The entrepreneurship ecosystem
The key focus of an entrepreneurship ecosystem is the support of the practice of entrepreneurship through the process of designing, launching, and running a new business. This also encompasses pre-entrepreneurship activities, such as promoting entrepreneurship as a career choice and raising awareness of prerequisites for successful entrepreneurship ventures. Entrepreneurship ecosystems are hyper-local (usually city-based) and cultivated by stakeholders rather than designed by governments. They are also self-sustaining.
The ecosystem approach recognizes that entrepreneurship is a complex activity, and that the success or failure of entrepreneurs and their ventures is not dependent only on their own skills and aspirations. Rather it is highly dependent on the quality of the ecosystem in which they seek to form and grow. Although no ecosystem can be copied, growth can be supported or hindered by government interventions in various domains.
As Figure 5 illustrates, the ecosystem model, introduced by Babson College in 2010, is composed of mutually reinforcing components ranging from macro-level policies to firm-level management and technical skills. The model divides the entrepreneurship ecosystem into six domains: (1) quality human capital; (2) the availability of funding and finance; (3) venture-friendly markets for products; (4) enabling policies and leadership; (5) institutional and infrastructural supports; and (6) conducive culture.
Each of these components interacts with the larger social and economic paradigm to yield a dynamic ecosystem. It is increasingly recognized that successful entrepreneurship is very much helped by having an effective ecosystem. This includes a regulatory environment that does not overly hinder firm registration and growth, a variety of financing sources, a supportive business culture, networks and mentors to tap into, and a variety of knowledge resources on which firms can draw. A common idea is that all actors or nodes in the ecosystem—institutions and individuals—act, interact, and influence each other in an organic fashion.
Arab world entrepreneurship ecosystems are underdeveloped and require a concerted effort on behalf of policymakers to address the significant gaps that are otherwise hindering entrepreneurs from taking risks. The annual GEI measures both the quality of entrepreneurship and the extent and depth of the supporting entrepreneurial ecosystem across 14 components (scores range from 0 to 100 percent). The average score for Arab world countries is 39 percent, close to the score of Jordan and Hungary (Figure 6). The GCC countries of Qatar, the UAE, and Oman are the top GEI performers in the region; Tunisia is the top performer in North Africa; and Jordan is the top performer in Mashreq or the eastern Arab world.28 According to the 2018 GEI,29 components relevant to product innovation and risk capital are the strongest areas of the Arab world ecosystem, while technology absorption (29 percent), competition (29 percent), and risk acceptance (29 percent) are the lowest-ranked components (Figure 7).
Although the GCC outperforms the region in most of the components, Mashreq entrepreneurs appear to have better start-up skills and a slightly higher product innovation. Figure 8 shows the subregional averages in the Arab world across the 14 components.
Most large Arab world tech start-ups (e.g., Souq.com, Careem, Bayt, and Wadi) are based in the six GCC countries. However, the available talent pool goes beyond that of the GCC. For example, although the Souq.com front-end/sales team is based in Dubai, the growing 500-person engineering team is based in Jordan. In addition, there is a lot of back-office talent in countries such as Egypt, Jordan, Lebanon, and Morocco that help boost the growth of the leading tech start-ups. Reaching out beyond the GCC for talent is crucial, because building a team of skilled workers is one of the main challenges facing Arab world tech start-ups.
A considerable number of Arab world tech entrepreneurs decide to establish their headquarters in the GCC because the regulatory environment in their home countries does not support the development of new businesses (e.g., tax and business laws are subject to constant revisions and legal enforcement is subjective). For example, Dubai-based online bookseller Jamalon’s founder Ala’ Alsallal is from Jordan (where 65 of his 70 employees are based). More broadly, while approximately 40 percent of the founders of the Arab world’s top 100 start-ups are from Lebanon and Jordan, only 16 percent of start-ups are headquartered there. Instead, the UAE hosts about 50 percent of the Arab world’s top funded start-ups (and 42 percent of all Arab world tech start-ups), while only 1 percent of founders are themselves UAE citizens.30
Enabling policies and leadership
This section discusses opportunities and constraints for encouraging entrepreneurship by reviewing the overall business enabling environment from a private-sector perspective. Box 3 presents a summary of some of the more recent initiatives to support entrepreneurship across the Arab world. The analysis is based on several different data sources including the GEI, the World Bank’s Doing Business Report and its Enterprise Surveys, and an independent survey of leading Arab world entrepreneurs conducted in May 2017 jointly with the World Bank and the World Economic Forum.
