As Saudi Arabia and its Gulf neighbors race to diversify their economies away from oil, the path to building true innovation ecosystems remains complex and uneven. In this conversation, Josh Lerner, the Jacob H. Schiff Professor at Harvard Business School and Co-Director of the HBS Private Capital Project, cautions that while Vision 2030’s goals are laudable, “these transformations have taken frequently a long time—one must be patient, and expect ups and downs along the route.” Josh has been recognized as among the 40 most influential economists worldwide by ScholarGPS and research.com.
Saudi Arabia’s Vision 2030 aims to diversify the economy away from oil by fostering innovation, entrepreneurship, and private-sector growth. From your research on how innovation ecosystems evolve, do you think Saudi Arabia is on the right economic trajectory to accomplish this shift?
Saudi Arabia has formulated some very ambitious goals to transform its economy and society. They are to be applauded for choosing this ambitious course of action. My one caution is that these transformations frequently take a long time, so one must be patient and expect that there will be ups and downs along the route.
Globally, successful diversification has often required deep institutional reforms in education, regulation, and capital markets. What lessons could the major GCC economies draw from such successful examples?
One of the key lessons is that giving money to venture capitalists and entrepreneurs is not enough. One of the key responsibilities of government is to ensure that entrepreneurship itself is an attractive option. Often, in their eagerness to get to the “fun stuff” of handing out money, public leaders neglect the importance of setting the table or creating a favorable environment. Such efforts are likely to have several dimensions. Ensuring that creative ideas can move easily from universities and government laboratories is critically important. But many entrepreneurs come not from academia but rather from corporate positions, and studies have documented that the attractiveness of entrepreneurial activity for these individuals is very sensitive to tax policy. Also important is ensuring that the law allows firms to enter into the needed contracts—for instance, with a potential financier or a source of technology—and that these contracts can be enforced. Finally, education is likely to be critical. Ensuring that business and technology students are exposed to entrepreneurship classes will allow them to make more informed decisions, and creating training opportunities in entrepreneurship for mid-career professionals is also likely to pay dividends.
In Boulevard of Broken Dreams, you argue that while governments can catalyze entrepreneurship, they often stumble due to poor design and limited understanding of how markets evolve. What lessons from your research are most relevant for the Gulf policymakers?
One frequently encountered problem is the creation of programs that ignore the market’s dictates. Far too often, government officials have sought to encourage funding in industries or geographic regions where private interest simply was not there. Whether driven by political considerations or hubris, the result has been wasted resources. Effective programs address this problem by demanding that credible private-sector players provide matching funds.
Many Gulf governments are trying to move from being consumers of technology to producers of innovation. What structural changes—economic or institutional—are needed to make that shift real?
One of the most important is developing the academic foundation. Cutting-edge innovation is associated with strong research laboratories. This is not easy and takes time, but is critical.
Across the GCC, early-stage VC is thriving, but growth-stage funding remains critically underdeveloped, with a reported $20 billion shortfall. From your research into public venture initiatives, what mechanisms have worked elsewhere to address such “missing middle” problems—and could those be adapted to Gulf markets?
One real worry is that incubators and early-stage funds can lead to a “bridge to nowhere”: there are no follow-on funds to take startups to the next level. This requires thoughtful policies, including the matching funds discussed above and the need to involve overseas venture investors.
The GCC’s largest sovereign wealth funds—PIF, ADIA, Mubadala, QIA—still invest mostly abroad. How might policymakers incentivize sovereign funds to support domestic or regional VC without undermining their global diversification goals?
On the one hand, it is understandable to keep sovereign funds focused on getting great returns: there are many cautionary tales where governments have blended economic development with investing and not achieved either good social or financial returns. At the same time, government funds, applied in a wise and thoughtful manner, can make a considerable difference in encouraging economic development.
You’ve examined the evolution of VC in China and Singapore. Are there parallels the GCC can draw from Asian state-led innovation models, or are there structural differences that make those examples less replicable?
Yes, the Gulf is different from Asia, without the huge consumer base that India and China enjoy. But I think there are many lessons from successful policies in the above nations that the Gulf should emulate, and will be very beneficial.
Innovation is often described as a cultural process as much as an economic one. How can Gulf societies cultivate greater tolerance for risk, experimentation, and even failure—qualities that drive innovation globally?
There is no easy answer here, I am afraid. But I am convinced that this is an area where “success breeds success”: early progress can go a long way to changing attitudes.
