How to boost innovation in the Middle East
Across the Middle East and North Africa (Mena), technology hubs are emerging. Whether it’s in the Beirut Digital District or the Greek campus in Cairo, some of the Middle East’s brightest minds are turning innovative ideas into marketable products.
When I visited the Beirut Digital District two months ago, and the Greek Campus startup hub before that, optimism was palpable – and for good reason. In a region that has struggled to find its economic footing since the Arab Spring, the entrepreneurial ideas being refined at incubators like these hold the keys to the region’s future. Startups anywhere contribute to job creation, competitiveness, higher productivity, and economic growth, while helping to reduce poverty and fight climate change. And when energetic new companies bring innovative products and services to untapped markets, they contribute positively to private-sector development.
In the MENA region, several successful startups are already doing this, and more. One example is Souq.com, an online retailer based in the United Arab Emirates that was purchased in March by Amazon. Souq led a revolution in e-commerce in the region that has powered cross-border trade and improved consumer choice.
In Egypt, Fawry has developed a game-changing electronic payment system that has freed consumers and businesses from using cash. More than 20 million Egyptians, including many small business owners, now use the service, which processes 1.5 million payments daily.
The region needs more of these private entrepreneurs. Unfortunately, at the moment, unsupportive business and regulatory environments are stifling the startup ecosystem. Despite the value that smaller companies bring to the region’s customers and economies, first-time business owners too often are on their own. For example, most new MENA businesses cannot access the credit needed to expand or hire workers. The region has 23 million small- and medium-size enterprises (SMEs), accounting for roughly 90% of the private sector, but SMEs receive just 8% of total bank lending. And capital-starved entrepreneurs have few other options; despite a growing number of accelerators and seed funds in the region, the venture capital market remains undeveloped.
Even well financed entrepreneurs face obstacles to growth, often due to a lack of experience. There is little formal education for new entrepreneurs, and only a handful of networks support start-ups. Gender bias, too, is a limiting factor; nearly every MENA economy fails to empower female employees and executives fully.
But much can be done to ensure that more startups in the region are able to make the leap from good idea to business success. For starters, countries need to reform their bankruptcy laws. Start-ups take risks, yet existing regulations make it difficult to liquidate companies, deterring potential creditors and increasing the cost of debt. An important part of these reforms is to abolish jail time for non-fraudulent bankruptcies, which remains a real threat for owners of small businesses throughout the region.
Moreover, many countries have labour laws that make it hard for businesses to recruit and terminate staff. Employee mobility is also mired in bureaucracy and costly paperwork. Addressing both challenges would help cash-strapped startups make every dollar count. Finally, countries should revisit restrictions on foreign ownership and strengthen intellectual property laws to protect entrepreneurs’ hard-won innovations. Doing so would encourage more investment to flow into the region.
Entrepreneurs drive economic growth in ways that go far beyond online sales and e-payment solutions. Creating jobs is one of the most critical contributions they make. Nearly one in three young people in the region are unemployed, and those who do have jobs often work in the public sector, which is the largest employer throughout the Arab world. In the Gulf States, Egypt, Iraq, Jordan, and Tunisia, government jobs account for an unsustainably high 60-80% of formal employment.
Governments need to reassess this balance, and adopt reforms that unlock the potential of private businesses to grow and take on more employees. Global development finance institutions, like the World Bank Group–which includes my institution, the International Finance Corporation (IFC) – can provide a bridge between governments and the private sector. The heart of the IFC’s strategy is to help develop new markets in low- and middle-income countries by encouraging private participation in what are often state-dominated economies. In May, the IFC, together with the World Economic Forum, brought together 100 of the most promising startups in the Arab world, with the goal of beginning to address the bottlenecks that stifle entrepreneurship. In time, it is companies like these that will deliver sustainable economic growth to the region, and create employment opportunities for millions of people.
That is the kind of future that Arab innovators, like those I met at the World Economic Forum in Jordan, know is possible. Our job, as global development advisers, is to help them realise it.