Removing institutional barriers to Arab entrepreneurship

Successfully nurturing start-ups would have a substantially positive impact on GDP, according to Joe Saddi, Senior Vice President and Head of the Middle East for Booz Allen Hamilton, a global management consulting firm with offices throughout the MENA region.

'Entrepreneurship, as evidenced by the strength of start-up activity, is a key driver of economic growth and job creation, and would be particularly welcome in the region, where there is a very low level of entrepreneurial activity,'

Saddi said during a conference on entrepreneurship at the fifth annual Middle East Day, hosted by the London Business School's Middle East Club.

The club chose the theme because of the recent huge capital flows into the region. Speakers addressed the current challenges and opportunities facing entrepreneurs in the Middle East given this unique environment.

He noted that once start-ups mature into Small and Medium Enterprises (SMEs), they become key contributors to employment and GDP. For example, SMEs contribute 70% of total employment in the European Union and 49% in the United States, while they make up 60% of France's GDP, 55% of Indonesia's GDP and 40% of the United States' GDP.

Unfortunately, start-up activity in the Middle East has been limited to date, with even better positioned regional countries such as the UAE placed quite low in international rankings. For example, only 2.7% of the UAE population is engaged in early-stage entrepreneurial activity, compared with 19.3% in Indonesia, 10% in the United States, 6.1% in Turkey, and 5.3% in South Africa.

Booz Allen's analysis points out three main components that make a business environment favorable 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, according to Saddi. The Arab average for R&D expenditure as a percent of GDP is 0.2%, while in Turkey it is 0.6%, 1.15% in Brazil, 2.3% in the OECD, 2.8% in the United States, and 3.1% in Japan.

In addition, entrepreneurs wishing to start a business face a variety of administrative, cost, and financing hurdles. In one Arab country, for example, the most problematic factors for doing business were identified in a survey as access to financing, bureaucracy, lack of an educated workforce, and taxes.

While the time it takes to start a business in this illustrative country is 36 days, 1.5 times as long as the OECD average, the minimum capital required is 25 times the country's average per-capita income, compared to just 44% of per-capita income in OECD countries.

Saddi identified two factors to support development of a large base of entrepreneurs. 'Respect and social recognition of entrepreneurs is a pre-requisite for establishing a culture of entrepreneurship. Second, an entrepreneurial culture should be developed in schools.'

To promote ideation and innovation activity, Saddi said,

'Market needs can be determined by the interaction of leaders from the government, private sector, and education, while the establishment of close links between universities, businesses, and the financial sector encourages innovation and the commercialization of new technologies. Governments can play a pivotal role in promoting R&D and ideation.'

The best ways to effectively support new start-ups, according to Saddi, are to develop a favorable 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.

Saddi concluded by sketching out a multi-dimensional approach to stimulating start-up activity. Some elements of this comprehensive strategy could include: cooperation among the public, private, and voluntary sectors to ensure that the environment is favorable to starting a business and that government is proactive in stimulating start-ups.

There also should be a coordination of public- and private-sector financing schemes at national/aggregate levels, both to help entrepreneurs maximize their capital and to establish new financing programs to fill any gaps. Existing government and private Business Development Services should be better coordinated and improved. New programs should be established to fill the gaps and entrepreneurs should be encouraged to use them. Governments should enable a unified and single point of contact (a one-stop shop) for entrepreneurs to develop their business ideas.

Governments should work with the public, private, and voluntary sectors to ensure that the environment is, and remains, favorable to starting a business and that the government is proactive in stimulating start-ups.

The Middle East Club sought to use the annual gathering to explore how businesses in the region could capitalize on the opportunities presented by the substantial and increasing flows of investments into the region.