In December 2021, the UAE government announced that it would remove the monopolies on the sale of imported goods enjoyed by some Emirati family businesses. One of the biggest resulting benefits will be an improvement in innovation in many of these enterprises, as they can no longer afford to be technological laggards.
A modern commercial ecosystem has much in common with a biological one. First, its inhabitants perpetually vie for scarce resources, incentivizing them to evolve and innovate. Second, selection pressure favors influential innovators at the expense of failed innovators and those who prefer to sit idle.
This creative-and-destructive aspect of the profit motive is why the new mobile phones entering the market in 2022 make the ones from 2012 look like stone-age contraptions. It also explains why companies such as Ericsson and Blackberry decided they couldn’t cut it as mobile phone manufacturers, shifting their focus to other commercial activities.
Competition plays a central role. Those above the age of 40 will have clear memories of publicly owned telecommunications behemoths that were legally guaranteed 100 percent of the market during the 1980s, providing low-quality products and terrible customer service.
The sector’s liberalization across most of the world during the 1990s and 2000s has been a breath of fresh air for consumers. It has allowed many other downstream industries to flourish, including the numerous services that depend upon the internet. One way to break this continual cycle of successful innovators suffocating stagnant laggards is by having a legally-enforced monopoly.
Family businesses in the GCC have enjoyed legal monopolies for decades, such as being the exclusive local dealer for a particular car or electronics brand. Like any business, having a guaranteed market dulls the incentive to innovate. This is one of the many reasons private expenditure on research and development in the GCC countries has been alarmingly low since the 1970s.
However, the fact that they are family businesses creates an additional reason for being anti-innovation, which is the nepotistic hiring practices that characterize these organizations.
Technically, a family business is defined only as being owned by members of the same family and not run by them. In practice, many of the founder’s relatives occupy key executive positions, both because it is a job that pays well and also because the founder often doesn’t trust outsiders, especially in countries with weaker legal systems such as those in the GCC during the 20th century.
There are two main disadvantages associated with restricting hiring to a handful of relatives. The obvious one is that the talent pool is a lot smaller. Still, the more subtle one is that it creates an anti-intellectual culture within the organization because innovation tacitly delegitimizes the family members holding senior positions.
To see why note that innovation is defined as developing new solutions to problems. For an organization to innovate, it has to identify issues that it needs to solve, which means taking a self-critical look at its operations. Otherwise, if everyone is required to say that everything is excellent all of the time, nobody can innovate because there is no room for improvement.
If you owe your position to nepotism, and everyone knows this, then this undermines your management powers and your sense of self-esteem, as people don’t trust you to make good decisions. Suppose employees are encouraged to critically examine their organization’s operations to look for ways to improve. In that case, likely, such investigations will starkly reveal to everyone just how incompetent the boss is. Accordingly, those executives hired through nepotism will establish a “yes-man” ethos and prevent an innovation culture from emerging lest it exposes them as fraudulent managers.
In a typical commercial environment, subpar executives behaving in this counterproductive manner will be snuffed out by natural selection, being either fired by their boards or seeing their companies go bankrupt. However, legally-enforced monopolies allow these charlatans to survive and possibly even thrive, even while controlling companies with zero innovation. The biggest loser is the customer who has to keep purchasing their products, though spare a thought for the employees whose desire to improve the company has been permanently crushed.
Not all family businesses follow this pattern, but the aggregate data on innovation in the GCC countries indicate that many family businesses are poor innovators. Therefore, the UAE’s progressive policy of removing monopoly protections will present these businesses with a stark choice: either learn to innovate correctly and – if need be – appoint qualified executives from beyond the family’s ranks; or continue to stagnate and risk being squeezed out of the market by more effective competitors. Either way, the customer will win.