The Gulf’s IPO markets: How firms going public can strengthen economic growth
As the war in Ukraine lingers following a renewed Russian offensive, stock markets in Tokyo, New York, London, and Frankfurt retreated significantly during the week. Fears of lasting inflationary pressure have been compounded by the acceleration of inflation in Germany and the prospect of higher interest rates, discouraging investors from infusing their capital into the market. Dramatically, as investors turned to less risky assets, the Initial Public Offering (IPO) market in the West tumbled. According to EY, a Big Four accounting firm, the US IPO activity sank to levels unseen since the Great Depression while Europe saw a similar decrease in its activity.
However, in the Gulf region, a significantly different situation unfolded. Indeed, the markets of the Gulf Cooperation Council (GCC) accounted for five of the ten largest IPOs in 2022. The United Arab Emirates (UAE) ranked 3rd globally regarding IPO proceeds (i.e., the funds raised from the IPO), followed by Saudi Arabia in 6th position. In addition, the positive trend experienced by the GCC’s IPO markets is set to continue throughout 2023. As such, what effects can this trend have on GCC members’ economies? This article argues that the region’s economies are likely to experience two developments that increase and sustain growth. First, IPOs have a positive effect on the development of local industries, especially innovative ones. Second, IPOs increase an economy’s attractiveness to Foreign Direct Investments (FDI).
The Gulf’s IPO markets have experienced their most expansive activity to date. This performance has been enabled by two factors. First, as energy prices increased due to Russia’s invasion of Ukraine, GCC members, whose economies are significantly dependent on the export of hydrocarbons, profited from these high prices and the subsequent “boost of liquidity and stronger investor confidence” that they engendered. Second, in an endeavour to diversify their economies, GCC governments have enacted policies aimed at “opening up more space for private investments” and supporting competitive businesses. For instance, both Qatar and the UAE increased the number of sectors for international investors seeking complete ownership of listed companies. Moreover, previous IPOs, such as the $29.4 billion Saudi Aramco IPO in 2019, have strengthened the regulatory environment and “enhanced market practices”, thereby attracting foreign investors. For instance, multinational investment banks Citigroup Inc. and Goldman Sachs Group Inc. plan to bolster their presence in the region by increasing their staff. Similarly, financial advisory firms Lazard Ltd. and Rothschild & Co seek to increase their activities in the region to benefit from projects on IPOs.
Importantly, as the GCC’s IPO markets continue to grow, the local economy is likely to sustain high growth levels due to two key developments. First, IPOs can have positive spillover effects on the local economy’s competitiveness and innovation. While going public enables a firm to access needed capital, studies demonstrate that innovation decreases within firms following their introduction to the financial stock market. This decrease leads skilled workers, and especially key inventors, to leave the firm to establish their own businesses or work for a new employer, causing an innovation spillover within the economy. Moreover, this spillover need not only impacts industries similar to the one in which the newly public firm operates, as “private firms even in unrelated industries (e.g., computer vs. chemical) still strongly benefit from the knowledge” that emanate from listed firms’ previous employees.
Accordingly, GCC economies may experience this spillover following successful IPOs in innovative industries. For instance, in the case of a highly innovative industry such as Fintech (financial technology), an increasing number of local companies are experiencing successful IPOs, thereby, increasing the likelihood of employees leaving these newly publicly listed companies to either start their businesses or bring their knowledge to different industries. As such, IPOs in the GCC increase the prospects of innovative spillovers within the local economies and, subsequently, the prospects of sustained high levels of economic growth.
Second, the innovative spillovers that IPOs engender attract foreign capital which, in turn, strengthens the spillover and positively affects economic growth. Studies on the effect of FDI on growth in the GCC have previously identified no significant effect because foreign capital was flowing into the energy sector rather than the underdeveloped innovative sector. These findings aligned with the wider literature demonstrating that foreign capital investments beg neither a significant nor a direct effect on a receiving state’s economic growth. But the region has since engaged in an endeavour to diversify its economy. According to PWC, the “post-Covid recovery in the GCC region has been led by the non-oil private sector”. A number of its “homegrown digital start-ups have already achieved success in the region [...] and attract[ed] the attention of foreign investors”, boosting the “GCC’s reputation as an emerging hub for digital innovation and development”. In a recent insight on the topic, Euromonitor International concluded that innovation hubs in the region will increasingly act as engines for economic growth and will attract FDI.
Crucially, as foreign capital flows toward IPOs emerging from these innovative industries, it will likely strengthen the innovative spillover effect previously discussed which, in turn, will further increase the region’s attractiveness for FDIs. For instance, if an innovative firm X in a certain industry A goes public knowing that foreign capital is available, then the subsequent spillover effect may engender the creation of a new firm Y in industry B that may itself attract foreign capital. As such, rather than directly affecting economic growth, FDI affect growth indirectly by amplifying innovative spillovers. This positive yet indirect effect on growth would align with another body of literature that finds FDI’s effects on growth to be dependent on a multitude of factors. Consequently, IPOs in the innovative industry will attract FDIs, and this availability of foreign capital will enable future IPOs to perpetuate the innovative spillover, thereby enabling long-term economic growth in the region.
In sum, the growth potential that IPOs, especially in the innovation sector, provide can have a significant effect on GCC members’ economies. On the one hand, IPOs increase the likelihood of innovative spillovers within the region. As knowledge migrates from publicly listed companies to new start-ups and other industries, competitiveness and innovation increase, and economic growth becomes sustainable. On the other hand, IPOs, and the innovative spillovers they engender, attract foreign investments to the area, therefore amplifying the innovative spillovers and further sustaining economic growth. Considering GCC members’ efforts to diversify their economies and become less dependent on hydrocarbons for economic growth, adopting policies aimed at safeguarding a vibrant IPO market reveals to be an auspicious strategy for achieving resilient growth.