Setting the context for entrepreneurship and diversification
This chapter aims to summarize the latest trends affecting entrepreneurship across the Arab world. In addition, links between entrepreneurship and diversification are explored, and policy recommendations are presented at the end of the chapter to provide governments with options for addressing key issues facing entrepreneurship development in the region.
The analysis is based on publicly available data from internationally recognized expert sources,3 as well as a recently conducted World Bank Group survey of leading Arab world entrepreneurs during the World Economic Forum on the Middle East and North Africa held in Jordan in May 2017. The survey covered 100 entrepreneurs, selected from Arab countries by a panel of World Economic Forum, International Finance Corporation (IFC), and private-sector representatives. Surveyed individuals represented entrepreneurs who have managed to successfully scale up their businesses. The survey revealed insights into the characteristics and traits of these entrepreneurs, the current landscape of challenges, support received along their journeys, and their perceived opportunities for future growth.
Defining and measuring entrepreneurship
Although often discussed and associated with the widely known concepts of innovation, risk, and initiative, there is no single globally accepted definition for the term entrepreneurship. A recent World Bank literature review of definitions (Box 1) shows that historically, and still today, researchers often use a wide range of terms, sometimes interchangeably, to describe entrepreneurship depending on the perspective from which the topic is being viewed.4 This chapter defines an entrepreneur as a person or firm willing to take risks to create new economic opportunities and/or to introduce new products, services, or production processes to the market.5
Measuring entrepreneurship is also a challenge. Although some organizations globally track entrepreneurship-related indicators (e.g., the Global Entrepreneurship Index, the World Bank’s Enterprise Surveys and Doing Business, the World Economic Forum’s annual Executive Opinion Survey, etc.), research tends to be most consistent for Organisation for Economic and Co-operation and Development (OECD) members and other high-income countries, with varying levels of information available for developing countries, including many in the Arab world.
Box 1: Definitions of Entrepreneurship
Entrepreneurship: The process of starting a business; using a manifest ability and willingness of individuals—on their own, in teams, within and outside existing organizations—to perceive and create new economic opportunities (new products, new production methods, new organizational schemes, and new product-market combinations) and to introduce their ideas to the market, in the face of uncertainty and other obstacles, by making decisions on location, form, and the use of resources and institutions.
Transformational/opportunity/growth entrepreneur: An entrepreneur who aims to create a large, vibrant business that grows far beyond the scope of an individual’s subsistence needs and provide jobs and income for others.
Subsistence/necessity entrepreneur: A person who engages in entrepreneurial activity chiefly as a means of providing subsistence income to him- or herself. Subsistence entrepreneurs typically do not—and do not aspire to—grow the business to the point of creating employment opportunities for workers outside of their immediate family.
High-growth entrepreneur: A high-growth entrepreneur leads, founds, organizes, or runs a business that can be classified as high-growth.
Entrepreneurial firms: van Praag and Versloot, in a 2007 systematic review of the literature on the contributions of what they term entrepreneurial firms, defined these as enterprises with fewer than 100 employees that are younger than seven years old and are new entrants to a particular market.
High-growth/fast-growth business/gazelle/high-impact firms: The United Kingdom and the OECD define high-growth businesses as firms with 10 or more employees that experience average annual growth in employment or turnover of 20 percent or more over three years. MIT economist David Birch introduced the term gazelle in the 1980s and defined it as a firm that has at least US$100,000 (roughly US$250,000 today) in annual revenues that sustains 20 percent annual revenue growth over a four-year period. Economist Zoltan Acs expands on the work of Birch to introduce employment growth as a further way to qualify the term gazelle. High-impact firms are gazelles (per the definition above) when they have an employment growth quantifier of two or more over a four-year period.
Sources: Olafsen and Cook 2016; van Praag and Versloot 2007; World Bank 2016a.
Links between economic diversification and entrepreneurship
Links between diversification and entrepreneurship can take many forms.