The overall quality of the business environment closely correlates with the strength of the entrepreneurial ecosystem in a country. For example, countries with better Doing Business rankings tend to also have better GEI rankings (Figure 9). More specifically, countries that have better legal and regulatory environments for doing business are also those that have better environments for promoting entrepreneurship. This provides a useful context for the issues that entrepreneurs raise from their individual country perspective.
The survey of leading entrepreneurs provides insights into key barriers to business development that firms across the region are facing. The most severe obstacles are access to finance (42 percent), an inadequately educated workforce (28 percent), business licensing and permits (27 percent), corruption (22 percent), and labor regulations (21 percent) (Figure 10).
In comparison, the World Bank’s Enterprise Survey suggests that Arab world firms perceive political instability (30.3 percent), lack of access to finance (13.0 percent), and lack of access to reliable electricity (10.1 percent) as the major barriers to growth for Arab world businesses (excluding GCC countries) (Figure 11).31 These perceptions directly correlate with the state of political unrest, conflict, and violence that has spread across the region since 2011.
Box 3: Recent Entrepreneurship Policy Initiatives in the Arab World
The Arab world has seen several policy initiatives in recent years targeted toward improving the entrepreneurship ecosystem. Some of the more noteworthy are noted here.
Egypt: In 2017, the Egyptian cabinet approved the creation of a new small- and medium-sized enterprise (SME) agency under the Ministry of Trade and Industry. The new agency will have the mandate to formulate strategy, policies, and regulations related to financial services and entrepreneurship, as well as to provide non-financial services. In 2016 Egypt started drafting an insurance law that will cover areas such as micro-insurance and medical insurance.
Tunisia: In 2016 the Tunisian parliament approved a new investment law to reverse the decline in foreign direct investment (FDI) the country has experienced since the 2011 revolution. A new banking law was also adopted in 2017. The Tunisian Insurance Regulator is planning to reform the legal and regulatory framework for insurance to align with international norms. And the Tunisian Startup Act, newly passed in 2018, aims to transform Tunisia into a center for capturing international investors and markets in addition to Tunisian diaspora residing abroad.
Jordan: In 2016, Jordan launched a National Financial Inclusion strategy for 2018–20. It focuses on SME support, microfinance sector development, financial education, and consumer protection, as well as ways to support vulnerable groups including women and youth. In 2017, Jordan approved an economic plan to boost growth through local investments and public-private partnerships. The plan will target 19 sectors with 95 economic reforms, and support a new credit bureau and improved access to credit information.
Morocco: The Moroccan government started drafting a central bank law in 2016, which aims to align the regulation of banks and financial institutions with European best practices. This follows the adoption of a new banking law in 2015 that introduced new rules on governance, resolution of credit institutions, and the management of the deposit guarantee system. The country also made business incorporation and paying taxes easier by improving the online system for these services.
Lebanon: In 2018, the Investment Development Authority in Lebanon launched a new business support unit (BSU) to be located within its premises. The BSU will provide start-ups with market information and free legal and tax/accounting advice, as well as licensing support, to help them establish and grow their companies in Lebanon.
Saudi Arabia: Saudi Arabia released its Vision 2030 for national long-term economic growth in 2016. The plan aims to transform the state-led economy into a private sector–led structure. Some areas are already showing improvement. The establishment of the Saudi SME Authority in 2016 and the development of a national vision to “make entrepreneurs the key drivers of the Saudi economy by enabling them to thrive via further cooperation and partnership” are an important milestone in the Kingdom’s efforts for entrepreneurship development. Minority investor protection has been strengthened by increased shareholder rights and more transparency overall. Contract enforcement was made easier through the introduction of an electronic case management system, for use by judges and lawyers.
