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Contents

Executive Summary Page 4

1. The changing economic and social landscape Page 6

2. Emerging economic paradigms Page 9

3. SMEs and entrepreneurship Page 17

4. Promoting SMEs and entrepreneurship in the GCC Page 26

5. Job creation through SMEs Page 32

6. Addressing challenges faced by SMEs Page 40

7. Conclusions and recommendations Page 46

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Preface SMEs are a vital sector for economies across the world. In the MENA region, SMEs account for 90% of the total registered companies. In the GCC too, governments are putting together many programs in place to push greater innovation and competitiveness within a SME ecosystem. New investment agencies have been created in countries such as Kuwait and the UAE in order to target and invest in SMEs with potential. The recognition that SMEs are among the key components of economic growth, job creation and value-­added exports is finding increasing acceptance in the GCC. Under various national transformation programs (e.g. Saudi Vision 2030), clear articulation of issues around the need to encourage SMEs with business-­friendly regulations, better access to funds, international partnerships and a larger share of national procurement and government tenders have been made. Moreover, the recent success stories emerging from the GCC with respect to SMEs have focused renewed interest and attention on entrepreneurship as a viable and attractive vehicle for a compelling career among many young GCC nationals. The GCC enjoys a demographic dividend in terms of the vast number of youth in its population. Around 40% of the population in the GCC is below the age of 25. The GCC is one of the most urbanized regions in the world, providing ample opportunities for the formation of business networks and ecosystems. Such ecosystems are already visible across the GCC, with examples such as the Dubai Media City (UAE) and Special Economic Zone Authority in Duqm (Oman). The wider world trends also point to an important role for SMEs in the GCC. The shift in global economic power from the West to the East has positioned the GCC region strategically in the middle of major global economic centres, providing the region with a unique opportunity to strengthen its role as a strategic logistics, trade and financial hub. As the opportunities multiply in the GCC, there will be more competitiveness engendered among the various nations in the bloc. For example, the logistics industry in Oman promises to develop into a vital logistics centre in the region. This is already bringing in intensified competition from centres such as the KSA and the UAE. Overall, such competitiveness will allow more nimble, flexible and efficient companies to develop. In the GCC, SMEs provide employment currently to close to 17 million people. Our estimates suggest that by 2020, the total number of people employed in SMEs will likely reach 20 million, at an average annual rate of close to 2.5%. However, the yearly growth rates could go even higher on the back of aggressive government support and increased flow of FDI due to various policies and institutions being put in place. The year-­on-­year growth rate could reach as much as close to 6%, implying over 22 million people employed. On the downside, any further erratic volatility in oil prices may squeeze government spending and private consumption, depressing the job creation potential of SMEs as well in the process. Yet, we project a rate of around 1.2% in annual growth in terms of SME jobs in the GCC in the event of any potential larger economic pessimism in the GCC region or instability in the wider MENA region. The wider arc of how SMEs in the GCC will evolve is still something that is ongoing. Though the final contours are not yet clearly in place, the volume and intensity of activities surrounding SMEs suggest that entrepreneurship will play a very vital role in the larger economic diversification and transformation project in the GCC.

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With growing clusters of challenges constellating around the global oil industry, GCC policymakers will have to look into jumpstarting sustainable businesses in the region, particularly through empowering SMEs. It is growing increasingly clear that going forward, SMEs will have an important role to play in GCC governments’ wider social, environmental and economic goals and in terms of building sustainable communities. Sustainable economies thrive on wide ranging investments that provide a relevant infrastructural system in order to strengthen economic resilience and support durable employment. A particular concern among many GCC policymakers is the relative lack of success of various employee nationalization programs. As a tool of sustainable economic growth that draw from a range of industries, SMEs can help in the process of accelerating structural economic reforms and create domestic demand bases for regionally created products. The urgent need of enabling sustained growth and rooting social mobility in private endeavor;; rather than government jobs, can more easily be materialized if SMEs are facilitated and encouraged to thrive. The success of SMEs in the GCC are likely to be tied largely to the degree and intensity of diversification away from oil revenues. As part of the efforts to consolidate an economically diversified knowledge economy, the GCC will have to consistently strengthen its business-­enabling environment and the attendant institutional frameworks towards improving competitiveness and encouraging innovation. By institutionalizing competition laws, new economic frameworks and innovative regulatory policies, the GCC‘s economic and institutional structures can increasingly inject more impetus for the efficient use of resources in allowing entrepreneurship to thrive. As the oil price seesaws, a new thinking is needed to govern the economic planning and regulatory buildup for establishing a robust private sector ecosystem in which SMEs can move towards knowledge-­oriented products and services. SMEs need critical focal points that can direct and develop the entrepreneurial skills among young GCC nationals. In order for SMEs to support thriving of innovation, a complete ecosystem of private and public sector institutions is needed. The ecosystem should allow synergies and networks to develop between various elements like technology acquisition, application oriented R&D, passionate and skilled workforce, favorable regulations, strong intellectual property regime, etc. In addition, diversification policies should be clearly tailored to national circumstances. For instance, not all countries will be able to create strong free trade zone ecosystems on which SMEs can bank on. This means that knowledge economy policies should focus on comparative advantages, with a keen understanding of traditional strengths and areas of challenges. A long-­term vision of science, technology and innovation (STI) to generate a knowledge-­based society and economy through a globally competitive innovation ecosystem requires an action plan that will help in making a start. Supporting SMEs should rank at the top of that list.

Executive Summary

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1. The changing economic and social landscape

1.1 Broad global and regional economic trends in the midst of oil price volatility

After reaching a high of USD 115.19 per barrel in June 2014, the price of Brent crude dropped to USD 27.88/bbl on 20 January 2016, a fall of about 75%. This precipitous drop left GCC countries perplexed and even troubled. Analysts opine that crude oversupply (e.g., U.S. shale revolution), slowing demand (e.g., Eurozone, China) and the reluctance of OPEC members (like the KSA) to restrain production and stabilize prices, etc., led to the run of falling price levels. Since then, the price has rebounded to over USD 50 per barrel, as talks of global production cut, with or without Iran, buoyed the commodity.

Brent Oil Prices in USD/bbl (June 2014-­June 2016)

Source: Reuters

The low oil price environment has significant implications for oil-­dependent GCC economies as oil revenues constitute about 80% of overall government revenues. In 2015, export revenues for GCC countries fell short by about USD 275bn, according to the IMF.

Oil Dependence of GCC Countries (May 2016)

Country Oil Revenues (% of GDP) Oil Exports (% of GDP)

UAE 27.0 30.4

Saudi Arabia 37.1 42.4

Kuwait 58.7 60.0

Qatar 39.6 58.4

Oman 21.8 53.4

Bahrain 42.9 30.2

Source: IMF, World Bank OPEC member countries produce around 30% of the global crude oil, and its decision to maintain production levels to hold onto its market share in the wake of weak demand and abundant supplies, is widely expected to keep oil prices below USD 60/bbl in the short to medium term.

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Prolonged lower oil prices could further exacerbate the fiscal situation which is expected to flip into a position of deficit from surplus position, as the breakeven oil prices for most countries are much higher than the current oil price. Fiscal breakeven for all major producers in 2016 are well above the current oil price, despite the rebound. For the GCC, assuming low oil prices persist, public foreign assets could decline substantially over the next 5 years. The bulk of the financing requirement would be concentrated in Saudi Arabia, while Kuwait, Qatar and the UAE are expected to preserve the sizable foreign assets. 1.2 Changing oil dynamics and emerging socioeconomic developments in the GCC The GCC is a region of large youth populations. Thus, the need to create quality jobs and good quality of life is essential in order to channel the energies of the youth for national development efforts. GCC Population (Ages 0-­14 as a % of Total Population)

Source: The World Bank With the ongoing volatility in oil prices, most GCC countries have already commenced energy price reforms. For e.g., Bahrain and the KSA have increased electricity tariffs on industry;; while the UAE has increased electricity and water tariff rates for the general population. According to IMF estimates, the national labour force in the GCC could increase by 1.5 million to 2 million people by 2020. Thus, the current social contract with respect to good public sector jobs and subsidized living is starting to show signs of change.

Many current and future job seekers in the GCC are likely to be faced with a persistent situation of sluggish government spending, along with the pressing need to discover alternative engines of economic growth. Yet, the issue remains that despite a number of labour market interventions, the employment of nationals in the private sector has proven mostly elusive. Moreover, issues like taxation and privatization are likely to come up for debates and discussions more often. Effective governance and efficiency are likely to be the key predictors of public sector success as well.

As the table below illustrates, state enterprises contribute to a sizeable chunk of the various national GDPs in the GCC. These state enterprises are largely tied to the energy sector or derive much of their financial strength from hydrocarbon revenues. With volatility in oil receipts, spending on various infrastructure and other developmental projects may get impacted, along with rise in cost optimization measures.

29.0%

22.0% 21.0% 21.0%

16.0%14.0%

KSA Kuwait Oman Bahrain Qatar UAE

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GCC Government stakes in listed state-­owned enterprises (US$ bn) Country Share in Value SOEs (% of GDP) Bahrain 2.4 7.9 Kuwait 6.9 5.7 Oman 2.9 4.9 Qatar 42.8 23.1 Saudi Arabia 129.1 19.8 UAE 77.2 21.8 Source: Bloomberg;; and IMF staff calculations There is growing emphasis on the need to enable more and more nationals to join the private sector. According to Ernst & Young, “in the UAE and Qatar, only 1% of the private sector workforce is made up of nationals. In Saudi Arabia, the figure is 18%, the highest in the GCC.” Even as the overall numbers are dismal, there is also a deep concern over the skillsets gap among students and professionals. The youth of today may have to think about the previously unthinkable subject of personal taxation as well. Even as finalization of value-­added tax (VAT) programs are gathering pace across the GCC, there are hints that over time, nominal income taxes could come in for consideration as well.

The GCC states have enjoyed a robust run of economic growth, infrastructure development and building up of social institutions on the back of sound oil receipts. The region appears on the cusp of a transition to a more advanced economic framework, underpinned by knowledge workers and the private sector. SMEs will play a critical role in this new framework and it remains to be seen how policies, regulations, plans and implementation shape up to fashion a new and promising economic reality.

1.3 The evolution of the GCC labour markets The private sector accounts for only one third of nationals’ jobs in the GCC, a share that has barely changed from over a decade ago1. There are, however, country-­specific nuances in the way the labor markets stack up. For e.g., in Bahrain and Oman, there is a relatively higher openness to work in the private sector;; while in Kuwait and Qatar—the propensity is low (albeit growing). Overall, in the GCC, the ratio of nationals to expatriates in the private sector is less than 1-­to-­52. Worryingly, this ratio has fallen slightly since 2006, according to the IMF.

