making platform – indicates four dimensionsalong which intermediaries provided value-added services to technology sellers and buyers.

Connectivity:

o Deep reach into corporate technical staffs;

o Access to key gatekeepers (tech transfer and tech acquisition);

o Relationships with venture capital and SMEs;

o Cross-industry, cross-geography.

Confidentiality:

o Opportunity screening and initial discussion;

o Protect client name and application;

Expertise:

o Evaluation and communication methods;

o Market and buy-side knowledge;

o Business formation and commercialization skills.

External perspective:

o Unbiased evaluation and critical thinking;

o Networked to cross-domain technical expertise.

In sum, intermediaries allow potential buyers and sellers to find each other, deploy the necessaryexpertise to settle and conclude the agreements, and preserve the anonymity which prevents parties frombeing disadvantaged against competitors. Intermediaries might also multiply the opportunities for firms toget access to alternative sources of finance (e.g., venture capital) and equip them with the requiredknowledge to develop their IPRs, embed them into products and sell them on the market.

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Business models can be extremely different; heterogeneity notwithstanding, it is possible to group IPRspecialist firms according to their specialized functions, which are169:

IP-management support. Navigating the IPR landscape requires firms to be endorsed with highlevel of legal, business and technical expertise to develop effective IPRs strategies. Under suchcircumstances, many IP specialist firms (e.g., ipCapital Group; ThinkFire) have seized theopportunity to provide various services that support and empower patent holders’ IPRs management.Among others, patent portfolios analysis and evaluation, competitors’ or potential clients’ patentsdue diligence, legal assessment of patent families, prior art and related patents, identification ofpotential licensees and negotiation support represent the most frequent services delivered;

IP-trading mechanism. As highlighted before, there are several factors hindering the match betweenpotential licensees and licensors. Sometimes, “patent holders do not have the resources, skills, orrelationships with interested buyers which are needed for a successful patent sale” and similarly“most willing patent buyers do not have enough resources and know-how needed to: identify the keypatents and their proper market prices; launch and facilitate the negotiations with owners of targetpatents appropriately; and conclude contracts successfully”. In this scenario, the role of IP specialistsis to provide services which support and facilitate the transactions and improve the liquidity of themarket. The principal business models pursued are: (a) patent license or transfer brokerage (e.g.,Fairfield Resources); online IPRs marketplace (e.g., Yet2.com); IPRs live auction/online IPRsauction and IPRs license-right trading market (e.g., Ocean Tomo); university technology transfer(e.g., MIT Technology Licensing Office, Isis Innovation, and MI.TO. Technology);

IP portfolio building and licensing. In this case, IP-specialist firms take advantage of the rentingpotential of IPRs. They develop strong patent portfolios either through their internal R&D activitiesor through huge strategic purchase (for instance through auction) and license-out them to other firms.These firms generally do not operate in the product market (do not use such patents in connectionwith any product or services of their own). Rather, they establish licensing programs and gain fromthe widespread utilizations of patents (mostly as far as standardized technologies are concerned).Sometimes, such firms enable transactions over a myriad of dispersed pieces of IPRs that, due to theenormity of transaction costs, would never generate revenues. Three are the most frequent businessmodels embraced: (a) Patent pool administration (e.g., Sisvel); (b) IP/technology development andlicensing (e.g., Rambus); (c) IP aggregation and licensing (e.g., Intellectual Ventures);

Defensive patent aggregation/framework for patent sharing. This function is similar to the previousone. However, in this case, IP specialist firms (e.g., Open Invention Network) seek to acquire“problematic patents that can be asserted before active IP enforcers acquire them, and get them offthe street to avoid costly and damaging litigation”. Such entities generally allow anyone to use themfree of charge. The Open Source Community is an example of such practice. Open source initiativesare also pursued by private firms, like IBM and Nokia which are taking steps in developing theLinux kernel;

IP-based financing. These IP specialized firms provide patent holders with extra source of financeexploiting the rent-generating potential of IP assets.

Alternative trading systems for IPRs

Markets for technology and intellectual property assets may have relevant financial implications. In fact,the possibility of extracting value from these assets through market transactions instead of productcommercialization potentially allows firms to monetize their intangible assets without bearing the burdenof manufacturing products or delivering services. This is particularly important for “yollies”, or younginnovative companies that suffer from stronger financial constraints. These firms, while having problems toaccess equity and debt markets, could raise new financial resources in the IP market.

Possible solutions to raise financial resources in the IP markets include: (a) exploitation via licensing,(b) monetization through patent funds or auction markets, (c) leveraging patents to access equity financing

169 For a complete review, see the highly documented report of OECD(2009), The emerging patent marketplace,DSTI/DOC(2009)9.

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by venture capital and business angels, or (d) leveraging patents as collateral for financial transactions (i.e.,patent-backed loans, patent securitization, patent sale and lease-back)170.

Lately, governments and international institutions have put efforts in promoting the exploitation of IPRand thus the transparency and liquidity of the markets for technology. There are a number of policy actionsthat can be taken along the steps that bring to commercialization, without necessarily adding complexity tothe system. These include:

Improvement of the patent system;

Improving disclosure of patent and license information;

Match-making services;

Support of patenting and licensing in public research organization;

Training, education and outreach to small firms;

Regulations and guidelines for exploitation;

Financial incentives for patent licensing;

Valuation tools;

Disclosure and reporting guidelines.

5.Opportunities and enabling environment for investments in the ICT sector

Creating the right environment for investment in ICT is certainly a complex endeavour, as the ICTecosystem is more complex and layered than most other markets. Based on our illustration in Sections 1and 2 above, creating the right environment would crucially depend on whether the policymaker is able toensure that all layers of the ecosystem are adequately promoted and developed: that said, countries mightthen decide to specialize themselves in one specific layer, or two of them, or in a sub-layer (e.g. mobileequipment, or videogames), depending on its specific strengths.

Against this background, creating the right environment for investment in ICT is a country-specificexercise, which is likely to entail the following actions:

Promoting investment in communication infrastructure, by providing clear and investment-friendlyrules on fixed and mobile communications. For example, box 12 below briefly comments on Brazil’schoice to depart from its original model (the EU telecoms framework) and launch a “regulatoryholidays” program for investment in broadband infrastructure, declaring that investors in suchinfrastructure will not be called to share it with new entrants for nine years. A similar approachadopted by the US in 2003-2005 had boosted investment in optical fiber technologies. Investment ininfrastructure can also be stimulated in other ways, including by public funding of broadbandprojects, clarifying rules on public-private partnerships and co-investment in broadband networks,using infrastructure clearinghouses, and even by adopting a nuanced approach to net neutrality,which preserves the possibility, for ISPs, to maintain managed services on top of best effortservices171. Part of this problem, for developing countries, is the need to increase the amount ofbandwidth available per user, which otherwise represents a key constraint for users located in thesouth of the globe.

170 Patent sale and lease-back is a lease-back solution using patents as underlying asset. In a typical transaction, a specializedinstitution (the lessor) purchases a single or a pool of patents from a company (the lessee). The latter, subsequently, leases patentsback from the lessor and obtains all rights to use them in its business activities paying some interests. The specialized institutionusually retains the ownership of the patents until the end of the lease. Patent securitization consists of the transfer of IP by an ownerto a special purpose investment vehicle (SPV) for securitisation and the receipt of capital from investors in the form of a lump sumpayment. Typically, royalty streams from the IP serve as the income stream to repay capital and interest to investors. Currently,however, the patent securitization market is still in an initial life stage.

