How rising startup entrepreneurship is reshaping the GCC economy

How rising startup entrepreneurship is reshaping the GCC economy

How rising startup entrepreneurship is reshaping the GCC economy
Startups are not only redefining the concept of entrepreneurship but also beginning to exert a far broader influence over the rest of the economy. (Shutterstock)
Short Url

The past few years have witnessed a dramatic increase in activity around technology-based startup entrepreneurship in the GCC. Within a short period, the region has transformed itself into a dynamic emerging market in this area with new records in terms of market entrants and capital raising being broken year after year.
At the same time, the stellar rise of startup entrepreneurship is beginning to reshape the broader economy — and society — around it in multiple ways.
The enthusiastic embrace of technology-based startups represents a dramatic paradigm shift for the concept of entrepreneurship in the Gulf.
Historically, the business formation was heavily tilted toward low-productivity activities with minimal barriers to entry: retail trade, restaurants and cafes, basic personal services, and subcontracting in the construction sector. This was driven by economic realities where, as Michel Chatelus put in 1987, “Getting access to the rent circuit is a greater preoccupation than reaching productive efficiency.”
As a result, as the World Bank observed last year, “over the past two decades, household income growth and public investment have allowed the GCC countries to diversify GDP composition away from hydrocarbons.” Household income growth was a key aspect of the “rent circuit” supported by public sector employment and project spending that drove increases in consumption and allowed the multitude of the service sector and small and medium-sized enterprises, SMEs, to survive and multiply.
More problematically, these were typically businesses that were very small, usually owned by one individual, primarily staffed by low-cost expatriate workers, relatively static, and almost exclusively focused on the domestic economy.
Startup entrepreneurship is a model that is an almost diametric opposite of these qualities. These companies are anchored in technology and tend to be capital- and knowledge- rather than labor-intensive.
Based on innovative ideas designed to address real economic needs, they are not — at least not typically — motivated by emulating existing business concepts but find their raison d’être in solving concrete problems. Their technology-based nature makes the location-agnostic in terms of both production and distribution.

Driven by technology
Digital solutions can be delivered through transnational teams and are inherently scalable as their delivery is not tied to a physical location. Since inception, tech-based startups are almost invariably growth-oriented and can scale beyond their home jurisdiction.
Driven by ideas and dynamic technology, startups are nimble and responsive to changing circumstances and new opportunities. They are often established by a group of founders, who enhance their chances of success by pooling different backgrounds, skill sets, networks, and capital. In brief, these are companies with the ability to drive growth and innovation in transformative ways.

Startups vs. SMEs
Startups and “conventional” SMEs are typically seen as separate universes that set up profound differences in culture, structure, and clientele. They seem to carry on an established regional tradition whereby areas of innovation emerge and develop separately from the rest of the economy.
Other cases in point, arguably, include various free-zone initiatives, new cities, activities governed by ad hoc regulation. But while there is doubtless an element of the “old” and the “new” coexisting, they also interact and influence each other in various ways.
Startups are not only redefining the concept of entrepreneurship but also beginning to exert a far broader influence over the rest of the economy.
Perhaps most immediately, startups have provided a concrete alternative to the more traditional notions of business formation. Some of them have skyrocketed into multi-billion dollar businesses and reshaped our lives in a multitude of ways. This shows how dramatically they have enhanced the appeal and credibility of these alternatives, encouraging more people to step out of their comfort zones.

A paradigm shift
This rebalancing means a shift in emphasis from the static to the innovative and from rentierism to productivity-led entrepreneurship. This shift will be important for economic diversification but, above all, for making productivity a more important growth driver.
New role models of successful founders can help instill a new culture around entrepreneurship. For instance, it can popularize the idea of having teams of founders as an alternative to the traditional choice of individual establishments while helping to create stronger companies.
Since startups address real economic problems, they are helping other businesses not only to do better but also to overhaul their business models. The rise of digital apps and home delivery that became a lifeline for many food and beverage, F&B, and retail businesses during the pandemic is a case in point.
More cost-effective solutions for SMEs that used to rely on recruitment to meet their different needs are reducing labor intensity while sometimes triggering broader business model overhauls.

Gig economy
Remote working and the rise of the gig economy are increasing the range of options companies can have for meeting their human capital needs. A growing range of digital solutions have become available on a cost-effective, scalable, and often on-demand basis. Many larger businesses are now collaborating with startups to develop solutions for specific problems.
The needs of the startups are driving institutional and regulatory changes too, and their impact often goes far beyond startups. Region-wide, governments have simplified corporate registration procedures and established more efficient, less punitive mechanisms for dealing with insolvency.
The rise of venture capital, private equity, and crowdfunding helps startups but also entails overall diversification of the financial sector, which can enhance the way capital is pooled and allocated to support economic growth.
Many of the changes delivered by startups are the outcomes that regional policy planners and visions have highlighted for a long time as necessities for future-proofing the Gulf economic model. Today, startups are creating examples on the ground, demonstrating in concrete ways what change can look like, and inspiring — sometimes pushing — others to jump aboard.

• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view