GCC employment by sector and nationality (2014)

Source: IMF

1 IMF 2 Ibid

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2. Emerging economic paradigms 2.1 Knowledge economy and the rise of knowledge workers Many global analysts are pointing out that the world stands on the brink of a technological revolution that will majorly alter the way people live, work, and relate or communicate to one another. According to the World Economic Forum, “[i]n its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before.” It is not yet clear as to how the transformation will take place;; but a suitable response to it will involve all stakeholders of the global economic system, from the public and private sectors to academia and the general civil society.

As various GCC countries ponder the questions of national competitiveness and future economic diversification efforts, it would be useful to consider the broad global historical trends for insights on strategic planning. According to some, the world has already entered or is poised to enter the age of the ‘Fourth Industrial Revolution’.

Source: The World Economic Forum Like the industrial revolutions that went before it, the Fourth Industrial Revolution has the capacity to raise income levels and improve the quality of life for populations around the globe. Early indications suggest that the largest beneficiaries of innovation are likely to be the providers of intellectual and physical capital, i.e., the innovators, shareholders, and investors. Thus, the GCC countries have to position its non-­oil capabilities in line with larger trends to derive greater benefits for national income and for the quality of life of its citizens.

According to many experts and analysts from advanced industrialized countries in the West, work tasks and activities that were once considered the exclusive remit of the human capability (such as driving vehicles on highways, drafting legal documents, certain forms of medical research, etc.) are now starting to be either tried out or routinely carried out using artificial intelligence and ‘big data’ analytical tools3. Though the debate about technology replacing many types of human work is now largely going on in advanced industrialized nations, there is little doubt that the trend would start impacting other parts of the world, as well, including the GCC.

3 Bloomberg

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The rise of artificial intelligence and advanced data analytical capabilities has resurrected the concept of the ‘knowledge worker’. According to Davis (2002), “knowledge workers are those employees who rely on information in order to make decisions.” In other words, knowledge workers depend more on creativity, communication and intelligent channeling of information to add value to their organizations and to further the base of the productive knowledge capacity. Even as routine tasks are automated, humans will be called upon more and more to express higher cognitive and expressive capabilities at work places. This is a deep paradigm shift with profound potential for impact on the future of work, worldwide.

Traditional manufacturing locations like China are showing a marked determination to better themselves in robotics as rising wages have eroded comparative cost advantages. The sharp falls in the price of industrial robots and a continuous increase in their capabilities have quickened the rapid rise of industrial robots in China, and many other parts of the world4. According to the Boston Consulting Group (BCG), a management consultancy, the price of industrial robots and their enabling software will fall by 20% over the coming decade, while their performance will rise by 5% each year.

Shipments of industrial robots to China

Source: The Financial Times Estimating the ability of a country to develop knowledge workers is a task of some complexity. No single easy measure is available. The overall picture with respect to the ecosystem in which knowledge workers have to function can be obtained only by constellating several indicators or KPIs. A country’s knowledge economy ecosystem can be judged to some extent by using the Global Competiveness Index (GCI) of the WEF. The following table collates indicators from the GCI with respect to top three performers and the six GCC countries across select indicators from within the GCI. Country Overall GCI Rank Innovation Capacity Spending on R&D Switzerland 1 1 1

Singapore 2 19 11

United States 3 2 3

KSA 25 57 38

Kuwait 34 101 102

UAE 17 28 22

Qatar 14 12 9

Oman 62 119 120

Bahrain 39 70 87

Source: The World Economic Forum

4 Financial Times

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One interesting takeaway from the above table is that Qatar ranks at the top of most of the indices with respect to the six GCC countries, followed closely by the UAE. Part of the reason why Qatar is surging ahead in capacity for innovation may be due to a well-­defined national research strategy. The Qatar National Research Strategy (QNRS) defines Qatar’s research objectives based on national priorities. The ecosystem for research and innovation is well-­rounded as well, with institutions like Qatar Foundation (QF) and Qatar Science & Technology Park (QSTP).

Source: Qatar Foundation & BLOOVO.COM Analysis ‘Thus, having a well-­planned strategy with a coalition of institutions geared to implemented it is very necessary in order to boost national innovation capabilities, and thereby the competitiveness of the private sector. 2.2 The role of R&D and innovation In an economy that is attempting to diversify in a sustainable manner, an ecosystem for innovation and research is key. An innovation ecosystem can offer the following benefits:

• Draw leading companies, entrepreneurs and investments from across the world. • The ability to work with an extensive network of partners to help business owners launch and

scale innovative practices. • Providing SMEs with the entrepreneurship skills needed to succeed, using processes and

methodologies that transcend conventional business thoughts and practices. • Development of responsive human capital development capabilities by creating a conducive

environment and support systems for research, experimentation and innovation in alignment with the educational sector.

Spotlight Qatar in the Knowledge Economy

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The innovation ecosystem

Source: Kuhlman & Arnold (2001) & BLOOVO.COM Analysis Without effective university-­industry collaboration (UIC), R&D-­focused SMEs cannot produce enough impact in terms of an innovation system5. SMEs are usually not blessed with resources like large companies and, thus, they have a strong incentive to overcome systemic hurdles and move toward UIC that can lead to specific outcomes such as the development of a new product or service. It is worrying that the spending on R&D in the GCC is very low in comparison with some international examples like Germany and the U.S., which are known to possess a strong R&D ecosystem. GCC R&D expenditure (% of GDP) in comparison to select international peers (2013)

Source: The World Bank The successful establishment of a knowledge-­based economy needs to be supported by a robust

5 Research Institute of Economy, Trade and Industry, Japan

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Science, Technology and Innovation (STI) base. For that, programs that support the building of a best-­in-­class innovation ecosystem in the GCC countries is needed. Only then the full potential of innovative ideas and products can be exploited. 2.3 Global industry trends impacting traditional jobs Globally, policy makers are grappling with the phenomenon of change and innovation, as shifts in the nature of work bring forth both opportunities and challenges. According to the U.S. Department of Labor — “in recent decades, a growing number of stable employment relationships have given way to something more arms-­‐‑length – from contract situations to temporary employment to one-­‐‑off job opportunities, […]” Technological change is propelling some of these developments, but these broad workplace shifts are happening simultaneously across both high-­ and low-­tech sectors. For some employees, changing work arrangements empower them to produce value in new ways. Moreover, evolving technology and changing models of business can improve capacity to respond to trends and consumer demand quicker and more efficiently. However, the caveat is that they can do so by fostering tenuous or superficial relationships between workers and businesses, moving further economic risk onto employees and their families. The shifts that have happened over the past few decades in terms of global realignment of capabilities in manufacturing is one evident example. Yet, that shift too is only barely the surface in terms of the changes imminent due to digital and analytical technologies. Top 15 manufacturers by share of global nominal manufacturing gross value added

Source: McKinsey Global Institute Analysis & BLOOVO.COM Analysis

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In multiple ways, the world of commerce and business appears poised on the cusp of change due to the convergence of many long-­term trends and effects. Some of them are summarized below:

Trend Factor Description

Quest for resources

§ Competition to ensure access to food and water. § Competition to gain access to new markets by various

countries that seek to grow their respective industrial bases. § Geopolitical tensions over access to key natural resources.

Environmental concerns

§ The threat of rapid climate change. § The associated focus on renewables, causing hydrocarbons

to face the prospects of being stranded.

Transport § New materials and power systems opening up new

opportunities for automated transport — meaning lesser reliance on hydrocarbons.

Technological disruptions

§ Digitalization of production. § The age of ‘big data’. § Convergence of technologies (i.e., interdisciplinary

networks).

Demographic developments

§ Employment of aspiring youth populations. § New business ecosystems requiring flexible, yet specialist,

skills. § The ability to project global understanding while acting

locally. Source: BLOOVO.COM Analysis Even as SMEs attempt to sprout and thrive across the GCC, the underlying currents of work places and work modes under pressure to increase adaptability and flexibility in order to deal with volatilities has to be acknowledged and leveraged. Decision-­making is occurring with more latitude in companies, emphasizing the need for continuous learning.6 Even as new trade corridors are opening between various parts of the world, supply chains too are set for long-­term changes. For e.g., China’s Silk Road initiatives have the potential to carve a new economic system that is centered on Beijing’s rise across the world stage. 2.4 The trend of economic growth with fewer jobs The way that future generations will work are being redefined. This has a bearing on how GCC SMEs are likely to shape up. According to economists from Harvard University, automation has “hollowed out” the American labor market over the last half a century. This explains, at least partly, the persistence of fewer jobs even during years of economic growth. Thus, entrepreneurship in the GCC can offset some of the negative human effects of automation by empowering individuals to mark out their own earning pathways. Essentially, what the emergent world of work is calling out for is differentiation in skills in terms of bringing in specialist expertise in some form of cognitive inputs. In the GCC context, SMEs can help address the skew in the labor market. McKinsey, taking the case of the Kingdom of Saudi Arabia, termed it as “[…] a dual labor market, with Saudi nationals in higher-­paying public-­sector jobs, and non-­Saudis in lower-­paying private-­sector jobs,”.

6 UK Commission for Employment and Skills

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Structural illustration of the Saudi labour market

Source: Saudi Ministry of Commerce & Planning, Saudi Ministry of Labor, Saudi Ministry of Health & McKinsey There is the concern among countries in the GCC that there is the need to boost productivity among nationals in order to provide impetus to the various national transformation programs. Some countries in the GCC have an extremely high expatriate component to their populations. Thus, the transition to the knowledge economy paradigm has to enable policies that can harness the contribution of the expatriate population, as well, in order to achieve the larger national economic transformation effect. Nationals as a % of total population in the GCC

Source: BLOOVO.COM Analysis using relevant government statistics According to the IMF, persistently low oil prices could mean that aggregate unemployment rate in the GCC would increase from 12.7% at the end of 2015 to 16% by 2020. SMEs can help in the case of generating employment;; but need to improve scores on productivity. The following figure compares the

67%56%

49%

34%

12% 10%

Saudi Arabia Oman Bahrain Kuwait Qatar UAE

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productivity score of Dubai SMEs, considered to have one of the strongest SME ecosystems in the region, to some international benchmarks. SMEs productivity benchmarks (USD PPP)