171 See Renda, A. (2010), Neutrality and Diversity in the Internet ecosystem, CEPS Working Paper, available athttp://ssrn.com/abstract=1680446 or http://dx.doi.org/10.2139/ssrn.1680446

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Investing in education. Broadband and ICT uptake crucially depend on computer literacy andconsumers’ ability to make full use of ICT equipment and networks. Data on Internet use by level ofeducation show that Internet usage is lower for less-educated individuals among both men andwomen. Figure 33 shows Internet usage rates according to educational attainments of “low”,“medium” or “high” (based on the international standard classification of education, ISCED) andthose with the highest level of education are more likely to use the Internet than those with lesseducation. A higher educational level generally also implies higher income and greater computerliteracy, both of which are important factors that drive Internet use172. Moreover, investors in newcompanies need qualified employees and sufficient human capital to realize their project, otherwisethey will try to find it in other countries if possible. Finally, education also helps in creating newentrepreneurs.

Figure 34. Individuals using the Internet from any location by educational level, 2011 or latest available year

Source: OECD (2012)

Another key factor to stimulate investment in ICT is smart legislation and good governance,especially in the field of intellectual property and competition law. Strong IPRs stimulate bothdomestic and foreign direct investment by providing credibly enforced commitments to theprotection of property rights;

On Layer III, countries can normally do a lot less, since the layer is by definition global andinterconnected. However, in specific areas government involvement in the promotion of investmentcan be essential: all security applications, e-government and e-health services, mobile paymentsmarkets exhibit local features, which in turn need legislation that is sufficiently investment-friendly.

The essence of creating the right ICT “environment”, in any event, is indeed to focus on thefundamental pillars of such environment, i.e. widespread and resilient infrastructure, rule of law andeducation: the rest can be channeled by the public sector towards specific applications and service, but forthe most part should be left to the private sector. The latter, as specified above, mostly needs deep capitalmarkets and a fertile entrepreneurial culture.

A recent publication by the World Bank and IFC (2012) takes a similar stance on governmentinvolvement with innovation and entrepreneurship in ICT.

172 See OECD (2012), Internet Economy Outlook 2012, Paris: OECD, at 121.

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Source: OECD (2012)






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Source: OECD (2012)






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“To unlock the potential of ICT innovation, governments have to calibrate their interventions. There isa fine balance between facilitating innovation and stifling it with too much intervention. Innovation,mainly led by the private sector and at the grassroots level, relies on creativity‘s ability to blossom—nota feature usually associated with government bureaucracy. The success of India‘s IT-based servicesindustry is widely believed to have taken off in the absence of heavy government intervention, other thaneffective telecommunications and education policies and marketing for major Indian cities as investmentdestinations. Kenya‘s m-Pesa thrived thanks to light regulation. Rather than direct intervention,governments should focus on the key enablers of ICT innovation: developing a skilled workforce,implementing ICT innovation policies, promoting ICT entrepreneurship, and facilitating a bottom-upapproach to innovation.”173

Box 12– US, EU and Brazil: finding the right balance between competition and investmentIn December 2012 Brazil and the EU celebrated ten years of co-operation in the ICT field with a full week of dialogueand exchange of ideas about innovation, research and regulation. The EU is an eager exporter of its regulatory models,and in the telecoms sector Brazil was quick to copy Europe's 2002 regulatory framework, which they praised as asolid basis for liberalizing reforms.

However there was a problem. Partly because of its antitrust rules, the EU's 2002 telecoms package centered on thecredo that market entrants should not be required to invest upfront in their own infrastructure. Rather, nationalregulators should help them to grow by ensuring that they had access to former monopolists' networks while theygradually invested in their own network. While sophisticated and elegant in theory, this model, termed the ‘investmentladder', has required mind-boggling acrobatics to implement.

The US has experimented with a similar model since 1996 (termed ‘stepping stones', rather than ‘investment ladder').However, when it came to stimulating investment in networks, the regulator decided in 2003 that access policy was a‘no-go'. When the Federal Communications Commission announced ‘regulatory holidays' for companies that investedin broadband networks, investment flourished.

Brazil decided to make the best of the EU and US models together, notably when it ran a 4G auction for high-speedmobile broadband long before many EU member states. It has taken the well-shaped EU telecoms package, but withregulatory holidays for broadband.

Now, the ball goes back to the EU. Perhaps the time is ripe for it to consider lifting regulatory obligations oninvestors. The EU has no reason to return to 27 monopolies, of course. Rather, what it needs to do is to ensure that, inany part of Europe, consumers have at least two, possibly three, options to subscribe to fixed or mobile internetaccess. Unless it does so, it is probable that Brazil will join the broadband fast lane before the EU – and the EU'sproductivity and growth in many other economic sectors will remain stunted.

__________________

(This article by Andrea Renda appeared on The European Voice in January 2012).

6.Venture capital and research and development efforts

As reported by OECD in its report on the Internet economy 2012, the ICT sector remains a key area offocus for venture capital investment and accounted for more than 50% of all VC investment in the UnitedStates, the largest market, in early 2012. Venture capital financing returned to steady growth after thecollapse in 2001 and this growth continued for the next seven years at a moderate rate (Figure 34 below).Investment began to fall again during 2008, but began to recover again in early 2009, returning quickly tothe longer-run growth path. ICTs still account for over 50% of total VC investments, highlighting theperception of future value in the ICT sector. These persistent high percentages of investment areparticularly impressive given that venture capitalists are increasingly investing in other areas such as greentechnologies and biotechnology.

173 See this link for more information.

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Figure 35. Venture capital investment in ICT in the United States, 1995-2012

Source: OECD Internet Economy Outlook 2012

Nigeria’s Venture Capital Fund

In order to develop the potential of Nigeria’s ICT sector, the country is establishing a venture capitalworth $15 million, the Minister of Communication Technology, Mrs Omobola Johnson announced inAbuja174.Nigeria’s budding ICT innovators and entrepreneurs have welcomed the development with muchcheer, stating that it is a step in the right direction. Financially challenged entrepreneurs are howeverfortunate as selection for the funding would be made without collateral requirement considering financialprospects only. “We will use those Venice capital fund to fund them because there is no collateral we aretaking a risk,” the minister said. The fund, which would be used to finance commercially viable indigenousideas, initiatives and projects in ICT, would be privately managed in collaboration with technocrats asdecision makers of the beneficiaries of the fund. The Nigeria Information Technology DevelopmentAgency (NITDA) has been identified as the first investor of the fund with a proposed $3.6 millioninvestment while the $11.4 million balance would be made up investments from local and internationalinvestors.

7. Business incubation and returns on investments

Business incubation is a process aimed at supporting the development and scaling of growth-oriented,early-stage enterprises. Incubators typically rely on the concept of industry cluster by establishingproximity with the target enterprise and offering a mix of strategic and operational support, focused on therefinement and upgrading of the original business concept. This is why incubators normally act during theearly stages of a business’ life, although the business model and overall implementation have to bereasonably defined for an incubator to be fully effective175. From this viewpoint, incubators differ fromBusiness Development Centres, which offer ad hoc assistance to entrepreneurs upon request and a pre-determined menu of rather standardized services; and they differ also from technology parks, which focuson providing the facilities and the real estate needed to trigger the positive effects of business proximityand complementarity (see Table 3 below).

174 Source: http://www.ventures-africa.com/2012/08/nigeria-launches-15m-venture-capital-fund-to-assist-ict-entrepreneurs/

175 InfoDev, 2012.

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175 InfoDev, 2012.

