• Microsoft invested $1.5 billion in the United Arab Emirates' top artificial intelligence firm, G42, as tech rivals including Amazon and Google also expand in the Middle East and leading venture firms pour money into the region.
• Access to vast amounts of data, the deep pockets of ambitious rulers of energy-rich Middle Eastern countries, and looser regulatory environments, are all advantages.
• But the Mideast and firms like G42 have also become embroiled in the U.S. and China rivalry over AI dominance and national security concerns.

Tech giants including Microsoft signaled in recent earnings calls that their intention is to spend aggressively on AI, but it's not just the billions of dollars being invested in U.S. AI companies like Microsoft partner and ChatGPT creator OpenAI, or the ballooning data center costs. Microsoft and its big tech peers are in a race for global AI dominance, and in a rivalry with China.

As part of the broader strategic planning, Microsoft invested $1.5 billion in the United Arab Emirates' top artificial intelligence firm, G42, a deal providing Microsoft with access to vast amounts of data, the deep pockets of the ambitious rulers of the oil-rich Middle Eastern country, and a looser regulatory environment. 

The UAE's tech ecosystem, free from political wrangling and barriers inherent in democratic legal systems, is overseen by Emirati authorities who have a more lenient view than many Western nations of the use of anonymized citizen data to train AI models. In multiple areas of technology adoption, the UAE's autocratic, state-capitalist governance is seen as an advantage, enabling smooth and speedy mobilization of substantial resources towards tech leadership goals.

G42 is central to Abu Dhabi's AI ambitions and a partnership with Microsoft could galvanize the development of a robust AI ecosystem which could fuel faster AI innovation. The UAE's tax-free income can also help to attract the world's highly sought after AI researchers.

"Microsoft opened a data center there a few years ago, so clearly it has been investing in the region," said Dan Romanoff, tech analyst at Morningstar.

Microsoft set up its first cloud data center in the UAE in 2019. As part of the recent deal, G42 would use Microsoft's cloud computing platform Azure as the backbone for the development and deployment of AI services it provides to all of its customers. Beyond the UAE, Microsoft and G42 plan on building out data centers in other countries, including in East African countries.

These facilities to power and cool the giant AI supercomputers are fundamental to further advance of the AI ecosystem.

"The compute needed for AI is large and consumes an enormous amount of power," said Andrew Feldman, CEO and co-founder of U.S.-based Cerebras Systems, a chip-making startup with relationships in the region.

Power availability, from oil to natural gas and solar, in the UAE can also help with new data centers, shifting compute away from overstrained electricity grids in other parts of the world.

OpenAI CEO Sam Altman has made numerous trips to the UAE looking to build a global AI coalition and earlier this year said the region could serve as the world's "regulatory sandbox" for AI testing.

The deep interest from Microsoft and OpenAI in the UAE is viewed by industry watchers as part of an effort to consolidate their AI leadership position and increase its global footprint, particularly in emerging markets. 

"For MSFT, this investment is more about gathering clients on its Azure infrastructure and reinforcing the notion that it is the early leader in all things AI by proliferating OpenAI usage," Romanoff said. 

Over the past few quarters, the UAE, particularly its glitzy capital Abu Dhabi, have grown from regional AI hub to become a global AI center, according to Feldman. Leaders like Microsoft, OpenAI and others "are doing pioneering work there," he said.

Feldman's Cerebras is building advanced supercomputer data centers in California, Texas and Abu Dhabi. It is also providing G42 its AI tech to develop what could be the world's most advanced Arabic large language model, a language spoken by approximately 400 million people, he noted.

But amid rising tensions between the U.S. and China, AI has become a critical battlefield, and for all the strategic reasons the UAE deal makes sense, it has also attracted a high level of scrutiny on Capitol Hill related specifically to G42's relationship with China. The geopolitical landscape has become more complicated since Microsoft's partnership with G42 was first announced, with growing unease among U.S. intelligence officials, according to a New York Times report, regarding the potential transfer of sensitive American technologies and data to China through G42's partnerships, particularly with companies like Huawei. The Biden administration reportedly pressured the UAE to sever its tech ties with China in an effort to safeguard critical AI technologies. 

A statement earlier this year released by Rep. Mike Gallagher (R-WI), Chairman of the House Select Committee on the Chinese Communist Party, further confirmed that the Emirati firm, G42, had sold its stake in Chinese companies in what he referred to as a "welcome first step."

"The UAE is a critical and powerful ally, one that will only become more important for regional and global stability as AI advances. Therefore, it is imperative the United States and the UAE further understand and mitigate any high-risk commercial and research relationships with PRC entities."

The pressure from Capitol Hill has not let up, with a report earlier this month from Politico saying that Microsoft is now tweaking its $1.5 billion partnership with G42. Initially, the deal involved transferring sensitive AI hardware and intellectual property, including advanced semiconductors, to G42. However, Microsoft now reportedly plans to instead lease its AI products to the AI company.

Microsoft's decision to pivot its strategy reflects the intense scrutiny and geopolitical challenges that surround the deal, highlighting the complex interplay of global tech rivalry, national security, and the broader U.S.-China tensions in the AI race.

Microsoft and G42 did not reply to emails requesting for comment.

Some experts contend that the deal still makes sense as a way to counter China.

"Microsoft's investment in the UAE strengthens a key U.S. partner with advanced AI capabilities," says Cory Johnson, chief market strategist and group analyst at The Futurum Group, a leading global technology advisory, media and research firm, in Austin, Texas.

"This could indirectly hinder China's influence in the strategically important Middle Eastern market."

China remains a formidable competitor with significant state backing. However, "to the extent Microsoft is in the UAE helping to build a regional AI hub, China is less likely to be there," Romanoff said. "Anywhere the West can have influence over China, it helps promote stability, so Microsoft investing in AI in the UAE should be viewed positively by the tech community, as well as western governments," he added. "In 10 years, you could see a bustling start-up community in the UAE where AI innovation happens," he added.

Microsoft's relationships in the UAE come amid greater focus among U.S. tech giants on the Middle East's AI potential, leading to a surge in investment and innovation in the region.

Leading Silicon Valley venture capital firm Andreessen Horowitz reportedly plans to invest heavily in a $40 billion Saudi Arabian AI fund, which could make the country the world's largest investor in artificial intelligence.

Amazon has also set up data centers in the UAE and is expanding its footprint in Saudi Arabia to support the growing adoption of artificial intelligence technologies. 

Google recently expanded its cloud services presence in the Middle East with a new Saudi Arabian HQ.

But when it comes to AI development, no country can exist on its own. "The most effective results come from countries that are open and embrace the best and brightest from around the world," Johnson said. "Collaborations like Microsoft and G42 are valuable, but fostering a global AI ecosystem is essential for long-term success. We should view this as one piece on the global AI chessboard, not a checkmate for China," he said. "The race is far from over."