Qatar: Qatar’s new Commercial Companies Law of 2015 cancelled minimum capital requirements to establish limited liability companies (LLCs). The One Stop Shop for Businesses and Investors program was also established to expedite start-up procedures for investors and entrepreneurs. Qatar Development Bank (QDB) launched the Ta’heel initiative to help Qatari manufacturers bid on government projects. In addition, the country started providing consumer credit scores to banks, financial institutions, and borrowers, which has improved access to credit information.
United Arab Emirates (UAE): The UAE improved access to credit information by starting to provide consumer credit scores to the banks and financial institutions.
Kuwait: The Kuwaiti government has increased its focus on promoting entrepreneurship and the establishment of SMEs by Kuwaiti nationals. Kuwait has established a one-stop shop for business registration, reduced the number of days required to register property, and increased transparency around the land administration system.
Financing is crucial for entrepreneurship. Different types of financing are needed based on the maturity of the firm (e.g., seed, venture capital, equity, credit are each needed at different stages). Provision of entrepreneurial capital is associated with a 20 to 25 percent higher likelihood of firm survival after four years and a 16 to 19 percent increase in the likelihood of eventually expanding to at least 75 employees.32 In the Arab world entrepreneurs face numerous barriers concerned with access to finance and credit.
Doing Business 2018, which focuses on the legal and regulatory environment for conducting business, cites that getting credit is one of the most problematic issues in the Arab world, with a regional ranking of 112 (out of 190 economies), together with resolving insolvency (113) and trading across borders (123).33 Doing Business’s resolving insolvency indicator reviews the effect of the business environment on firms’ willingness to take risks in business exit. For example, the absence of modern bankruptcy laws can result in unpaid bills, landing entrepreneurs in prison. In addition, when there is no legal framework for companies to restructure debt, the probability of SME default as well as financial loses in case of default both increase. This, in turn, increases banks’ reluctance to invest in equity and lend money to SMEs in the first place.
Poor access to finance hinders business formation, survival, and growth in the region. In addition to low access to bank lending, start-ups and SMEs also have limited access to venture capital, an area where private equity and venture capital industry is underdeveloped in the Arab world. As Figure 12 shows, the ratio of venture capital investments to GDP in resource-poor Arab world countries is below 1 percent, which is very low compared to some European countries.
Arab world countries also need to strengthen their ecosystems and networks of accelerators, incubators, and business angels that provide strategic services to start-ups and medium, small, and micro-enterprises (MSMEs). These services, such as concept development, mentoring, market/product analysis, and market launch, are crucial for the takeoff and survival of small and young firms. Figure 13 presents a summary of the different types of support often provided across the various stages of growth. Indeed, these services prepare small companies to become viable for equity investments.
The World Bank Group survey of Arab entrepreneurs conducted for this report similarly shows that bank financing to start-ups is scarce. Most entrepreneurs (about 55 percent) had used personal savings or family/friends to fund their start-ups. Venture capital and private investors were the second-most important source of capital (44 percent), while funding from commercial banks had been used by only 1 percent. As shown in Figure 14, equity financing mainly targets seed and early stage businesses; although seed financing is the most easily accessible, fewer options are available as companies mature. Financing requirements above US$250,000 are often the least accessible for entrepreneurs. In growth businesses, venture capital funds provided 52 percent of growth capital, followed by 20 percent from private investors and business angels. Most of the surveyed entrepreneurs claimed to be interested in raising US$1 million or more in the coming years to further scale up their businesses, while about 70 percent wanted to grow and then exit or sell their businesses to larger companies.
Recent IMF research corroborates the above findings. The most recent regional IMF economic update reports that SME lending accounts for only 8 percent of total bank lending in the region; the share of total bank lending in middle-income countries is 18 percent.34 According to some estimates, scaling up SMEs in the Arab world faces a finance gap of US$160–180 billion.35 Public-sector lending continues to dominate the financial sector and personal networks remain the primary source of start-up finance in the region.
