Archive for September 2013

In many Arab countries, economic integration, the need for economic diversification, occupational preferences for public sector employment, and high youth unemployment rates have prompted the adoption of economic reforms to improve the enabling environment for entrepreneurship. However, understanding the determinants of self-employment and how they might differ across the region is critical if entrepreneurship is to be a solution for the region’s youth unemployment challenge and can ultimately lead to desired economic outcomes. Differing determinants of entrepreneurship across the region have significant implications for national policies and support programs that might be offered to regional entrepreneurs. The distinction between necessity and opportunity entrepreneurship is becoming increasingly relevant as countries in the region are largely pursuing undifferentiated entrepreneurship policies that are primarily aimed at opportunity entrepreneurs.

Necessity and Opportunity Entrepreneurship in the Arab World

Since 2001, the Global Entrepreneurship Monitor (GEM), which is an annual assessment of entrepreneurial activity in 100 countries, has distinguished between two types of entrepreneurs: opportunity entrepreneurs who pursue business opportunities voluntarily for personal interest, greater independence, or higher income often at the same time they hold a regular job and necessity entrepreneurs who are engaged in self-employment because they are unable to find better work and self-employment is the best alternative, but not necessarily preferred, employment option (Reynolds, Camp, Bygrave, Autio, & Hay, 2001; Xavier, Kelley, Kew, Herrington, & Vorderwülbecke, 2012)[1]. Analysis of GEM data indicates that innovation-driven countries with higher GDP per capita have higher rates of opportunity entrepreneurship while lower income countries have higher concentrations of necessity entrepreneurs. GEM data also suggests that a higher percentage of opportunity entrepreneurship occurs in high skill, knowledge-based business services with a greater concentration of necessity entrepreneurs in low and semi-skilled consumer-oriented economic sectors. Growth aspirations also vary substantially based on entrepreneurship types with the majority of necessity-driven entrepreneurs expecting their firms to remain under 5 employees (Reynolds et al., 2001; Xavier et al., 2012).

GEM data on 11 countries in the Arab region enables the classification of countries according to their ability to provide a sufficient enabling environment for opportunity-driven entrepreneurship. Arab countries can be classified into three maturity stages which relate economic development, labor market conditions, and industrial structure to the potential for opportunity-driven entrepreneurship. A brief description of each equilibrium phase is discussed below and applied to 11 Arab countries for which GEM data is available in Figure 1.

Low Opportunity Entrepreneurship Equilibrium: A low opportunity entrepreneurship equilibrium occurs when an economy adopts a lower value added production orientation when faced with a low supply of workforce skills. In economies facing low opportunity entrepreneurship equilibria, the industrial structure is typically made up of a large number of micro and informal enterprises which are highly susceptible to economic shocks. Small firms are more susceptible to economic fluctuations that can cause changes in unemployment rates or fail to provide sufficient employment opportunities which lead to comparatively high levels of necessity entrepreneurship. Egypt, Palestine, and Yemen, which have high concentrations of necessity entrepreneurs, exhibit low levels of ecosystem maturity in terms of presenting opportunities for opportunity-based entrepreneurship.

Intermediate Opportunity Entrepreneurship Equilibrium: With an average annual GDP growth rate of nearly 3% in 2012 according to World Bank statistics, over two times the GDP growth rate in the OECD, the Arab countries which fall in the intermediate opportunity entrepreneurship equilibrium stage are experiencing comparatively moderate levels of economic growth which has been shown by GEM data to lead to significant levels of necessity entrepreneurship (World Bank, 2013). However, the structure of such economies, which cannot be classified as specializing in knowledge-based industries or goods and commodity industries which require low levels of workforce skills, have led to comparatively lower levels of unemployment than in countries in a low opportunity entrepreneurship equilibrium. For this reason, such economies also offer significant opportunities for opportunity-based entrepreneurship. Countries at the intermediate opportunity entrepreneurship equilibrium stage have implemented economic policies to enhance entrepreneurship and enacted reforms towards improving the quality of education and integrating entrepreneurship within education and technical and vocational education and training systems. Countries at the intermediate opportunity entrepreneurship equilibrium stage include Algeria, Jordan, Morocco, Syria, and Tunisia.

