How do Small Businesses make it Big?

"Entrepreneurship is about getting people to believe in something which doesn’t yet exist."

When Charles Leadbeater, a leading authority on innovation and creativity, elucidated this basic principle at the recent EO Majlis, he was also talking about the amazing story of Qatar and their winning World Cup bid — of crafting ideas for people to invest in something that is not yet there….

But even with such an inspiring story that makes the perfect setting for entrepreneurial spurts, why are Qatar’s small and medium-sized enterprises (SMEs) not making much of a contribution to the GDP? Though there are some successful entrepreneurial activities and also active governmental handholding, fewer than 40% of the existing SME enterprises were established after 2000. The sector only contributes about 15% to the GDP, a minimal figure considering neighbouring GCC countries.

In a country that has no defined path for an SME startup, nor any specific characterisation of an SME, how do you inculcate an entrepreneurial spirit? How vital are startups when the country has resources to last for decades and a public sector that has recently hiked its salary for nationals? How can you rationalise a positive entrepreneurial interest when the same study (Silatech Index) shows a high level of interest in government employment similar to that of other Arab countries?

Qatar Today discusses with experts why it is essential to foster an entrepreneurial spirit even in countries with high GDP while we discuss the tools that are made available to foster an entrepreneurial spirit in the land of plenty.

The GCC perspective

The overall share of SMEs in the Middle East-North Africa (MENA) region is estimated to account for 71% of employment but only 28% of GDP.
In Bahrain, the GDP share of SMEs is 28% while they are responsible for 73% of all private sector jobs.

In Dubai, SMEs are estimated to make up 95% of the total number of enterprises, 42% of the workforce, and 40% of GDP.

Saudi Arabia’s SMEs are responsible for approximately 40% of jobs in the country and their GDP contribution is estimated at 28-33%.

By comparison, in the US, SMEs contribute close to 50% of GDP, whereas their share in the EU is just under 60%. They provide more than half of the employment in the US and more than two-thirds in Europe.

The main challenges associated with Gulf SMEs are fourfold. Firstly, they represent a minor contribution both in terms of workforce and turnover. For instance, 87.8% of Bahraini companies have no more than 10 employees. Of the 785,000 commercial establishments registered in Saudi Arabia (2008 figures), some 764,000 were sole proprietorships.

Secondly, the average Gulf SME is primarily engaged in the buying and selling of goods. About 42% of all Bahraini and Saudi enterprises are engaged in “trading”. Construction is typically the second most important area of activity, followed by industry.

Thirdly, a typical Gulf SME relies very heavily on expatriate employees. For instance, in Bahrain, nationals account for only 14% of SME employment, while the Saudi private sector as a whole is 90% reliant on expatriates. This limits the size and growth of the pool of entrepreneurs in the region as well as the employment contribution of GCC SMEs.

Lastly, typical Gulf SMEs are relatively inefficient. Their share of employment is far greater than their share of GDP, highlighting the limited value added contribution made by most of them. They tend to have limited access to credit and capital and the opportunities posed by retained profits are modest.

Overcoming these limitations is likely to require significant new initiatives in a number of areas.

The need for local entrepreneurs

Milhan Baig, Assistant Director at Delotte puts entrepreneuship in context by quoting Baroness Margret Thatcher, the longest servicing prime minister of the UK, from one of her speeches at the Small Business Bureau conference in 1984, “small firms can be a seed-bed for new ideas and a testing ground for new ways of working. They often lead the way in new products and new services. The freer the society, the more small businesses there will be. And the more small businesses there are, the freer and more enterprising that society is bound to be”.

It could be argued that her recognition and promotion of SMEs was one of the key factors contributing to the UK’s economic recovery and growth from the late 1980s and into the 1990s.

"Today, in the more developed economies, such as the UK, USA, Japan and much of Europe, SMEs contribute at least fifty percent of the countries’ GDPs whereas this statistic is much lower across the GCC."

And the reason Baig attributes to need for entrepreneurship activities as opposed to multi-nationals is the need for sustainability or “home-grown” enterprises.

"Unlike the larger businesses or recruiting foreign owned businesses into a country, SMEs form part of a more successful long-term economic strategy. The reason for this is that local SMEs today will eventually grow to become the larger local firms of tomorrow. This will lead to several home-grown employment, fiscal, trade and development prospects that are contained in the local economy with little leakage to other economies.

According to Chady Zein, a Principal with Booz & Company and a member of the firm’s financial services private equity practice who advises the region’s leading private equity and venture capital firms, entrepreneurship will “undoubtedly” be one of the key driving forces in the region. And one of the main drivers is the bulging youth population.

"The MENA region is home to a very young population with almost half of it under 25, with growth at about 1.5 times the world’s average. This has led to one of the world’s youngest workforces, requiring an additional 75 million jobs to be created by 2020, or an average of eight million jobs per year. By way of comparison, the US created approximately 3.5 million jobs for an almost equivalent population in 2011," says Zein.

The recent political unrest seems to have fanned the need for change too.
"We have witnessed (through the Arab Spring) the importance of boosting the region’s economic stability. Politics aside, we have all seen how lacklustre opportunities for securing one’s income can quickly become a strong driver for change."