According to the MENA Annual Venture report, in 2017, 123 start-ups from 12 economies attracted US$475 million worth of investments in the region. The UAE saw most of these investments (84 percent), mainly because of large investments in Careem and Starz Play, followed by Saudi Arabia in terms of deal value and Egypt in terms of deal count. Most of these investments went into e-commerce, local services, financial services, and logistics.36
Initiatives to increase the amount of available seed capital to SMEs are occurring in the GCC countries and Lebanon. For example, the Saudi Arabia Public Investment Fund (Sovereign Wealth Fund) set up a 4 billion Saudi riyal fund (US$1 billion), which will act as a “Fund of Funds” and invest in venture capital and private equity funds targeting the SME sector. Qatar’s Development Bank (QDB) provides seed capital for Qatari companies; Bahrain launched a US$100 million fund to invest in SMEs; and Oman launched the Oman Technology Fund (OTF) with US$200 million in start-up capital, to invest in Omani emerging technology enterprises and start-ups. In Lebanon, the central bank is implementing Circular 331, which aims to inject the potential of US$600 million into innovative firms.
Private equity investors and fund managers in the Arab world are mostly based in GCC countries, with 132 investors and 126 fund managers. In Lebanon, more than 13 funds were established after 2013. In 2015 there were 122 venture capital and 53 private equity investments in the region, with a total investment value of US$1.5 billion.37 In 2016 the number of venture capital and private equity investments was up to 175 and 69 respectively, with total investment dropping to US$1.1 billion.38 Since 2008, Arab world–based private equity funds have raised US$16 billion in total, while 44 percent of capital raised was for funds intended to buy out companies.39 Last year, most private equity investments focused on transport, retail, finance, and information technology (IT and fintech) sectors. Most investments are directed to the UAE, Lebanon, and Saudi Arabia.40 In addition, the five largest Arab world–based private equity funds spread their assets across Asian, Latin American, and emerging markets rather than focusing on the region.41
Crowdfunding generated a total financing of US$3.25 million in the Arab world in 2015 and 2016. About US$527,000, or 16 percent, of these funds went to female-led fundraising campaigns. The UAE and Bahrain are the only two countries in the GCC that allow and regulate crowdfunding. Bahrain created a legal framework for loan crowdfunding (both conventional and Sharia compliant) to help SMEs and start-ups while providing governance support for fintech businesses to protect their customers. The framework also allows crowdfunding on online platforms. The Dubai Financial Services Authority and Dubai SME also introduced new regulations to help SMEs and start-ups to raise funds by crowdfunding. In 2015 and 2016, 97 such fundraising campaigns were funded successfully. In other countries, crowdfunding platforms reportedly operate online, through other countries or off-shore centers.
Finally, diaspora engagement, which remains largely overlooked today, can be an important source of finance for Arab world entrepreneurs. More than 20 million, or 5 percent, of the Arab world’s population live abroad, many as professionals. A recent World Bank survey of Arab world diaspora showed that in the region, diaspora feel strongly connected to their home country: 87 percent are willing to invest time in mentoring individuals in their country of origin, 85 percent believe that giving back to country of origin is important to them, and 68 percent are willing to invest capital and trade with their country of origin.42 Arab governments do not systematically engage with their professional diaspora abroad and therefore are missing an opportunity to tap into extended finance networks that can provide seed financing and mentorship, in particular to high-growth entrepreneurs. Yet some initiatives aiming to connect entrepreneurs to diaspora networks are occurring. For example, a US$50 million Morocco Seed and Early Stage Equity Financing project that aims to mobilize private equity capital and increase venture capital offerings to SMEs with high growth potential will involve the Moroccan diaspora at all stages of the process.43 Tunisian expatriates have also launched several initiatives related to entrepreneurship in Tunisia, such as the Impact initiative.44 In Algeria, a network of high-profile researchers and executives in the healthcare sector has launched the Algerian American Foundation in the United States to provide training and technical assistance to emerging medical and research centers in Algeria.45 Professional Lebanese associations such as LebNet and Lebanese International Finance Executives are also solidifying the network abroad, financing their activities, and then turning to the home country for concrete projects.46
Fear of failure is a deterrent to entrepreneurship in the Arab world. While about 74 percent of leading Arab world entrepreneurs state that failures are not accepted in their societies, the GEM Report 2017 suggested that the wider Arab community does not fear failure.47 Although leading entrepreneurs’ fear of failure might have motivated them to succeed, there is still a need to reduce such perceptions in the region to encourage more people to become entrepreneurs. Entrepreneurship is as much a social phenomenon as an economic one. The broader culture influences how entrepreneurship is perceived by potential entrepreneurs and their networks—a perception that in turn influences whether people take up entrepreneurship as a vocation. Fear of failure and the manner in which failure influences someone’s social standing (e.g., the way that failure leads to social ostracizing) has a direct impact on the willingness of potential entrepreneurs to take the risk.