Source: D&B Business Insights;; SME Dubai;; Local Media Reports

107

59

31 26

Singapore South Korea Dubai New Zealand

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3. SMEs and entrepreneurship 3.1 The need for an economic model that is sustainable and inclusive While discussing sustainable and inclusive economic development, it would be useful to dwell on a concept called ‘economic complexity’. In their work called The Atlas of Economic Complexity: Mapping Paths to Prosperity, Hausmann, Hidalgo et al. define the concept of economic complexity as follows: “Economic complexity, is expressed in the composition of a country’s productive output and reflects the structures that emerge to hold and combine knowledge.” Thus, to understand what the index of Economic Complexity (EC) is all about, it is vital to grasp what is meant by “productive output”. Productive output can be interchangeably used with the term “product space”. By product space, Hausmann defines it as “the network of relatedness between products,” Relatedness can further be understood as the similarity in the inputs needed by a certain economic activity, including human skills, institutional capacities, infrastructural requirements and technological sophistication. Thus, the EC is a direct reflection of a nation’s combination of networks that interconnects the multiple poles of usable knowledge embedded within the national space or scope. In other words, the EC captures “the total amount of productive knowledge that is embedded in a society as a whole and is related to the diversity of knowledge that a society holds.” Hidalgo and Hausmann point out that traditionally, states’ economic development has been measured via an array of aggregated variables, like the gross domestic product (GDP). However, development need not necessarily follow a linear causal path, always. In fact, it can be argued that economic development has been mostly associated with an increase in the range or diversity of products created that cannot be captured or identified through simplistic aggregate measures. This follows the logic that as nations develop, multiple industries and products are born. Thus, a more nuanced lens to understand development is required that focuses on assessing how nations develop various industries and products, rather than attempting to predict how they accumulate capital. The ECI is based on the nuanced approach that “it is possible to use export data to study development as a diffusion process over a network.” EC argues that nations tend to diversify by developing or creating products that are close in the product space to those they already export. This helps in identifying the most promising areas to focus for economic growth. Product Space Network

Source: Hausmann, R., Hidalgo, C.A. (2011) The Atlas of Economic Complexity: Mapping Paths to Prosperity & BLOOVO.COM

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It is highly likely that a country that depends on extractive industries for income will be saddled with a narrow base or platform of productive knowledge due to low complexity levels. This is due to the ECI’s implicit message that countries very rarely make radical structural transformations. In other words, countries drawing a major proportion of their revenue from a singular or limited basket of resources are likely to face greater challenges in economic diversification. Thus, the need to imbibe the principles of sustainable economic development are key in order to develop the economic base that can nurture long-­term diversification programs and strategic frameworks. According to the World Bank, there are three pillars of sustainable development:

• economic growth. • environmental stewardship. • and social inclusion.

In the context of the GCC, and especially in terms of its SMEs, this means that acceleration of the growth and stable competitiveness of higher-­value-­added sectors is critical. The key ingredient is to foster closer collaboration between the governments and the private sector. This means that rather than choosing winners in the economic system, governments should provide adept in managing resource optimization in terms of allowing those sectors and private players that show promise to rise up on their own within a managed infrastructure and support ecosystem. 3.2 Definition of SMEs – global and regional There is no one single universally accepted definition of SMEs7. Usually, countries define SMEs according to the number of personnel or turnover or both. At times, the asset levels can also be used. Moreover, various nations and regions may have their own specific definitions. For instance, the European Union (EU) applies the following criteria to identify a SME. Company Category Employees Turnover Balance Sheet Total Medium-­sized < 250 ≤ € 50 m ≤ € 43 m Small < 50 ≤ € 10 m ≤ € 10 m Micro < 10 ≤ € 2 m ≤ € 2 m Source: European Commission In addition, global and regional institutions and bodies can have their own identifying parameters for SMEs.

Institution Max No. of Employees

Max Turnover (US$)

Max Assets (US$)

World Bank 300 15,000,000 15,000,000 Multilateral Investment Fund/ Inter-­American Development Bank

100 3,000,000 None

African Development Bank 50 None None United Nations Development Programme (UNDP)

200 None None

Source: The Brookings Institution

7 World Intellectual Property Organization

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GCC SMEs Definitions

Country

Small

Medium

No. of Employees

Turnover (USD)

No. of Employees

Turnover (USD)

Bahrain 11-­50 265K – 2.6M 51-­250 2.6M – 13.2M Kuwait 21 to 50 N/A 50+ N/A Oman 6 to 9 65K – 649K 10 to 99 649K – 3.9M Qatar -­ -­ 250 27.4M Saudi Arabia 2 to 49 27K – 1.3M 50 to 200 1.3M – 13.3M UAE (Dubai) – Trading 10 to 35 2.4M – 9.5M 36 to 75 9.5M – 20.4M UAE (Dubai) – Manufacturing 21 to 100 2.7M – 27.2M 101 to 250 27.2M – 68.1M UAE (Dubai) – Services 21 to 100 817K – 6.8M 101 to 250 6.8M – 40.8M UAE (Abu Dhabi) 6 to 19 -­ 20 to 45 -­ GCC Average 52 -­ 167 -­ European Union 11 to 50 11M 51-­250 55M

World Bank 11 to 50 3M 51-­100 15M Source: WB, EU and national authorities in each country, Intracen 3.3 SMEs current contribution to economic growth In the GCC, SMEs constituted close to 90% of the total companies’ base. The following table illustrates the statistical conjunction of total number of SMEs in various GCC countries to the percentage of the SMEs among total companies established. GCC SMEs Definitions Country Number of SMEs % of SMEs / Total Companies Bahrain 29,600 99% Kuwait 27,000 90% Oman 13,741 90% Saudi Arabia 670,000 90% Qatar 30,881 75% UAE 350,000 94% Source: BLOOVO.COM Research Official figures on how much SMEs contribute to GDP in the GCC are hard to come by in many cases. According to analysis from A.T. Kearney, the SME contribution in the GCC is low in comparison with international standards (such as the EU average). SMEs contribution to GDP in the GCC, in %

Source: A.T.Kearney & BLOOVO.COM Research

55%

30% 28%22% 20% 17% 14%

EU Average UAE Bahrain KSA Kuwait Qatar Oman

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SMEs in the GCC can also provide a boost to manufacturing capabilities. According to the Gulf Organization for Industrial Consulting (GOIC), the number of small and medium-­sized factories in the GCC was around 13,480 in 2014, including 10,809 small factories and 2,671 medium ones8. According to GOIC, the small and medium-­sized factories amounted in 2014 for 82.7% of the total number of factories across GCC manufacturing industries. Moreover, these industries offer employment to 44.1% of the total industrial sector workforce. This is despite the small size of investments. GCC industrial base statistics (2014) Country Large Industries Small and Medium Industries Number of factories distribution 17.3% 82.7% Workforce distribution 55.9% 44.1% Investment distribution 96.0% 4.0% Source: GOIC Usually, analysts make the mistake of considering the characteristics of employment in all the GCC countries to be very like. Certain aspects of it are true, such as dependence on public sectors for majority of the jobs among nationals. However, there are multiple nuances as well, which can often be overlooked. Overlooking the nuances can cause missed opportunities in terms of spotting sectors that are emerging as ones with most potential. Generally, outside the energy industry in the GCC, sectorial opportunities are constrained by scale, cost and geographic factors. The current composition of industrial strength can dictate the pathways that SMEs can take to move forward or expand. For instance, the efforts exerted by the Saudi government for the support of industrial development has led to the development of centers such as Jubail and Yanbu industrial cities, which could act as hubs for SMEs focused on industrial technologies. The UAE is seeing much activity with respect to advanced engineering. For example, aerospace is one of the key sectors identified in the Abu Dhabi 2030 Vision as a critical strategic industry for creating a high-­tech and knowledge-­based economy. Plans are in the works to make Al-­Ain’s Nibras Aerospace Park a major aerospace manufacturing and servicing hub. Similarly, the UAE Space Agency was established in 2014 that, over time, can support an ecosystem of high technology SMEs in the UAE. In the case of Qatar too, it is apparent that efforts are building up to create a knowledge and innovation-­based economy, with broader transformations that can make SMEs integral to the national economic structure. The Qatari national strategy has made it clear that the exact areas in which economic and comparative advantage will occur cannot be accurately pinpointed. In effect, “picking winners” in terms of sectors for focus is not the Qatari strategy;; but allowing a process in which many stakeholders are involved in search, experimentation and learning. The Saudi government, as part of long-­term privatization plans intends to boost private sector contribution by facilitating investments, both domestic and international, in healthcare, general services, housing, finance, energy, etc. Thus, sectors such as transportation & storage, information and communication, etc. can expect to see robust growth. Thereby, SMEs associated with such sectors will greatly benefit. As the KSA intensifies its plans to become a regional logistical hub with investments in ports, railways, roads and airports, SMEs can find a plethora of opportunities ranging from integrating into the supply chain by providing suitable products to facilities management (at least in small scales). Similarly, the UAE offers many opportunities in the constructor sector too, which is reflected in the larger distribution of jobs across the economy.

8 Gulf Organization for Industrial Consulting

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As part of BLOOVO.COM’s analysis, it was uncovered that SMEs consist of the following distribution in the GCC with respect to the percentage of total employment.

Country SMEs as % of Total Employment KSA 60% UAE 72% Oman 43% Kuwait 23% Bahrain 57% Qatar 20%

Source: BLOOVO.COM Analysis From the above table, it is evident that the UAE leads, as a percentage of total employment, in terms jobs created from SMEs. The UAE, particularly Dubai, is at the forefront of steps to facilitate the thriving of SMEs. For example, to address the SME financing gaps in the market, an SME Bank Friendliness Index was commenced in 2012, with the aim of identifying UAE banks that had the highest inclination towards supporting and developing the nation’s SMEs. The Index also helped as a feedback mechanism to the banks on areas to improve their SME financing strategy and product offerings. Though Qatar and Kuwait come at the bottom of the above table, there are many supportive government policies and institutions being set up to support SMEs, which are likely to bear fruit in the medium-­ to long-­term. The following section will provide a forecast of the jobs likely in the SME sector across the various GCC countries. 3.4 Forecasting the number of SMEs jobs in the GCC Methodology – The forecasts have been constructed out of a systematic methodology using multiple data points to build a cohesive picture with respect to the likely SMEs job forecasts for the GCC. In order to average out potential discrepancies in the forecasts and to provide a more likely range within which the values are likely to fall—three case scenarios have been envisaged as part of the methodology. For the forecasts, values from sources such as the IMF, World Bank and respective GCC statistical websites were retrieved with respect to population forecasts, labor force participation rates and unemployment rate forecasts. These values were triangulated with the 2015 estimates of BLOOVO.COM with respect to the number of SME jobs across the various GCC countries. The scenarios or portfolios envisaged were as follows, along with the logic behind them:

§ Baseline Scenario: The baseline scenario assumes little need for rebalancing in the trend lines predicted for population forecasts, labor force participation rates and unemployment rate forecasts. Thus, this set can be taken to be most likely the values if the current set of market conditions hold. However, the business climate could drastically change if government policies do not support SMEs;; or even if supportive, are not actually enforced. Moreover, oil prices could veer even downward, impacting government spending that, in turn, could affect SMEs down the value chain. A peripheral but potent item is the overall geopolitical situation that governs the wider MENA region at any given point in time.

§ Positive Scenario: The positive outlook reflects the assessment that the underlying economic conditions, including government policies, could shift positive more in favor of SMEs. For example, governments could undertake aggressive procurement policies that hold SMEs at the center of the supply chain in terms of quota for procurement. A sudden rise in oil prices could ease the operating conditions for large public and private sector companies that may choose to undertake discretionary spending in alignment with policies aimed at supporting SMEs.

