Journal Essay

Saudi Arabia: From Oil Kingdom to Knowledge-Based Economy

Mohammad S. Khorsheed

Fall 2015, Volume XXII, Number 3

Professor Khorsheed is the former GE Innovation Officer in Saudi Arabia and the Secretary General of the Steering Committee for Saudi Innovation Ecosystem (

A large proportion of economic growth is accounted for by knowledge-driven technological change and innovation. Irrespective of whether innovation is related to products or processes, whether it is abrupt or incremental in nature, or whether it is technological or related to business models and organizational structures, it improves value for the consumer, the producer or the society at large. It is a nonlinear process involving complex interactions among a multitude of organizations.

A society's capacity for innovation, as well as its ability to sustain growth, depends to a large extent on the strengths of and interactions among many institutions and the effectiveness of a variety of policies. The phrases "national innovation ecosystem" (NIE) and "national innovation system" (NIS) have come into use to characterize the relationship among people, enterprises and institutions that guides the flow of technology and information within a country.1 Both include elements such as human resources, research and development (R&D), knowledge networks that enable rapid communication and collaboration among technical professionals, an environment for entrepreneurship, a policy environment, market and financial conditions, and infrastructure. A serious weakness in any element can pose a significant barrier to innovation.

Different schools of thought have emerged in the study of NIEs. Frameworks implemented by the governments of Taiwan and Korea have led to improvements in innovation capacities.2 The Korean model is based on the development of infrastructure, intellectual capital, incentives and commercialization. It encourages various sectors by use of incentives such as an intellectual property (IP) information center (an IP bank), IP rights protection, a procurement system, standardization and quality control, and the promotion of the quality of industrial products, standards, measurements, inspection and testing. This motivates each sector to innovate and out-compete the others and thus propel the economy further.3 The Australian government also continues to invest in infrastructure in order to promote skills development through teamwork, problem-solving, communication, prioritizing and managing innovation, and the development of fluency in the languages needed to enhance global competitiveness.4 The Finnish NIE process also considers infrastructure and intellectual-capital development as essential building blocks.5

The innovation capacity of both China and India has contributed to their economic growth in recent years.6 Their enhanced innovation capacity was primarily the outcome of heavy investments in R&D and personnel. Both governments have transformed their NIEs by linking the science and business sectors, incentivizing innovation activities, and balancing the import of technology with indigenous R&D efforts. The same may be said about Japan,7 where relationships among R&D entities, industry and other sectors play an important role in transforming the NIE there. Other Southeast Asian countries formulated their NIE frameworks to enable developing economies to pursue an industrial-development strategy.8 Both industrial policy and value-enhancing rents are playing an important role in the development of indigenous technology. Thanks to the industrial-development strategy in those countries, indigenous technologies benefit from linkages and technological spillovers, as is evident in the newly industrialized economies of Asia.

Some nations have developed customized NIE structures designed to address major challenges related to science and technology development in their states. These practical models of NIE frameworks often exhibit iterative or radical changes that illustrate how an NIE framework evolves to meet needs over time.9 One of those models is the "7i" (seven eyes) framework, which identifies seven factors, all beginning with the letter I, that contribute to improving a nation's innovative capacity: infrastructure, intellectual capital, interaction, integrity, interactions, incentives and institutions.10 These factors facilitate movement up the innovation value chain. The 7i framework is surrounded by various agents, including government, enterprises, entrepreneurs, associations, financiers, knowledge-transfer centers, social networks and research hubs. The placement of the seven Is at the center of these organizations points to implicitly formed interactions, connections and feedback loops. Another NIE framework model is open innovation.11 This reinforces NIE by balancing the internal and external elements involved in the ability to acquire and sell knowledge and intellectual property. Open innovation enables a firm to benefit from various components within NIE — research centers, universities, technology-based firms, corporate entrepreneurship and intellectual-property management.


For four decades, a question has often been posed: what would be the impact of the sudden deluge of wealth for the future of one of the most underpopulated and underdeveloped regions in the world?12 Saudi Arabia represents a rare case in which capital formation does not impose any constraint on development. The kingdom has focused on technology transfer to compensate for a paucity of indigenous technological capabilities. Three main factors are involved: manpower, expenditures and — most importantly — a well-conceived policy for carrying out scientific and technological activities. The five-year national development plans the Saudi government inaugurated in the mid-1970s (eight of them so far) have been an attempt to orchestrate the development rhythm inside the country, retaining its prominence as a modern state without losing its leadership position as the heart of the Islamic world.

