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Countries in the Middle East have been contemplating for long how to jump-start high-tech entrepreneurship in the region.
Since no country has unlimited oil resources, diversifying Arab economies away from oil and public service and creating quality jobs for the youth is uppermost in the agenda of Middle East nations.
But even as the desire remains, many Arab countries still place countless obstacles in the way of business creation, from endless red tape to punitive debt and bankruptcy laws.
There is no doubt entrepreneurship is a key driver of economic growth and job creation and would be particularly welcome in the region.
Unfortunately, start-up activity in the Middle East has been limited, with even fast-emerging countries such as the UAE is quite low in international rankings. For example, only 2.7 per cent of the UAE population is engaged in early-stage entrepreneurial activity, compared with 19.3 per cent in Indonesia, 10 per cent in the United States, 6.1 per cent in Turkey, and 5.3 per cent in South Africa.
However, Bahrain, after the success of the internationally-lauded Bahrain Model for entrepreneurship and enterprise creation, is fast-developing a strong reputation for its support of new businesses.
The kingdom has been named as the headquarters of the Mena Network for Business Incubation and the World Bank has recognised the Bahrain Model as the most effective mechanism to nurture start-ups.
According to Booz Allen Hamilton, there are three main components that make a business environment favourable to start-ups. First, and crucially, there must be a large base of entrepreneurs and an entrepreneurial culture.
Second, there must be ideation and innovation activity, which includes identifying market opportunities and developing new concepts. Third, there must be effective support for start-ups.
Excessively low R&D expenditures in the Middle East are a major impediment to start-up activity.
The Arab average for R&D expenditure as a per cent of GDP is 0.2 per cent, while in Turkey it is 0.6 per cent, 1.15 per cent in Brazil, 2.3 per cent in the OECD, 2.8 per cent in the United States, and 3.1 per cent in Japan.
In addition, entrepreneurs wishing to start a business face a variety of administrative, cost and financing hurdles.
The advantage of fresh entrepreneurship is that once start-ups mature into Small and Medium Enterprises (SMEs), they become key contributors to employment and GDP. For example, SMEs contribute 70 per cent of total employment in the European Union and 49 per cent in the United States, while they make up 60 per cent of France’s GDP, 55 per cent of Indonesia’s GDP and 40 per cent of the United States’ GDP.
The best ways to effectively support new start-ups are to develop a favourable business environment, including tax incentives, streamlined procedures, and the reduction of red tape and bureaucracy.
As well, there are many ways to facilitate access to financing and support for start-ups, whether public, private, or through a joint partnership.
The regulatory hurdles to business formation in the region are reinforced by a financial system that tends to ignore small and medium-size enterprises, according to a 2007 study by the Peterson Institute for International Economics.
SMEs account for roughly nine per cent of estimated $118 billion investment made in the industrial sector in the GCC.
These firms employ more than half of 815,000 people working in manufacturing industries across the region.
Around 70 per cent of the 10,431 firms in the regional industrial sector are small and more than 16 per cent of them are medium.
A company with an investment of less than $2 million was treated as small-size, while a medium enterprise had an investment between $2 million and $6 million.
In the UAE’s industrial sector, 93.9 per cent of the total operating firms were SMEs. The figure was 92.9 for Bahrain, 88.6 for Kuwait and 74.7 per cent for Saudi Arabia.
Despite their dominance in terms of numbers, the share of industrial SMEs accounts only for nine per cent of total investment in the GCC’s industrial sector.
So in order to foster entrepreneurship and industrial growth nations need to go beyond business parks to innovation clusters. When developed intelligently and in harmony with the natural environment, these knowledge-based ‘cities’ will create prosperity, safety and a high quality of life for citizens.
There was also the need to cultivate a culture of innovation and risk taking among the youth. This requires employers, educators and mentors to reward risk taking by not punishing individuals for failure. In fact failure is a necessary component of the creative process.
Empowerment of women is also a key area. In Lebanon or Syria, one third of the start-up CEOs is women.
At the Higher College of Technology in the UAE, over 60 per cent of the students are women. In Saudi Arabia, there are very impressive all-women software companies.
What one nation or corporation learns can be transformed into best practices that can be adopted across borders and industries.
Another aspect that needs transformation is access to capital and innovation.
Government and private sector investors must step forward with the funds necessary for entrepreneurs to transform their creative ideas into lucrative enterprises.
These public-private partnerships create a mutual commitment to success and an opportunity to share in the rewards of these innovative ventures.
Talking Business
K S Sreekumar
sreekumar@tradearabia.net