Economic complexity and entrepreneurship indexes
Research has shown that countries and regions characterized by higher entrepreneurial activity tend to have higher growth rates and greater job creation, the main pathways through which to grow the global middle class.6 Entrepreneurial activity, in turn, is affected by the strength of the entrepreneurial ecosystem, which is a mix of attitude, resources, and infrastructure needed to support entrepreneurship.
There is a positive correlation between the Economic Complexity Index (ECI), which measures the relative knowledge intensity of 124 economies,7 and the Global Entrepreneurship Index (GEI), which measures the health of the entrepreneurship ecosystems in 137 economies.8 This correlation suggests that countries that have managed to diversify exports tend to also have stronger ecosystems and higher levels of entrepreneurial activities. Figure 1 shows that top-performing countries in the ECI ranking tend to also perform well in the GEI. Arab world countries follow the same trend, yet they lag in performance. The average ECI ranking for Arab world countries is 71.4; the average GEI ranking is 55.8. The United Arab Emirates (UAE), Jordan, and Tunisia are the top performers on the ECI. On the GEI, the top performers are Qatar, the UAE, and Oman.
Global value chain links to entrepreneurs: A pathway for diversification
For some countries, stronger links to global value chains (GVCs) are central mechanisms for achieving greater economic diversification and creating new opportunities for entrepreneurial small- and medium-sized enterprises (SMEs) to improve their productivity and growth. A recent World Bank publication states:
[T]he ability of SMEs and firms in low-income countries to be successful in GVCs (to adopt new technologies swiftly, learn by doing, innovate, and optimize their production) depends more heavily on framework conditions and externalities from the operating environment. Public goods and externalities that matter are wide ranging: from world-class logistics and ICT [information and communication technology] connectivity, to open markets, to the business environment, to the educational and vocational system, to the existence of a well-functioning innovation infrastructure and efficient forms of financing.9
For Arab world countries, it is evident that not all of the above conditions exist. In addition, the same authors claim that when these conditions are not present:
Entrepreneurs may opt for suboptimal strategies that do not foster productivity and economic growth. These strategies include seeking loans from friends and family instead of formal sources of capital; limiting investment in technology that would boost productivity and growth; not hiring talent that can help the business grow and thrive over the long term; failing to adopt tools for identifying new market opportunities; and not seeking opportunities for scaling their companies, but instead putting the firms on a below-potential growth path.10
As confirmed in latter sections, this phenomenon seems to prevail across Arab world countries and across countries of different income groups, but it is also one that concerted efforts from governments have the potential to improve.
Such challenges in the Arab world can seem even more daunting to tackle in the context of low levels of economic diversification. However, some national diversification strategies have managed to leverage foreign direct investment (FDI), innovation, and entrepreneurship policies for private sector–led growth through exports and greater participation in GVCs, as the chapter on diversification notes. Countries such as Ireland, Norway, and Malaysia, for example, have managed to diversify by widening the scope of their economic activities (industries and services) through focusing on innovation-driven strategies for increasing exports. This focus is supported by incentives and dedicated institutions to enhance domestic value-added through concerted support to SMEs and entrepreneurs. Human capital development, with special attention to skills needed by these upcoming industries, has also been a critical part of the success stories of similar countries such as the Republic of Korea and Finland.
World Bank research has shown that increasing entrepreneurial activities in the private sector, along with aiding domestic firms to grow large enough to participate in GVCs as suppliers, can spur economic growth and promote higher productivity while supporting the achievement of economic diversification goals. GVCs can help countries engage in economic upgrading or moving to higher-value-added tasks, both of which can support diversification. Furthermore, domestic firms with aspirations for global reach tend to have the most capacity to innovate and grow.11 Global practices confirm such trends, where, for example, Korean conglomerates Hyundai, Samsung, LG, and Lotte have recently spearheaded growth and exports by providing supply opportunities and global links to local SMEs and entrepreneurs. In Finland, Nokia contributed to the country’s economic boom in the late 1990s and most of the 2000s. In addition, some governments managed to attract FDI to integrate with GVCs (e.g., Ireland and Costa Rica), and have taken the opportunity to link these investments with local suppliers, which are mainly SMEs. These local suppliers in turn have helped these countries to enhance their labor skills and productivity; adopt new technologies; and, as a result, diversify their economies. All these lessons can be useful for the Arab world.
