Middle East countries should implement a multi-dimensional approach to stimulating new business start-ups, says a study.

Successfully nurturing start-ups would have a substantially positive impact on GDP, according to Joe Saddi, senior vice president and head of the Middle East for Booz Allen Hamilton, a global management consulting firm with offices throughout the Mena region.

“Entrepreneurship, as evidenced by the strength of start-up activity, is a key driver of economic growth and job creation, and would be particularly welcome in the region, where there is a very low level of entrepreneurial activity,” Saddi said during a conference on entrepreneurship at the fifth annual Middle East Day, hosted by the London Business School’s Middle East Club.

The club chose the theme because of the recent huge capital flows into the region. Speakers addressed the current challenges and opportunities facing entrepreneurs in the Middle East given this unique environment.

He noted that once start-ups mature into Small and Medium Enterprises (SMEs), they become key contributors to employment and GDP. For example, SMEs contribute 70 per cent of total employment in the European Union and 49 per cent in the United States, while they make up 60 per cent of France’s GDP, 55 per cent of Indonesia’s GDP and 40 per cent of the United States’ GDP.

Unfortunately, start-up activity in the Middle East has been limited to date, with even better positioned regional countries such as the UAE placed quite low in international rankings. For example, only 2.7 per cent of the UAE population is engaged in early-stage entrepreneurial activity, compared with 19.3 per cent in Indonesia, 10 per cent in the United States, 6.1 per cent in Turkey, and 5.3 per cent in South Africa, he said.

Booz Allen’s analysis points out three main components that make a business environment favourable to start-ups. First, and crucially, there must be a large base of entrepreneurs and an entrepreneurial culture. Second, there must be innovation activity, which includes identifying market opportunities and developing new concepts. Third, there must be effective support for start-ups.

Excessively low R&D expenditures in the Middle East are a major impediment to start-up activity, according to Saddi. The Arab average for R&D expenditure as a percent of GDP is 0.2 per cent, while in Turkey it is 0.6 per cent, 1.15 per cent in Brazil, 2.3 per cent in the OECD states, 2.8 per cent in the United States, and 3.1 per cent in Japan.

In addition, entrepreneurs wishing to start a business face a variety of administrative, cost, and financing hurdles. In one Arab country, for example, the most problematic factors for doing business were identified in a survey as access to financing, bureaucracy, lack of an educated workforce, and taxes.

While the time it takes to start a business in this illustrative country is 36 days, 1.5 times as long as the OECD average, the minimum capital required is 25 times the country’s average per-capita income, compared to just 44 per cent of per-capita income in OECD countries.  

Saddi identified two factors to support development of a large base of entrepreneurs. “Respect and social recognition of entrepreneurs is a pre-requisite for establishing a culture of entrepreneurship. Second, an entrepreneurial culture should be developed in schools.”

To promote ideation and innovation activity, Saddi said: “Market needs can be determined by the interaction of leaders from the government, private sector, and education, while the establishment of close links between universities, businesses, and the financial sector encourages innovation and the commercialization of new technologies. Governments can play a pivotal role in promoting R&D and ideation.”

The best ways to effectively support new start-ups, according to Saddi, are to develop a favourable business<