Since mid-2003, Saudi Arabia has experienced a strong economic performance, due primarily to a combination of high oil prices, increased oil production and oil-based export earnings. Increasing demand for oil, paired with structural reforms and stable macroeconomic policy making, has enabled a sustained growth momentum in the last decade. However, despite some attempts at economic diversification, the Saudi economy remains heavily dependent on oil and petroleum-related industries including petrochemicals and petroleum refining.


Economic Conditions

Saudi Arabia's population of more than 27 million represents about two-thirds of the Gulf Cooperation Council (GCC). Its gross domestic product (GDP), which exceeded $727 billion with an annual growth rate of 8.63 percent in 2012, is dominated by the oil sector, accounting for 85 percent of GDP.13 Supported by higher oil and gas prices (despite reductions in output), government and private investment and consumption are driving overall economic growth. In order to defend its most significant resource, Saudi Arabia increased its oil-production capacity to more than 11 million barrels per day in 2011.14

Large parastatal corporations still dominate the Saudi economy: Saudi Aramco, which has a monopoly on upstream oil development and controls 98 percent of the country's oil reserves, and Saudi Basic Industries Corporation (SABIC), the world's seventh-largest petrochemical producer and the largest non-oil company in the Middle East. SABIC has been leading the nation's efforts to diversify into the manufacturing of petrochemicals, plastics, fertilizers and metals (mostly steel), all of which are dependent on oil or gas feedstocks or are energy intensive.

Most other manufacturing in Saudi Arabia consists of the production, assembly or packaging of consumer products for the domestic market. In the Eastern Province, an industry cluster around light manufacturing, machine tools and assembly has emerged, in addition to the more established industry cluster related to chemicals, petrochemicals and fertilizers. In the Al Baha, Jazzan and Tabouk areas, food processing, packaging and other agriculture-related sectors are gaining ground. The Qaseem region has substantial industrial activity in building materials, foodstuffs, chemicals, plastics, fabrics, smelting and electro-mechanical equipment manufacturing. The Riyadh region has a solid industrial base in value-added manufacturing, assembly and chemicals, as well as service sectors such as information technology, healthcare and financial services. The Makkah (Mecca) region includes the Muslim holy places, in addition to King Abdullah Economic City (KAEC) and King Abdullah University for Science and Technology (KAUST) — an entrepreneurial hub for the whole country. The most populated region in Saudi Arabia, Makkah provides a huge demand for goods and services — light industry, healthcare technology, Islamic tourism and transportation. Generally speaking, small and medium-sized enterprises carry out the majority of manufacturing in the country. Many of these facilities are located in one of several industrial parks. Despite efforts by the government to spread economic activity around, development performance has been uneven among the provinces.

The vast majority of production-line workers are expatriates, while at the same time, Saudi Arabia faces serious unemployment, particularly among younger people (6 percent for males, 35 percent for females).15 The nation also has one of the world's highest population growth rates, around 2.9 percent annually, which necessitates much higher levels of employment creation.

Since the recovery of oil prices in the late 1990s, economic reform has steadily progressed, paving the way for Saudi Arabia's accession to the World Trade Organization (WTO) in 2005. The World Economic Forum's Global Competitiveness Index (GCI) included Saudi Arabia for the first time in 2007. Saudi Arabia's ranking of 35th made it the highest new entrant to the index. In addition, Saudi Arabia entered the index as one of the highest-ranked countries in the region. Its ranking in the World Bank and International Finance Corporation's Doing Business 2013 report jumped from 67th in 2004 to 22nd in 2012 out of 185 countries. Saudi Arabia was the top-ranked country in the Middle East and North Africa in 2012.


