Gulf States Focus on New Starts
At the Global Entrepreneurial Summit (GES) in Dubai last week, it was clear to me that there is a new level of engagement in developing more entrepreneurial economies at the highest levels of government in the Middle East and North Africa (MENA) region. The summit, a collaboration between the U.A.E. Prime Minister’s office and the Obama Administration, was an effort to leverage U.S. strengths in high growth entrepreneurship. Now that the summit is over, we take a look at the challenges before policymakers in the region in making the path easier for even more nascent entrepreneurs to succeed in the future.
It was encouraging as I walked around the Dubai World Trade Center last week to see so much activity already underway in the MENA countries to advance entrepreneurship. U.S. Government-led programs such as Partners For a New Beginning (PNB), the State Department’s Global Entrepreneurship Program, and the Global Innovation in Science and Technology (GIST) projects were very visible. So too were many of the flagship entities from the region including the Higher Colleges of Technology, Khalifa Fund and Dubai SME, all active players in financing and encouraging start-ups in the region.
Perhaps most encouraging however, was looking to the future. Private sector power houses such as Abraaj Capital are now global operations and an all-day meeting the day before the summit of Global Entrepreneurship Week (GEW) MENA leaders revealed that powerful local GEW Boards are forming to drive more entrepreneurial activity and more resources into developing smarter supportive ecosystems. On-line communities like WAMDA are now active in fostering broader discussion among the public at large and fueling the emergence of more globally recognized initiatives like Startup Weekend throughout the Gulf States.
Youth unemployment is clearly one of the region’s most urgent problems. About one-third of the population ages 15 - 29 unemployed and roughly 100 million more Arabs are about to reach employment age. U.S. President Barack Obama, who initiated this series of global entrepreneurship summits in the region in his now famous 2009 Cairo speech, placed entrepreneurship at the center of discussions about regional job creation. Yet, entrepreneurship, being messy and unpredictable as it is, cannot arise from a plan. The best course is to use a strategy. Entrepreneurial activity is best fueled from the bottom up by entrepreneurs, but it can easily be stifled if there is not genuine support from the top. Last week, Entrepreneurial Ventures of Arabia (EVA) presented itself as “the U.A.E.’s flagship platform for entrepreneurship across the Arab world” calling for an annual summit each year during Global Entrepreneurship Week. Below are some issues that this strategy might address in a build up to next year’s summit.
- Laws governing bankruptcy promote a culture of risk aversion
Unleashing entrepreneurship demands reforming bankruptcy legislation to promote risk-taking. In Egypt, for example, bankruptcy procedures are extremely slow and costly, and they even criminalize bankruptcy. As a result, scaling up is not a pragmatic option for a business owner. In addition, a long period to clear debtors denies entrepreneurs the opportunity to start new ventures.
- Unleveraged female entrepreneurship
The unemployment rate for young women is much greater than that of men in the same age. Not surprisingly, their participation in the SME sector is considerably lower. In Egypt, for instance, SMEs account for about 75 percent of total employment and 80 percent of GDP—yet women own less than two percent of SMEs. To better grasp the size of the loss this trend implies, consider the fact that according to the World Bank female-owned firms have increased their work force faster in Egypt, Jordan, Saudi Arabia, and West Bank and Gaza than male-owned firms. Perhaps, the Amman-based Oasis 500 accelerator program provides us with some evidence of the untapped potential in the region at large—40% of those accepted to the program are female despite the fact that only 25% of applications come from women as reported on the Wall Street Journal.
The problems that need to be addressed to fully tap this untapped source for growth go beyond nurturing the desire for an entrepreneurial career among women. They include structural problems, like access to business credit and lack of social support, as shown in the weak women entrepreneurs’ networks, according to an IFC/ CAWTR 2007 study. Such issues do not only affect the number of startups founded and run by women, but also their chances of success.
- Entrepreneurship not seen as a good career choice for the young
The February 2012 Silatech-Gallup poll found there is a marked decrease in young people planning to start businesses in recent years. In 2009, 26% of Arab youth ages 15 - 29 could be labeled as young aspiring entrepreneurs (those planning to start a business within 12 months). By 2011, that pool dropped to 9%. While this sharp drop has occurred in parallel with the global recession, youth entrepreneurship can be promoted in the MENA region.
The most obvious solution is entrepreneurship education. In fact, only 37 regional universities—fewer than 10% of the universities in the MENA region—offer entrepreneurship courses. Just 17 universities in the region have centers for entrepreneurship and a mere five actually offer a major in entrepreneurship, as reported in the 2011 World Economic Forum report.
Yet cultural capital must be also created to change the current attitudes of the young toward business creation. This is where government might help by supporting grassroots, bottom-up campaigns like Global Entrepreneurship Week and the plethora of existing initiatives that encourage entrepreneurial activity in the MENA region run from technology incubators, NGOs, networking associations and university programs.
- Unleveraged Arab diaspora
The best and brightest men and women from the Middle East have often gone on to work in Europe or the U.S., but anecdotal evidence suggests many of them are now seeking to become innovative leaders in their own countries instead. The region should at the very least create bridges between successful Arab émigrés and emerging local entrepreneurs, and ideally implement programs that combine the key ingredients for the success such as Start-Up Chile which was presented at the summit by its executive director, Horacio Melo, as a way to benefit from opening doors to outside participants as entrepreneurs that seed Arab born communities and businesses.
- Informal entrepreneurship
It is estimated that as much as half of the region's entrepreneurs remain in the informal sector, where they are even more prone to failure. This reflects unhealthy regulatory environments, as evidenced in how poor the MENA region ranks among indicators from the World Bank, the World Economic Forum and other research institutions. For example, starting up a firm can require as much as 20 times the average annual income, as in Yemen. According to a study by the Institute for Democracy and Liberty (ILD), the Tunisian fruit vendor whose self-immolation sparked the Arab Spring would have needed to raise 12 times his monthly net income in capital and complete 142 days worth of administrative steps to register his business and join the formal economy.
The region, and some countries more than others, need to implement sensible regulatory reform and mechanisms to facilitate regulatory compliance. In this regard, Oman and the United Arab Emirates are good examples of governments helping create a one-stop-shop for entrepreneurs.
- Not a Level Playing Field
It is difficult for people to start new firms when there are barriers to entering the market. In many MENA economies, many laws, policies and regulations have unintended consequences of promoting unproductive entrepreneurship. Government ministries should examine the rationale behind—and consequences of—direct involvement in the economy and act assertively to eliminate policies and programs that crowd out new entrepreneurs and startups through an examination of economic subsidies and protections.
It is two years ago today that a wave of demonstrations started in the MENA region kicking off the Arab Spring. The transition toward stability is and will continue to be a complex one but one where entrepreneurship is central. According to Ernst & Young’s Middle East Attractiveness survey 2012, despite the unrest caused by the Arab Spring, in 2011 the number of foreign direct investments (FDI) projects in the region as a whole rose by 7.8% when compared to 2010. This persistent confidence in the Middle East’s attractiveness as an investment destination is in part due to its strong demographics. With a clear strategy to turn this demographic into a source for innovative business creation, the region’s attractiveness will go well beyond an interesting consumer market to a global powerhouse of entrepreneurship. His Highness Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister, and President Obama should consider last week’s summit a successful launch of the next chapter in smoothing the path of young aspiring Arab entrepreneurs.