At the same time, successful entrepreneurs are very well regarded. As Table 1 shows, successful entrepreneurs are largely perceived to achieve high status (85 percent on average). The region also does well on perceived capabilities, where 62 percent of respondents believe they have the required skills and knowledge to start a business. There is a good media attention for successful entrepreneurs (64 percent of respondents).
Infrastructure and support
The Arab world has considerable room for growth in ICT infrastructure, since limited competition at international gateway and data operator levels, and pervasive regulatory constraints are limiting private-sector development in the Internet sector. The broadband Internet market in the Arab region has the highest degree of economic concentration of all regions in the world.
The use of the Internet by individuals in the region is around the world average (43.7 percent, compared to 44 percent globally),48 thanks to the diffusion of mobile broadband and speed ranges that are around the global average (23.2 megabits per second [Mb/s] download average, compared to 23.75 Mb/s globally).49 The region is among the fastest growth regions for data exchanges, even though it started from a very low base.50 In 2015 the Arab world had 136 subscribers to mobile services (per 100 population), compared to the global average of 110, but the percentage of those subscribers who use a mobile connection to access the Internet is significantly lower—ranging from 30 percent in Iraq to 82 percent in Lebanon. Most mobile markets in the Arab region are, therefore, pre-paid voice markets and the transition to data poses challenges. More than 80 percent of the Arab population have a mobile broadband download speed below the global average, except for GCC countries (34.6 Mb/s) and Lebanon (33.9 Mb/s). Qatar and the UAE have among the fastest mobile broadband speeds in the world (59.8 Mb/s and 54.2 Mb/s respectively). About 47 percent of mobile users in the Arab world still use G2 technology, and only 8 percent use G4 technology (compared to 68 percent G4 technology users in the United States and 51 percent in Europe).51
The Arab world has 7.7 fixed broadband subscriptions per 100 people, significantly higher than South Asia (1.5), but lower than North America and Europe (both 32) and Latin America (11). Fixed broadband speed is an issue. The whole Arab region has a fixed broadband download speed that is lower than the global average (45.9 Mb/s).52
Internet use varies enormously by country within the Arab world. About 80 to 90 percent of GCC individuals use the Internet, while usage is lower in non-GCC Arab countries (for example, it is 25 percent in Yemen, 35 percent in Egypt, and 38 percent in Algeria). High-speed Internet is becoming more affordable in the Arab region. However, in countries such as Yemen, as well as in rural areas of most countries and among the poor, there are significant affordability issues. A mobile broadband subscription can cost as much as 20 percent of the estimated monthly income for someone in the poorest 40 percent of the population in Yemen.
The lack of access to reliable electricity in several countries negatively impacts entrepreneurial activity. Poor access to electricity was perceived as the key constraint to nine Arab economies according to World Bank Enterprise Surveys between 2011 and 2016.