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175 InfoDev, 2012.

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Table 2. Business development centers, incubators and technology parks

Adopting a concept of “ecosystem”, the World Bank’s InfoDev stresses the “ecosystemic” nature ofinnovation and entrepreneurship, and thus the need for innovation accelerators that liaise at once withfinanciers, academia, policymakers, and the business community. Khalil and Olafsen (2010) stress that “[i]fany one of these linkages is weak or non-existent, the entire system suffers and the ecosystem is not aseffective at enabling innovative entrepreneurship as it could be”176.

C. THE SITUATION OF THE SECTOR IN THE ARAB REGION

Acknowledging the decisive role investment plays in the development of ICT sectors, the Tunis Agendafor The Information Society in 2005 highlighted the need for financial mechanisms for bridging the digitaldivide, hence the formation of the Task Force on Financial Mechanisms (TFFM), whose mandate was toundertake a thorough review of the adequacy of existing financial mechanisms in meeting the challenges ofICT for development.

The Tunis Agenda asserts that attracting investment in ICT had depended crucially upon an enablingenvironment, including good governance at all levels, and a supportive, transparent and pro-competitivepolicy and regulatory framework, reflecting national realities; in particular, the Agenda recommendsimprovements and innovations in existing financing mechanisms, including making financial resourcesmore predictable and sustainable, enhancing regional cooperation, creating multi-stakeholder partnerships,developing domestic financial instruments, including by supporting local microfinance instruments, ICTbusiness incubators, public credit instruments, among others177.

In this context, the drive towards building effective and vibrant ICT sectors, as is the case in any otherproductive sector in modern economies, requires not only technical expertise and managerial skills, but alsoseed money as well as venture capital funds and, in many instances in developing countries, directgovernment funding to support and encourage the development of ICT projects. This challenge becomes allthe more important as projects involve the acquisition of technologies from developed countries and/orrequire large amounts of capital to finance extensive infrastructure projects. The availability of suchfunding and the modes of finance differ across countries with direct bearing on the ability to move forwardin establishing competitive ICT sectors and promote innovation start-ups.

This notion holds true for all regions. For instance, citing literature on the barriers to innovation inEurope compared with the United States and why European firms are less present as leading innovators innew ICT sectors, the European Commission notes that the most common factor raised to explain the

176http://siteresources.worldbank.org/INFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/ChapterKhalil_Olafsen.p

df

177ITU (2005). "Tunis Agenda For The Information Society". http://www.itu.int/wsis/docs2/tunis/off/6rev1.html

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differences in dynamic structure between the US and the EU is a greater willingness on the part of the USfinancial markets to fund projects in new sectors178.

In the Arab region, banks contribute very modestly to start-up companies and generally do not haveprograms to support entrepreneurial projects. According to the World Economic Forum, only 20 percent ofSMEs have a loan or a line of credit, the lowest percentage of any region in the world, and only 10 percentof SMEs investment expenditures are financed by a bank loan, also among the lowest worldwide179. In theabsence of such a role by the banks, other arrangements and financing modes must offset this creditshortage including government support, public-private partnerships, and private equity. Further, the lack ofmature capital markets in the region and initial public offerings (IPOs) in the ICT sector undoubtedly bearsheavily on the sector.

Multinational corporations (MNCs) also play an important role in fostering ICT activities throughinvesting in areas of interest and where these companies need to establish presence and achieve strategicobjectives such as higher market shares. But to attract investment, countries in the region need also toenhance the business environment and dismantle the barriers which make it costly to start businesses.

According to Doing Business 2013, despite substantial efforts by governments in the Middle East andNorth Africa to improve business regulation for local entrepreneurs, the region faces structural challengesthat can impede private sector activity; a history of government intervention has created more opportunitiesfor rent seeking than for entrepreneurship180. Entrepreneurs across the region face relatively weak investorand property rights protections.

From the private sector point of view, investing in ICT is impacted by country-specific comparativeadvantages and the quality of the business environment181; in this regard, regulatory stability, the ease ofdoing business, and the prevalence of corruption were perceived as important criteria when decidingwhether or not to invest in this sector; another issue highlighted as an effective financing mechanism is theestablishment of more multi-stakeholder funds, which offer the advantage of pooling and coordinatingresources to limit duplication of activities, and allow for more concerted and effective assistance.

Arab countries have been allocating large sums of funds to invest in the ICT sector. Saudi Arabia, forone, will invest up to $10 billion in its telecom sector in year 2013 alone, with future forecasts predictinginvestments of up to $13.3 billion by 2015, putting growth rates at more than the rest of the GCC telecommarkets combined.182 Mobily, the second largest mobile service provider in the country with over 40percent market share of the mobile subscriptions plans to spend nearly 6 billion on infrastructure over thenext five years.183 It is reported that the Kingdom has become one of the fastest growing IT markets in theMiddle Eastern region and is projected to account for up to 50 percent of the total ICT investments in theGCC during 2010-2012.184

Small and medium-sized enterprises (SMEs) constitute the majority of business activity in the Arabregion, yet bank lending to these institutions in the region accounts for less than 8 percent of total lending.In the GCC states, it is merely low at 2 percent. However, this lack of funding to SMEs could present an

178 EC (2012). “Lessons for ICT Innovative Industries: Three Experts’ Positions on Financing, IPR and IndustrialEcosystems”. European Commission. p:12. http://ftp.jrc.es/EURdoc/JRC76458.pdf

179 WEF (2011). "Accelerating Entrepreneurship in the Arab World". October 2011. p:14.http://www.wipo.int/freepublications/en/intproperty/944/wipo_pub_944_2011.pdf

180 World Bank (2013). "Doing Business 2013". p:12.http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-full-report.pdf

181 WBI (2006). "Information and Communications Technology for Economic Development: Exploring Possibilities for Multi-sector Technology Collaborations". World Bank Institute. p:24.

182 http://www.arabnews.com/ksa-telecom-investment-reach-sr37bn

183 http://gulfnews.com/business/telecoms/mobily-to-spend-22-billion-saudi-riyals-on-infrastructure-1.1134542

184 http://www.rncos.com/Report/IM322.htm

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opportunity for private equity (PE) and venture capital (VC) firms to provide the financial and strategicsupport that such firms need185.

Nevertheless, the venture capital and private equity markets have not developed enough in the regiondue to supply as well as demand side considerations. It is not only the PE and VC industries that are notoffering enough capital, but it is also the businesses that are hesitant to relinquish some control of theirenterprises to investors, especially in a region characterized by a large share for the SMEs in businessactivity along with the prevalence of family-owned enterprises.

Modes of financing ICT start-ups could take various forms including government support and privatefinancing in debt as well as equity stakes. These various forms have varying implications for the fund-receiving enterprises. For instance, while angel capital is not normally associated with high conditionality,venture capital might require entrepreneurs to relinquish certain level of control of their businesses.Likewise, debt financing has markedly different implications than that of equity financing.

The WEF notes that the Arab region’s financial enablers are underdeveloped and that the financialsupport in the region is focused on very small start-ups and what is missing is funding for businesses withan enterprise value between US$ 500,000 and US$ 8 million186. In particular, the network of equityinvestors is still nascent in the region and the region’s banks seldom have special start-up or entrepreneurialprogrammes, which prompted several Arab countries to introduce special programmes to encourage banksto increase lending, including exemptions on reserve requirements, credit subsidies and partial creditguarantee schemes. But such government initiatives are not sufficient to make available all neededfinancing environment for start-ups.