High Opportunity Entrepreneurship Equilibrium: Countries in a high opportunity entrepreneurship equilibrium are generally comparatively wealthy countries on a GDP per capita basis with a substantial number of knowledge-based industries which provide high skill, high wage employment to a majority of the population. These countries may also have large rates of concessionary public sector employment which provided funding and availability for opportunity-based entrepreneurship. The industrial structure of such countries is characterized by a strong small and medium sized enterprise sector as well as large, sophisticated firms which may be state owned. Countries in a high opportunity entrepreneurship equilibrium have implemented economic policies specifically to support entrepreneurship and have achieved significant success in improving the quality of education and integrating entrepreneurship training into education and technical and vocation education and training. The level of economic development, labor market conditions, and industrial structure of such economies is conducive to high levels of opportunity-based entrepreneurship particularly in higher value added service industries. Countries at the high opportunity entrepreneurship equilibrium stage include Lebanon, UAE, and Saudi Arabia[2].

Based on the maturity model for opportunity-driven entrepreneurship proposed, the Arab countries exhibit a large degree of diversity in their ability to provide an ecosystem conducive to opportunity-based entrepreneurship. However, the diversity of entrepreneurial opportunities available in countries across the region has not led to targeted economic policy interventions regarding entrepreneurship at the national level. In several Arab countries, economic policy does not differ significantly based on the higher concentration of either necessity or opportunity entrepreneurs. Most Arab countries are pursuing identical entrepreneurship policies, which include career guidance, funding, business skills training, reducing bureaucracy, and establishing business incubators, without regard to the types of entrepreneurs in their countries and vastly different support needs required by necessity versus opportunity-based entrepreneurship.

Arab countries can be classified into three maturity stages which relate economic development, labor market conditions, and industrial structure to the potential for opportunity-driven entrepreneurship.

Figure 1. Opportunity-based entrepreneurship ecosystem maturity 

The Need to Distinguish Between Types of Entrepreneurs in the Arab World

An emerging body of international empirical literature suggests that necessity and opportunity entrepreneurs differ significantly in socio-economic characteristics; motivation and the types of opportunities pursued; and the potential for their entrepreneurial endeavors to create jobs and motivate private investment. Figure 2 summarizes the key differentiating characteristics between necessity and opportunity-driven entrepreneurs according to international empirical studies.

Category of Comparison Opportunity EntrepreneursNecessity Entrepreneurs
AgeOn average approximately 5 years younger according to empirical studies based on international dataUp to 5 years older than opportunity entrepreneurs in empirical studies based on international data
EducationTend to be more highly educated with education and general labor market experience having a positive impact on earnings and reducing exit ratesTend to be less educated and benefit more from specific vocationally oriented education found to be related positively to earnings
Industry ExperienceMore likely to have working experience from regular employment in the same industry they are enteringLess likely to have experience from regular employment in their focus industry
Motivation Voluntarily attracted into self-employment by the identification of opportunities; They often leave wage employment or pursue opportunities alongside full time employmentOften driven into self-employment after involuntary job loss or scarcity of employment opportunities
CyclicalityMore likely to create ventures when economic conditions are good and unemployment is low; They also choose to create businesses regardless of their employment statusNegative economic shocks that are more likely to affect small firms or increase unemployment push individuals to create businesses
Quality of Opportunities PursuedCreate larger businesses in knowledge-based industries which require significant amounts of invested capital and employees generate higher earningsLess likely to have business ideas with significant growth prospects and more likely to exploit entrepreneurial opportunities in low-income, low knowledge-content sectors
Potential for Job CreationHigher probability of creating additional jobs Primarily focused on employing themselves and have lower probability of creating additional jobs
Firm Survival Higher survival and lower failure and closure ratesFace a higher risk of failure, or, if they survive, they may produce only marginal businesses, invest insignificant amounts of capital, fail to create further jobs, and earn minimal incomes
Capital Investment and Risk ToleranceInvest higher amounts of capital into their venture and are more risk tolerantLower amounts of invested capital and lower tolerance for risk
Tendency to Seek External SupportMore likely to have built their network to include people valuable in the process of venture creation such as potential customers, cofounders or financiersLess likely to seek support in the form of professional or personal assistance during venture creation

These empirical findings present strong evidence that national training and support programs for entrepreneurship require significant tailoring to meet the needs of both necessity and opportunity-driven entrepreneurs. By not accounting for particular needs of different types of entrepreneurs, regional entrepreneurship policy is designed around a one size fits all approach which is particularly lacking in regards to serving necessity-driven entrepreneurs. Based on the proposition that entrepreneurship policies in a given country should reflect the mix of necessity versus opportunity-driven entrepreneurs operating in the country, Arab countries, based on the equilibrium stage they fall into, should have significantly different, contextually dependent economic policies surrounding entrepreneurship. However, in many Arab countries entrepreneurship policies are not necessarily aligned with macroeconomic and other critical policies for economic development. Several studies (See for example Aradi, Buckner, & Schwalje, 2013) of the Arab region have shown a large disconnect between entrepreneurship policies and programs and critical sector development strategies. For example, Aradi, Buckner, & Schwalje show that Qatar’s entrepreneurship and educational policies are not necessarily aligned and are not viewed as complimentary. This results in a lack of career guidance for aspiring entrepreneurs and entrepreneurship training being rarely offered in K-12 schools due to lack of an approved curriculum. Rather than complementing existing curricula, aspiring entrepreneurs in Qatar are exposed to entrepreneurship much later in their schooling or have to seek out such training at specialized institutions outside the formal education system.