Innovation and Development

As the home of the two holy mosques, Saudi Arabia has a unique advantage in the Islamic world that translates into economic opportunities: the Hajj and Umrah. Both are pilgrimages to Mecca performed by Muslims at least once in their lifetimes. The Hajj occurs from the eighth to the thirteenth of Dhu al-Hijjah, the twelfth and last month of the Islamic calendar; Umrah can be undertaken at any time of the year. In 2012, more than 3 million pilgrims performed the Hajj and more than 6 million Umrah. These figures illustrate the importance of investment in hard and soft infrastructure — security, crowd control and public health — in order to provide pilgrims with appropriate services.

Thanks to its extensive capital resources, the country has made substantial investments in roads, air and sea ports, telecommunications, schools and hospitals, providing some of the most modern infrastructure available in the region. There are substantial reserves in its banking system, a history of government budget surpluses, and abundant domestic and offshore investments by institutions and individuals. Some of the key economic sectors in the country are leaders in the global arena and have attracted world-class companies and natural cluster formations around them. In addition, with a young population, Saudi Arabia has a continuously expanding labor pool that, if properly activated, could create sustained economic growth for the country.

The most serious challenges facing Saudi Arabia in its efforts to stimulate innovation lie in its human resources. Despite enormous gains in education over the past three decades, a shortage of qualified people in science, technology and engineering is a major constraint on the development of innovation capacity and competitiveness. The number of science and engineering students has increased significantly, but graduates continue to be fewer than 1.0 per 1,000 people aged 20 to 34 — low when compared with most developed countries. In addition, employers generally agree that the quality of Saudi graduates' skill sets is a problem. Brain drain is also a major handicap; around 25 percent of graduates in science, medicine and engineering emigrate each year. Low student enrollment at secondary and tertiary levels and low public expenditures on education aggravate the human-resource situation.

Despite the oil boom and financial liquidity, Saudi Arabia offers limited specialized loan and risk capital to innovation-oriented companies. Saudi investors tend to be risk averse and less favorable towards extending funds to young technology-driven companies, which almost always have a high-risk profile. Banks and investors are currently geared to extending funds to companies in established sectors such as trade and consumer-goods, wholesaling and retailing.

Concerning national innovation performance, data on key indicators are scarce. For example, figures on employment in knowledge-intensive occupations are unavailable. R&D expenditures by private firms are not being monitored but are considered very low by international standards. R&D programs are limited largely to a handful of major companies. Until recently, institutions of higher education have focused solely on teaching; academic research has lacked momentum. Because of market failures related to knowledge creation and diffusion activities in the private sector, government spending on higher education and scientific research has been bolstered in the last few years. The country's leadership has committed itself to raising science and technology expenditures from below 0.2 percent of GDP in 2000 to 2.5 percent by 2020.


Opportunities and Challenges

An expanding spectrum of emerging opportunities, coupled with the aforementioned strengths of the Saudi economy, provides the country with the necessary impetus to build its innovation capacity and competitiveness. At the same time, a range of emerging challenges, coupled with the inherent weaknesses discussed earlier, dampens the interest of stakeholders in the innovation ecosystem. The rise of political instability in neighboring countries negatively impacts the flow of trade and people, though Saudi Arabia's 2005 accession to the WTO has paved the way for expanding access to new markets.

The rise of post-industrial India and China, as well as dynamic regions such as Dubai, has significantly raised the level of competition for Saudi enterprises, especially in the export market. Of course, these developments also present opportunities for Saudi Arabia to leapfrog stages of development. The emergence of a wider set of sources of innovation offers the country an expanded range of partnerships to bolster its own NIE.

The global economic slowdown and, more recently, the huge drop in oil prices pose major threats to Saudi Arabia's oil revenues in the near term. In addition, promising sources of technologies related to alternative energy threaten the sustenance of the economic boom Saudi Arabia has witnessed in the past few years. The country's private sector and universities still operate in silos when it comes to research and technology development. Aggressive global institutions of higher education and research lure the Saudi private sector to work with them rather than with local universities. On the other hand, local universities are developing their own technology plans without strategic inputs from industry.


Saudi Arabia's vision is to become an international leader in science and technology. In the near term, the country intends to establish an infrastructure of people, equipment, policies and institutions that will provide the foundation for growth. In the longer term, Saudi Arabia aspires to significantly increase investments in science and technology to become one of the leaders in the region and in Asia. Reaching these goals will require the participation of an increasing portion of the population and greater effectiveness of the country's institutions.