In Lebanon, for instance, the Central Bank announced in January 2013 that it will give credit facilities tocommercial banks with 1 percent interest and up to 10 years maturity, which would enable them in turn toprovide soft loans with relatively low interest rates to productive sectors including the ICT sector. TheCentral Bankhad decided previously to exempt banks from the statutory reserve requirements on certaintypes of loans, including the ICT sector.

Jordan: Innovation Clusters and incubators

The Information and Communications Technology Association of Jordan – int@j is an ICT and ICTESindustry-support association founded in 2000 with the aim of improving the dynamics of Jordan's ICT &ICTES markets and developing the Kingdom's ICT & ICTES related activities, and includes more than 210local and global companies working in IT, Telecom, and IT enabled services (Outsourcing). TheInformation and Communications Technology Association of Jordan Int@j has been exerting effortsaiming at advancing the Jordanian ICT and ICTES sector187. Int@j has been looking for variouspartnerships with different institutions on the local, regional and international levels aiming at creatingbetter ICT and ICTES industry in Jordan, increasing the awareness of ICT and ICTES services andproducts and stressing on the benefits of integrating ICT and ICTES in other sectors.

The int@j is initiated with USAID, Jordan Economic Development Program, and The Red Sea Institutefor Cinematic Arts - RISCA "Creative Industry: Innovation Cluster“ in Aqaba in February 2012.

The "Creative Industry: Innovation Cluster“ aims at building Jordan’s emerging screen industry and itslinkages with the media, ICT, Education and digital content industries by engaging all stakeholders,initiatives, and financing sources for maximum impact. RSICA plays a major role in providing the skillsthat are based on industry-best standards and designed to provide graduates with a broad set of professionalabilities to enhance employment opportunities and the Creative Industry development.

185 MPEA (2012). "Venture Capital in the Middle East and North Africa Report", August 2012. p:3.http://www.wamda.com/web/uploads/resources/MENA_VC_REPORT_August_2012.pdf

186 WEF (2011). "Accelerating Entrepreneurship in the Arab World". October 2011. p:14.http://www.wipo.int/freepublications/en/intproperty/944/wipo_pub_944_2011.pdf. Financial enablers include equity investors,banks, microfinancing, and government programmes such as funds, and short-term loans and guarantees.

187 Source: int@j, February 2012. http://www.intaj.net/content/sponsored-usaid-jordan-economic-development-program-intj-rsica-are-launching-creative-indust

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Furthermore, the cluster will ensure bringing all stakeholders to work together and reveal potentialopportunities which will help in clarifying their different roles and responsibilities.

The Jordanian government is also working hard to keep telecoms investment from leaving the country.As such, it is keen to keep France Telecom, the country’s sole fixed-line provider, invested in Jordan. Itencouraged the firm to pursue new investments, specifically in systems and training technology. Efforts arenow underway to enhance the telecoms sector’s ability to hire new recruits and expand its role inemployment. The government is also attempting to ensure that ICT entrepreneurs receive full funding andsupport through a number of government-supported incubators. It is hoped that Amman can become aglobal leader in terms of innovation from its ICT firm188.

Qatar: Investment in the ICT Market By Public And Private Sectors Continues To Grow.

The booming technology sector has grown at an average rate of 17 percent a year for the last five years,to a total value of approximately QAR 15.5 billion in 2011, which represents around 1.6 percent of totalGDP in Qatar, up from 1.2 percent in 2008, and includes more than USD 300 million in investments fromlarge global firms like ExxonMobil, GE, and Microsoft. This type of success has led to the recognition ofQatar as a regional technology hub, which, in turn, is promoting further investment in the local ICTmarket189.

Saudi Arabia: a Historic ICT Investment Program

With over 27 million consumers and a number of global enterprises, Saudi Arabia is the largest ICTmarket by far in the Middle East. For example, the Saudi Arabian telecommunications and informationtechnology industries represent over 55 percent and 51 percent of the total Middle East markets,respectively. Yet, while many of the world’s ICT markets are maturing, the Saudi Arabian market remainssubstantially under-developed by global standards and remains on a rapid growth trajectory.

ICT spending has grown at over 10 percent per year since 2001 to reach US$7.3 billion in 2006.Liberalization is occurring across the telecom industry, driving increases in competition, service levels, andusage. Numerous Saudi Arabian IT industries show clear signs of rapid growth, driven by the committedpresence of major multinationals, and by the expanding skills and confidence of local companies.

Saudi Arabia has embarked on a twenty-year ICT plan that will support widespread technology andtelecommunications adoption across KSA’s households and enterprises. A combination of deregulation andsubstantial public investments will create attractive investment opportunities for the private sector. Recentexamples of such participation include a US$100 million investment by a venture capital firm in Saudi-based technology companies190.

Global Chipmaking Industry in Abu Dhabi

Abu Dhabi plans to bring the global chipmaking industry to the Middle East as it seeks to diversify itseconomy into knowledge-based industries. The Advanced Technology Investment Company (Atic), a state-owned company created in 2008 as a separate entity from the Mubadala sovereign investment vehicle, saidit would invest in building an advanced technology cluster. Atic would also explore "the various modes ofinvestment required" to start attracting other semiconductor companies.

In 2009, Atic it invested $1.4 billion in a partnership with Advanced Micro Devices to spin-off the USgroup's manufacturing arm into Globalfoundries. Then, in September 2010, Atic paid $1.8 billion for amajority stake in Chartered Semiconductor of Singapore, which put Globalfoundries just behind TaiwanSemiconductor Manufacturing Co and United Microelectronics as the world's third-biggest contractchipmaker.

188 Source : http://www.oxfordbusinessgroup.com/economic_updates/jordan-fourth-telecoms-provider

189 http://www.ictqatar.qa/sites/default/files/documents/Annual_Report_11_EN_0.pdf

190 Source: excerpts from http://www.sagia.gov.sa/en/Key-sectors1/ICT/

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Abu Dhabi will invest in Globalfoundries and in training a pool of domestic talent in the emirate over thenext five years. The plan includes establishing a new semiconductor polytechnic university in the city191.

Lebanon's Restructuring Plan: a mixed picture

In January 2013, the Cabinet agreed to extend the operation licenses of its two mobile phone operatorsTouch and Alfa for a maximum of one month to pave the way for a new tender. The government plan toinvite the current companies and other international firms to bid for new contracts to operate the state-owned cellular networks for five years.

The Ministry’s plan involves merging the state-owned mobile network infrastructures of the existingtwo operators, into a single platform and then licensing three to five private firms to operate as MobileVirtual Network Operators that offer retail services to customers. The plan also calls for governmentownership of the single network infrastructure, with the possibility of floating a stake of up to 3 percent onthe market.

Business Monitor International (BMI), the London-based risk analysis company, said the new proposalby the Telecommunications Ministry to restructure Lebanon’s mobile phone sector would kill any chanceto privatize the cellular network in the future; the proposed structure for Lebanon’s mobile phone sectorwould meet the government’s revenue targets but is not likely to stimulate innovation or raise the usage oftelecoms. BMI pointed out that the new model ignored the fundamental need for private investment andcompetition at the network operator level, even though it allowed competition between the MVNOs at theretail level192.

Another important initiative in Lebanon has been the launch of the Beirut Digital District (BDD),designed to attract high-tech companies with its prime location and advanced infrastructure. “We need thecreation of a good eco-system to encourage change and nurture talent,” says K. K. , the entrepreneur whoinitiated BDD. “This is a way to have the public sector help the private sector. They can’t do it alone,” headds. In planning the BDD, he met with companies and asked them: What will it take for you to come toBeirut? The No. 1 requirement for all of them was high-speed Internet.