Implications for Policy and Practice

Due to the scarcity of empirical work on necessity and opportunity entrepreneurship in the Arab region, it is difficult to formulate specific prescriptions at the national level. However, this exploratory analysis shows that strong differences exist between necessity and opportunity entrepreneurs which have not been accounted for in regional entrepreneurship policies. Entrepreneurship policy across the region fails to differentiate between necessity and opportunity entrepreneurs favoring a one size fits all approach that is largely shaped by programs that serve opportunity-driven entrepreneurs. In doing so, tailored offerings based on the characteristics of different types of entrepreneurs are rarely considered.

International empirical findings, assuming applicability to the Arab region, suggest a strong case for more tailored national entrepreneurship policies in the Arab region which reflect the mix of necessity versus opportunity-driven entrepreneurs operating in particular countries. Entrepreneurship in countries at a high opportunity entrepreneurship equilibrium, which likely includes all of the Gulf countries, is presumably much different than entrepreneurship in countries like Egypt, Palestine, and Yemen in a low opportunity entrepreneurship equilibrium. Necessity and opportunity entrepreneurs differ in socio-economic characteristics; motivation and the types of opportunities pursued; and the potential for their entrepreneurial endeavors to create jobs and motivate private investment. These differences are potentially unexploited policy levers which might serve as guidance for targeted national policies. Instead of classifying all entrepreneurs as a homogenous group driven by opportunity and offering undifferentiated support, regional governments can introduce targeted training programs and support, contingent financing, and subsidies which might better serve both necessity and opportunity entrepreneurs. If entrepreneurship is to continue to be championed as a panacea for the region’s youth unemployment challenge and resolving structural economic and labor market issues, then such tailored policy measures appear long overdue. Figure 3 presents a summary of potential components of regional entrepreneurship policy which may need to be reconsidered to more effectively meet the needs of both opportunity and necessity entrepreneurs.

Components of Entrepreneurship PolicyTypical Opportunity Entrepreneur Approach in the Arab RegionWhat Might be Needed to More Effectively Reach Necessity Entrepreneurs in the Arab Region
Entrepreneurship Policy Approach Policies view entrepreneurs as a segment of the national economy who can take advantage of all programs and may not distinguish between small business support and policies which support entrepreneurial venturesDefined policies and programs to meet the specific needs of necessity entrepreneurs and other country specific challenges
Entrepreneurship EducationEarly and post-secondary entrepreneurship education and business skills training at university and non-university based business incubatorsSupport for training in specific technical and vocational areas potentially below the post-secondary level in addition to early and post-secondary entrepreneurship education and business skills training
Access to Finance Increasing the supply of capital through direct loans and venture funds Public financing programs that may target a broader range of industries along with a stronger focus on helping entrepreneurs access capital by focusing more on business issues such as management skills and evidence of a solid business plan
Optimizing the Regulatory EnvironmentMacroeconomic approach to tax and regulatory policy focused on changes in laws (e.g., general tax reductions) and regulations that affect everyone doing business Policy impact analysis to determine if regulatory changes are sufficiently focused on the needs of necessity entrepreneurs; Policies that most benefit these businesses are those that defer expenses,
allow companies to convert tax incentives into cash, and lower development costs
Technology
Exchange and Innovation
Cluster development and leveraging public funds,
that encourage university-private sector collaboration
Benchmarking and evaluating the benefits associated with state investments on necessity entrepreneurs and whether they are adequately served by such initiatives

From this analysis, it is clear that a large number of Arab states should be reassessing their strategies, policies, and programs to maximize expenditures on fostering entrepreneurial activity. This article is designed to raise issues to spur a more informed debate around the impact of entrepreneurial policies in the region and promote national policies that accommodate, when necessary, both opportunity and necessity entrepreneurship.  


[1] Caliendo & Kritikos identify a third classification of push-and-pull entrepreneurs who are driven by a mixture of push (unemployment or difficulty locating a suitable job) and pull factors (personal interest, greater independence, or higher income). Though they express mixed motivations for pursuing entrepreneurship, push-and-pull entrepreneurs are more similar to opportunity entrepreneurs.

