Entrepreneur Ecosystems

Three Reforms Needed To Stimulate Entrepreneurship, Innovation And Employment In GCC

In the GCC, the contribution of small and medium enterprises (SMEs) to the overall gross domestic product (GDP) remains small, and the pace of innovation, while accelerating, is still in need of major improvement.
Three Reforms Needed To Stimulate Entrepreneurship, Innovation And Employment In GCC
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Chief Investment Officer, Savola Group
7 min read
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In the GCC, the contribution of small and medium enterprises (SMEs) to the overall gross domestic product (GDP) remains small, and the pace of innovation, while accelerating, is still in need of major improvement. SME contribution stands at 20% of GDP in Saudi Arabia. By contrast, in Europe, SMEs represent 58% of GDP according to Eurostat, and they create 70% of all jobs.

Our governments recognize the importance of the SME sector, especially as a tool to create jobs, and have put in a lot of effort to stimulate young minds to innovate and/or set up and run their own businesses. SME funds, VC funds, incubators, and accelerators focused on the tech space, one-stop shops aimed at easing complexity, conferences and hubs that aim to congregate talent in an ecosystem have all been set up in recent years. Large organizations are also playing their part as corporate social responsibility increasingly becomes a measure for rating companies and their leadership teams.

However, some key areas fundamental to the development of the SME sector, and essential for entrepreneurs and innovators to thrive, have not been addressed properly to date.

Before young men or women even get to the stage of requiring funding or an ecosystem to work within, they have to arrive at the stage of ideation, followed by a decision to take risks. Following successful fundraising, these individuals enter a new stage of competition, and strive for survival in an environment, where, historically, a culture of monopolistic tendencies by large family-owned and other firms has developed. Let’s take each of these stages, and examine the challenges associated with them.

EDUCATION REFORM

THE IDEATION STAGE

Ideation needs a foundation of relevant and decent education, or access to information. We are spending a lot of resources of time and money in startup workshops, conferences, and accessible information platforms, but the reality of the matter is that by the time you are at the age of benefitting from these initiatives, you have already missed out on a lot of preparation.

Where we need to intervene is at the early stages of elementary and preparatory education. Granted, this investment will take time to bear fruit, but it is essential. Private schools still represent less than 20% market share across the GCC according to UNESCO, where English is introduced in grade 4. In today’s world, that already puts public school graduates at an early disadvantage vis-à-vis their counterparts. A lot of them struggle. In 2017, UAE started taking some measures to teach more science subjects in English for grades 10, 11, and 12 as many public school pupils fail the high school exit test that measures their level of English readiness in grade 12.

Holistic education is also a gap within the public system. Whereas private schools run entrepreneurship camps and have career counselors to help kids think about future aspirations, public school kids are often reliant on what is known to their parents or what they access on social media, which tends to be skewed towards fashion and food, limiting ambition horizons considerably.

A memorizing and regurgitation approach is encouraged at the expense of a thinking and problemsolving approach across the board. An enhancement of the schooling systems particularly public syllabi, is one of the most important areas of focus when looking to diversify our economies, and build an SME growth engine for healthy, productive countries.

LEGAL REFORM

THE RISK-TAKING DECISION

In Silicon Valley, you can meet any number of people who call themselves serial entrepreneurs, and wear their one, two, or three startup failures as badges of honor. Here though, we find it difficult to embrace failure as part of any learning journey. Culturally, we are not very tolerant of failure, but this is only a very small part of the real issue at hand.

There is a more tangible, practical aspect of risk-taking associated with starting up or running a business in many of the region’s markets, which is embedded in the lack of a true limited liability regime. The capitalist system has thrived on the concept of limited liability, whereby the risk that you take with a venture is limited to that which has been contributed into the venture, and nothing more. However, we have not implemented this truly into our corporate law.

In fact, even today, and despite being signatories to human rights charters that forbid debt imprisonment, many of our markets continue to put failed entrepreneurs owing money and crooks who have defrauded others out of money in the same place– jail. There have been measures to improve bankruptcy laws in the recent past, but this imprisonment law, combined with authority to issue travel bans due to money owed by people, is a real risk that entrepreneurs in developed markets do not have to take.

The law has actually led to a weak credit rating system, whereby instead of investing in strong credit check and diligence departments, lenders simply rely on postdated checks and IOUs, because no matter how well intentioned you are, they can put you behind bars to get their money back. Once imprisoned, most of the systems have no exit other than repayment or settlement, meaning that it acts a bit like a ransom case.

On top of this, even directors and officers of any entity that is in default of payment are at risk of imprisonment and travel bans, so companies that are new and therefore risky, or those that are in distress and in need of experts, actually find it difficult to enroll the support they need.

It is imperative that the limited liability concept is properly and completely embedded into our legal systems. Without this, the funding initiatives are not truly supportive of entrepreneurs, and could, in fact, end up being exploitative.

REGULATORY REFORM

COMPETING AS A STARTUP

GCC markets are considered tax havens given the low or zero level of corporate taxation depending on the country you are in. However, in many cases, this is compensated by exorbitant set up and running costs, as well as fees that can scarcely be absorbed by a struggling startup.

Despite the many one-stop shops and investor friendly campaigns, the reality remains that in the UK, you can be up and running as a new business for as little as GBP100- that is an impossibility in our region. Even recent freelancer licensing schemes entail over AED7,500 of costs before accounting for any visa needs that you may have.

For businesses setting up under specific regulators, multiple authorities (economic departments, relevant ministry, municipality, civil defense, etc.) pose a huge challenge. The authorities seldom communicate with each other, and what may pass with one can be blocked by another.

Furthermore, barring a few free zones that offer “flexidesks” at exuberant rates, no authority would even agree to look at any application without reference to the “premises” being used. The practical ramification of this requirement is that many entrepreneurs burn hard earned money in renting space they cannot use for up to a year in some cases, especially if food, municipality, or healthcare authorities are involved.

Costs of operations are also high regardless of size– whether you are an established multi-billion-dollar group or a startup, the same level of visa costs has to be paid to secure expat workers.

Unfortunately, all these are the ingredients for perpetuating monopolies and putting them at a permanent advantage versus newcomers. Large groups, with existing cash flows from established presence in various sectors, are always better placed to bear the set up, rental, visa, and other costs of a new business or concept.

When comparing this to an environment with corporate tax, it’s easy to see why the latter is more supportive of entrepreneurs– you do not pay taxes if you are making losses, whereas, in the former, you are paying high fees (albeit not termed taxes), regardless of performance or stage of growth.

Related: Driving Opportunity: Three Recommendations To Help Spur Entrepreneurship In Kuwait

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