NGC Special Report: How can we help Arab Entrepreneurs?

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NGC was honored, as a Knowledge Partner of the Arab Thought Foundation, to plan and moderate the Fikr 12 workshop on “Entrepreneurship and Start ups: from individual achievement to collective success” (Ritz Carlton Dubai, 5th December 2013) with the valuable participation of distinguished guests representing the entrepreneurial ecosystem in the Arab world:

H.E. Mr. Abdul Baset Al Janahi, CEO, Mohammed Bin Rashid Establishment for SME Development (“Dubai SME”), United Arab Emirates
Dr. Khalid bin Othman Al-Yahya, Managing Director, Accenture Management Consulting, Kingdom of Saudi Arabia
Mr. Eyhab AlHajj, Co-Founder, Managing Director, Prosper, Sultanate of Oman
Mr. Fadi Bizri, Managing Director, Bader Young Entrepreneurs Program, Lebanese Republic
Mr. Ziad Mabsout, Financial Consultant and Analyst, Lebanese Republic

Following a brief presentation, NGC co-founder, Issam al Khatib, moderated a lively session based on Q&A with the speakers and the public to better define obstacles to entrepreneurship in the Arab countries and identify priority reforms.

The Diagnosis

The Arab world suffers from the highest (figure 1) and most persistent Youth unemployment in the world (figure 2), implying that it is a structural, deeply entrenched matter that will not be solved by an increase in economic growth.

Figure 1: Total and Youth Unemployment by regions (2010)

figure 1Source: ILO and IMF

Figure 2: Youth Unemployment Rates by Region (%), a structural issue in the MENA region.

2000 2012 (previsions)
World 12.7 12.7
EU & US 13.5 18
MENA 26.3 27.3

Source: ILO, Global Employment Trend for Youth 2012.

The Arab world also happens to be the least “entrepreneur-friendly” region in the world [1] : it has one of the lowest numbers of newly registered firms per working-age population (figure 3), some of the world’s oldest firms, and the highest average age of CEOs. This is reflected in the World Bank ranking of “Ease of Doing business”, with the remarkable exceptions of the UAE and Morocco (Figure 4).

Figure 3: Average entry density for selected emerging economies (2004-2009).

Newly Registered

Figure 4: Ease of Starting a Business (World Bank 2012)Figure 4

The obstacles to entrepreneurship are many; however the issue of cost and access to capital stands out as the most striking hindrance (Figure 5).

Figure 5: Obstacles to Doing Business.Figure 5

In general, the entrepreneurial ecosystem in the Arab world appears to be genuinely imbalanced (Figure 6), with serious gaps and obstacles in terms of access to capital, legal framework and education.

Figure 6

In a context where Arabs ought to create 80 Million jobs by 2020 only to stabilize current levels of unemployment, not helping or simply standing in the way of local entrepreneurs is not an option.

The Treatment 

1. Short Run: Reap Quick Wins by Lifting Harmful Regulation

Regulatory framework has been identified as a key obstacle to entrepreneurship: minimum capital requirements, numerous procedures and interlocutors, previous authorizations, dragging delays, corruption and “wasta” are among the common evils entrepreneurs face to start a company.

In that respect, many called for less State regulation. Unlike other purely economic factors, the good news is that regulation depends mostly on political will (or simple administrative good will) and can be done rather quickly with little cost and high socio-economic impact. Administrative barriers to enter – and to exit – the market should be reduced to the minimum.

The reforms implemented by Mohammed Bin Rashid Establishment for SME Development (Dubai SME) can be considered as a reference in that matter. Dubai SME has managed to reduce drastically the time, cost, number of steps and interlocutors needed to officially register a start up. It acts as a unique portal through which entrepreneurs can register their start ups on-line in a few clicks. The institution takes it upon itself to later deal with the other administrations and provide them with the needed documents.

Based on a simple survey to identify key obstacles to starting a business in each Arab country, reforms should be swiftly implemented to pave the way for a more vibrant entrepreneurial economy. The minimum capital requirement should be urgently reduced as a top priority: it prevents many from starting their business without being an efficient protection against bankruptcy.

By lifting unnecessary or harmful regulations, public authorities will also reduce the “economic rents” [2] that flourish with no real justifications around entrepreneurs and facilitate the fight against corruption.

2. Medium Run: Support and Incentivize Entrepreneurship Financing

Access to capital is probably the Number One obstacle to start a business in the Arab region. None of the actors of the financial ecosystem is playing its part: banks are not lending SMEs and start ups [3], Business Angels and Venture Capital (VC) exist in insignificant numbers while equity funds are under-developed.