[2]Upper-middle income countries like Lebanon may not be able to emulate many of the policies and practices of the richer Gulf Cooperation Council countries which generally offer highly paid public sector work and social benefits that affords many individuals the time and resources to pursue opportunity-based entrepreneurial endeavors alongside full time work. This suggests that even at particular equilibrium stages, countries will likely need to follow country context dependent policies aligned with national resources available to support entrepreneurship relative to other socio-economic government aims.

As Arab countries pursue knowledge-based economic development, national skills formation policies require significant rethinking says a new report from Tahseen Consulting in collaboration with the Sheikh Saud bin Saqr Al Qasimi Foundation for Policy Research.

Wes Schwalje, chief operating officer at Tahseen Consulting, says swift action must be taken to create sustainable jobs and develop the region into a truly global knowledge economy.

Wes Schwalje, chief operating officer at Tahseen Consulting, says swift action must be taken to create sustainable jobs and develop the region into a truly global knowledge economy.

You can read the article here: http://gulfbusiness.com/2013/09/why-the-gcc-needs-news-skills-formation-systems-now/#.UiRyOT-7Liq

Why The GCC Needs New Skills Formation Systems – Now

As Arab countries pursue knowledge-based economic development, national skills formation policies require significant rethinking says a new report from Tahseen Consulting

In our recent study A Conceptual Model of National Skills Formation for Knowledge-based Economic Development in the Arab World we raise a red flag over whether regional economic development plans have sufficiently accommodated global trends that have eroded the high wage, high skill opportunity bargain throughout Europe and the United States as these regions have pursued knowledge-based development. Nearly all of the countries in the Arab World have adopted development of a knowledge-based economy as a policy objective to meet economic, political, and social objectives. In the region, policies aimed at catalyzing knowledge-based economies are highly related to job creation, economic integration, economic diversification, environmental sustainability, and social development. While the advantages of knowledge-based economic development have become clearer, so too have the challenges of implementing related policies.

The potential risk of Arab economies failing to effectively contest knowledge-based industries by not factoring in the globalization of knowledge is reminiscent of the story of Muhammad Ali’s attempt to industrialize Egypt through the establishment of a textile industry in the 1800s. In 1819, Muhammad Ali began an industrialization drive using imported foreign technicians which led to the establishment of 30 modern factories for textile manufacturing. By 1830, these factories employed 30,000 but within a decade all the factories had failed due to lack of technical skills, European competition, and increased production quality in Europe.

In today’s global economy, a key question is whether Arab economic development strategies based on the transition to knowledge economies have sufficiently taken into account the changing economic environment where knowledge is becoming cheaper and commoditized by emerging economies. Decreasing pressure on wages due the globalization of knowledge industries and growth in high skill, low cost talent in emerging countries challenges the assumption that more education, higher levels of skills, and national labor markets can provide prosperity to Arab citizens and nations. Because competition for dominance in knowledge-based industries is now global and emerging countries are moving up the value chain to perform increasingly more sophisticated activities, the Arab region’s plans to enter knowledge-based industries are susceptible to the globalization of low cost, high skill competition from beyond the region’s borders.

Nations which have pursued economic development strategies to capitalize on offshoring have generally employed either a strategy based on the export of low-cost and high-end knowledge-based services or alternatively low-cost export-oriented manufacturing strategies. Because knowledge and business process and manufacturing outsourcing is a cost minimization strategy pursued by companies, wages in outsourced sectors face persistent compression forces from many countries which are in line to offer the lowest wages possible to secure employment for their citizens and spur economic growth. The Gulf countries, which employ many of their citizens in high wage roles in parastatals operating in knowledge-based industries, may be particularly threatened by competition from low wage knowledge workers and be subject to significant margin compression which challenges the economics of their entry into knowledge-based industries.  A recent ranking of the attractiveness of the top 50 global service offshoring locations shows that competition is not only coming from the BRICS but from many countries in Southeast Asia, the Baltic States, Eastern Europe, and Central and South America. However, only five Arab countries, Egypt, Jordan, Morocco, Tunisia, and the UAE, appear on the ranking.

