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In response to several messages we received regarding the potential of Arab SMEs to meet the region’s youth employment challenge, we decided to also look at the other end of the employment spectrum to determine which entities across the region are the largest employers.

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In our post Company Sizes in the Arab World: Small and Medium-sized Enterprises Dominate Arab Economies we found that 92% of businesses in the Arab region are under 200 employees. The concentration of SMEs in Arab economies has a significant on employment creation and potential public sector responses the region’s youth employment challenge.

Below is a list of the Arab region’s largest employers segmented by country and industry gathered from press accounts, regulatory filings, and government sources. In several countries education, health, and defense ministries employ large segments of the population. We also observe much similarity across the region in terms of industries which are large employers (telecom, services, construction, diversified conglomerates, aviation, and financial services). What is less clear, however, is whether these industries have produced high skill and knowledge-content, high wage jobs.

Related Blog Posts

In our blog post Many Arab Countries Are Headed Towards Knowledge-based Economies.. But What are Knowledge-based Industries? we explore how the concept of Knowledge-based industries and economies lacks a clear definition. Defining the size and growth of knowledge-based industries is especially difficult in the Arab region.

In our blog post Knowledge-based Economy and Employment Generation in the Arab World we show that the emergence of knowledge-based industries has not necessarily led to meaning levels of job creation in the region. 

