New business models often originate from
entrepreneur-created enterprises and the successful ones not only
catalyze economic development and diversification, but they also go on
to create significant new employment opportunities. In the US for
example, between 1980 and 2005, forty million new jobs were created by
businesses that were less than five years old. Indeed one can say that
most large corporations began life as SMEs.In the case of growth
markets like Saudi Arabia, SMEs are especially vital to economic growth
and social stability given that they represent a much higher proportion
of business activity in general. It is perhaps less about innovation
and new business models and more about the evolution of traditional
segments of the economy, such as health care, education and logistics. Lacking
the liquidity and efficiency of more developed markets, a
growth-oriented economy may support multiple players in a given field,
with the winners — and losers — only being defined after the influence
of extraneous factors such as FDI inflow, private equity activity or a
strategic consolidator. This is borne out in statistics that see
over 90 percent of all enterprises in the Middle East and North Africa
(MENA) region falling into the SME category.In Saudi Arabia, SMEs similarly are a critical segment of the economy and make up 90 percent of all businesses in the Kingdom. As
the Saudi Arabian economy is currently not home to market dominating
multinational corporations that can soak up the increasing numbers
entering the workforce, the role of SMEs is especially important. With
unemployment numbers at 10.5 percent and youth unemployment at as much
as 28 percent in the country, entrepreneurship and the SME segment in
particular must shoulder the burden of job creation.The good news is
that with historic investment in most sectors at a relatively low
level, there is significant opportunity to support the SME segment at
this critical phase. Operationally well-managed SMEs that have,
through structural constraints, been denied the requisite financial and
strategic stimuli to produce more goods and services, offer arguably the
best investment opportunity in the region today. With their
business models proven, often under difficult circumstances, and with
demographic forces that provide a ready — and well-trained — workforce
on the one hand and abundant consumers on the other, smart money is able
to unlock enormous pent-up demand for capital and thus create value.From a government’s perspective, the benefits of a thriving SME sector are clear. In
addition to employment creation and GDP growth, the SME segment
provides the means to address structural issues in local economies
including economic diversification and much needed innovation in a fast
evolving globalized marketplace. Underlying this positive thesis,
however, is the worry that much needed and readily available
productivity enhancing technology is bad for job growth. But this
concern is overly simplistic and misses the statistical fact that
employment growth has followed productivity growth in emerging markets
the world over. Just ask the Chinese, who have created over 200 million
new jobs over the last two decades.To date, as with other economies
in this part of the world, Saudi Arabia’s SME sector has not been able
to realize its full potential. SMEs continue to suffer from a number
of underlying weaknesses, which hamper their ability to take full
advantage of the opening of the market economy and the increasingly
accessible global marketplace for goods and services. It seems that
many SME businesses are in a “low-growth trap” — dealing in traditional
forms of production and unable to climb up the technology ladder. The
reasons are familiar, including, limited access to institutional
capital and too much red tape impeding easy start-up and operational
ramp-up. Private equity and venture capital were until recently
virtually non-existent and obtaining of a typical small business loan
from a bank is often just not possible in practice, with requirements
for personal guarantees and collateral creating disproportionate
risk-sharing. There is broad acknowledgment that Saudi Arabia has
entrepreneurial and intellectual talent in abundance and with a
population of nearly 28 million there is no shortage of consumers for
products and services of all kinds. What is missing most is greater access to finance and particularly long-term capital in the form of private equity.
— Hossam Y. Radwan is country head of Abraaj Capital Saudi Arabia and
Tom Speechley is the chief executive officer of Riyada Enterprise
Development