"In this context, entrepreneurship has a crucial role to play in securing the region’s economic future and stability. The challenge requires addressing all elements of the entrepreneurship ecosystem. Moreover, this will also require the active participation of several stakeholders including governments, the private sector, educational institutions, media, the financial sector as well as entrepreneurs themselves," he stresses.

Steps in the right direction

Qatar has begun to take steps to give startups a push in the right direction. There is Enterprise Qatar (EQ), a governmental body with its objectives to strengthen the SME business environment, making it more viable for entrepreneurs to take a prominent role in Qatar’s economy and to give SMEs and entrepreneurs a voice that is heard.

"At EQ, we work hard to build a sustainable environment and a solid platform for SMEs which will enable entrepreneurs to become Qatar’s ambassadors for entrepreneurship on a regional and global level," says Noora Al Mannai, Chief Executive Officer of Enterprise Qatar (EQ).

The Qatar Science and Technology Park (QSTP) has also launched its Executive Entrepreneurship Certificate Program and plans to become an incubator for startup businesses and entrepreneurs, both local and from overseas.

Qatar Development Bank (QDB) was opened to promote and finance SMEs.
Bedaya Center and Roudha Center are organisations that will help startups through mentoring (for more check detailed interviews in later pages).

"But without more creative ideas, informal networks to scope them, and mentors to guide teams in exploring them, we will continue to see low rates of new firm formation in Qatar and fewer Qataris creating rather than taking jobs," says Jonathan Ortmans, President of the Public Forum Institute, a non-partisan organisation dedicated to fostering dialogue on important policy issues.

Almost as an answer to this need, Entrepreneur Organisation (EO) Qatar Chapter organised the EO Majlis that was aimed as a networking event to highlight best practices and highlight success stories for the Qatari youth.

Another step to encourage enterprise was the Ernst & Young Entrepreneur of the Year award (EOY) supported by EQ which helped spread success stories in a bid to encourage and inspire youth to follow the footsteps of the finalists.

"EOY is acknowledged as being pivotal in the discovery and promotion of talented entrepreneurs and in putting our very own on the global stage to represent our country at the World Awards at Monte Carlo this June to vie for this coveted title amongst 60 peers representing over 50 countries," says Al Mannai.

Strong entrepreneurial spirit 

As a result of these encouraging efforts, the country’s youth seem to be showing an entrepreneurial interest.

According to a recent Silatech Index analysis conducted by Gallup, Arab countries have seen a marked decrease in young people planning to start businesses in recent years. In 2009, 26% of Arab youth aged 15 to 29 could be labeled as young aspiring entrepreneurs, or those planning to start a business within 12 months. By 2010, the Arab world’s pool of young aspiring entrepreneurs dropped to 11%, before settling at 9% in the fall of 2011. Although this drop largely occurred in parallel with the global recession, its magnitude and uniformity across the Arab world has been stark.

However, Qatar stands alone as the only Arab country in which youth entrepreneurship levels held firm or grew during this period, increasing to 33% by the end of 2011 from 24% in 2009. According to a Gallup poll, Qatar has uncovered signs of a more robust entrepreneurial youth culture than in any of its Arab neighbours.

 ”The country’s natural resources and high GDP constitute undoubtedly a comparative advantage especially if one considers how they create fundamental economic drivers for a multitude of business opportunities for entrepreneurs. However, a flourishing entrepreneurial ecosystem requires nurturing its essential components,” says Zein.

Qataris’ attitudes toward starting businesses are improving in tandem with the establishment of favorable conditions for entrepreneurship in the country. Two-thirds of Qataris aged 15 to 29 say they personally know someone who would be able to give them advice about managing a business. Similarly, 74% of Qatari youth say there is someone other than their family members they trust enough to make a business partner. The majority of young Qataris also acknowledge having access to training on how to start a business (58%) and access to money to start a company (61%).

Passion is the only driver

While there is an improvement in views of entrepreneurship, the country’s youth still showed a high level of interest in government employment similar to that of other Arab countries. Assuming that pay and work conditions are similar, more young Qataris would prefer to work in government (58%) than in self-employment (13%), private business (8%), or the non-profit sector (13%), says the Silatech Gallup index.  In the Arab world, the safety of a career in government has generally been accepted as preferable to entrepreneurship in recent history. It’s likely the Qatari government’s status as a preferred employer is due to its shorter work hours, higher salaries and generous holidays.

The country’s prosperous economic climate and government benefits programmes have naturally skewed the incentive for work and entrepreneurship as compared to many countries. Symbolic of the country’s wealth, all citizens received a standard 60% salary increase on already inflated salaries in October 2011, in line with the actions of other GCC governments in the wake of Arab Spring instability. By status of their citizenship, Qataris are essentially guaranteed the comforts of a middle-class lifestyle, thus most would never need to start a business as a means of economic survival but are more likely to be guided into entrepreneurship by financial ambition or ideas of passion, says the report.

Like Saleh Al Khulaifi of Bedaya Center remarked, “It is only passion that steers the youth towards start ups.”