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§ Negative Scenario: The negative scenario presupposes pessimistic conditions, such as steeper than expected contractions in GDP growth, slow movement in economic reforms, etc. Factors such as greater unemployment could precipitate weaker private consumption, having an adverse impact of domestic SMEs in turn. In the event of greater falls in oil prices, bank liquidity situations could enter difficult territory further, thus stifling lending to SMEs.

With an explanation of the above scenarios, the following tables capture the forecasts under the three scenarios described. In the calibration of forecasts, country-­specific nuances have been factored in to the extent possible with respect to respect to singular countries. Baseline Scenario – Forecasts of Jobs in the GCC SMEs (2016-­2020) Country 2015 2016F 2017F 2018F 2019F 2020F CAGR KSA 9,114,494 9,296,575 9,482,722 9,672,353 9,865,759 10,062,941 2.0% UAE 5,338,457 5,491,684 5,649,370 5,811,513 5,989,257 6,172,016 2.9% Oman 996,004 1,026,351 1,057,995 1,090,935 1,125,173 1,160,967 3.1% Kuwait 629,485 647,098 665,018 683,550 702,695 722,300 2.8% Bahrain 496,170 505,756 516,109 526,462 536,815 547,551 2.0% Qatar 419,990 447,226 467,350 474,462 480,361 481,575 2.8% Source: BLOOVO.COM Analysis Positive Scenario – Forecasts of Jobs in the GCC SMEs (2016-­2020) Country 2015 2016F 2017F 2018F 2019F 2020F CAGR KSA 9,114,494 9,656,171 10,247,452 10,868,147 11,519,728 12,203,395 6.0% UAE 5,338,457 5,570,022 5,811,188 6,062,202 6,335,104 6,619,285 4.4% Oman 996,004 1,068,675 1,146,191 1,228,805 1,316,777 1,410,692 7.2% Kuwait 629,485 685,863 745,626 809,271 876,995 948,797 8.6% Bahrain 496,170 522,524 550,625 579,725 609,841 641,443 5.3% Qatar 419,990 469,588 514,085 545,632 576,433 601,969 7.5% Source: BLOOVO.COM Analysis Negative Scenario – Forecasts of Jobs in the GCC SMEs (2016-­2020) Country 2015 2016F 2017F 2018F 2019F 2020F CAGR KSA 9,114,494 9,180,656 9,246,829 9,312,337 9,377,363 9,441,804 0.7% UAE 5,338,457 5,451,700 5,567,178 5,684,800 5,815,295 5,948,128 2.2% Oman 996,004 1,008,383 1,021,021 1,033,857 1,046,829 1,060,114 1.3% Kuwait 629,485 635,629 641,504 647,389 653,256 658,939 0.9% Bahrain 496,170 496,975 498,233 499,180 499,819 500,504 0.2% Qatar 419,990 441,199 455,690 457,183 457,356 452,988 1.5% Source: BLOOVO.COM Analysis

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In order to drive more insights from the above analysis, the following figure charts the CAGRs from each of the above scenarios side by side for the six GCC nations. Comparison of the CAGRs under the three scenarios

Source: BLOOVO.COM Analysis The above percentage growth may pose a skewed picture with respect to showing Kuwait and Oman as more robust in growth than UAE or KSA. However, it has to be noted that UAE and the KSA enjoy larger SME bases currently, which means that the additive percentages can appear low, but represent significant numbers on the ground. The positive scenario figures are attainable if a range of initiatives are unveiled, targeting specific areas of entrepreneurship development that leads to the emergence of a thriving ecosystem. Moreover, sharing of knowledge and best practices among the various institutions within the GCC can further increase the contribution of SMEs to overall economic diversification and job creation in the region. 3.5 SMEs trends in some GCC countries Countries that harness their STI capabilities have higher chances of success in a very competitive global commercial environment. The surging currents of technology and innovation have obtained significant leverage as fundamental tools for jobs creation and wealth generation, worldwide. Moreover, jobs creation is an important priority area for the GCC. For example, taking the case of Kuwait – recently, the IMF pointed out that with about 74,000 to 112,000 Kuwaitis forecast to enter the job market by the year 2016. Thus, the Kuwaiti authorities will need to restructure the labor market in order to encourage Kuwaiti nationals to opt for the private sector. Out of the new job entrants, the Kuwaiti private sector is expected to absorb 17,000 individuals. Putting it in annual terms, it would mean that about 30,000 Kuwaitis will enter the job market every year through 2016, of which the private sector can absorb only about 5,000 at current private sector performance levels. Without substantial structural reforms, the government will be forced to absorb the rest. SMEs are an integral part of the strategy to boost the private sector job creation. SMEs have a good chance of thriving in the GCC due to the high urbanization rates. The GCC is one of the most urbanized regions in the world, with over 70% of the population living in urban areas. In fact, Kuwait and Qatar are almost fully urbanized. Population growth rates are also healthy, which means that needed talent and domestic (or regional) markets are expected to flow reliably.

6.0%

4.4%

7.2%

8.6%

5.3%

7.5%

2.0%2.9% 3.1% 2.8%

2.0%2.8%

0.7%

2.2%1.3% 0.9%

0.2%

1.5%

KSA UAE Oman Kuwait Bahrain Qatar

Positive Baseline Negative

24

Population growth (annual %) in the GCC (2014)

Source: The World Bank Though SMEs have a good chance of growth in the GCC, experts and analysts point out to a wide set of challenges that the SME ecosystem has to face. Some of the key ones are illustrated in the following table. Challenges Faced by SMEs in the GCC Category Description

Finance § Lack of enough credit lines to SMEs. § Harsh bankruptcy laws. § Limited array of Islamic finance products for SMEs.

Difficult business environment § Poor ease of doing business rankings in many GCC countries.

§ Difficulty in accessing appropriate domestic workers (i.e., the need to depend on expatriates).

Slower than expected progress in reforms

§ Frequent legislative disagreements result in delay for reforms.

§ PPP projects are facing inertia in some GCC countries.

Educational sector challenges

§ Lack of enough emphasis on modernizing the educational sector across some GCC countries.

§ Little vocational training and internships, which means that the pool base of knowledge workers in limited.

No research and additional support

§ In many GCC countries, there are no bodies or organisations to which entrepreneurs can turn to for extensive research, data and reports on niche markets.

§ Absence of incubators and mentors in some cases.

ICT lag § In some GCC countries, digital governance or smart

governance with respect to facilitating SMEs through apps for registering for licenses, etc., is missing.

Source: BLOOVO.COM Analysis

8.1%

4.3%3.3%

2.2%0.9% 0.5%

Oman Kuwait Qatar KSA Bahrain UAE

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In 2005, Talabat.com was launched by a group of Kuwaiti students. What followed next was a remarkable journey of perseverance and success.

Source: BLOOVO.COM Talabat.com, Middle East market’s most popular online food delivery service was bought by Rocket Internet, an online incubator that invests in online businesses in a number of different segments including, Food & Groceries, Fashion, General Merchandise, Home & Living and Travel. Its network of companies operates a variety of business models in over 110 countries on six continents with more than 36,000 employees at the end of 2015. In February 2015, Rocket Internet paid USD 170 million for Talabat.com, which has ongoing operations in all of the GCC countries. This deal helped in generating lot of interest around the tech acquisition scene in the Middle East region as this deal had over taken Yahoo’s acquisition of Maktoob (USD 160 million) as the largest acquisition in the tech space in the region. Talabat.com’s success was built on the following principles: Size always does not matter – Oil & gas resources in the region results in most of the companies being in asset heavy industry (Oil operations -­ Upstream and Downstream), which could be a limiting factor for lot of entrepreneurs while venturing into business. Owing to the demographic mix of the region, the predominant business for private sector has been real estate, construction and trading. Emergence of services business that involves high volume frequencies could also be attractive as other asset-­heavy businesses. Instead, what Talabat.com did was something that was remarkable. It helped in bringing to the foray the small and medium sized enterprises in the food industry in the GCC region. In 2014, Talabat.com has achieved 125% growth in restaurant sales through its portal for partner restaurants. Through the app many of the specialized restaurants were able to find new clientele. Technology as an Enabler – Internet enabled businesses around the world to benefit from mass technology adoption such as smartphones and high-­speed internet services. While the citizens of the region have quickly embraced the latest technology, governments in the region have not been so. The case of Talabat.com is just one example of how a seemingly impossible task was handled with relative ease using technology. Talabat.com achieved 85% increase in growth in orders, and 72% growth of customer registrations.

Case Study Talabat.com

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4. Promoting SMEs and entrepreneurship in the GCC

4.1 Regulatory developments There have been many developments in the GCC with respect to recent laws aimed at supporting SMEs. Regulatory developments should aim at removing most occurring obstacles that SMEs in the GCC face. The following distribution of challenges that SMEs in the KSA face are representative of the most common challenges that SMEs in the GCC encounter. Common obstacles facing SMEs in the KSA

Source: Jeddah Economic Gateway The following table summarizes the key regulatory development with respect to supporting SMEs. Regulatory development in the GCC Category Description

Saudi Arabia In 2015, the Public Authority for Small and Medium Enterprises (PASME) was formed.

Kuwait In 2013, Kuwait’s National Fund for Small and Medium Enterprise Development (National Fund) was established (fund value of USD 7bn).

UAE Federal Law No 2 of 2014 was set up that will work towards categorizing SMEs, establishing a dedicated council and determining incentives to be offered to small business owners.

Qatar In 2011, a body called ‘Enterprise Qatar’ was established to support the SME sector in Qatar.

Oman In 2012, Oman launched a SME Development Fund, which offers subsidized finances to SMEs and makes available training and mentoring support, too.

Bahrain In 2006, a body called ‘Tamkeen’ was established with the aim of supporting the private sector, including SMEs.

Source: BLOOVO.COM Analysis Rather than making a list of various policies that could be construed as supportive of supporting SMEs across the GCC, it would be useful to delineate the wider policy arcs that are likely to affect SMEs in the GCC. The following table attempts to do that, with relevant examples.

32% 33%41% 44%

53%59% 65%

Information Related

Managerial Technical Workforce Related

Marketing Financing Bureaucracy

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Regulatory policy arcs Trend Description

SME funds Setting up of funds that can provide subsidized financing and mentoring support. E.g., the Kuwait National Fund for SME Development.

Changes to Companies Laws

More flexibility in terms of structuring of companies and allowing of foreign nationals to hold enhanced stakes in some cases. E.g., the new Companies Law of the KSA (introduced in November 2015) allows for a single shareholder;; rather than the hitherto mandatory two.

Focus on intellectual property and commercialization

Supporting inventors and companies with legal and financial help for filing patents internationally. E.g., Takamul of the UAE.

Procurement policies

Measures to integrate SMEs and other private sector players into critical supply chains. E.g., in April 2014, the UAE approved Federal Law No. 2 of 2014, which among other things, stipulates that UAE’s federal authorities and ministries must procure at least 10% of their purchasing, servicing and consulting requirements from the UAE’s SMEs.