To speed up the process, he appealed to private investors who shared his vision, instead of applying forgovernment funds, which can be a long process. He acknowledges that the returns will be slow andpossibly modest, but he sees the payback as social development.

He notes that an integral part of the plan was an incubator for new startups and he doesn’t want to stopwith what has already been built – an office space of 2,600 square meters. It will reach 14,000 squaremeters by January 2014, and by 2016 it will be expanded to 40,000 square meters.

If he can attract enough investors, he also hopes to expand beyond Beirut – in the impoverished areas ofTripoli and the Bekaa Valley193.

Venture Capital Gaining Ground in the Arab Region

Venture capital has been rapidly developing in some of the Arab states. Here are some recentexamples194.

In Saudi Arabia, in 2012 VC and overall SME activity increased significantly, driven by two keyfactors, 1) overall robust growth of the Saudi Arabian economy, and 2) the realization by the Saudigovernment of the importance of SMEs to economic and social prosperity. Several funds using pure equityor structured equity approaches are being launched targeting the KSA SME sector. The Saudi government

191 Source: http://www.ft.com/intl/cms/s/0/ebe6f448-6ddd-11df-b5c9-00144feabdc0.html#axzz2KEgV4hX3

192 Source: http://www.lebanonwire.com/Byblos/LTW-294.pdf

193 Source: http://www.dailystar.com.lb/Business/Lebanon/2012/Sep-22/188845-planting-a-technology-seed-in-heart-of-beirut.ashx#axzz2KKqgzmfO

194 Based on MPEA, 2012. http://www.wamda.com/web/uploads/resources/MENA_VC_REPORT_August_2012.pdf.

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has announced several initiatives and programs to expand financing access to SMEs in KSA. There is eventalk of creating an SME-specific authority in KSA to promote the sector.

In Kuwait, the government has tried to stimulate the VC market via a $360 million fund developed bythe Ministry of Finance and the Kuwait Investment Authority (KIA) in 1997. The fund was structured tosupport Kuwaiti entrepreneurs by financing up to 80 percent of the project costs for start-up ventures.Several privately owned companies have tried to invest in the local VC market, with some great success.One company that is currently trying the bridge the gap between governmental and private VC is theNational Technology Enterprises Company (NTEC), which is fully owned by the Kuwait InvestmentAuthority (KIA) but is operationally set up as a private company. NTEC focuses, among other sectors, 0nICT, where they are actively developing projects in Kuwait and the region by leveraging close links withKuwaiti ministries and the private sector.

In Egypt, the ICT sector has emerged to become one of the most significant contributors to GDP. Fueledby strong demand for mobile services and infrastructure, the sector has sustained its double digit growthwhich has enabled local players to go beyond the country’s borders. Companies like Orascom Telecom andRaya have established success stories that serve to inspire entrepreneurs and attract investors to thetechnology sector in VC investment is still a relatively new concept to Egypt, with only a small number ofactive players. Egypt’s largest and oldest VC firm is Ideavelopers, the VC arm of EFG-Hermes; it managesan Egypt-focused $50 million fund, sponsored by some government-owned organizations in addition tobanks and insurance companies. Ideavelopers has been very active in 2011, investing in three new internetand mobile companies as well as making two follow-on investments in existing companies in its portfolio.Sawari Ventures is another strong player in the venture space in Egypt. The fund has completed severalinvestments in Cairo and Alexandria with a particular focus on mobile technologies.

Jordan has a nascent VC industry; 2011 was in many ways a pivotal year that saw unprecedentedactivity in the sector and the wider ecosystem that supports it. The increase of capital in the Jordanian VCsector in 2011 was driven by several factors. On an institutional level, several local and regional institutionsentered the market with their first Jordan-focused funds. Funding has also witnessed an unprecedentedincrease from non-institutional sources, with angel investors specifically showing record interest in VC-style investment. Investments into Jordanian ventures also came from international investors (i.e.MarkaVIP raised $8 million from a UK based VC fund and a U.S.-based funds; Choozon raised $4.5million from a consortium of local and global VCs and angels). Another global player to enter the sector in2011 was Cisco, which announced a $10 million commitment for local funds to invest in innovativeJordanian technology ventures.

For what concerns Lebanon, during 2011 the nascent VC industry grew as a new fund, Abraaj’sCapital’s $50 million targeting small- and mid-cap Lebanese companies, the fund closed its first investmentin Nymgo, a VoIP company based out of Beirut. Among the most active existing are Berytech Fund andMEVP whose portfolios have reached 10 and 8 companies respectively. While Berytech Fund has investedexclusively in Lebanon-based technology companies, MEVP has diversified its commitments acrosssectors and countries in the MENA region.

As regards the Maghreb area, Morocco and Tunisia have emerging domestic VC and PE industries thathave begun to attract international investors, particularly from Europe. Funds domiciled in the Maghrebraised approximately $746 million between2006 to 2011. Approximately half of this was frominternational, mostly European, investors. Algeria and Libya, both economies historically dominated bystate-owned oil and gas sectors, substantially lag behind their two Maghrebi neighbors in development ofprivate, growth-oriented entrepreneurship. These countries have yet to develop advantageous legalframeworks for venture type investment, and lack well-functioning financial and capital markets.

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SECTION IV – HIGHLIGHTS

Promoting investment in ICT requires a suitable, fertile business environment and sound knowledge ofthe ICT ecosystem.

Investors seem to place broadband connectivity and resilient energy networks first, followed closely bystrong rule of law and IP enforcement. However, with the evolution of cloud computing, legal certaintyon key areas such as cybersecurity and data protection is expected to become more and more important.

Venture capital and equity financing in general require a mature financial market: this can be achievedthrough the setting up of dedicated stock exchanges, although these platforms tend to be very volatileand incorporate fluctuations that are not ICT-specific. To the contrary, IP financial markets can becomea key accelerator of ICT investment by providing platforms for exchanging information on innovativenew ventures and business opportunities, as well as complex financial transactions that help younginnovative companies (e.g. patent sale and lease-back, or securitization).

Developing countries have often focused on venture capital to boost investment in ICT: however,without adequate attention to absorptive capacity (e.g. investments in skills and education), suchinvestment is not likely to suffice for an effective investment promotion strategy in ICT.

Arab states seem to be very attentive to venture capital, with many funds being launched: however, ruleof law and broadband infrastructure should be improved to attract more capital to the benefit of localentrepreneurs. Also, IP financial markets could be developed alongside stock exchanges to enabletrading of technology and, consequently, more targeted and dynamic investment in ICT.

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V. KEY ACTIONS TO PROMOTE ICT INVESTMENT AND INNOVATION FORGROWTH IN THE ARAB REGION

The past sections have helped us understand the key strengths and weaknesses of the Arab region forwhat concerns the ICT sector and its possible promotion, which appears to promise important benefits forthe region itself.

Major strengths are found in the well-developed capital markets and favorable fiscal environment insome Arab states. These are rarely found conditions in emerging economies and should be considered as akey starting point for developing an ICT strategy for the region. That said, weaknesses are still found interms of basic infrastructure, skills, IP legislation and overall governance. Below, we list a number ofactions that will boost ICT innovation and investment in the Arab region.

