Karl Ulrich, the Wharton school’s Vice Dean of innovation and CIBC professor of entrepreneurship and e-commerce, returned to Abu Dhabi for the second innovation tournament held by the business school and its local partner, the Higher Colleges of Technology. First place in this year’s competition was awarded to "DiaLife," a proposed diabetes management solution designed to meet the needs of regional diabetic patients and their caregivers, using the Internet and interactive tools.

Though governments in the Middle East now support the idea that innovation and entrepreneurship are essential to transforming their economies, Wharton’s Ulrich says that without institutions such as incubators, and business-friendly policies, innovation culture cannot take root.

Quality of life is also key, he says, noting that Dubai’s ability to attract people and capital from across the Middle East and the world stands as a successful regional model. Wharton finance professor Bulent Gultekin, academic director of the Wharton Center at CERT in Abu Dhabi, adds that government policies, long-term vision and a shift away from oil wealth-centered structure are needed ingredients in establishing a more entrepreneurial economy in the Gulf.

An edited transcript of the conversation follows.

Arabic Knowledge at Wharton: Innovation is fast-becoming a buzzword, suggested as a cure-all for all that ails the Middle East. But given the lack of infrastructure and culture, how does this region do that?

Karl Ulrich: Culture follows from process. I normally think about that in the context of an organization. One of the levers that you have in that context is establishing an innovation process, and innovation tournaments are an example of the process. You put in place an explicit pipeline that identifies opportunities, evaluates opportunities and makes investments in opportunities, that culture follows from that process. Conversely, it’s very hard to create culture if you don’t have that process. You say, you want more innovation, ‘Please be innovative.’ Well that doesn’t really mean anything. You have to say, ‘We have a process for generating, evaluating, investing in and developing opportunities.’ So at the level of society, I’d say, do we have the institutions that would support innovation? Without those institutions, it’d be hard to imagine that culture developing.

So what would those institutions be? Some sort of risk capital, angel capital, venture fund companies that are making investments in new opportunities; universities that have business plan competitions, courses that are project-based and experiential; incubators — those kinds of institutions, you can’t have innovation culture without those.

Arabic Knowledge at Wharton: Everyone around the world is trying to replicate Silicon Valley. Chile has Start Up Chile; India has Startup Village, with the goal of creating 10,000 startups in the next 10 years. Anything from elsewhere that could be applied to this region?

Ulrich: There are certain necessary conditions related to how easy is it to form an entity, and how good are the property rights. You start there, and then you layer on to that, is it a nice place for young people to live? Are the universities where people like to go and study, and do they stay? Places like Silicon Valley develop a network effect, wherein you go there because there are hundred companies that could hire you, and other interesting people are there. To develop those elements does take time, but you have to start with the basics — there has to be a level playing field, there has to be relatively low friction to set up a business, there has to be efficient capital markets that can provide capital to start, all those things have to happen before you get people to come, start businesses and stay. The first part of it is, put in the necessary conditions for this thing to grow, and then let it take time.

Arabic Knowledge at Wharton: Yet in this region, the countries producing the most innovative entrepreneurs experience frequent instability, while the nicest places to live see a dearth of innovators.

Ulrich: It could also be that there’s less to lose. But that doesn’t apply to Silicon Valley. It’s not a particularly painful place to live. So, that’s something else, that’s another effect.

It’s the story of Dubai. It’s the story of having places where it’s not so hard to set up a business, where people are coming to be where it’s not that hard a place to live, where it has some attractions, and its really a story of when you have a few people there, where else would you want to set up shop? Where there will be the right kinds of lawyers, accountants, incubator spaces, the kinds of vendors you need. All that develops where you have critical mass, where you have a consensus where you want to be.

Bulent Gultekin: This is something we tried as policymakers in the Turkey in the 1980s. One cannot explain Silicon Valley until they go back to the Second World War. If you look at cities in the United States with high tech areas, these were places where very heavy defense spending was done. It didn’t start because of Stanford. Berkeley in the 1970s had 14 Nobel Prize winners in its Physics department, because they got all those Manhattan Project-funded physicists there, it was remarkable.

Arabic Knowledge at Wharton: The Gulf countries, though, are among the top purchasers of military weapons.

Gultekin: Purchasing is different, building is different. There is a spillover from that technology, that’s how Stanford and all these universities became what they are. Once it becomes self-sustaining, it becomes almost like a region. We tried to build by developing certain region, helping companies, but it doesn’t work that way. You really need an oasis, a large community; once that’s built it becomes self-sustaining and self-perpetuating.

… In these areas, the policies we put into place 25 years ago in Turkey are only coming to fruition now because it required many things that needed to happen. You needed to have universities with enough people, you needed to build the entrepreneurial spirit, the economic environment — it took us a generation, even though we knew exactly what we wanted to do.

Over here in the Middle East, first they have to compete, and one way to do this is by cloning — by that I mean what Chile is doing. They make things happen, and if they have this community, then there could be a spillover effect everywhere else. But they have a long way to go, because of the education and entrepreneurship skills needed. They have entrepreneurs spread on the commerce side, but not on the manufacturing or engineering side. That requires quite a bit of engineering skill. That’s why one of the reasons so many entrepreneurs than MBAs. You have to be an engineer and develop a product to be an entrepreneur. That’s why the policy makers here have to figure out what they need to do, put it in a timeframe, and then go for it.

Arabic Knowledge at Wharton: So much of business and policy is driven by perception. You go to Silicon Valley because you expect to find innovators there. What then should the world look for from the Middle East?

Gultekin: With innovation it’s easy to make generalizations. Some seems to come from individuals, because they are creative and come up with interesting applications — Facebook is a typical example. Others are individual inventors, and they can be in any culture, provided that they received a certain education, and because creativity is not the monopoly of any nation or culture. And there are other types of innovation that require large structures, because they need big entities. So aerospace, for instance; you can’t build a Boeing in your backyard anymore. Also, in many countries that tried to make innovation their domestic policy but it didn’t always work, as the case in Korea, it came out in different ways. It’s hard to predict. Energy efficiency and innovation may be easy to suggest, because these are energy producing countries. I don’t know what is the comparative advantage, be it based on alternative energy or oil.

Ulrich: I don’t know if that will get you to an entrepreneurial place. It might get you to a technology base for economic growth, but not entrepreneurship. For the reasons you say: the barrier to innovation is pretty high in some of those industries.

Gultekin: There’s more competition now, and everyone wants to do the same thing. As economies grow, there will be more opportunities. The key over here is that policy helps and doesn’t inhibit business, and that the environment is conducive to entrepreneurship. If you don’t have that, it’s a problem. In Abu Dhabi the government is the biggest employer, so the question how are you going to structure incentives for joining the private sector? That requires a whole different mindset and structuring of priorities for the economy. It isn’t impossible, but it requires a macro vision. Having such a wealthy oil economy is a blessing and sometimes a curse.