Policymakers could do more to help the GCC’s SMEs innovate and succeed

GCC governments can do more to uplift their SMEs, such as helping to close the financing gap. But they also need to innovate, as the German experience shows 90 per cent of its patent applications come from SMEs.

The World Bank estimates that there is a financing gap of up to US$2.6 trillion for formal and informal SMEs. Mona Al Marzooqi / The National
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SMEs are essential for the GCC – they are the forefront of job creation. There is no decent conference or workshop that doesn't include a mention of SMEs. Either a speaker will mention that SMEs are the backbone of a country's economy or a question from the audience will arise along these lines.

In terms of contribution to GDP, SMEs’ role is greatest in Brazil at 61 per cent, China at 60 per cent then the United States at 50 per cent. The EU average is at 55 per cent. The figures for the GCC economies are much lower: Saudi Arabia, 21 per cent; Qatar, 17 per cent; Oman, 14 per cent; Kuwait, 20 per cent; and the UAE at 30 per cent.

In terms of job creation, SMEs in developed-market economies, including Europe, are responsible for the majority of new jobs. The global average for jobs being created by SMEs is 63 per cent. In comparison, Saudi Arabia is at 53 per cent, with about a 10th of the new jobs going to nationals.

Policymakers in the region have recognised the importance of SMEs. Just a year ago, Saudi Arabia established the SME Authority to foster the development of these businesses; in 2007, Abu Dhabi established the Dh2 billion Khalifa Fund for local entrepreneurs. Both institutions have brought in successful entrepreneurs to help guide their path, as they know better than anyone else the obstacles their peers face. By 2030, Saudi Arabia wants to increase by 14 percentage points to 35 per cent SMEs' share to GDP.

From the above employment and GDP figures, one can infer that regional SMEs tend to be more inefficient than their counterparts overseas: more jobs for less GDP output per SME. Moreover, the figures point to another predicament: SMEs have a low value-added contribution. This is not to discount the importance of existing SMEs in the region but to shift into high value-added products there is a policy shift that is required to happen.

There is a need to think about what is globally competitive and what can one produce given the complexities of labour and energy-price reforms. The role of government is essential in guiding and supporting SMEs.

Consider the case of Taiwan in the 1980s when the government started to promote the development of high-technology industries with high value-added and low-energy consumption. SMEs in Taiwan started to adapt to the new environment. They improved their productivity and quality, deepened R&D activities and started to look to the outside world.

And during the late 1980s, South Korea established its R&D institute to support SMEs globally. The focus in both countries was always for SMEs to compete internationally. Even when it came to FDI, there was a deliberate policy of steering investments in areas that would help SMEs and high value-added products that had an export focus.

In South Korea and Taiwan, the government’s strategic focus fed the growth of companies such as Samsung and HTC – and created an environment that nurtured SME-sized players in the tech sector.

What is also important for SMEs is innovation. It’s good to be small and become part of a value chain but it’s more important to innovate. In Germany, about 90 per cent of patent applications come from the SMEs.

Finance is another problem all SMEs face and the GCC is no exception. Compared to large companies, SMEs have limited access to finance. In a 2015 World Bank study, 50 per cent of formal SMEs have no access to formal credit. For the micro enterprises (employing fewer than 10 people) and those in the informal sector, access to finance is even harder.

The World Bank estimates that there is a financing gap of up to US$2.6 trillion for formal and informal SMEs. Financing is derived from personal funds, family and friends. Without proper financing the ability to create 600 million jobs globally over the next 15 years, as per the World Bank, will be a challenge.

What can the GCC do to uplift its SMEs? Governments and markets have to work together to facilitate growth and investments. Institutions are important but the government needs to create the necessary environment to allow SMEs to grow. The use of technology and automation are two areas that could offer the region definite advantages to rid itself, over time, on its dependence on labour-intensive sectors. Easing business conditions for entrepreneurs, such as licensing, have to be continually improved. Finally, SMEs need to understand markets and have access to them.

SMEs are always faced with inordinate difficulties in management, which can be outsourced to help those who are less skilled learn and build their companies. As GCC economies try to nationalise their workforce, higher technology usage and automation will allow for higher productivity gains over time. An export focus is also important for SMEs’ expansion. As regional economies are in the midst of a slower growth cycle, more has to be done from policymakers to create incentives for SME growth.

John Sfakianakis is the director of economic research at the Gulf Research Centre in Riyadh.

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