1. Government commitment: put ICT at the core of a clear, long-term smart, sustainableand inclusive growth strategy

Promoting a competitive ICT sector capable of contributing to the social, economic, and environmentalobjectives of Arab countries, requires not only crafting national ICT strategies, but rather ICT strategiesthat are integral parts of comprehensive national development strategies. This notion is rightly emphasizedby the Tunis Agenda for the Information Society of the WSIS in 2005, which encourages countries toincorporate ICT into their national development plans and, in the particular case of lower incomeeconomies, to integrate national e-strategies into their poverty reduction plans. Likewise, OECD has alwaysput government commitment and a long-term vision as the essential preconditions of any regulatory reformagenda.

Due to the central role the information and telecommunication goods and services play in moderneconomies, it is incumbent upon Arab countries to declare the ICT sector a strategic sector and designate ita public policy priority. The region has been striving for years to diversify its economic activities, boostproductivity and create job opportunities for the millions of new entrants to the labor force in countries thatare generally characterized by relatively young populations. Promoting the ICT sector will helpgovernments achieve development goals and will lay the foundation for the establishment of knowledgeeconomies and information societies in Arab countries.

2. Adopt a bottom-up, holistic, “double ecosystem” view of ICT innovation

As observed in Section II above, both innovation and ICT are ecosystems, i.e. environments that requirethat all actors and basic ingredients are in place before ultimate positive results can be seen. Accordingly,focusing on only one component (e.g. venture capital) won't result in the emergence of a sustainable ICTsector. To the contrary, ICT innovation requires that the knowledge triangle of education, research andindustry blossoms and spins under the aegis of smart government. The double ecosystem view ofinnovation in ICT requires a number of simultaneous actions and cross-fertilization of existing bits of acomplex puzzle. The best possible way to approach ICT innovation policy is a “three-layer” one, with keyroles being reserved for government mostly in the bottom and the top layers. More specifically:

At the bottom layer, governments should mostly focus on tangible and intangible infrastructure,education, and the drafting of simple, innovation-friendly legal rules;

In the middle layer, governments should merely act as facilitators, by providing platforms whereuniversity, research and business can engage in fruitful exchanges;

At the top layer, governments should (i) demand innovative products; (ii) launch a limited set ofpartnerships to promote the development of solutions to grand societal challenges for which there islimited market development; or (iii) steer and coordinate smart cities, smart regions or clusterprojects. Demand-side innovation policy entails i.a. the strategic use of public procurement tostimulate innovation. Partnerships for innovation should look at the long-run and should be shaped asmulti-stakeholder, public-private ventures aimed at developing new standards and/or creating new

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knowledge on how to solve emerging societal challenges (e.g. sustainable development, or ageingsociety).

3. Enhance the legal and regulatory frameworks

With regard to the central issue of establishing an adequate regulatory framework and best practices todevelop the ICT sector, efforts can progress on both regional and national fronts. The aim is to organize thesector and undertake the proper steps towards liberalizing it in a way that does not create private sectormonopolies, instead of the current public sector monopolies, and at the same time preserve the interests ofstakeholders, and in particular consumers. In this regard, the TFFM Report195 identifies the key regulatoryimperatives necessary to promote competition and market-based development as governments establishpolicies for strong and effective regulatory mechanisms. These imperatives are licensing procedures,competition regulation, interconnection regulation, and reducing costs and risks196. But global experiencesshow that effective management of competition is far from being an easy task. UNCTAD maintains thatopening markets and reducing restrictions on licenses are only the first steps since establishing effectivelycompetitive markets needs managing competition in view of the complexity and size as the market growsdramatically .197

In the Arab region, one main impediment to establishing such an effective regulatory framework andindependent regulators lies in the lack of adequate expertise in the embryonic and swiftly changing ICTindustry. Highlighting this issue, UNECE suggests that the challenge for effective regulatory institutions isacquiring adequate expertise and resources, which developing countries may find difficult to support,concluding that to address such barriers, there is a need for capacity building including training andexchange programs with developed nation regulatory institutions198.

One useful early step made by Arab countries to heed international recommendations has been theestablishment in 2003 of the Arab Network of Regulators (AREGNET). This network aims at developingthe ICT sector, preparing general policies and common regulatory guidelines, synchronizing regulatorypractices, and working on legislative convergence among Arab countries. Such regional initiatives shouldplay more active roles in setting the stage for greater ICT participation in the region. But in the MiddleEast, slow deregulation of the telecoms markets hinders the strong development of ICT and the operators'geographic area of focus in the region is mainly their home market, as the regulatory environment does notfacilitate cross-border deployments199. This clearly challenges efforts towards regional connectivity andintegration.

Summing up the steps the Arab governments need to take to develop their ICT sectors, the ITUrecommends taking measures to ensure a transparent and predictable regulatory environment that fostersinvestment, increase competition in both fixed wired and wireless technologies, expand the roll-out ofbroadband networks, particularly to rural and remote areas, and formulate an ICT plan or strategy toachieve concrete targets200.

195 Task Force on Financial Mechanisms, Tunis Meeting 2005.


197 ibid, p:5.

198 UNECE (2007). “Information and Communication Technology Policy and Legal Issues for Central Asia”. p:3.http://www.unece.org/fileadmin/DAM/ceci/publications/ict.pdf

199 Delta (2011). "ICT in emerging market ".p:13. http://www.deltapartnersgroup.com/asset/download/612/true/ICT.pdf


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4. Develop the financial system, sources of funding of start-ups, and the proper financing modesto encourage investment in ICT activities

A number of arrangements and alternative schemes can be utilized to develop sources of funding forICT start-ups, to establish proper financing modes and to encourage investment in ICT activities. Theseinclude equity financing, debt financing, government support programs, and support from regional andinternational specialized organizations.

In the European Union, moving towards innovation-based sustainable growth through R&D andinnovation is at the heart of the region’s response to globalization. The EU established five key fundingopportunities to support research and innovation, including the Research Framework Program and theCompetitiveness and Innovation Framework Program, now termed “COSME” under the new Horizon2020framework 2014-2020201. In order to promote investment and innovation in the ICT sector in the Arabregion, regional programs similar to those adopted in the EU should prove useful, to complement nationalschemes. In particular, establishing regional funds to support R&D and innovation in the ICT sector shouldcontribute significantly to meeting the major economic and social regional priorities, including innovation-based sustainable growth, creating employment opportunities for new entrants to the labor force, andbridging the digital gap.

As implied in earlier sections, bank lending, venture capital and private equity have not developedenough and must assume a greater role if this sector is to rise to its potential. On their part, banks must beencouraged to be less risk averse with regard to lending start-ups and to offer entrepreneurial lendingfacilities. In particular, the special schemes to increase lending are to be broadened in scope and scale,including exemptions on reserve requirements, credit subsidies and partial credit guarantee schemes.

In turn, equity financing including seed funds, angel and VC funds, and primary and secondary capitalmarkets can be developed further. In the past few years, modest attempts have been made to establishpublic and private business angel networks and "super angels" in the region, along with attempts to betterconnect the Arab region with international ICT innovation centers. These networks include the ArabBusiness Angels Network (ABAN), the Lebanese Business Angels Network (LBA), and the Qatar BusinessAngel Network. Another useful initiative was the establishing of TechWadi, a non-profit organization thatworks with regional and international organizations to empower entrepreneurs and aims at building bridgesbetween Silicon Valley and the Arab world. Such experiences need more support and portend a new era ofICT development provided that the region strengthens the regulatory environment, enacts conducivecommercial and investment laws, better enforce court rulings, encourage patent registration, and protectintellectual property rights (IPR).

