An empirical study of innovation-led economic diversification in MENA oil exporters

Abstract

This paper aims, on the one hand, to investigate the impact of innovation on economic diversification in 11 oil-abundant MENA countries (Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, United Arab Emirates, and Yemen) over the period 1996-2019 using the Arellano-Bond difference GMM estimator and, on the other hand, to reveal how much the level of economic diversification will increase if MENA oil exporters will have innovation rates similar to that of a successful diversifier like Canada. The main findings emphasize the importance of innovation in promoting economic diversification in MENA oil-exporting countries; the level of innovation-led economic diversification increases at a greater pace in GCC countries than in their non-GCC counterparts. The results also show that governance, human development, domestic credit to private sector, and economic freedom positively and significantly affect economic diversification in MENA oil exporters, while oil rents negatively affect economic diversification in these countries. Moreover, the results confirm the effectiveness of the joint impact of governance index and oil rents in boosting economic diversification in oil-rich MENA countries. The results also reveal that the rate of improvement in economic diversification brought by replacing MENA oil exporters' innovation rates with those of Canada is 1.77% (for every 1% increase in innovation). Based on that, one can say that increasing the rate of innovation in MENA oil-exporting countries does accelerate the pace of economic diversification.

Keywords: Economic diversification; Innovation; MENA oil exporters; Oil rents.