The FDI angle:

• The Middle East was the only region that saw growth of tech FDI projects between 2022 and 2023.
• Governments in the region are actively courting and funding tech companies in their bid to diversify away from oil.
• Why does this matter? The region's growth as a neutral tech hub is making Washington worried about sensitive AI technologies getting into Chinese hands.

Rising tech investments in the Middle East bucked a downward global trend last year, as governments rolled out the red carpet to attract companies and talent in knowledge-based industries through favourable regulations, tax breaks and large sovereign investments into venture capital (VC) funds.

The Middle East was the only global region to record growth of inbound tech FDI projects between 2022 and 2023, according to fDi Markets, with 400 projects recorded compared with 384 a year earlier. This was counter to a 40% year-on-year decline of tech FDI projects worldwide in the same period.

Tech FDI projects in the Middle East last year were about 12 times greater than those announced in the region when fDi Markets began tracking greenfield investments in 2003.

The global decline in tech FDI was due to many factors such as a slowdown in VC funding, falling tech company valuations and cost-cutting measures like lay-offs. However, governments in the Middle East like the UAE, Saudi Arabia, Bahrain and Qatar have magnetised FDI in this downward trend through their active courting of high-tech companies and talent.

“Middle East countries, particularly in the Gulf, have realised that they cannot rely on oil,” says Racha Helwa, a senior economist at the Atlantic Council’s Rafik Hariri Center for the Middle East, who adds that countries like the UAE and Saudi Arabia are deploying resources to invest in tech and innovation and renewable energy as part of their economic diversification plans.

Tech investors in the Middle East argue that foreign companies can find new business in the region. Rabih Khoury, a partner at Middle East Venture Partners, an early stage software VC fund, tells fDi there is a “big opportunity” to sell tech services to Middle East businesses, which tend to lag other countries like India and China in areas like cloud penetration.

“[This growing tech FDI] is the tip of the iceberg,” he says, adding that he expects more tech investment in the Middle East in the years to come. Other close observers of the region say that a major focus of developing local tech industries rests on artificial intelligence (AI), which is seen as the next major tech trend to future-proof Middle Eastern oil-reliant economies.

“The Gulf States aren’t merely testing the waters of AI; they’re plunging headfirst into the deep end,” says Mohammed Soliman, the director of the Strategic Technologies and Cyber Security Programme at the Middle East Institute. 

The UAE in particular has been assertive in developing its AI strategy and soft infrastructure to fend off any competition within the region. Off the back of the national AI strategy launched in 2017, among other things the government established the world’s first university dedicated to AI research; Abu Dhabi established an AI and Advanced Technology Council, which is charged with implementing research and investment strategies regarding AI; and Dubai set up the first digital economy court. 

Foreign investors are taking notice. One prominent example is seen in Abu Dhabi, where Microsoft invested $1.5bn in local AI company G42. PIF, Saudi Arabia’s sovereign wealth fund, has also become increasingly active in its AI investments.

Among destination cities in the Middle East, Dubai attracted more than half of tech FDI projects to the region in 2023, followed by Saudi capital Riyadh, which saw a jump between 2022 and 2023. These two leaders were followed by the UAE’s capital Abu Dhabi and Doha in Qatar.

The main source country for tech FDI into the Middle East in 2023 was the US with 95 projects, but India was in a close second with 92 projects after several years of growth (up from 64 in 2022). More FDI also came from tech companies from other Asian countries like Pakistan and Singapore and from companies within the Middle East region itself.

Countries like Saudi Arabia and the UAE have also been attractive to foreign tech companies from these countries due to their geographical position and neutral geopolitical stance in the tech war between the US and China. But Washington worries that Chinese firms are gaining access to sensitive technologies through their operations in the Middle East. 

“The dance between the Gulf states and the superpowers — the US and China — resembles a high-wire act without a net,” says Mr Soliman. “The spectre of sensitive AI technology finding its way into Chinese hands, potentially tipping the scales of global competition and posing national security threats, is a cause for deep concern.” Geopolitics is making tech FDI an ever-increasing point of contention in our fractious times.

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