The Arab countries are also encouraged to make use of available funding from internationalorganizations. The region can benefit from technical as well as financial support offered by suchinstitutions as the International Finance Corporation (IFC), the private sector arm of the World Bank, andvarious related European programmes. For example, the Deauville Partnership represents such a venue andopportunity for the region. According to the World Bank, Deauville partners could offer technicalassistance and experiences to support SMEs and innovation strategies, and to further ICT development 202.

5. Ensure the deployment of physical infrastructure

The development of vibrant ICT sectors calls for putting in place the indispensable backbone of suchsectors, including a world-class physical infrastructure. This includes the availability of resilient energynetworks, good transport and logistics and most importantly a high-speed broadband connectivity. In manycountries in the region, as established previously in this report, there is relatively high cost of access to ICTphysical infrastructure to users, including hardware, software and services. This creates a barrier to both thesupply and demand sides of developing the ICT sector. The region might consider some measures to tackle

201 EU (2012). "New Practical Guide to EU funding opportunities for Research and Innovation". European Union .p:1.ftp://ftp.cordis.europa.eu/pub/fp7/docs/practical-guide-rev3_en.pdf


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these bottlenecks such as facilitating trade through lowering or eliminating trade barriers on ICT hardwareand software and encouraging foreign investment to develop the physical infrastructure.

The availability of infrastructure is so important that some emerging countries (e.g. Brazil) and, in thepast even the Unites States have decided to suspend or repeal the application of access policy in telecomsregulation to prioritize investment, and thus dynamic efficiency rather than static efficiency. Werecommend that this approach is at least considered in the Arab region, if it can lead to faster roll out ofbroadband connections. Infrastructure can of course include both fixed (DSL, FTTx) and wireless (3G, 4G,WiMax, satellite) technologies. In the latter case, which we warmly recommend, spectrum policy should bedesigned in a way that leaves sufficient spectrum for wireless broadband applications, especially in the so-called upper UHF band (700Mhz to 860Mhz), which possesses the right combination of coverage andcapacity that can bring high speed Internet at reasonable cost to less densely populated areas. Also, the“Ku” and “Ka” bands are needed for new-generation satellite technologies to bring good-speed, goodinteractivity Internet connection to very remote areas, which are common in the Arab region. According toindustry experts, Arab countries urgently need to deliver adequate mobile broadband spectrum in line withinternationally and regionally harmonized spectrum bands to foster further growth in investment,innovation and productivity.203

That said, once infrastructure is in place the government has to ensure that it is affordable, and thatbroadband uptake is boosted by the diffusion of digital skills among the population (see nextrecommendation).

6. Invest in education and skills

Two of the main barriers to the development of a lucrative ICT sector and the achievement of a trueknowledge economy in the Arab region area widespread lack of ICT skills in the general population,particularly among females, the elderly and transient laborers, and the high cost of buying or rentingcomputers. In this context, the World Bank suggests that to mitigate the challenges facing advancing theirICT sectors, countries can connect their technology teams with technology firms in developed markets. Inthis model technology companies in developed countries gain access to high-quality talent in developingcountries at low initial cost and grow their businesses, and in turn participate in funding and providingincubation support to early-stage startups.204 The dearth of human capital and technical skills casts doubton the ability of some countries in the region to achieve their ICT objectives. For instance, analysts havequestioned how successful Abu Dhabi will be in seeking to set up high-tech industries in the emirate, givenits finite pool of human resources.205

The region is thus encouraged to revamp its education systems and to put more emphasis on vocationaltraining programs in high-tech and ICT related curricula. The launch of programs with regional focuswould provide a significant opportunity for jobs in the region and elsewhere suffice it to recall that thereare an estimated 1.7 million jobs unfilled every year in the cloud computing sector globally, and that theEU estimates that there are 900,000 jobs unfilled in the digital environment only in Europe. Investing inskills would thus mean at once gaining labor productivity, attracting foreign direct investment, unleashingthe socio-economic potential of ICT, and even exporting talents abroad.

7. Promote demand-side innovation policy

As shown by the example of fast-emerging economies such as Turkey, e-Government services and pre-commercial procurement can prove essential for the development of a country’s ICT sector. Developinginnovative SBIR (small business innovation research) services that can locate and fund young leading

203 http://gulfnews.com/business/technology/arab-states-need-more-mobile-broadband-spectrum-allocation-1.1145632

204 World Bank (2012a). “ICT for Greater Development Impact”.p:19.http://siteresources.worldbank.org/EXTINFORMATIONANDCOMMUNICATIONANDTECHNOLOGIES/Resources/WBG_ICT_Strategy-2012.pdf

205 http://www.ft.com/intl/cms/s/0/ebe6f448-6ddd-11df-b5c9-00144feabdc0.html#axzz2KEgV4hX3

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SMEs, possibly in combination with sophisticated IP financial markets, can be decisive to boost the localICT sector. Accordingly, governments should realize that one of the best ways to stimulate innovation inICT is to demand innovative ICT solutions. Once broadband infrastructure is reasonably available to all thepopulation, policymakers should consider launching e-Government initiatives and migrating to the use ofcloud computing, which in turn would lead them to achieve significant savings in the use of IT services,and stimulate the development of cloud services at the local level through pre-commercial procurement(see recommendation below).

8. Leapfrog in technology, and harness the potential of the cloud

Emerging and developing economies today have a great opportunity: as several generations oftechnologies have been used in developed countries, they can decide to leapfrog and boost an advancedICT ecosystem without experiencing the same, lengthy transition of other countries. For example, asalready recalled, developing countries (e.g. Malaysia, Indonesia, Colombia) have managed to launch 3Gservices in telecommunications, and even 4G (or Long Term Evolution) technologies before moredeveloped EU member states (e.g. Italy, Spain, France). Arab states should consider doing the same, basedon the existence of very advanced, innovative multinationals (e.g. Orange) and local players in theinfrastructure layer, often with regional coverage (e.g. Orascom, Zain).

Also at higher layers of the ICT ecosystem, leapfrogging is possible especially if governments stimulatethe development of local applications that are compatible with existing dominant platforms (Android, iOS,Windows) and possibly included in emerging cloud architectures (Microsoft, Amazon, Google, Cisco, Delletc.). Partnering with emerging cloud giants to achieve solutions that fit the needs of local SMEs is one ofthe possible avenues of future government action in this domain. Cloud solutions can lead at once tosignificant savings in IT costs for SMEs (up to -70%), global scalability of software solutions, significantenvironmental benefits.

In those Arab countries in which the cost of energy is not prohibitive and energy and telecom networksare sufficiently resilient, governments might also consider attracting investment in data storage centers andcloud storage. Multinationals wishing to relocate their activities from developed to developing andemerging countries might find it convenient to build data centers in countries with access to bandwidth,good data protection, reliable governments, low-cost qualified labor and a well-developed financial market.Some Arab countries fit this definition.

9. Smart specialization: choose the layers of the ICT ecosystem in which investment should be stimulated

Our analysis of innovation in the ICT sector at the global level and in the Arab region suggests thatthere are ample margins for policy reforms that target social and economic development. Promotinginnovation becomes an imperative for any region in the world as this sector is widely recognized as a keydeterminant of productivity and growth, and as a key ingredient in enabling technologies of the future, suchas cloud computing (which promises significant savings for SMEs), nanotech, biotech, smart cities andsmart grids, e-Health applications, remote monitoring applications, machine-to-machine (M2M)communication, 3D printing, etc. Just as wireless communications have revolutionized trade in manydeveloping countries and contributed extensively to productivity across the globe, new ICT-basedtechnologies will become a key component of new markets, products and services.