Source: BLOOVO.COM Analysis The most common funding routes available for SMEs are banks, equity finance, venture capital and others (such as governmental funds, bonds, leasing, etc.). Government funds are an attempt to step in and fill a gap where other investors like banks may be wary of entering due to perceived risk. Meanwhile, procurement laws are shaping up that would allow SMEs to access spending programs of government agencies. Due to its sheer size, public procurement is a potentially powerful instrument of supportive economic policy vis-­à-­vis SMEs. The awarding authorities may pursue socially important goals, other than that of optimizing cost, while managing public tenders. Public sector job creation is expected to slow in the GCC. The private sector will have to take the lead, and SMEs, being a key part of the private sector, will be looked upon as a key route of job creation. Estimates of job creation by sector and nationality (2000-­2015) Numbers in '000 Job Creation Private Sector Public Sector Bahrain 297 284 14 Bahraini 55 42 13 Non Bahrainis 242 242 1 Kuwait 986 680 306 Kuwaiti 135 65 69 Non Kuwaitis 851 615 237 Oman 527 481 46 Omani 157 105 52 Non Omanis 370 376 -­6 Qatar 1,118 1,078 40 Qatari 40 21 19 Non Qataris 1078 1,057 21 UAE 1,546 1,391 155 Emirati 110 99 11 Non Emiratis 1,436 1,292 144 Saudi Arabia 2,598 2,344 254 Saudis 1,302 1,068 234 Non Saudis 1,296 1,276 20 Total 7,072 6,258 814 Nationals 1,799 1,401 398 Non Nationals 5,273 4,857 416 Source: IMF

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4.2 Importance of Financial Institutions in SMEs development SMEs in the GCC face funding barriers at multiple levels due to lack of cohesive financial inclusion. There are no dependable financial operating standards earmarked for the SME sector, despite them making up over 90% of the enterprises in many GCC countries. Moreover, the reluctance of banks to lend to SMEs, with rejection rates as high as 75% in most countries, means that institutional frameworks that cater specifically to funding needs of GCC SMEs are needed9. Noting the worrying lack of funding, national agencies in some GCC countries are advocating for a shift away from traditional ways of operating with respect to funding SMEs. For e.g., Dubai SME, the agency of the Department of Economic Development (DED) has called for robust insolvency and bankruptcy frameworks for companies in the UAE, along with exploring the option of a secondary market. A secondary market would allow SMEs to list without complex regulatory prerequisites or conditions. Financial inclusion will require the government and the private sector banks to participate in a form of PPP to offer funding options for SMEs. As a trend, this is visible in the UAE with the Khalifa Fund for Enterprise Development (an independent body of Abu Dhabi Government), launching a guarantee scheme in partnership with Arab Bank. Under the scheme, the bank would finance SMEs approved by the Khalifa Fund, up to a maximum of AED5 million (or US$1.36 million). The Khalif Fund has noted that the failure rate of all UAE-­based SMEs is about 30-­40%. Thus, by providing a guarantee for the funds allotted to SMEs by banks, the Khalifa Fund is removing a major source of apprehension in banks to lend. 4.3 Existing challenges The major challenges that SMEs in the GCC face revolve around the structuring of an effective ecosystem based on the principles of national competitiveness. The need to create a knowledge economy in which SMEs can thrive requires the ability to foster and commercialize innovations. According to the global consulting firm, Booz Allen Hamilton, “building a global innovation network requires three elements…” Three elements of a global innovation network Element Description Sensing Innovators seeking relevant knowledge and skills on a worldwide basis. Accessing Having a strategy and means to access critical knowledge and skills.

Melding Integrating each site (or partner) of concerned R&D activity into a seamlessly coordinated and managed innovation network.

Source: BAH The amount of expenditure on R&D as a percentage of GDP of the country is an important indicator which indicates the amount of investment that a country spends on R&D in relation to its economic activity. Historically, advanced countries like USA, Japan, Sweden, South Korea spent about 2-­4% of their GDP value in R&D10. However, the scenario in GCC countries is quite different, with the amount spent being a very small percentage of GDP and well below the average of developed countries.

9 Gulf Business 10 World bank database

29

R&D Expenditure in GCC remains Miniscule Country Expenditure on R&D (USD bn) Year Bahrain 0.02 2013 Kuwait 0.26 2013 Oman 0.83 2013 Qatar 1.3 2012 Saudi Arabia 1.8 2012 UAE 2.5 2011 Source: World Bank Database Qatar and United Arab Emirates are the highest spenders among GCC countries when it comes to expenditure on R&D. R&D expenditure when compared to global peers

Source: World Bank Database Moreover, ease of doing business scores too need to be improved significantly across several countries. Ease of doing business scores can be interpreted as the quality of responsiveness of the government towards the private sector, which includes SMEs. Ease of doing business indicators can help in assessing challenges, identifying policies and determining institutional roles, targets and resource optimization strategies. This underscores why governments, in their bid to support SMEs, should emphasize on improving data availability, while simultaneously investing in reliable collection and distribution of SME-­related ease of doing business data. GCC Ease of Doing Business and components (2015 Rankings) Economy UAE KSA Qatar Bahrain Oman Kuwait Ease of Doing Business 31 82 68 65 70 101 Starting a Business 60 130 109 140 149 148 Registering Property 10 31 28 25 33 68 Getting Credit 97 79 133 109 126 109 Protecting Minority Investors 49 99 122 111 134 66 Paying Taxes 1 3 1 8 10 11 Trading Across Borders 101 150 119 85 69 149 Enforcing Contracts 18 86 112 101 70 58 Resolving Insolvency 91 189 51 85 105 122 Source: World Bank doingbusiness.org

4.29%

3.58%3.17% 3.16%

0.49% 0.47% 0.30% 0.25% 0.17% 0.04%

South Korea Japan Finland Sweden UAE Qatar Oman KSA Kuwait Bahrain

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Another key issue facing SMEs in the GCC is lack of funding. According to a 2011 World Bank/Union of Arab Banks survey of over 130 MENA banks, only 8% of lending goes to SMEs across MENA, and even less in GCC countries at 2%. This is significantly lower when compared to the middle-­income countries lending average of 18% and high-­income countries average of 22%. The following points summarize the challenges that impede lending by banks to SMEs in the GCC:

§ Opacity in terms of the SMEs situation in the region. Mostly, no centralized database available that keeps track of SMEs.

§ Little or no availability of information on SMEs’ creditworthiness. In addition, credit histories are not recorded well. Where recorded, the quality of information is usually not very reliable.

§ No dependable collateral registry. Lack of modern, electronic, and easy to access centralized collateral registries. No visibility of SMEs inventories or receivables.

§ No credit scores available. Coupled with the cost and general difficulty in enforcing collateral for SMEs, small ticket lending is highly not incentivized for banks.

§ SMEs typically approach banks for working capital. Since they are light on fixed assets, the collateral used are inventories. However, absence of a mechanism to register such current assets as collateral limits SMEs lending.

Youth unemployment is high in the GCC. Thus, without concerted efforts to develop SMEs as providers of quality jobs, the situation will prove difficult to rectify. Youth unemployment in the GCC (2014)

Source: World Bank Database 4.4 Existing challenges In the 21st century, global economy, governments around the world have recognized the importance of innovation in meeting the many challenges confronting society. Some countries are rushing ahead to carve a significant market for themselves in the pie of global business that will be increasingly shaped by an acceleration of digitalization across traditional and emerging industries. A case in point is the ‘Industrie 4.0’ initiative of the German government, aiming to be at the vanguard of what it deems as the fourth industrial revolution that would be based on ICT and robotics. For many countries in the GCC, the domestic markets are rather small in terms of population size. This means that immediate captive markets are not very large, necessitating the need to scout for foreign markets, too.

29.5%

19.4% 18.8%

10.9% 10.0%

1.3%

Saudi Arabia Kuwait Oman Bahrain United Arab Emirates Qatar

31

GCC countries population in millions (2015)

Source: The World Bank With every GCC country looking to aggressively develop their SMEs, there is likely to be competition to sell to other countries within the GCC and the wider MENA region over the long term. Thus, the question of ensuring market access may receive greater significance in time. While discussing the subject of market access with respect to the GCC countries, it is important to remember that SMEs are not a homogenous set. They range from marginal enterprises in the informal economy to fairly large family run businesses. Thus, jobs, exports and earnings are not generated evenly among SMEs, but tend to be large in the case of more entrepreneurial ones. Small businesses that engage in international trade are usually found at the larger end of the jobs and earnings spectrum. One of the major reasons why SMEs from Dubai are considered relatively more successful is because they are highly export oriented, with about 50% of Dubai SMEs generating a significant part of their earnings from overseas11. Moreover, 60% of Dubai’s SMEs exporters generate over 20% of their sales revenues from their international markets. In order to encourage internationalization among GCC SMEs, measures such as offering specific credit lines for GCC SMEs that export can be adopted.

11 Emirates NBD

1,371

32181 53

China USA Germany GCC

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5. Job creation through SMEs 5.1 The need for holistic outlook The imperative of sustainable economic development requires support for GCC SMEs from the respective governments. Entrepreneurs and SMEs in the GCC face a formidable set of challenges. Ranging from lack of financing to gaining licenses for utilities and land, there are a number of obstacles to contend with and surmount. Moreover, GCC countries, individually, are a relatively limited market due to the population sizes. Thus, for SMEs in the GCC to thrive and prosper, support should be forthcoming from the government. In order to structure services and support for SMEs, it is important to consider the fact that entrepreneurs are placed within an ecosystem. The ecosystem can be either conducive or obstructive.

An entrepreneur’s ecosystem

Source: Dubai SME & BLOOVO.COM Analysis Dubai SME’s entrepreneurial ecosystem framework closely mirrors the system suggested by the World Economic Forum, with four layers of enablers – Personal Enablers, Financial Enablers, Business Enablers and Environment Enablers. Thereby, initiatives are more precisely targeted at supporting all levels of the entrepreneurship ecosystem—from addressing skills deficit to incubation and funding. Without the dynamic perspective of an ecosystem approach, a long term vision of science, technology and innovation (STI) to generate a knowledge-­based society and economy through a globally

33

competitive STI ecosystem cannot be crystallized effectively. The range of STI opportunities facing GCC countries could be potentially countless. However, not every STI activity need be a major success for a country. Some STI activities may be better able to leverage a country’s inherent strengths, which may even be subliminal or latent. There are SMEs across various sectors in the GCC. Currently, the shift is more towards trading and services. Yet, it may move towards technology and digital space, given the innovation policies being shaped up in the region.