Saudi Arabia has the necessary resources to invest in people, infrastructure and R&D. It is essential, however, that these resources be targeted effectively to educate its population in math and science and train them to be researchers, innovators and technological leaders. The country must increase investment in R&D, strategically focus on the technical areas where it has the greatest chances of success, and fund ideas and people based on merit.


Conceptual Understanding of NIE

Stakeholders in Saudi Arabia's innovation ecosystem highlight other weaknesses that continue to hinder the country's progress towards a knowledge economy. For example, an outdated legal system with obsolete laws and poor enforcement of property rights cripples the country's growth momentum. Resistance to change, a shortage of women participating in economic activities, poor public attitudes toward science and engineering, a lack of awareness and interest among parents in children's education, and a lack of respect for accountability and transparency slow the country's transition into a knowledge-driven economy. On top of these weaknesses, abundant financial resources resulting from oil revenues and the recent real-estate boom have produced a resource curse, a form of the Dutch Disease that has had the combined effect of making the manufacturing sector less competitive, creating complacency among young Saudis and reducing the incentive to pursue technology and innovation.

A collaborative framework for innovation at the national level needs to be articulated. This framework must enable all relevant stakeholders to align their organization-level innovation plans with the activities of other participants in the ecosystem, identifying important leverage points, and enabling greater collaboration, coordination and achievement of organizational and national goals.

NIE provides the missing link between the various plans, policies and programs initiated by major constituents in Saudi Arabia, catalyzing flows of knowledge, technology and information across all stakeholders. This would transform Saudi Arabia into a global innovation hub.

A dynamic NIE draws upon a wide range of individuals and institutions representing the public and private sectors:

Layer 1: General Policy Framework, decided by the highest-level leadership, including the Council of Ministers and the Shura Council, and providing overall vision, endorsing policies and regulations, ensuring commitment and setting the country's development agenda.

Layer 2: Science, Technology and Innovation-Policy Institutions, to formulate policies, provide strategic thinking and advice to the Policy Framework Layer, develop strategies and broad mechanisms for development, and provide financing for implementation — including various ministries, King Abdulaziz City for Science and Technology (KACST), the Saudi Industrial Development Fund (SIDF), the Saudi Arabian Monetary Agency (SAMA), and the Saudi Credit and Savings Bank (SCB).

Layer 3: Science, Technology and Innovation Facilitating and Modulating Institutions, such as KACST, the Saudi Arabian General Investment Authority (SAGIA), the Saudi Industrial Property Authority (MODON), the Saudi Standards, Quality and Meteorology Organization (SASO), the King Abdulaziz and His Companions' Foundation for Giftedness and Creativity (Mawhiba), and the Council of Saudi Chambers (CSC), to facilitate research, development and innovation across multiple performers, provide technical standards and enable technology partnerships.

Layer 4: Knowledge Production, Acquisition and Diffusion Institutions, including universities, the Technical and Vocational Training Corporation (TVTC), private-sector training organizations, national labs and hospitals and KACST, whose roles are vital to producing knowledge, acquiring knowledge from outside, and diffusing knowledge through teaching and training.

Layer 5: Technology Transfer and Commercialization, to assist individuals and firms to identify/source appropriate technologies, transfer technology from laboratories to the marketplace and commercialize through specialized programs and means — including techno-valleys at universities; the BADIR Program for Technology Incubators, SIDF; the Technology Innovation Centers (TIC); and scientific societies, professional associations and the SCB.

Layer 6: Goods and Service Producers, actors in the marketplace to produce, enhance, sell or make available products and services to the end users across basic industries, downstream industries, the agriculture sector and the service sector including banking and finance, information technology, trade, the legal system and utilities.

Although the roles and responsibilities of actors categorized in these layers render an impression of a hierarchical system, in all dynamic NIEs, institutions interact nonlinearly and flexibly. They overlap in their roles, and varied communication channels enable dialogue and cooperation at all levels.


