Latest Wamda survey results highlight obstacles to growing companies
In the coming months, I’ll continue to write about issues related to strategies for economic growth in the Maghreb and youth employment in particular. These topics are particularly challenging because jobs, equality, and dignity are themes still resonating negatively after the Arab uprisings, as there has been little progress in addressing these issues. While there are many structural concerns that impact job growth, ranging from broadband availability, logistics and distribution facilities to legal and regulatory regimes, and political risk, there are substantive issues as well.
Among the most pressing is identifying core sectors of opportunity for investments that would result in large-scale job creation. This is a critical concern because foreign direct investment (FDI) usually targets multimillion dollar projects that, aside from tourism and shopping malls, are more capital than labor intensive, limiting their net impact on job creation. And in the Maghreb countries, agricultural labor still is the dominant sector for employment, which is both seasonal and outside the usual government social services schemes. Thus, there is a need to fill the gap between small concerns, which are usually in the informal sector, and the large corporations, where jobs depend on skilled applicants.
In developed countries, small and medium-sized enterprises (SMEs) generate 60 to 70 percent of jobs. According to The next step – breaking barriers to scale for MENA’s entrepreneurs, a recent report from Wamda Research Lab, in the Middle East and North Africa (MENA), SMEs, constitute a majority of enterprises [approximately 80-90 percent], yet account for an average of 30 percent of private sector employment and 4 to 16 percent of total employment.” This more limited role for SMEs as job creators in the MENA highlights two negative outcomes: the high level of public sector salaries distorting the overall labor market and share of national budgets, and the scale of the challenges facing the private sector in growing employment when SMEs are quite small in scale.
Building up the “middle”
IMF Managing Director Christine LaGarde recently said in a speech in Morocco, “Strengthening the economic middle means giving a shot in the arm to small- and medium-sized enterprises (SMEs) in the formal sector. These are the kinds of firms that form the backbone of a healthy economy, and— in other regions of the world—are the main engines of job creation.”
The Wamda report takes up this theme and surveyed more than 900 entrepreneurs and experts on “the barriers to scaling up” faced by existing firms with a track record of growth.
Their results focused on four priority areas to enable expansion and job creation:
- Increasing revenues through better marketing, market access, and market education for consumers and entrepreneurs to drive demand for products and services.
- Boosting investment while improving communications between investors and entrepreneurs.
- Attracting talent through improvements in the educational system and robust employee benefits.
- Facilitating expansion across borders by reducing legal barriers and costs and identification of strategic partners.
The report concluded that “To achieve the maximum impact on job creation, the region’s entrepreneurship ecosystem must reduce the barriers to scale for entrepreneurs. A multi-stakeholder approach is needed across the ecosystem if these barriers are to be effectively addressed.”
This emphasis on the private sector driving job growth is consistent among stakeholders, including the World Bank, IMF, EU, UNDP, and others. All parties point to the requirement for a viable, sustainable ecosystem of institutions that supports the training, mentoring, incubation, and other services needed to support entrepreneurs. While these have expanded rapidly in the past ten years to more than 140 in MENA, resources available for scaling existing companies to grow successfully are not yet sufficient. Among the entrepreneurs surveyed in the Wamda report, “roughly 60% say that scaling is the most challenging development phase for entrepreneurs in the region.” For successful start-ups to become job creators, much more must be done by all stakeholders to enable and promote scaling.
Strategies for successful scaling
It is instructive to review the profiles of the participants in the Wamda survey, as they characterize entrepreneurs throughout the region and provide insights into how to support their initiatives. For example, almost three-quarters of those surveyed have either studied or worked abroad. Women make up less than one quarter of the founders of the companies surveyed. And personal savings were the source of initial investments for close to three-quarters of the group while financing from friends and families made up 43 percent of funding sources. This poses several types of challenges: how to engage women more effectively, how to engage the diaspora and reverse brain-drain, and how to make better financing options available from banks and private investors.
Among the entrepreneurs and experts interviewed, “entrepreneurs experience difficulties understanding marketing strategies for the countries they seek to enter, and face challenges acquiring marketing talent to execute their strategies…entrepreneurs need to determine proper market fit for their products and services.” This lends support to the need for broadening regional exchanges that link together entrepreneurs across markets to increase access to market awareness and skilled human resources. In fact, “The majority (63%) of entrepreneurs in our sample state that finding talent is their biggest challenge to building a team.”
In terms of investment, a third of the respondents noted the “small supply of venture funding was a primary challenge… [and] investors not offering enough value beyond cash.” This is a common affliction of growing firms once the start-up capital is exhausted. Perhaps a beneficial role for international and bilateral technical assistance should focus on mobilizing local capital for local firms that demonstrate a clear and well-defined business plan for regional markets. Linking these across borders would address the skills, markets, and investments challenges.
As the Wamda report explains – a view shared by many others — “Economic and social prosperity in the MENA region cannot be achieved without widespread and sustainable job creation. Entrepreneurs are critical to these efforts, yet in order for them to contribute meaningfully to the region’s employment agenda and foster thriving societies, they must be able to scale their companies.”
Progress is being made as governments develop a range of strategies to promote entrepreneurs and their efforts. For example, the report points out that “…Morocco eliminated the minimum capital requirement for limited liability companies in 2013. That decision, along with the institution of several banking reforms over the past several years, have made Morocco one of the most friendly countries for SME lending in MENA.” Only through a concerted and long-term program to support entrepreneurs across a range of sectors through multiple stages of growth will job creation achieve the levels needed to meet skilled labor supply and job demand.