Sectoral breakdown of Saudi and UAE SMEs

Source: Standard Chartered, 2013 5.2 Labour market and educational reforms According to the IMF, in the GCC, “the private sector largely employs foreign labor, and efforts to boost private sector employment of nationals have yielded mixed results so far. In all GCC countries, foreign labor takes up over 75% of private-­sector jobs.” According to the World Economic Forum, between 2000 and 2010, nearly 80% of jobs created in the GCC private sector have been filled by expatriates. Skills of foreign workers in the GCC (2013)

Source: IMF

12% 15% 16% 18% 19%36%

88% 85% 84% 82% 81%64%

Bahrain Oman KSA Qatar Kuwait UAE

High Skilled Low Skilled

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The oil and infrastructure boom in the GCC has predominantly attracted expatriates with lower levels of skill sets that are suited for jobs involving manual labor. However, the push towards a knowledge economy will require higher caliber skillsets in the form of specialists and well-­educated experts. Moreover, the large wage differential between the public and private sectors creates a strong incentive for nationals to choose public-­sector employment. This, essentially, reduces work opportunities for nationals in the private sector. It also encourages a preference for expatriates in the private sector. This is one of the main reasons why various GCC efforts (like the Saudi Nitaqat program) to wean businesses off expatriates in order to encourage more employment of nationals have met with limited success. In order to alleviate the structural imbalance in the workforce, a concomitant effort has to be made with respect to educational reforms as well. The educational systems in each of the GCC countries has its own nuances. However, the following applies largely to most GCC educational systems.

§ Lack of well-­trained and motivated teachers. § Outdated pedagogical methods. § Curricula that are in dire need of modernization. § Limited adoption of ICT in learning and teaching methods. § Little in the way of career counseling and academic advice in order to facilitate the pathways of

excellence and success for students. § High land and facilities rent costs for private schools, including the vexing issue of lack of access

to fresh plots of land for greenfield activities. § Fee capping on private schools that distorts the free functioning of the market, etc.

Educational system statistics in the GCC Indicators (Ranks are out of 140 Countries)

Kuwait

KSA

UAE

Qatar Bahrain

Oman

Satisfaction with Education Quality (%) – Gallup World Poll (2011)

1

61.2 61.8 80.6 69.9 80.5 70

Mean Years of Schooling (2012)1 6.1 7.8 8.9 7.3 9.4 5.5

No. of students from abroad studying in given country – (2012)

2

7,984 46,566 54,162 7,154 2,648 2,108

Students from given country studying abroad – (2012)

2

10,686 62,535 8,526 3,410 4,096 10,049

Quality of Primary Education 103 72 13 9 38 88 Primary Education Enrolment rate 81 35 94 78 48 73 Secondary Education Enrolment Rate 32 7 67 10 53 62 Tertiary Education Enrolment Rate 80 44 99 103 73 82 Quality of Math and Science Education 99 69 11 5 42 102 Quality of Management Schools 86 62 20 7 43 128 Source: UNDP – Human Development Report, UNESCO Institute for Statistics, The Global Competitiveness Report The educational sector in the GCC needs reforms on two fronts. One, on making the public schooling system more effective in terms of producing talent that is suitable for the times and the future, and two, allowing the private schools to thrive under a system of regulations that is ever alert to prevent exploitation of parents and children who are in search for quality education (e.g., by imposition of very high fees). As the educational sector is reformed, quasi-­government entities can be created under PPP schemes with respect to providing a transition path from public sector employment to private sector employment for many nationals.

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Employment transition pathway

Source: BLOOVO.COM By having a PPP scheme, nationals will be more willing to apply since government ownership adds a layer of job security to the mix. While being employed in a quasi-­government entity, nationals will get used to working longer hours compared to the public sector. In addition, they will be trained on being more competitive in the labor market, which in-­turn after several years, is expected to make them ready to pursue a career in the private sector. 5.3 Promoting FDI and technology transfers Inward flow of FDI is important in order to develop the private sector ecosystem. The following figure provides a snapshot of the net inward FDI inflow into GCC.

Inward flow of FDI (2014) – in USD million

Source: The World Bank FDI supplements and complements domestic investment. SMEs can enjoy enhanced access to supplementary capital and state-­of-­the-­art technologies. Also, exposure to global managerial practices and technologies will come along with the ability to integrate into global value chains. However, at times, FDI investments can alter the playing field for SMEs unfavorably as well. Some experts have expressed the concern that policymakers, in their bid to attract increased FDI, can offer greater incentives for FDI;; while domestic SMEs suffer from outdated laws and very rigorous licensing regimes. Yet, on balance, SMEs can benefit from targeted FDI, especially if they are invested directly into the small businesses. This is due to the fact that foreign investors can act as potential source for knowledge at the technical and systemic level.

486 957 1,040 1,180

8,01210,066

21,741

Kuwait Bahrain Qatar Oman Saudi Arabia UAE GCC

36

It is to be noted that FDI cannot be attracted on the basis of incentives offered alone. Foreign investors typically look for a range of enabling factors in considering a country for investment. Some of the key factors are listed below12:

• Domestic and regional market size. • Growth potential. • Investment climate (country's laws, institutions, etc.) • Availability of a skilled workforce. • Strong IPR regime • Infrastructure, etc.

Thus, incentives can mostly only act as a significant value add-­on rather than a completely decisive element. It is essential that GCC countries tailor their FDI incentives in direct alignment with overarching policy objectives. Incentives and enablers offered by the GCC countries Country Government Incentives and Key Investment Enablers

KSA

§ Establishment of the Saudi Arabian General Investment Authority (SAGIA) as a one stop shop for foreign investors to coordinate their entry into the country.

§ No personal income taxes;; 20% taxes on company profits. § Additional tax incentives for training and recruitment of Saudi nationals in designated regions

such as Jazan and Najran. UAE • No personal or corporate income tax.

• Tax holiday on profits. • 100% foreign ownership of companies in Free Trade Zones (FTZs). • 100% repatriation of profits and capital with respect to foreign enterprises in FTZs.

Kuwait

• Income tax exemptions for a maximum period of 10 years. • Total or partial exemption from customs duties on imports of manufactured goods, etc. • Allotment of real estate as per Kuwaiti laws. • Labour employment flexibility in terms of deployment of expatriate workers.

Oman

• Loans with low interest rates (3%) for investments totalling RO250,000 or less. • Free transfer of capital and profits. • Expatriate labour flexibility. • No taxes on machinery imports during industrial construction period.

Bahrain • No personal or corporate taxes. • 100% foreign ownership of companies permitted. • Nil exchange control restrictions on capital, dividends and profit repatriation.

Qatar • No custom duties on imports of machinery for industrial projects. • 100% foreign ownership of companies permitted. • Projects showing value addition to the Qatari economy will be considered for funding.

Source: Source: Saudi Ministry of Finance, UAE Ministry of Economy, Kuwait Ministry of Commerce and Industry, Oman Special Economic Zone Authority, Bahrain Customs, Qatar Ministry of Foreign Affairs 5.4 Private equity Inward flow private equity (PE) can play a constructive role in the shaping of SMEs in the GCC. Usually, private equity is invested in exchange for shares, meaning that the investing PE’s returns are dependent on the performance and profitability of the business. Thus, apart from the capital, PE may also be willing to provide much needed operational skills in order to deliver growth, since they directly share rewards in proportion to the level of successful outcomes. GCC SMEs could also benefit from the additional layers of governance support that PEs can bring in. Moreover, as a means of diversified funding, PE can help support the development of a sustainable 12 The World Bank Group

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SMEs ecosystem in the long-­term. Deeper integration of PE into the GCC SMEs ecosystem will mean that entrepreneurs will have to pay attention to economic performance indicators that can be expressed in monetary terms. This would help develop a culture of pragmatism, as it is possible that promoters can get overly identified with their own ideas and strategies, misinterpreting market realities in the process. Thus, PE can induce an attitudinal shift in how SMEs promoters emotionally align with their businesses. Generally, PE investors look for investment projects that portray market potential, while providing pre-­IPO opportunities that relatively quickly support a strategy of high return rate on the investments. Given the emphasis being placed on SMEs in the GCC, there are probabilities that several IPOs would follow, backed up by supportive ecosystems and government policies. 5.5 Facilitating SMEs through free trade zones (FTZs) In the GCC, the UAE has over time, gained a reputation as a stalwart in the field of economic diversification through FTZs, which is considered a good tool for attracting FDI. Strategic use of FTZs has helped in Dubai’s multipronged efforts to turn into a regional and global trading hub. Various GCC countries seem to have their own model or strategy for FTZs. FTZs all over the GCC need not conform to a singular model. For instance, in Saudi Arabia, the focus is on developing entire cities under the rubric of ‘Economic Cities’, which the country looks upon as a further innovation on the concept of FTZs. FTZs are now a vital cog in the wheel of globalized commerce. Thus, an effective policy framework to guide the sector is paramount, enabling further innovations in attracting FDI. Benefits derived from FTZs for the national economy Direct Benefits Indirect Benefits Foreign Exchange earnings Skills upgrading FDI Testing field for wider economic reform Employment generation Technology transfer Government revenue Export diversification Export growth Enhancing trade efficiency of domestic firms Source: World Bank It is now regular practice for many countries to dedicate certain areas within their borders as a free trade zone (FTZ). FTZs aid in minimizing international trade barriers, which allows exporters and importers to operate under more salubrious economic conditions, than usual. The U.S. Small Business Administration (SBA) defines a FTZ as follows — “A free trade zone is a designated area that eliminates traditional trade barriers, such as tariffs, and minimizes bureaucratic regulations. The goal of a free trade zone is to enhance global market presence by attracting new business and foreign investments.” SMEs can benefit from FTZs due to the following spinoff benefits of FTZs:

• Attracting FDI – FTZs help in the process of attracting FDI, which helps in increasing the level of capital stock of the host country.

• Income generation and employment creation – Experts argue that FTZz can lead to

increased urbanization, and can provoke a shift towards manufacturing. Over time, the manufacturing capability is expected to yield capabilities to produce quality products, thus increasing the chances for export revenues. In the process, multiple employment opportunities are created, as well.

• Technological transfer and knowledge expansion – FTZs can help in the cause of

technological transfer and knowledge expansion, thus bringing in crucial technological expertise and opportunities for skills enhancement into a country.