Arab technology start-ups are also serial entrepreneurs, who provide new technology base layers for future start-ups and enable further growth. A few companies in the Arab region managed to attract strategic investors and became highly visible. Just as PayPal founders and employees spawned Tesla Motors, LinkedIn, SpaceX, YouTube, Yelp, and Palantir, so did Maktoob founders create Souq.com, which Amazon acquired recently. There is substantial growth potential in the technology sector in the Arab world, since only 8 percent of companies have an online presence (compared with 80 percent in the United States). The e-commerce market was only 3 percent of the region’s total retail market in 2015, but this is quickly changing; it is expected to grow about 300 percent by 2020, from US$5.3 billion in 2015 to US$19 billion in 2020. Digital payment constraints need to be addressed for technology companies in this region to grow further. In terms of support, the survey of leading entrepreneurs in the Arab world showed that around 65 percent of those surveyed reported that they received mentorship and about 42 percent and 44 percent respectively had gone through incubation or acceleration and training.
About two-thirds of the leading Arab entrepreneurs surveyed for this report suggested that the availability of talent is a very important determinant of success for their future operations. They perceive an inadequately educated workforce as the second-most severe obstacle facing their businesses, suggesting that talent is easiest to find outside the region and least accessible inside their own countries.
Research has shown that acquiring the right mix of skills, ideas, and talents is a challenge for entrepreneurs, especially in markets where the required skills are scarce or expensive. Ensuring that the right mix of skills is matched to an entrepreneurial venture requires reducing information asymmetry about skill sets and effective contracting mechanisms that guarantee the efficient allocation of skills and talent across firms.53 For Arab world entrepreneurs, this challenge is exacerbated by rigid, inflexible labor markets bogged down by an overall lack of inclusion, given the high rates of youth unemployment and low levels of female participation in the labor force.54 Entrepreneurship requires talent at all levels. This need for talent is evident throughout a new enterprise, from the entrepreneur her- or himself to the variety of skills required to populate the business from technical to managerial roles. Academic research indicates that entrepreneurs are not born but taught—and that at least some aspects of entrepreneurship can be taught successfully, even from a relatively early age.55
Although the extent of the impact of new technologies on occupation or work area cannot be precisely determined, it is becoming evident that the jobs of tomorrow will require new skills that help workers to adapt to a tech-led constantly changing world. These so-called future-proof skills will probably comprise a combination of technical and social skills centered on intelligence, creativity, social competence, and the ability to learn how to learn, as well as the ability to engage with and exploit artificial intelligence for solving tasks of varied complexity.
Arguably, technology start-ups come closest to the vision of the employer of the future, since they actively source labor with future-proof skills. The past two decades have witnessed the emergence of new market categories because of the disruption to traditional business models by start-ups across many sectors of the economy—including, but not limited to, transport, logistics, hospitality, transportation, services, and manufacturing. Tech start-ups’ forward-thinking founders and versatile personnel are at the core of this transformation. The new tech jobs generated by start-ups are not only relevant to the founding team and those with high tech and business skills (such as engineers, MBAs, and so on). Rather, as start-ups grow and scale, they also need less-skilled workers to expand the activities initiated by the core group of founders and initial workers. Many of the skills required to expand the business—such as building a website, a basic database, and web or mobile app—do not require higher education degrees.56
Although educational attainment is rising in the Arab world, the quality of education, as measured by primary school proficiency tests, remains lower than in most other regions.57 The education system in the region yields an inadequately trained workforce where graduates are unprepared for the job market and entrepreneurs are unable to find needed talent. Surveys show that aspiring entrepreneurs and those with advanced technological skills are mostly self-taught.58 This points to a need for policies to promote education and skills development across the region. INJAZ Al-Arab, a pan-Arab non-profit organization, is an excellent example of the type of entrepreneurship education programs needed in the Arab world. Its work focuses on three areas: workforce readiness, financial literacy, and skills needed to start and run a business. About 3 million students in more than a dozen Arab world countries have participated in its programs.59
The Basic-school Entrepreneurial Education and Training Index measures the extent to which training in creating or managing SMEs is incorporated into the education and training system at the primary and secondary levels.60 Some of the leading countries on this index include the Netherlands (3.28, on a scale of 1 to 9 where 9 is best), Estonia (2.76), Sweden (2.50), Indonesia (2.48), and Switzerland (2.45). The Arab world averages 1.86 (not far below the United States, at 1.96).