CountryEntitySectorNumber of Employees
Saudi Arabia Ministry of Education Education
418362
Saudi ArabiaMinistry of Defense and Aviation
Defense
106000
Saudi ArabiaMinistry of Health Healthcare
73314
Saudi ArabiaSaudi Aramco
Oil & Gas51000
Saudi ArabiaSaudi Basic Industries Corporation
Chemicals
31000
Saudi ArabiaSaudi Electricity Company
Utilities 28300
Saudi ArabiaSaudi Telecom Company
Telecoms
21190
Saudi ArabiaThe Savola Group
Conglomerate
12500
Saudi ArabiaZamil Group
Conglomerate
10000
Saudi ArabiaAlmarai Co.Food Industries
9505
Saudi ArabiaAl-Rajhi Banking & Investment Company
Financial services
8299
Saudi ArabiaZamil Industrial Investment Co.
Financial services
8200
Saudi ArabiaAbdullah Al Othaim Markets Co.Retail5097
Saudi ArabiaSaudi Public Transport Co.Transport
5065
Saudi ArabiaRiyadh Bank
Financial services
4768
United Arab EmiratesArabtec Construction
Construction
52000
United Arab EmiratesMinistry of Defense
Defense
48800
United Arab EmiratesAl Habtoor Group
Conglomerate
40000
United Arab EmiratesEmirates GroupAviation
30297
United Arab EmiratesDP WorldTransport
30000
United Arab EmiratesAl Jaber Group Conglomerate
25000
United Arab EmiratesMinistry of EducationEducation
24000
United Arab EmiratesAl Ghurair Group
Conglomerate20000
United Arab EmiratesAl Futtaim Group Conglomerate20000
United Arab EmiratesAbu Dhabi National Hotels Company
Hospitality
12000
United Arab EmiratesMajid Al Futtaim Group
Conglomerate
11000
United Arab EmiratesJumeirah Group
Hospitality
11000
United Arab EmiratesEtisalat
Telecoms10083
United Arab EmiratesDepartment of Health & Medical ServicesHealthcare
9422
United Arab EmiratesEmirates NBD
Financial services
8139
United Arab EmiratesMinistry of HealthHealthcare7000
KuwaitAl-Kharafi Group Conglomerate
100000
KuwaitMinistry of Health
Healthcare
36000
KuwaitMinistry of Education
Education
34801
KuwaitAgility
Services
31055
KuwaitKuwait Food Co. - Americana
Food Industries
21522
KuwaitArabian Construction Company
Construction16500
KuwaitAlshaya
Retail16130
KuwaitMinistry of Defense
Defense15500
KuwaitAl-Abraj Holding Co.Services15000
KuwaitZain GroupTelecoms
15000
KuwaitKIPCO
Services8000
KuwaitSultan Center Food Products Co.Food Industries7000
KuwaitNational Cleaning Co.Services6022
KuwaitHeavy Engineering Ind. & Shipbuilding Co.Services5000
KuwaitKuwait & Gulf Link Transport Co.Services5000
KuwaitThe National Industries Group
Conglomerate
4000
KuwaitKout Food Group
Food Industries4000
KuwaitNational Mobile Telecommunications Co.Telecoms2923
KuwaitNational Bank Of Kuwait
Financial services
2921
KuwaitCombined Group Contracting Co.
Construction2831
KuwaitAl Arabi Group Holding Co.Conglomerate2763
KuwaitKuwait Hotels Co.Hospitality2540
KuwaitKuwait Finance HouseFinancial services 2032
KuwaitACICO Industries Co.Construction2000
OmanMinistry of Defense
Defense41700
OmanOmzest Group
Conglomerate
40000
OmanMinistry of Education
Education39993
OmanMinistry of Health
Healthcare
21447
OmanSuhail Bahwan Group
Conglomerate
15000
OmanSaud Bahwan Group
Conglomerate
11000
OmanRenaissance Services Co.Services9000
OmanOman Aviation Services CoServices3360
OmanOman Telecommunications CompanyTelecoms2735
OmanOman National Engineering & Investment Co.Services2630
OmanShanfari Group
Conglomerate2500
OmanBank Muscat
Financial services
2157
OmanSalalah Port Services
Services2079
OmanOman Holding International Co. Financial services 1600
OmanNational Bank Of Oman Ltd.Financial services 1155
BahrainMinistry of Defense
Defense12000
BahrainMinistry of Health
Healthcare
7213
BahrainMinistry of Education
Education5000
BahrainAlmoayyed Group
Conglomerate
5000
BahrainAhmed Mansour Al A'ali Group
Conglomerate5000
BahrainNass CorporationServices
4729
BahrainDadabhai GroupConglomerate3500
BahrainAhli United BankFinancial Services2800
BahrainBahrain Telecommunications Company (Batelco) Telecoms2579
BahrainFakhro Group
Conglomerate1000
QatarSupreme Education Council
Education13000
QatarMinistry of Defense
Defense11800
QatarQatar Shipping Company
Services3518
QatarIndustries Qatar
Conglomerate
3400
QatarAamal Company
Conglomerate3000
QatarQatar Navigation Company
Services2500
QatarMannai Corporation
Services2400
QatarQatar Telecom (Qtel)Telecoms2000
QatarSalam International Investment Co LtdServices2000
QatarQatar Electricity and WaterUtilities1500
QatarQatar National Bank
Financial services1400
QatarQatar National Health Authority
Healthcare1200
QatarBarwa Real Estate Company
Services
1100
QatarQatar National Cement CoServices1050
IraqMinistry of Interior
Civil Affairs
348000
IraqMinistry of Defense
Defense
270000
IraqMinistry of Education
Education 120000
IraqMinistry of Higher Education and Scientific Research
Education 100,000
IraqMinistry of Health
Healthcare100000
IraqMinistry of Electricity
Utilities42000
IraqSouth Oil Co
Oil & Gas18000
IraqNorthern Oil Co
Oil & Gas13000
IraqKBR -IraqOil & Gas7000
IraqAl Elaf Group of Companies
Conglomerate5000
IraqFalcon Group
Conglomerate3500
IraqBaghdad Soft Drinks CoFood Industries3400
IraqBahrani Group
Conglomerate3000
IraqZain Iraq
Telecoms3000
IraqIraqi Airways
Aviation
2400
IraqDanube Group
Conglomerate2000
IraqAsiaCell
Telecoms2000
YemenMinistry of Education
Education194443
YemenMinistry of Defense
Defense66000
YemenMinistry of Interior
Civil Affairs
51200
YemenHayel Saeed Anam Group
Conglomerate25000
YemenPublic Electricity Corporation
Utilities15000
YemenSabaFon
Telecoms10000
YemenMinistry of Health
Healthcare7300
YemenPublic Telecommunication Corporation
Telecoms7000
YemenYemen Company for Drug Manufacturing and Trading (Yedco)
Services
5000
YemenYemen Economic Corporation (YECO)
Services5000
EgyptMinistry of Education
Education
1099000
EgyptMinistry of Interior
Civil Affairs
350000
EgyptMinistry of Health
Healthcare215000
EgyptMinistry of Defense
Defense
80000
EgyptTelecom Egypt
Telecoms55000
EgyptOrascom Construction Industries
Construction50000
EgyptKuwait Food Company (Americana) in EgyptFood Industries45000
EgyptOrascom Development
Real estate18000
EgyptOrascom Telecom Holding
Telecoms15000
EgyptMansour Group
Conglomerate11000
MoroccoMinistry of Defense
Defense196300
MoroccoMinistry of Interior
Civil Affairs
93500
MoroccoMinistry of Health
Healthcare
52000
MoroccoGroupe OCP
Chemicals
20000
MoroccoChabbi Group
Conglomerate
18000
MoroccoMaroc Telecom
Telecoms
11000
MoroccoYNNA Holding, Group Miloud Chaabi
Conglomerate
11000
MoroccoONA Group
Conglomerate10000
MoroccoMinistry of National Education
Education
7400
MoroccoLesieur Cristal
Food Industries5000
MoroccoBanque Marocaine du Commerce Exterieur
Financial services4000
MoroccoCompagnie Generale Immobiliere
Real estate
2800
MoroccoAttijariwafa Bank
Financial services
2000
TunisiaMinistry of Education and Training
Education124000
TunisiaMinistry of Health
Healthcare105000
TunisiaPoulina Holding Group
Conglomerate
13000
TunisiaTranscom Worldwide Tunisia
Services11000
TunisiaSatex
Textiles10000
TunisiaCompagnie des Phosphates de Gafsa
Chemicals9000
TunisiaTunisie telecom
Telecoms7500
TunisiaLeoni Tunisie
Services6500
TunisiaTunisair
Aviation5200
TunisiaGroupe ChimiqueTunisien Services4500
TunisiaSystem De Cablerie Automobile De Sousse Services4300
TunisiaEvolServices4000
TunisiaSte des Arts TextilesTextiles3300
TunisiaThe Banque Nationale Agricole
Financial services2700
TunisiaThe Societe Tunisienne de Banques
Financial services2600
TunisiaBanque Internationale Arabe the Tunisie
Financial services2200
LibyaGumhouria Bank
Financial services3500
LibyaGeneral Tobacco Company
Tobacco1500
LibyaTrucks and Bus Co
Services1000
LibyaArab Union Contracting Company
Construction800
LibyaAlmadar
Telecoms550
LibyaCentral Bank of Libya
Financial services300
LibyaAkida Group
Conglomerate195
LibyaLibyan Tractor Company
Services100
AlgeriaMinistry of Education
Education323000
AlgeriaSonatrach
Oil & Gas120000
AlgeriaNaftalOil & Gas30000
AlgeriaAlgerie Telecom
Telecoms27000
AlgeriaAir Algerie
Aviation8800
AlgeriaGiplaitFood Industries
4500
AlgeriaGroupe Saidal
Pharmaceuticals4400
AlgeriaMinistry of Health and Population
Heath care4400
SudanFederal Ministry of Health
Heath care54000
SudanMinistry of Education, Science and Technology
Education 18000
SudanSudan Railways Corporation
Transport13000
SudanChina National Petroleum Corporation (CNPC) in Sudan
Oil & Gas11000
SudanKenana Sugar Company
Services6000
SudanDAL Group
Conglomerate4000
SudanSudatel Telecommunications Group Ltd.Telecoms2500
SudanSudan Airways Company
Aviation2000
LebanonSarkis Group International
Conglomerate
7000
LebanonMinistry of Health
Healthcare5400
LebanonZakhem Group
Conglomerate5000
LebanonOgeroTelecoms
3800
LebanonAverda Group ( Sukkar Engineering Group)
Conglomerate 3,500
LebanonMiddle East Airlines (MEA)
Aviation3000
SyriaMinistry of Defense
Defense319000
SyriaMinistry of Health
Health care63354
SyriaMinistry of Petroleum and Mineral Resources
Oil & Gas47000
SyriaSyrian Telecommunication Establishment
Telecoms25000
SyriaSyrian Petroleum Company
Oil & Gas17500
SyriaGeneral Establishment of Syrian Railways
Transport12000
SyriaSyrian Arab Airlines
Aviation5300
SyriaCham Holding
Conglomerate4000
SyriaJoud Company
Conglomerate3000
SyriaGeneral Company for Electrical and Communication Works
Utilities2500
SyriaMTN Syria
Telecoms2100
SyriaAlfadel Group
Conglomerate2000
SyriaSyriaTel
Telecoms1900
SyriaND Group