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The success or failure of a zone is closely linked to the policy and incentive framework, strategic nature of the location, development and management efficiency. The use of generous incentives to offset key disadvantages in location and management is pointed out as ineffective by experts in the field. Also, there is a growing consensus that trade or economic zones should not be seen as a substitute for a nation’s overall trade and investment reform strategy and efforts. Zones are only one tool in an array of mechanisms in terms of creating jobs, generating exports and improving levels of foreign investment. In addition, SMEs can feed effectively into their ecosystem if suitable policies and plans exist. 5.6 Growing the knowledge economy In a knowledge economy, the key sources of wealth and national wellbeing will be determined by skills across sectors such as healthcare, advanced manufacturing and engineering, automation, information technology, innovative scientific research, etc. The knowledge economy makes it possible to strengthen the human resource aspect, a highly crucial and indispensable linkage. The emergence of new technological bellwethers such as Big Data and the Internet of Things (IoT) means an economic age that is predicated on information has already taken birth. Data, information and knowledge have become synonyms in an interconnected world, where communication between machines and between humans and machines has already spawned several new industries (e.g., smart cities market). Effective innovation governance will involve exploring and finding new ways to ease the progression from university-­based research concepts or prototypes to marketable products. Ultimately, government research entities and university-­based research have to facilitate private sector job growth and economic diversification. Here is where entities like Takamul of the UAE can be of significant importance and help. Takamul, launched in 2011, is an innovation support program developed and operated by the Abu Dhabi Technology Development Committee (TDC). The entity’s objective is to support inventors from the UAE with legal and financial help for filing patents internationally, and providing the expertise and tools necessary for the commercialization of patents. Essentially, Takamul can be viewed as operating under two verticals: Patent Support;; and Commercialization. Patent Commercialization Services of Takamul Service Description

Invention Disclosure

The invention is communicated to the Takamul Technology Transfer who secures patent protection for inventors and their innovations. The invention is communicated by means of an Invention Disclosure Form that is to be completed and submitted by the inventor. This form also includes a request for financial support and prosecution of a patent.

Technology Assessment

The disclosure is assessed using a triage scorecard. Scores are provided for various criteria such as the strength of the Intellectual Property (IP), size and competiveness of potential markets for the IP, etc.

Intellectual Property Protection

If the invention is determined to be novel and that of high potential commercial value, Takamul Technology Transfer proceeds to prepare and file the patent. This requires significant input from the inventor(s) and external patent and technical experts.

Technology Marketing

Takamul Technology Transfer conducts extensive technology field analysis that includes elements such as comparing competing technologies, studying size and growth of target markets, etc. Takamul Technology Transfer then develops marketing material for the technology along with a list of potential licensees.

Proof-­of-­Concept In some cases, the effective development of the IP may require further development to validate the efficacy of the invention at a scale, location or context appropriate to its intended use. This work often results in the

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development of a prototype. Takamul Technology Transfer Partners can apply for funding, from the Takamul Technology Transfer to perform these proof-­of-­concept activities.

Decisions

The Takamul Technology Transfer partner has the ultimate authority to make all decisions throughout the IP commercialization process. This is particularly vital under the scenario where the IP has not scored well in the Technology Assessment Phase or if it has failed to meet the criteria during the Proof-­of-­Concept phase.

Engage with Licensees

Takamul Technology Transfer directly approaches potential licensees and enters into formal negotiations with interested potential licensee(s). This is to execute an option or license agreement on behalf of the Takamul Technology Transfer partner.

Cross-­Cutting Services

In addition, Takamul Technology Transfer will provide a range of cross-­cutting services. These services include training / awareness programs and access to a network of various external experts specialized in a range of subjects.

Source: TDC Takamul (Verbatim, with light editing in some instances) Effective patent creation happens in a conducive ecosystem. If the innovation ecosystem is effective, then it is a predictor of more patents emerging from a country. Building a knowledge-­oriented economy is largely an institutional effort, with both government entities and the private sector contributing their parts. Given the predominance of the government sector and the energy industry in the GCC, it is but natural that national visions and programs will initially provide the momentum into the creation of a knowledge economy. Changes in the major frameworks or institutions that engage in R&D will help build the knowledge workforce of the future, usually over a longer time scale than that visible in economic markets.

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6. Addressing challenges faced by SMEs 6.1 Funding SMEs can very often run into what is called the ‘Funding Gap’. Crowdfunding’s Position in the Funding Lifecycle

Source: Nordic Crowdfunding Alliance’s adaptation of World Bank (2013) & BLOOVO.COM Research Though there is official support for SMEs in the GCC, the concept of successful start-­up SMEs is still new to many parts of the GCC business culture. Thus, rather than completely fresh start-­ups, investors and banks may like to fund franchises, wherein there is a proven brand backing the investment, and there is operational support and training available for the applicant. However, there are steps being taken by various governments to create a robust SMEs framework. For example., in Kuwait, the National Fund for SME Development provides funding for SMEs. Entrepreneurs in the GCC, with respect to receiving bank loans, are known to face time-­consuming documentation, daunting penalties on early repayments, shorter repayment periods, higher interest rates in comparison with large corporate borrowers, etc. Banks, on the other hand, contend that higher premiums and voluminous documentation are required as steps towards protecting riskier lending propositions. The reluctance of banks to lend to SMEs means that there is space for innovative funding practices like international funding for GCC SMEs and through domestic venture capital funds. Several countries in the advanced economies bracket have already developed venture fund models such as limited partnerships and limited liability companies. Given the drive towards innovation in many of the countries in the GCC region, it is time to explore innovative financing mechanisms, as well, such as institutionalized funding sources for SMEs focused on innovation. In the GCC countries, the share of SME loans in total bank loans has tended to be around 2%. However, there are signs of innovative financing mechanisms being adopted within the GCC. In September 2014, Dubai SME launched the Equity Investment Initiative (EII). The EII targets capital infusion into the SMEs sector through equity participation of venture capitalists, angel investors, private equity firms etc. It has also been reported that Dubai SME is compiling a domestic directory of angel equity investors focused on SMEs. The effort is part of a survey on SMEs equity funding needs.

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There are some global examples that the GCC can adopt and customize. One example is the InnovFin initiative of the EU. InnovFin is a joint initiative by the European Investment Bank (EIB) and the European Investment Fund (EIF), in cooperation with the European Commission (EC). The InnovFin SME Venture Capital offers equity finance for research and innovation through selected intermediaries like investment funds, venture capital funds or vehicles that support co-­investment facilities for Business Angels. Non-­institutional participation, in the form of opening up SMEs to investments in the stock exchanges could also become frequent. The concept of the ‘Fund of Funds’ (FoF) may also gain popularity. Many observers comment that governments need not be adept in identifying promising SMEs. Thus, instead of directly funneling investments into companies, the government can invest into VCs that can in turn scout for viable and promising funding opportunities. One such example is The Dansk Vækstkapital (Danish Growth Capital) of Denmark, which is a partially public investment fund-­of-­funds that invests in small cap, mid cap, venture and mezzanine funds. The Dansk Vækstkapital only invests in funds and not directly into Danish companies. Businesses will have to apply for financing directly at financial institutions that take part in the Dansk Vækstkapital program. An emerging concept in terms of SMEs funding is the growing phenomenon of crowdfunding or peer-­to-­peer lending. Before deliberating on crowdfunding, it is essential to understand what the concept actually implies, as it is still a nascent, but rapidly evolving, subject. The term has quickly become an umbrella classification for a new wave of fund raising for startups. Yet, there is much confusion. For instance, most private equity offerings are still limited to only accredited investors. Thus, some question whether it actually is a spontaneous “crowd”. Moreover, the market views peer-­to-­peer (P2P) lending separately. To put ideas in much clearer perspective, it would be useful to look into the broad classifications of crowdfunding that currently exist. Crowdfunding classification Classification Description

Rewards-­based

It is also referred to as “peer-­to-­peer investing”. In this model, participants pledge money online to back a start-­up or some creative project, and they receive a reward in return. For instance, the right to purchase a product first when (and if) it reaches the market.

Equity This format offers ownership in private enterprise with the possibility, albeit with no guarantee, of an investment payoff through an initial public offering (IPO), or through a potential merger or acquisition.

Peer-­to-­peer lending

This form attempts to match investors with individual borrowers who are looking for options to deal with personal debt issues, like credit card debt. Though this format started for small-­sized loans, it is now expanding to cater to larger debt instruments like mortgages, too.

Donation-­based Funders donate to causes that they want to support, with no expectation of any compensation or return.

Source: Pensco, Nordic Crowdfunding Alliance GCC’s first crowdfunding plan is Aflamnah, a UAE-­based platform that allows individuals from the Middle East region to raise funds for fresh ideas in areas like films, games, television, art, music, etc13. The platform was launched in 2012 and has gained attention because the film When I Saw You14, which won several international awards, raised $10,000 through the platform for its production. In November 2014, the real estate firm, DURISE, in the UAE announced its plans to launch a crowdfunding concept for the sector throughout the GCC and wider MENA area15. The idea behind

13 Saudi Gazette 14 A Palestinian drama film released in 2012 15 Arabian Business Publishing Ltd.

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DURISE’s real estate crowdfunding program is to allow investors to invest in real estate projects through a crowdfunding concept for amounts as low as $5,00016. Crowdfunding platforms like Shekra (based in Egypt) open the possibilities for many customers within the GCC to access Shariah-­compliant funds. This is because Shekra ensures specific Shariah screening and legal formalities. Some of the ways in which crowdfunding can support Shariah-­compliant financing for start-­ups are:

§ Providing investors with the opportunity to receive equity, through either capital contribution or in-­kind contributions.

§ The crowdfunding platform itself being compensated through in-­kind equity rather than a broker deal to ensure that the platform’s interests, as a service provider, are aligned with those of investors and entrepreneurs.

§ Focusing on ensuring Shariah-­compliance and social responsibility. § Focusing not only on growth or technology companies, but also on startups that generate a

steady income. The typical exit for investors might not be an acquisition but instead a buyback by the entrepreneur.

Many experts opine that crowdfunding would grow in the GCC region due to scarcity of venture capital and public offerings for entrepreneurs, and can act as a powerful financial tool. Also, firms like Eureeca, which is a crowd-­investing platform, provide opportunities for channeling investors’ funds into promising ventures. A UAE based platform, Eureeca calls itself a crowd-­investing arena because interested investors can view profiles of available projects to invest in. In turn for the investments, the investors will gain shares in the businesses into which they make their investments. In March 2015, it was reported that Eureeca had received regulatory approval from the UK’s Financial Conduct Authority (FCA), adding impetus to the platform’s plans to enter new products and add further products17. The approval from the FCA will not only allow Eureeca to expand its business in the European market, but it can protect Mena-­based clients as per U.K. regulations. In essence, it can be stated that the emergence and the growth of the crowdfunding concept in the GCC has seen a significant uptake in the UAE. Moreover, the phenomenon cannot be divested from the wider MENA region, as crowdfunding, by nature, is immune to borders. The internet has allowed investors and entrepreneurs seeking funds to come together in an environment of shared values and risk perceptions. Also, the concept of paying money into promising startups as a way of giving back to society is fast catching up in the GCC. For instance, in 2014, the Qatari company, Silatech, joined hands with Qatar Charity to launch a crowdfunding platform that is dedicated to young Arab entrepreneurs18. The platform, called Narwi.com, acts a “micro-­giving” resource in support of young entrepreneurs. An innovative aspect of Narwi is that funds are provided on the platform as revolving donations, which means that when an entrepreneur repays the original loan, the returned fund then moves on to support other entrepreneurs within the Narwi ecosystem. 6.2 Right talent GCC countries have started programs for training and educational reforms to meet the medium-­ and long-­term skill demands, especially in the private sector. A combination of price and institutional measures are needed to reduce wage expectations to market levels, increase productivity, and enhance job creation. In order to develop appropriate talent for the knowledge economy, the following steps would be useful.