The Arab world on average also scores relatively low on the GCI’s measures of capacity to attract talent and capacity to retain talent, about the same level as Bangladesh (roughly 3.5 on a scale of 1 to 7, where 7 is best) (Table 2). There are exceptions: the GCC countries such as the UAE, Qatar, and Bahrain all score in the 4–6 range for attracting and retaining talent.
Women’s economic participation is very low in the Arab world as well. Although the economic benefits of women’s economic participation are well documented,61 local challenges abound. In the Arab world, as Table 3 shows, female labor force participation is lower than in any other region: less than 21 percent compared with 74 percent for men. Within the region, it ranges from 6 percent in Yemen to 58 percent in Qatar for women and 64 to 95 percent for men. Female unemployment rates are also at the highest levels in the Arab world: 18.75 percent, compared to 3.8 percent in East Asia and 10.48 percent in Latin America and the Caribbean.
The World Bank’s Women, Business, and the Law 2018 report, which covered 189 global economies, provided seven indicators to measure the participation of women in economic activities. The Arab world economies had the lowest average scores across all indicators, and appear to have the lowest scores among world regions in indicators measuring protecting women from violence (24 percent), going to court (41 percent), using property (43 percent), and accessing institutions (66 percent). Most OECD economies mandate equal remuneration for work of equal value, while only 25 percent or less of economies in the Arab world mandate equal remuneration. Gender-differentiated retirement ages are also highest in Arab economies (58 percent).62
Women, Business, and the Law further examines places where women’s testimony does not carry the same evidentiary weight in court as men’s. In 12 Arab world economies the law differentiates between the evidentiary value of women’s and men’s testimony. Of the 189 economies covered by Women, Business, and the Law, 130 economies have laws prohibiting sexual harassment in employment. In Arab economies, 70 percent of examined economies do not have legislation protecting women from sexual harassment at work.63
Gender inequality in the Arab world is also reflected in the realm of entrepreneurship (Figure 15). According to the World Bank Enterprise Survey data, less than 23 percent of enterprises in the Arab world have female participation in ownership, compared with almost 35 percent in the rest of the world.64 Only 3.5 percent of firms have majority female ownership, more than four times below the world share of 14.5 percent; and less than 5 percent of firms have a female top manager, compared with the world share of almost 19 percent. Women’s entrepreneurship, especially in Arab world, where unemployment among women is as high as 34 percent,65 has significant growth potential.
However, there are some positive signs. More than 25 percent of start-ups in the Arab world are founded or led by women (compared to 17 percent in the United States).66 According to the GEM 2017 Women’s Entrepreneurship Report, women entrepreneurs have high innovation levels and are 60 percent more likely than men to report that their products and services are innovative.67
Markets and connectivity
Market access for entrepreneurs is a key signal of firms’ ability to reach domestic, regional, and international markets, both physically (i.e., in terms of trade and logistics) and through unrestricted movement and access for individual entrepreneurs. Although governments often enable access through formal trade and investment agreements, informal business networks can also be crucial for transmitting and sharing knowledge and market intelligence.
In many traditionally hierarchical societies, it can be difficult to enter new networks without personal contacts. This barrier yields tremendous benefits to well-connected entrepreneurs but constrains (and may even discourage) aspiring ones who lack such connections. In this context, significant importance lies in developing networks and associations that can provide platforms for peer-to-peer contacts and provide opportunities to engage with the broader business community. Organizations and channels that facilitate these contacts are even more important for women entrepreneurs.
Similarly, the Arab world faces challenges in formal access to markets. For example, the World Bank’s Logistics Performance Index (LPI) indicates that Arab world countries are “doing comparatively worse than their income level would indicate, due to lack of integration, political unrest, and security challenges.”68 In 2016 the average LPI ranking for the Arab world was 69, with the UAE (18) and GCC countries in general performing best; Iraq, Mauritania, and Syria rank last within the region (Figure 16).
