Family businesses in the Gulf are some of the strongest in the region and across the world, but their continued success necessitates engaging in a business evolution with innovation and sustainability at its heart.
Forbes recently released their 2020 list of the “Top 100 Arab Family Businesses in the Middle East,” and Gulf businesses made a strong showing, occupying 19 of the top 20 positions.
These businesses have made an important contribution to the Gulf economy throughout the last century; but the 21st century has brought new challenges. Now is the time for Gulf family businesses to once again adapt and embrace change.
In the pre-oil era, the role of governments in the Gulf countries was limited to maintaining law and order, and managing foreign policy. The economies were too poor – and the climate too unforgiving – to allow for powerful bureaucracies similar to those operating in Europe and East Asia in the pre-modern era.
Due to the limited economic base, business people were invariably merchants rather than entrepreneurs: They specialized in importing foreign goods and redistributing them domestically, though managing the production of pearls was an important exception.
The 1930s discovery of oil transformed the economic landscape. Gulf governments expanded their activity to include managing oil resources, with the assistance of the Americans and British, leading to unprecedented economic growth. However, despite governmental control of oil production, delivery of goods and services remained under the purview of merchant families.
A historic lack of intervention in commercial affairs combined with the influence of Western capitalism, and a security guarantee from the West, contributed to Gulf governments seeking only a minimal involvement in daily commercial life.
This allowed family businesses in the Gulf to gradually accumulate expertise in consumer goods and services, based on decades of experience in managing international supply chains and striking business deals with merchants overseas, often by communicating in foreign languages such as Farsi, Urdu and Hindi, a specialization that was lacking at a governmental level.
A history of adaptation
In the 1960s and 1970s, inward migration from other Arab countries and Asia created an abundance of cheap labor, and family companies adapted their business models accordingly. Some of these developed into family construction businesses, which have made important contributions to the high-quality infrastructure and housing enjoyed by residents in the Gulf today. Meanwhile, governments’ direct influence on the economy remained restricted to three activities: oil and gas; public sector employment; and spending on projects.
In the 1980s and 1990s, as oil prices fell, and Gulf populations began to grow, it became evident that public sector hiring was not a sustainable source of jobs for citizens. Gulf governments began to experiment with nationalization quotas in the private sector, forcing many family companies to once again adapt their business models.
In Bahrain and Saudi Arabia in particular, family businesses that operated Gulf franchises of global giants such as Toyota, Starbucks and Microsoft started to employ nationals at much higher frequencies than before. This has contributed to the development of the region’s human capital, especially as employees gained valuable insights into business operations working at foreign brands, a process known in industry parlance as knowledge transfer.
However, despite these developments, two key features of the Gulf family commercial model remained intact: a large dependence on cheap foreign labor; and minimal levels of homegrown innovation, with almost zero investment in research and development.
This latter trait is reflected in several macroeconomic indicators of innovation: Gulf countries have consistently had low research and development (R&D) spending as a percentage of GDP, low patents, and low production of scientific papers, with most innovative activity emerging from state-owned oil-related companies.
The lack of innovation is concerning since historically, throughout the world economy, private-sector-led technological progress has been critical in maintaining high living standards and persistent economic growth.
High and rising oil prices between 2003-2013 meant that the Gulf economies could still grow without innovating, but the 2014 oil-price crash brought this period of remarkable growth to a close, and created the need for a new economic model.
The ambitious economic visions announced by authorities across the Gulf, such as Saudi Arabia’s Vision 2030, are an acknowledgement of this reality, but if family businesses are to fulfill what the visions ask of them – to transform the private sector into the economy’s main driver – they need to evolve.
In particular, they need to work out how to be more innovative, and how to diminish the importance of cheap foreign labor to profitability. This is a tough task, but not an impossible one, as these businesses have several important ingredients already in place.
They have accumulated large profits that can easily be invested, although any investment activity needs to be prudently made. They are able to easily procure high quality foreign talent that can transfer knowledge to locals, but there needs to be a good knowledge transfer system in place. They have access to some good universities to assist with research and development, but they need to understand the process of transforming basic research into a commercially viable product.
The key is being a proactive rather than passive agent in this evolution, a point that American artist Andy Warhol once made: “They always say time changes things, but you actually have to change them yourself.”
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.