16 Ibid. 17 GN Media 18 Crowded Media Group

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Developing talent for the knowledge economy Classification Description

Performance assessments Using standardized performance assessments to determine promotions and salary increases.

KPIs based appointments Reducing the influence of influence in leadership appointments.

Educational reforms

§ Curriculum overhaul. § Developing accreditation methodologies for vetting prospective teachers.

§ Linking vocational training to earning pathways (like the educational model prevalent in Germany).

Sabbaticals for government staff

To pursue entrepreneurial interest. If failure happens, then they can come back to their government jobs.

Quasi-­government entities By having a PPP scheme, nationals will be more willing to apply since government ownership adds a layer of job security to the mix, thereby allowing them to train for private sector like roles.

Source: BLOOVO.COM Analysis 6.3 Market access In order to secure reliable market access for products and services, it would be worthwhile to consider the concept of Smart Specialization (SS). SS “is about a new generation of research and innovation policy that goes beyond the classical investments in research and technology, and general innovation capacity building. What makes a smart specialization strategy different from the average innovation strategy is that:

§ Its evidence-­base does not only consider typical research and skills issues, but looks into all assets, e.g. geographic location, population structure, climate, natural resources, and into demand side issues, e.g. societal needs, potential customers, public sector innovation. It will encourage a country or region to merge its unique local know-­how and productive capacity into new combinations and innovations.

§ Smart specialization is not a top-­down decision, but developed and implemented in a dynamic entrepreneurial discovery process involving key stakeholders in collaborative leadership.

§ It has a global perspective on potential competitive advantages, markets and potential for cooperation with innovators beyond geographic boundaries.

§ It is not focused on the production of new knowledge everywhere, but commends sourcing-­in existing knowledge and technologies to innovate in all possible forms, including inter alia organizational, marketing, user-­driven, and social innovation.

§ It is about setting priorities in times of scarce resources and focusing investments on comparative advantage to accumulate critical mass and thus to excel by differentiating the country or region from others.

§ Smart specialization is not about picking winners in terms of sector or technology, but about cross-­fertilization between and among sectors and technologies. For some regions the clustering can provide a starting point for cross-­sectoral links and knowledge spillovers, both within the region and externally with other regions.”19

When designing and implementing a SS inspired innovation strategy for industrial and economic diversification, it is necessary not only to consider how to secure ‘path extension’, which has been the main goal in much of traditional innovation policy, especially in countries with a resource based economy due to the importance of process innovations to secure high productivity in the exploitation of natural resources such as oil and gas. Path extension mainly results in incremental product and process innovations in existing industries and technological trajectories. While this can secure competitiveness 19 European Commission

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and growth in a short and medium term perspective, in a longer time perspective these industries run the risk of path exhaustion, referring to situations where the capacity for renewal is lacking. Path renewal takes place when existing local firms branch into different but related activities and sectors. The main problem of traditional industries with respect to promoting new path development and making them more innovative and competitive is the low educational and competence level and a lack of investment in R&D. This implies that these firms and industries have a low absorptive capacity, which limits their capacity of accessing and acquiring new and often external knowledge, make use of new production equipment and penetrating new markets, especially international ones. It also handicaps them in approaching universities to make their knowledge more research based and/or informed, which would extend their mode of innovation to the STI type. This underscores the fact that educational and labor reforms are instrumental in order to build market access over the long-­term. For GCC SMEs, establishing links with large enterprises via supplier and subcontracting partnerships can represent an important pathway to derive the benefits of deeper access to markets and technology of larger companies. Usually, SMEs fit into value chains as peripheral suppliers to one or more nodal links in the chain, largely as second-­ or third-­tier suppliers. For e.g., in 2012, GE signed a partnership agreement with the Saudi Aramco Entrepreneurship Center Company (Wa’ed). The stated objective was to develop a domestic SMEs led supply chain for manufacturing and services purposes in the energy sector. Now, GE Oil & Gas and Wa'ed are engaging local SMEs in the manufacture of wellheads. 6.4 Regulations In order to support a GCC Innovation Ecosystem that can support SMEs, regulatory tools or choices will have to revolve around what can be termed as the ‘innovation infrastructure’. The innovation infrastructure will consist of four key conceptual themes or ingredients: Funding for private enterprise, reliable intellectual property rights (IPR) regime, ease of doing business and a focus on continuously boosting national competitiveness. Taking the approach of ‘innovation infrastructure’ would mean that the regulatory perspectives would turn holistic in nature and can thus spring up innovative solutions. For instance, it is well known that SMEs in the GCC find it difficult to access traditional bank loans. Moreover, crowdfunding and access to capital markets are being increasingly recommended as options for better funding. The private sector, through a government Fund of Funds approach, could be empowered to scout for and invest in promising SMEs and technological companies. The concept of the Fund of Funds follows from the principle that governments need not be adept in identifying promising SMEs. Thus, instead of directly funneling investments into companies, the government can invest into VCs that can in turn scout for viable and promising funding opportunities. Taking the idea further into the realm of national competitiveness, which encompasses a broad range of areas, ranging from labor productivity, ICT, quality of infrastructure like roads, capacity for innovation, etc.— industrial clusters should be built after analysis about their feasibility and viability within the particular environment of a nation. For instance, the UK, after clearly identifying its national advantages and technological capabilities, unveiled the concept called Catapult Network, which consists of the creation of a network of technology and innovation centers across Britain. Specific clusters that the UK identified for attention and concentration include cell therapy (given leading universities operating in the country) and offshore renewable energy (given the island nature of the country). The GCC countries too will have to conduct feasibility analysis on the types of clusters that it can effectively support. Regulatory developments can then follow such analysis, thereby providing competitive strength and optimization of resources.

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Cluster development in the GCC Country Cluster Focus Areas Bahrain Education, Financial Services Kuwait Downstream oil;; energy related industries Oman Software;; energy;; processed food;; knowledge industries Qatar Education, Financial Services Saudi Arabia Downstream oil;; energy related industries;; education

UAE Logistics;; technology;; media;; science and education;; construction/design;; light manufacturing;; financial services;; aviation;; defence;; clean technology and renewable energy

Source: Intracen

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7. Concluding remarks 7.1 Policy analysis In order to accelerate the process of the knowledge economy and innovation growth that can carry SMEs along in the generation of jobs, that the GCC can take the following measures for improving analytics and research capabilities. Measures recommended Area Measures Education § Overhaul educational systems -­ develop a culture of inquisitiveness.

§ Quality of faculty should be enhanced and appointments to be made based on meritocracy, to enhance the competitiveness of system.

§ Curriculum to be updated, in-­tune with current industry needs. § Stress upon vocational training to make graduate industry ready. § Emphasize on University-­Industry linkages to commercialize new

findings. Private sector § Incentivize to invest more in research (due to current reluctance to

spend on research) and offering essential infrastructure. § Private sector jobs could be made attractive by providing targeted wage

subsidies. § Adopt strict IP rights and uphold patent regulations to protect

intellectual capital. § Encourage entrepreneurship (e.g.: setting up SME incubators).

Government § Accelerate investments in educational sector. § Establish scientific institutions with necessary support infrastructure

and funds. § Policies should be drawn to establish technological industries to ensure

absorption of talented people. § Setup ecosystems by clustering together institutions that work around

a particular sector on the lines of silicon Valley. Public companies § Develop procurement policies that are supportive of domestic SMEs.

§ Public companies can make available talent and mentoring support to SMEs.

Technology transfer § Preference for turn-­key solutions should be avoided. § Joint ventures and private participation (through PPP mode) should be

mooted in infrastructure projects to enable local companies to scale-­up the value chain and facilitate technology transfer.

Source: BLOOVO.COM Analysis The three key input factors in the GCC that will impact on and influence SMEs and jobs growth are human capital, R&D-­capacities and institutional capability. Innovation governance through effective institutions will play a significant role in producing highly skilled and capable individuals.

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Building an effective innovation framework

Source: OECD & BLOOVO.COM Analysis The GCC has to evolve a system wherein the SMEs can systematically utilize several stakeholders and networks (incubators, supply chains, etc.) to optimize and continuously improve their product or service offerings. 7.2 Implementation difficulties Supporting SMEs in the GCC will require reform efforts on a broad scale. Any reform strategy plan needs to be formulated in consultation with multiple stakeholders—establishing clear long-­term objectives, including determined follow-­up. A well-­planned communication strategy is essential to help generate broad-­based support, and should be maintained throughout the process of reform. The fall in the price of oil since the second half of 2014 has spurred or coincided with a series of reform steps in the GCC. In the GCC, the public sector is the employer of first resort, providing relatively high employment benefits compared to most private sector jobs. Reorienting a shift in mindset that embraces more strenuous private sector jobs would likely prove difficult, at least in the short-­term. 7.3 The need for imaginative solutions Reforms cannot normally be totally planned such that all unpredictable changes can be accounted and factored for. More often, innovative policies are the result of subtle compromises and flexibility between conflicting requirements. Even simple objectives, like increasing the levels of R&D undertaken by SMEs, can be thwarted by implementation difficulties. Sometimes, even the definitions of R&D and SMEs can lay obstacles in the path of innovation and product commercialization. Innovation with respect to SMEs in the GCC can be realized only through adjustments in broader policy conditions and regulations. In fact, the key to transforming the SME sector governance may be to re-­think how to best achieve institutional structures and processes that focus on delivering based on key performance indicators (KPIs).

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Solutions need to focus on service delivery across three key areas:

§ Structural obstacles: Tackling fragmented competences and weak or ineffective innovation governance mechanisms.

§ Resource shortages: Inability to rally resources at critical junctures or lack of consensus among stakeholders as to how SMEs should be best supported in terms of resource distribution.

§ Weak coordination: Weak networks or lack of a cohesive approach in terms of the institutions or entities tasked with creating a conducive SME ecosystem.

The difficulty will actually lie in institutionalizing systematic monitoring and impact assessments within the framework of performance-­oriented policy and regulatory approaches. The industrial technology development system

Source: The World Bank & BLOOVO.COM Analysis Innovation solutions, as depicted in the above model, will position SMEs at the heart of the industrial technology system, wherein they generate both the demand and supply of goods and services. Moreover, R&D is only the tip of the technology development process, with emphasis going into commercialization and profitable continuation of enterprises. In order to bring GCC SMEs into the center stage of industrial organization, coordination of information and business fundamentals through a centralized information system would be very useful. SMEs that are equipped with required information can compete better on customer requirements and prove more adept in generating business and products/services innovations. Beyond building effective governance and monitoring mechanisms in all aspects of delivering services, SME-­centric policies are also required to demonstrate strong project management skills in order to convert long range plans into action and, consequently, into reality. To conduct a smooth shift into the next phase of economic growth for the SMEs, the GCC will have to display the ability to absorb the best of all consultative feedbacks and promote sustainable communities of excellence through specialized public-­private partnerships. End of Report