Tech start-ups also can create “new” jobs, as opposed to “old” jobs that are being replaced by technology.12 However, the majority of new jobs come from traditional industries that have introduced technology into their processes as a result of competitive pressures from new business models generated by start-ups or innovation absorption from the start-up ecosystem. For example, many banks and retail companies are facing greater competitive pressures to develop mobile applications.
Leading firms in their respective industries are increasingly innovating approaches to tap into the power of entrepreneurship in introducing new business models and diversifying products. Such approaches tend to involve cooperation between large firms and professional accelerators to jointly run cohorts of start-ups and provide them with the financial resources, mentorship, and networking support needed to put forward new business models for their industries. As an early adopter of financial technologies (fintech), Barclays Bank in the United Kingdom partnered with TechStars in 2013 to produce a new generation of fintech businesses. Many other global and regional companies are following the same trend (see Box 2 for observations of this recent trend).
Box 2: Corporate Diversification through New Business Models
Large corporations often find it hard to innovate regardless of whether the innovation in question is in terms of products, services, or entire business models. They are better in executing their current business models than finding new ones, and nimble start-ups have been able to disrupt legacy industry by innovating fast and scaling up. But both corporations and start-ups stand to benefit from collaborations based on solving mutual needs. The corporations learn ways to adapt to market changes and find new business models and opportunities. For the start-ups, collaboration with corporations can be key to scaling their business and developing viable products and services.
Wamda, a regional catalyst for entrepreneurship development in the Arab world, has suggested collaborative entrepreneurship, which they define as a mutually beneficial engagement structure between large corporations and start-ups, as a recommended activity in the Arab world for developing the regional entrepreneurial ecosystem, supporting diversification, and addressing community needs.1
Globally, this trend toward a collaborative approach has been emerging since 2013. More and more collaboration between large corporations and start-ups is occurring in diverse ways. These collaborative relationships aim to foster innovation from the outside—for example, by growing and acquiring innovative start-ups or by promoting innovation. For instance, Google alone has acquired over 150 companies since 2008.
In the United States, Accenture Interactive, Marriott International, and 1776 launched the Travel Experience Incubator in 2017, a new program designed to discover and foster start-ups working on innovative technologies and solutions to improve the travel experience.2 The incubator brings together the hospitality industry expertise of Marriott International and its official Travel Experience Incubator partner, Accenture Interactive, along with participating start-ups, to co-create unique and inventive new experiences for travelers.
In the United Kingdom, Barclays Bank and TechStars started a collaboration in 2013 to support innovative business models in financial technology (fintech).3 This unique partnership brings two networks together into one accelerator program that offers entrepreneurs unprecedented access to industry experts as well as world-class mentors and investors. The program has graduated 100 start-ups since its inception.
In Egypt, the American University in Cairo (V Labs) engaged with Commercial International Bank (CIB) in July 2017 to run a 12-week acceleration program for fintech entrepreneurs. Since then, V-Labs and CIB have implemented several acceleration programs, which aimed to expand access to finance for the unserved or underserved and develop market-driven solutions for CIB.
In the UAE, Wamda started the TestBED collaborative program with Marriott in September 2017. TestBED provides start-ups with an invaluable opportunity to test their products/services for 10 weeks within an operating Marriott hotel in a major city in the Middle East or Africa. During this period, start-ups will be able to receive feedback from Marriott guests and associates to help develop their product.
Sources: Olafsen and Cook 2016; van Praag and Versloot 2007; World Bank 2016a.