In the face of this fundamental gap in the allocation of financial resources in the Arab economies, governments and non-state actors have stepped up and taken a number of interesting initiatives (public funds, competitions, tax incentives…) but none is enough to make up for this huge market failure.

The discussion focused on the root causes of this gap: first, there are higher and less risky returns in other sectors (energy and real estate mainly); second, banks lack the expertise to assess the business plan of a start up; third, there are little incentives and guarantees to develop new products for SMEs and start ups.

The solution could lie in a policy mix tailored for each country, including:

  • Tax incentives for banks lending to SMEs and start ups to make up for the perceived lower return on investment
  • Training programs to update the financial expertise of banks and other VCs. This could be done in collaboration with experienced incubators and accelerators in the region such as Wamda, Bader, and Oasis 500…
  • State guarantees to secure part of the financial investments.

Facilitating access to capital for Arab entrepreneurs will not be easy and will require time, patience and the collaboration of all stakeholders to create a smooth and continuous financing life cycle from inception to maturity (Figure 7).Figure 7

Source: France Angels

This should be regarded as a strategic priority for the future of the entire region. Unlike our first point on regulation, smart intervention of the State is crucial to send a strong signal to the market through appropriate incentives, rewards and technical support. The State should however stop short of replacing private actors in the financing of entrepreneurship: it is too expensive, too risky and public entities do not have the expertise to make the right choices.

3. Long Run: Update Education to Empower Future Entrepreneurs

Culture and Education were repeatedly mentioned throughout the event as one of the most challenging obstacles to a thriving private sector in the Arab region. The Youth aspire to a life-long position as civil servants rather than starting their own business [4], families and friends fear rather than value risk-taking, society rejects and stigmatizes failure while the educational sector does not inspire nor prepare potential future entrepreneurs for real life.

According to the special Fikr 12 report conducted by PWC on Job creation , 86% of the surveyed population considers that raising the level of education is very important to improve Youth unemployment.

More than raising the current level of education, what is needed is a qualitative change to modernize the methodology and the content of what is being taught. This means concretely:

  • Integrating entrepreneurship in the academic programs, when appropriate (business majors, Communication and Marketing, Economics, Business Law…). The current system, where students graduate then get the proper training from an ad hoc incubator is not optimal. We believe in a future model where incubators and accelerators will be built in the academic curricula, within the walls of the universities, in close partnership with the private sector.
  • Updating higher education curricula to provide the market with the needed skills. Rather than focusing on memorization, teaching methods should enhance team work, problem solving, critical and creative thinking through collective projects, hands-on training, internships and by leveraging e-education technologies.
  • Improving career guidance to help students chose the right career path. Today, due to a lack of information, too many students graduate in Social Sciences [5], not enough in Science and Technology. This leads to a serious imbalance in the allocation of human resource in the Arab economy.

Conclusion

Entrepreneurs might not be able to save the Arab world , but they are definitely a big part of the solution and everything must be done to unleash their potential. To succeed, any reform will have to:

  • Take into account local needs and specificities
  • be based on sound research and direct surveys with Arab entrepreneurs to get their input before taking any action
  • focus on improving the entrepreneurial ecosystem as a whole, rather than aiming at one reform in particular
  • Identify clear priorities, time-frames and measurable targets to mobilize all stakeholders. A country could for instance decide to reduce the time and cost to register a start up by 50% the first year, while aiming at increasing by 1% the proportion of loans to SME in 2 years, and plan for integrating entrepreneurship in some pilot universities within the next 3 years.

NGC would like to thank and congratulate the Arab Though Foundation (ATF) for organizing such a stimulating, high-level event and for giving us the opportunity to be part of this endeavor. NGC will remain engaged, in close collaboration with the ATF, in promoting reforms to help solve youth unemployment. More to come soon on future initiatives!

[1] : There are plenty of “necessity entrepreneurs” in the Arab world – those who are forced to start a micro business to survive, but few “business entrepreneurs” who can identify a gap in the market and create a solution with a view to achieve profit and growth.

[2] : Certain legal obligations such as paying to register with chambers of commerce, requirements to get a lawyer or an external audit represent unnecessary barriers to entry for start ups and prove to be difficult to reform due to vested interests of influential lobbies.

[3]: SME lending represent less than 8% of total lending in the MENA region and less than 2% in the GCC countries., while they are the first employers in the region.

[4]: There are very tangible reasons that explain this preference: job security, higher salaries than in the private sector – where wages have been stagnant for the past twenty years – attractive social packages and social prestige.

[5]: On average, two third of the Arab students graduate in Social sciences.

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