Saudi NIE Framework

The NIE framework for Saudi Arabia must not only be suitable for the nation's current level of development but also forward-looking and ambitious, to enable the nation to leapfrog development stages. Fundamental foundational elements — infrastructure, education, etc. — must be included in the NIE, as the kingdom is still in the process of building its capacity for innovation. In addition, supplements to the basic NIE components must be denoted explicitly so that targeted interventions are developed and sufficient investment is allocated. Emerging components from the NIEs of other countries — networks, attitudes, etc. — must also be included so that the kingdom's NIE incorporates learning from global experience.

The Saudi NIE framework comprises six pillars: infrastructure, human capital, governance, innovative capacity, networks and attitudes, and finance and capital. They encompass both the essential foundational components, on which continuing attention must be devoted to attain world standards, and more ambitious elements with which more advanced countries are now grappling.



This is essential for establishing and nourishing innovation in a country. Three major infrastructure subcomponents are necessary: physical, digital and institutional. Physical infrastructure concerns the quantity and quality of the country's physical "grid," including roads, railways, air-transportation facilities, ports, electricity, water and local suppliers of such utilities. Digital infrastructure concerns access to, investment in, and the reach and usage of digital tools including the Internet. Institutional infrastructure involves the public investment in research institutes, science/technology parks, business incubators and pilot plants, as well as advanced facilities such as clean rooms, wet labs, dry labs and specialized machinery. The complexity of the infrastructure correlates to whether the innovation ecosystem is serving an advanced country or a nascent knowledge economy.

Human Capital

Three components of human capital are critical: education, workforce quality and composition, and specialized training for researchers and scientists. The education component concerns the overall expenditures and quality of educational investments. It spans primary, secondary, vocational and tertiary education, including that related to science, technology, engineering and mathematics (STEM). Saudi Arabia's public expenditure on education improved its ranking in the GCI's health and primary-education pillar, from 74th in 2010 to 58th in 2012.

This pillar also covers the investments made by firms/institutions in training the highly skilled workers (researchers, R&D personnel, medium-/high-tech manufacturing employees, engineers, PhDs, etc.), their numbers and proportion of employment, and their mobility into, out of and within the country.



Governance is critical to the operations of an innovation ecosystem; it determines what policies are pursued, what functions are assumed or ignored, and, in many circumstances, how different parts of the system interact with others.

Laws, regulations and incentives must be tailored to the support of R&D activities, the protection of intellectual-property and the accreditation of institutions, professional qualifications, products and services. They must also include economic policies affecting the macroeconomic environment in the country, trade and investment policies to attract foreign direct investment (FDI) and transparency practices — including the participation of citizens in public matters — fostering public trust in government and politicians and mitigating the costs to business of corruption, crime and violence.


Innovative Capacity

This focuses on the systems available to support the transformation of a broad range of new ideas into marketable products, processes or services. There is a twofold impact: the types and levels of research output and the levels of entrepreneurship. It aims to improve the mechanisms for technology transfer and diffusion, the degree to which research is commercialized and the business dynamism for both start-ups and enterprises, especially in medium- and high-technology sectors.


Networks and Attitudes

It is important for a culture to encourage risk-taking, value creativity and reward entrepreneurship. This is facilitated by an environment in which people who demonstrate such characteristics are able to connect readily with each other and to the resources they need to move forward with their ideas. This requires collaboration and linkages among public institutions, universities and private enterprises and deep knowledge of customers' behavior in order to be responsive to market signals and drive market trends.


Finance and Capital

Public and private-sector investment in R&D and entrepreneurship are critical to the development of a robust innovation ecosystem, as is an overall financial and capital-markets system that is stable, sound and provides the variety of funding vehicles needed by entrepreneurs. The finance and capital pillar gauges the soundness of the financial system and access to both public and private funding, mainly for R&D. It is also concerned with capital investments that support innovation in the broad context.


Bridging the Innovation Gap

To support the Saudi NIE in a manner consistent with the framework, Saudi Arabia's current level of development, and effective practices from countries with highly developed innovation ecosystems, 67 targeted initiatives were proposed. These were intended to address gaps within the innovation ecosystem. Each initiative included its project elements and defined the key deliverables, its strategic value and importance to the country, the activities and stages of implementation, achievement indicators, implementation requirements (including estimated budgets and human and institutional contributions), and institutions involved in the project's implementation and their respective roles. Some institutions held primary responsibility for design and implementation of the initiatives; other key stakeholders provided input and participated in the realization of the initiatives.

