While enormous strides have been made in recent years in terms of creating a more conducive environment for entrepreneurship, the focus to date has been mainly of macroeconomic stability, regulatory reform and increased investments on education and training.

Yet the main challenge for the region remains more effectively linking its wealth of financial capital with the large pool of human capital.

Jarmo Kotilaine, chief economist of the National Commercial Bank, says: “It is becoming increasingly clear that success in bridging human resources with funding will have to involve a much more direct focus on enabling entrepreneurship. Encouragingly, the GCC has seen a dramatic increase in the number and scale of various public and private initiatives designed to support small- and medium-sized companies.”

Even though the GCC corporate sector is overwhelmingly dominated by SMEs, their economic potential remains far from exhausted by global standards.

“Although SMEs make up more than 95 percent of the number of companies in the Gulf, their contribution to employment and GDP is far more modest. By contrast, this 'SME gap' is much smaller in the advanced economies,” says Kotilaine.

For instance, in Bahrain, which produces the most detailed SME statistics in the region, the SMEs' share of the total number of companies is 99 percent. They make up 73 percent of private sector employment and only 28 percent of GDP.

The figures for the other regional economies are broadly similar, although the share of employment tends to be even lower: Around 40 percent in Dubai and some 30 percent in Saudi Arabia. By comparison, SMEs contribute some 50 percent of US GDP, whereas their share in the EU is just under 60 percent. They provide more than half of all jobs in the US and more than two-thirds in Europe.

The main challenges associated with Gulf SMEs are fourfold. Firstly, the representative SME is a small company in terms of its employment and turnover. For instance, 87.8 percent of Bahraini companies have no more than 10 employees. Of the total number of 785,000 commercial establishments registered in Saudi Arabia as of 2008, some 764,000 were sole proprietorships. Secondly, the average Gulf SME is primarily engaged in the buying and selling of goods. About 42 percent of all Bahraini and Saudi enterprises are engaged in the amorphous category of “trading.” Construction is typically the second most important area of activity, followed by industry.

Thirdly, a typical Gulf SME relies very heavily on expatriate employees. For instance, in Bahrain, nationals account for only 14 percent of SME employment, while the Saudi private sector as a whole is some 90 percent reliant on expatriates. This limits the size and growth of the pool of entrepreneurs in the region as well as the employment contribution of GCC SMEs.

Lastly, typical Gulf SMEs are relatively inefficient. Their share of employment is far greater than their share of GDP, highlighting the limited value added contribution made by most of them. This state of affairs suggests that the growth potential of individual Gulf SMEs is limited. Most of them are trapped in a low-efficiency and low-growth equilibrium. They tend to have limited access to credit and capital and the opportunities posed by retained profits are modest.

Overcoming these limitations is likely to require significant new initiatives in a number of areas.

Kotilaine says: “The development of SMEs in mature economies relies on an elaborate infrastructure of support touching on all aspects of entrepreneurship. There are wide-ranging initiatives providing funding, advice and consultancy, education and training, and a wide range of information, including — importantly — examples of success stories that can inspire others to embark on a career in entrepreneurship.”

The development of the SME supporting infrastructure in the Gulf is still very much at the extensive or developmental stage. A number of new initiatives are emerging both in the public and in the private sector but they tend to be fragmented, their aspirations sometimes far exceed their resources, and their auditing is usually partial at best. As a result, much more can typically be done to create an interlinked network of support organizations and to extract the maximum value of the different initiatives that exist. Moreover, the focus of the programs to date has been on subsidized credit rather than advice and consultancy, let alone efforts to encourage and inspire.

A large and growing number of surveys on Gulf SMEs have fairly consistently identified funding as a key constraint. Historically, SMEs have tended to come into being relying on the financial resources of an individual or his circle of family and friends. The options beyond this remain limited.

The World Bank in its recent Financial Access and Stability Review suggested that only 2 percent of GCC bank loans currently go to SMEs.

The World Bank estimates that only some 20 percent of SMEs in the Middle East have a bank loan or a line of credit, a lower proportion than in any other region in the world apart from Africa. Internal finance provides 85 percent of the funding of Middle East SMEs, as opposed to 7 percent from bank finance and 3 percent from trade credit. The corresponding figures for middle-income countries in general are 65 percent, 19 percent, and 5 percent. Even though these figures to a degree reflect the broader state of affairs in the Middle Eastern corporate sector, they clearly highlight the under utilization of the formal financial sector.

Enhancing the value added potential of GCC companies is critically reliant on providing access to advice, cost-effective consultancy and suitably qualified human capital. Yet the resources of SMEs for training tend to be acutely constrained as most SME entrepreneurs are busy 'multitaskers' by default and funding is limited. An important opportunity exists for certificate and diploma programs in sectors with a heavy SMEs' presence. Establishing and running such programs in turn represents an opportunity for entrepreneurship, as the demand for many essential skills is not only large-scale but also likely to endure for years to come in view of the demographics and growth prospects of the Gulf economies.

Entrepreneurship can also often critically benefit from steps to facilitate access to an appropriate physical infrastructure. Especially in the area of innovative industrial entrepreneurship, this has given rise to the idea of clusters and incubators. Such facilities can be particularly important in cases where the cost of land and real estate has become an important hurdle to new entrepreneurs or where some indivisible resources, for example, administrative support can be shared by a number of companies.

Ultimately, entrepreneurship is critically linked to creative energy. The Gulf economies have countless under- or unexploited niches in many economic sectors. Establishing an entrepreneurial culture can help boost the chances of enabling especially the local youth to tap such opportunities. Publicizing success stories has an important positive role to play in inspiring budding entrepreneurs. In addition, such publicity can increase awareness of the approaches adopted and challenges faced by entrepreneurship, thereby gradually giving rise to an informal support network.

A more detailed analysis of the subject can be found in the Q3 GCC Economic Review of the National Commercial Bank entitled “Global Storm Clouds Gather.”