Against this background, an innovation strategy for the Arab region cannot be developed by looking atall sectors of ICT, nor at any textbook or international report on ICT. Innovation strategies must be basedon local specificities and strengths. In this respect, the scientific literature has focused on the concept of“smart specialization”, which leads to developing innovation strategies that are tailored on the peculiaritiesof national markets.

Smart specialization is essentially a bottom-up policy as it is based on the need to analyze a region’sunique features, actors and assets and thus the potential region’s competitive advantages before decidinghow to allocate funds and mobilize stakeholders to develop a coordinated, future-proof vision of regionalexcellence. In addition, implementation of the smart specialization approach must start by establishinga multi-level-governance structure, securing the seamless coordination from the national, regional and locallevels. At the EU level, a “Regional Innovation Strategy for Smart Specialization” (RIS3) has beendeveloped based on the so-called “4C”, i.e.:

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Competitive advantage: match R&I potential with business needs and capacities & develop cross-cutting links between sectors; adoption of technologies (cutting-edge/tested) to for specializeddiversification of sectors;

Choices (tough ones): select a small number of priorities on the basis of specialization & integration ininternational value chains;

Critical mass of resources & talent: promote cooperation between regions to avoid duplication andfragmentation;

Collaborative Leadership: involve key stakeholders from academia, businesses, public administrationsand civil society ("quadruple helix") for efficient innovation systems & synergies between fundinginstruments (EU, national, regional).

Putting the RIS3 strategy in practice requires the implementation of the following key steps:

Analyzing the national/regional context and potential for innovation;

Ensuring the presence of a sound and inclusive governance structure;

Developing a shared vision about the future of the country/region;

Keeping the number of priorities for development to a minimum;

Creating suitable policy mixes;

Bringing into play monitoring and evaluation mechanisms.

Based on these insights, it becomes essential to identify the relative strengths of the Arab countries and,accordingly, develop an innovation strategy that fits such features. A recent report by the World Bank206

(2012b) formulated the following strategy to boost IT-based innovation and investment at the local level:

Clustering IT-based businesses (for content and applications) to link SMEs and local researchinstitutions to economic activities. In Europe the clustering of SMEs and the creation of sub-clustersof creative industries through the DigiBIC network have helped start-ups and SMEs exploit newtechnologies and catch market opportunities through cooperation with leading research institutions.

Leveraging the lower value-chain segments of the IT-based service industry to incubatedecentralized SMEs, following Kenya (pursuing ―impact sourcing, especially in rural areas), India(rural business process outsourcing), and Cambodia (digitizing government data in rural centers).

Creating capacity-building intermediaries to help entrepreneurs turn business ideas into reality andto modernize and improve companies‘ competitiveness through ICTs. New models that demonstrateand prototype activities—borrowing western intellectual property rights for local applicationdevelopment—can be explored with international industry leaders and specific initiatives such asMobile Apps Labs established by infoDev, the World Bank Group‘s multidonor partnership programand the government of Finland.

Creating open innovation forums or ―Living Labs – to engage start-ups and small firms incooperation with other innovation actors to evaluate concepts and develop prototypes in real-lifesettings with real users. Examples are available in Europe, where Living Labs are strengthening theinnovation chain from ideas to incubation and engaging local SMEs to develop local ICT services.The model is also becoming popular in China, Latin America, and Africa.

10. Seek economies of scale, preferably at the regional level

However, succeeding in this effort requires a holistic approach which rests on regional collective effortsand a genuine conviction that promoting ICT is not purely a technical issue, and perhaps not even a mere

206 World Bank (2012). "From Political to Economic Awakening in the Arab World: The Path of Economic Integration". May2012.

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county-specific concern. As such, it is recommended that a region-wide ICT strategy be crafted based on asequence of specific steps:

o Identifying region-wide focus ICT sectors as well as subsectors to be developed;

o Examining the comparative advantage of developing various ICT products across countries in theregion;

o Formulating resource-based strategies based on the comparative advantages and distinctivecompetencies of individual countries;

o Provision of ICT value chain activities as per countries' comparative advantage.

Figure 36. Elements of a regional ICT strategy

This proposed model offers many advantages and poses many challenges as well, but the enormouspotential benefits of the synergy precipitated by the collective efforts outweigh the costs incurred andjustify grappling with the challenges.

First of all, the region does not encompass homogeneous countries but it rather consists of countrieswith differing human, financial, and natural resources. While some countries are endowed with natural andfinancial wealth, others boast good educational systems and skilled labor forces, along with highmanagerial and marketing skills. Further, the region's countries range from relatively large markets of 85million inhabitants (e.g. Egypt) to others of 1 million with limited land size (e.g., Bahrain).Consequently, aregional approach would enable the use of economies of scale and thereby, increase the overall competitiveadvantage of the regions' ICT goods and services. It also allows the region to make better use ofappropriate selected strategies, namely, low-cost provider, best-cost provider, and a broad differentiationstrategy, with the latter possibly best suited to serve the Arab markets, while the first two strategies couldbe used to target foreign markets.

In addition, such a regional approach facilitates ICT regional trade and expanding markets, which is keyto using demand side as well as supply side forces to promote the ICT sector. Demand-pull ICTdevelopment requires, for instance, stimulating demand and spending on ICT products through suchactivities as enhancing learning with technology, digital literacy, and other applications such as e-government,e-business, and expanding ICT services to traditionally excluded rural areas.

On the other hand, the supply side aspect of developing the ICT sector requires building the ICTresearch infrastructure, including physical infrastructure, increasing R&D spending, encouraging ICTstartups and SMEs, promoting incubators and ICT hubs, and preparing skilled scientists, engineers, andtechnicians.

It is also essential to note that monitoring and evaluating progress in executing the adopted strategiesand the extent to which the region and its countries have succeeded in achieving the ICT priorities andobjectives, needs developing benchmarks and ICT indicators. Thus, to enhance the process of assessing theimpact of the ICT sector on the Arab economies and the level of progress in promoting the ICT sectors, it isincumbent upon the governments, private operators, and international institutions to (a) constantly improvethe methodologies employed in this regard and (b) overcome the serious issue of data sparsity andinternational statistical standards needed for such comparative assessments, as recognized by the GenevaPlan of Action in the WSIS 2003 meeting, and in line with the Partnership on Measuring ICT forDevelopment which was launched at UNCTAD in June 2004.

Identify ICTpriorities

Examinecomparativeadvantagesof countries

Formulateresource-

basedstrategies

ICT Valuechain

activities

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But UNCTAD points out that illustrating impacts of ICT statistically is far from simple for severalreasons, including (a) the multiplicity of ICT with varying impacts in different contexts and countries, (b)the indirect impact of some ICT, and (3) the difficulty to establish causality between ICT, on the one hand,and the other social, economic, or environmental dependent variables, on the other hand207.

Nevertheless, this proposed regional model does not preclude country-level ICT development efforts asthese two approaches are by no means mutually exclusive. On the contrary, they would feed into andstrengthen one another. While national ICT projects stand to benefit from financial backing of regional ICTfunds and seek technical assistance from regional incubators, region-wide projects could benefit fromindividual country experiences and diverse resources.

207 UNCTAD (2011). "Measuring the Impacts of Information and Communication Technology for Development", UNCTADCurrent Studies on Science, Technology, and Innovation, Nº3. p:2.

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