The total amount devoted to executing these initiatives is more than 2.8 billion Saudi riyals. It is mainly distributed among eight strategic programs: (i) Organizational Structures of Science, Technology and Innovation; (ii) Scientific Research and Technology-Development Capacity; (iii) Science and Technology Human Resources; (iv) Science, Technology and Society; (v) Science, Technology and Innovation Regulations; (vi) Diversification and the Increase of Sources of Financial Support; (vii) Strategic and Advanced Technologies; and (viii) Technology Transfer, Localization and Development.

As 25 percent of this budget is dedicated to Science and Technology Human Resources, the Saudi NIE's main concern is clear: the challenge of adequate human resources, especially in science and technology. Education and training in STEM-related fields are increasingly critical if Saudi Arabia is to attain its desired position among developed, knowledge-based economies. The Saudi NIE has designed a scholarship program to attract and retain male and female students in STEM. The program follows international best practices regarding, for example, size and delivery/operational mechanisms. An important program that is not part of the NIE initiative but complements it is the King Abdullah Foreign Scholarship Program. This program aims to sponsor Saudi male and female students to pursue studies that lead to degrees (bachelor's, master's and doctorates) and medical fellowships. By the end of 2012, more than 145,000 Saudi students were studying in universities around the world, 49 percent of them in the United States.

Besides STEM education, business education for scientists is a valuable tool, not only for individuals, but also for a nation's economic development. Students in science and technology focus their attention on core academic fields. However, for scientific and technological knowledge to be transferred to use as a product or service, or for research to be commercialized, a well-rounded approach to the business aspects of science and technology is necessary. The Saudi NIE aims to educate future scientists about the business of science and technology and to encourage technology transfer and research commercialization within the country. This cross-training focuses future scientists on subjects such as general business skills, business networking, accounting, business law (intellectual-property rights), finance, management, entrepreneurship, grant writing and reporting, and marketing. This has developed into an industry-based internship program for male and female graduate students in science and technology in order to identify key constraints and opportunities in the country and the availability of graduate-level internships at corporations.

Entrepreneurship is a driving force of innovation and economic growth, as well as a fundamental component of NIE. Therefore, the Saudi NIE has developed a tailored curriculum and training program that provides aspiring entrepreneurs with the skills and background needed to transform an idea into a business start-up. Besides this, it has designed an entrepreneur mentorship program that focuses on advice, community development and business continuity. The purpose is to take advantage of the opportunities to establish linkages between new and current business people.

A core component of NIE that is also related to entrepreneurship is intellectual property. This comprises not only the most valuable economic assets of private firms, but also the social and cultural assets of society. NIE intends to emphasize teaching and education in the area of IP principles and methods. This is relatively new to many academic institutions internationally. It must be correlated with increasing the competitiveness of national small and medium-size enterprises (SMEs) by providing IP expertise and support services delivered through regional chambers of commerce and local consultants.


Despite the external and internal challenges facing Saudi Arabia — a declining global economy, disruption and instability in neighboring countries, the recent plunge in oil prices, and internal challenges such as a shortage of qualified engineers and scientists and low female labor participation rates — the biggest challenge is to orchestrate activities among various NIE components in order to strengthen competitiveness. Having strong components inside the ecosystem does not solely serve this target; all the components must be mature, and the linkages among those components have to be fully developed. To this end, the country has proposed a framework for its NIE and developed a roadmap to bridge the gap of innovation across various components through certain key strategic interventions.

These interventions are driven by tactical goals articulated by Saudi Arabia's stakeholders. Concerted efforts have been applied to incorporate these goals into the proposed NIE framework — providing funds to support small and medium-size enterprises and establishing efficient links and coordination between the public and private sectors. This attracts expatriate experts and thereby exploits Saudi Arabia's growth potential. Through technology and advancement in research, the nation seeks to accelerate the transition to electronic governance. This is leading to an increase in funding for science, technology and innovation initiatives. The extra funding is promoting increases in incentives for researchers and innovators and enhancing the communication and transportation infrastructure.


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