Furthermore, in terms of border compliance (time to export, in hours), the Arab world averages 62.6 hours per container; this is about the same as the regional average for Latin America and the Caribbean (62.5), South Asia (59.4), and East Asia (55.9), but worse than Europe and Central Asia (28.0). Algeria is the slowest, at 118 hours. In terms of border compliance cost to export (in US dollars), the Arab world averages US$464, which is the highest in the world after Latin America and the Caribbean (US$526). Iraq is the most expensive, with $US1,118 in border compliance cost per container (Figure 17).
This contributes to the Arab world underperforming other regions on the Doing Business distance-to-frontier measure of trading across borders (Figure 18). It measures complexity to export and import goods by recording the time and cost associated with the logistical process of exporting and importing goods. The Arab world averages 121 out of 190 countries and, similar to its performance on the LPI, in the Doing Business measure of the distance to the frontier, the West Bank and Gaza, Jordan, and Morocco perform best, whereas Yemen, Algeria, and Iraq rank among the lowest in the Arab world.
In addition, the Arab world remains one of the most fragmented regions in terms of production, trade, and economic links. In spite of its population of about 350 million people who share a common language, culture, and rich trading civilization, the Arab world does not function as one economic market. Rather, regional markets are cut off from each other and from the rest of the world, and the region plays the role of bystander rather than an active participant in processes of globalization. 69
Social entrepreneurship in the Arab world
Social entrepreneurship is an untapped potential in the Arab world that governments could catalyze to address many of the key challenges that the region faces today, including service delivery gaps, increasingly vulnerable social services, environmental degradation, and a restless younger generation. The growth in service demand often outstrips the government’s financial and technical capacity to keep up or address these issues, and markets for them are often neither conducive to entrepreneurship nor profitable enough for traditional private-sector players. Social entrepreneurs can address these problems by developing business models that solve these challenges, such as by developing skills for low-income youth, providing jobs platforms for refugees, recovering and recycling waste, increasing access to last-mile health services, and improving smallholder productivity through ICT.70
“Social enterprises could be private for-profit, non-profit and hybrid organizations with a social mission that use business approaches to achieve their objectives,” according to researchers Triponel and Agapitova.71 Social enterprises may encompass any activity and are found across different economic sectors—they may be suppliers (providing services/goods to last-mile markets) to the poor, or consumers (sourcing or employing from marginalized groups) helping improve their livelihood opportunities, or even both. Social entrepreneurs tend to be driven by values—they take the risk and innovate to bring solutions to their communities.
A recent study sponsored by the regional serial entrepreneur Fadi Ghandour found that a growing number of young social entrepreneurs took the initiative in recent years to invest in a career addressing social issues critical for their well-being in their communities.72 The study suggests that key challenges facing social entrepreneurs are financing and regulations. Because of the lack of awareness about social entrepreneurship purpose and structures, entrepreneurs find it hard to attract investors who are mainly interested in financial returns. In many cases entrepreneurs face difficulties in dealing with governments when it comes to offering services that are generally offered by the public sector.
Given the positive externalities social enterprises can bring to the economy, Arab world governments would benefit from encouraging the growth of social entrepreneurship. Global experience indicates that a range of policy initiatives can be deployed.73 On the regulatory side, recognition of social enterprises as a business type can help provide awareness, targeted assistance, and tax incentives that will ease an enterprise’s growth. Public financing to support the growth of social enterprises and hence their social impact could also be provided through grants. For more advanced social enterprises, financing could be provided through public-private partnerships, social procurement preferences (by including the social impact of an enterprise as part of the selection criteria in addition to economic cost), or, as has been done more recently, social impact bonds (as is currently being developed in the West Bank and Gaza on job creation for youth). Governments can also provide legal frameworks and vehicles for impact investors and philanthropists that will incentivize them to invest in social entrepreneurs. The last few years have seen an increase in the number of nongovernmental organizations trying to address societal challenge that governments have not been able to resolve. However, because of the absence of impact investors, these initiatives have been funded mostly by donors. This is a less sustainable model, and it has not been able to introduce many social enterprises to the ecosystem.