With increasing cost competition in knowledge-based industries from emerging countries, the less resource wealthy Arab countries could feasibly follow a development trajectory grounded in selective participation in knowledge-based and manufacturing industries in which they have a cost advantage and have or can develop quickly sufficient workforce skills to compete against emerging country rivals.  However, the high wage structure of Gulf labor markets is at odds with the emergence of high skill, low cost knowledge workers in other countries and attempts by global companies to minimize costs through outsourcing. While leapfrogging into some of the more innovation-driven, high skills knowledge-based industries might be a long-term vision for Arab countries, such a development trajectory ignores the immediate need now to create jobs and provide economic opportunity for youth. Across the region there is also the risk of competitive latency in which global industry possibility frontiers are driven by an increasing array of countries which may create additional competitive gaps compared to leading edge countries and companies that go unrecognized or cannot be reached due to market failures in skills formation by the Arab countries. Our research provides evidence of a lack of effectiveness of Arab skills formation systems that influences Arab firms to contest lower-skilled, non-knowledge intensive industries at the detriment to regional competitiveness and knowledge-based economic development.

The Arab opportunity bargain relies on a modernized interpretation of creative destruction which posits that emerging markets can also be sources of knowledge-based innovation. The low levels of regional R&D and innovation led to substantial expenditures in the Nineties on critical components necessary for innovation systems, research, market-oriented R&D, and entrepreneurship such as educational systems; institutions conducting basic, applied, and interdisciplinary research; business incubators; funding institutions; and professional societies. An important question for the Arab World to answer in making such investments is how much of a risk creative destruction poses for high skill, high wage job creation since continually innovating economies present both employment opportunities for workers in new industries who have the right skills as well as failed dreams for those who do not have the right skills, experience, or education. Contrary to what the region’s economic development strategies suggest, the future of the Arab Dream is very much reliant not only on what happens nationally and regionally but what happens globally in terms of increased economic integration, availability of cheap highly skilled labor, rival competition for knowledge-based industries, demand for commodity exports, and the economic health of other countries.

National Skills Formation for Knowledge-based Economic Development

Beginning in the 1990s, there was a shift in the Arab World away from viewing education and training systems as solely suppliers of skills toward an emphasis on the relationship between governments, educational systems, labor markets, and firms to generate demand for skills. By adopting demand-driven, ecosystem approaches to skills formation, Arab governments can align education and training systems with high-growth sectors of industry for knowledge-based economic development and achievement of accompanying economic, political, and social objectives.

While many international models of skills formation promote an exclusively market based approach, several Arab countries view investment in human capital as a political and economic goal in which significant government intervention is warranted. Yet, many previous attempts at skills formation policy have failed to address persistent skills development problems and do not present a comprehensive strategy to develop the skills of the national workforce as a whole. Despite the need for countries to adopt demand-driven approaches to skills formation, many of the countries in the region have pursued policies with no clear link between key stakeholders and specific economic outcomes.

The changing demands of knowledge-based economic development create a need for interdependence and collaborative networks for effective skills formation. The widespread regional pursuit of knowledge-based economic development is driven by policies that envision the emergence of high skill, high wage economies that will create jobs. However, the global availability and growth of low cost, high skill workers potentially threatens the viability and economic fundamentals of sophisticated, innovation-driven knowledge-based industries taking root in the region if skills formation challenges are not addressed.

The Need for a New Approach

The changing demands of knowledge-based economic development, global macroeconomic trends, and social development, create a need for interdependence and collaborative networks consisting of education and training providers, firms, government entities, and other key stakeholders for effective skills formation. Citing good practices of skills formation policy from across the Gulf Cooperation Council countries, our research presents a framework via which countries can analyze their skills development systems.

Arab skills formation system reforms must challenge the assumption that more education is always better. Particularly in non-resource rich Arab countries, governments must reconsider the full employment promise which hampers global competitiveness, reduce wage inequality to ensure equal distribution of wealth, and determine the Arab world’s position in a global economy with emerging low cost, high-skill competitors that challenge knowledge based economic development both in the developed and developing world.

While some Arab countries are more suited to competing in a high-skill, low-wage global economy, other Arab countries which are unable to compete in high-skill, high-wage knowledge-based industries will need to adequately calibrate the expectations of their citizens regarding the types of jobs that will be available in the future. They will also have to account for the likely instability of salaries due to wage compression from competing low-wage, high-skill workers. Efforts in the region to privatize education attainment so that labor market success or failure passes the burden on to individuals are prone to market failure without sufficient demand for skills from the labor market. If knowledge-based industries fail to take root and lead to employment, many of the reforms and money spent on higher education expansion, education quality, R&D ecosystems, and entrepreneurial growth could be deemed inappropriately spent.

A copy of our recent study A Conceptual Model of National Skills Formation for Knowledge-based Economic Development in the Arab World can be downloaded at http://www.alqasimifoundation.com/en/Publications.