Conglomerate1450
SyriaByblos Bank
Financial services1150
SyriaSyrian Modern Cables
Services1050
JordanMinistry of Health
Healthcare24000
JordanArab Bank
Financial services6500
JordanThe Royal Jordanian Airlines Company
Aviation4300
JordanThe Royal Jordanian Airlines Company
Metals and mining4300
JordanJordan Telecom Group /Orange
Telecoms4000
JordanHikma Pharmaceuticals
Pharmaceuticals2700
JordanArab Potash Company
Services2000
JordanHousing Bank for Trade & Finance
Financial services1900
PalestineMinistry of Education
Education48000
PalestinePalestine Development & Investment Ltd. (PADICO)
Conglomerate35000
PalestinePalestinian Security Forces
Defense30000
PalestineMinistry of Health
Health care13000
PalestinePaltel
Telecoms12000
SomaliaSecurity Forces of Somaliland
Defense7000
SomaliaAmal Group of Companies (Amal Express)
Conglomerate1000
SomaliaSOMTEL
Telecoms1000
SomaliaTelecom Somalia
Telecoms750
SomaliaSomafone
Telecoms150
MauritaniaSociété Nationale Industrielle et Minière--SNIM
Conglomerate804
MauritaniaSOMAGAZ
Oil & Gas400
MauritaniaAir Mauritanie
Aviation300
DjiboutiDaallo Airlines
Aviation 250
DjiboutiDjibouti National Army
Defense11000
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In the Arab World, a society characterized by skilled, flexible, and innovative individuals nurtured through quality education, employment, and broadly accessible life-long learning opportunities is seen as a vital precursor to knowledge-based economic development (Kingdom of Saudi Arabia Ministry of Economy and Planning, 2010). To varying degrees, Arab countries are faced with similar human capital challenges that serve as obstacles to knowledge-based economic development:

Low Levels of Workforce Productivity

Across the region, labor productivity is low. Based on GDP per person employed data from 2008, Qatar, the richest Arab nation, is approximately two-thirds as productive as Organization for Economic Cooperation and Development (OECD) countries, despite the upward trending of oil and gas which forms the majority of Qatar’s domestic product receipts (World Bank, 2010a). Labor productivity data from 1991-2008 show a .7% compound annual growth rate for the Arab World while East Asia and the Pacific grew at 3.97%; Latin America grew at a rate of 1.19%; Sub Saharan Africa grew at 1.46%, and the OECD countries grew at 1.54%.

Preference for Public Sector Employment

Long standing social aspects of career specialization have led to some reluctance to pursue certain professions (United Nations Educational, Scientific, and Cultural Organization, 1960). The social aspects of career choice has slowed economic integration, led to the substitution of expatriate labor in certain industries, and decreased productivity in low value added industries for which low skill expatriate labor is imported from abroad to perform (Ministry of National Economy of the Sultanate of Oman, 2010). The social preference for public sector jobs has precipitated a crisis in which regional governments are unable to create suitable employment opportunities to absorb the youthful population entering the labor market.

Increasing Female Labor Market Participation

Despite significant gains in educational attainment, female labor market participation is estimated at 22% resulting in high levels of female unemployment (International Labor Organization, 2010). While more women have entered the labor market, many have found employment in part-time work, microenterprises, and the informal economy (Flynn and Oldham, 1999). Rapidly evolving cultural values and changing views on familial obligations continue to be influential in labor market participation and obtaining higher levels of education (Miles, 2002).

Poor Match Between Workforce Skills and Those Demanded by Public and Private Sector Employers

In surveying the public sector, Al-Yahya (2008) finds evidence of a low match between the skills of public sector employees and the work roles they perform particularly at lower administrative levels. Al-Yahya also finds evidence that formal educational qualifications are frequently not related to current jobs and a high number of public sector employees who believe their current jobs require low levels of their perceived skills and capabilities. Citing deficiencies in soft skills like communication, teamwork, analytical skills, and innovative thinking, a recent survey of the private sector also found that 46% of regional CEOs do not believe that education and training systems in the Arab World prepare students for the workplace (Mohammed bin Rashid Al Maktoum Foundation, 2008). These findings are indicative of a vast disconnect between current regional human capital levels and the skills demanded by private sector employers.

Education and Training System Misalignment With the Needs of Knowledge-based Economies

Many Arab countries are unable to meet the needs of all students who want to pursue education because of dramatic increases in student enrollment and insufficient resources (United Nations Development Program, 2002). Though there is a continued long-term trend towards increased budgets for education in the region, meeting the combined demands of increased access, assuring relevance, and improving quality in the face of finite resources is challenging (United Nations Educational, Scientific, and Cultural Organization, 2010b). Despite positive gains to promote educational opportunity and increased national spending on education, poor educational quality continues to hamper regional human capital development and the ability of Arab countries to compete in the global economy. At the higher education level, the region’s education systems are failing to produce the right quality and mix of human capital needed for knowledge-based development.

Barriers to Entrepreneurship

While some gains have been made in facilitating entrepreneurship in the region as evidenced by the increasing number of new business registrations, the procedures, time, costs, and minimum capital required to start a business remain much higher than OECD countries (Klapper, 2010, World Bank, 2010b). Though some Arab countries provide venture funding for entrepreneurial endeavors, startup and early-stage financing from banks, venture capitalists, and angel investors is very limited in the Arab World due to low liquidity conditions on exit markets. In terms of nurturing businesses, the Arab World has approximately 100 business incubators as compared to 1,600 in the United States to serve rather similar populations (National Business Incubation Association, 2011).

Weak Innovation Systems

R&D spending is significantly lower than in the developed world with very little private sector funding (United Nations Educational, Scientific, and Cultural Organization, 2010a). Regulatory frameworks do not protect intellectual property leading to low levels of patents and stifling private R&D expenditure. There is weak government policy making in research and innovation in spite of various studies which have shown that critical components necessary for innovation systems, research, market-oriented R&D, and entrepreneurship need to be concurrently fostered and linked in knowledge-based economies (Cooke, 2001, Pietrobelli, 2009). These components include educational systems, institutions conducting basic, applied, and interdisciplinary research, business incubators, funding institutions, and professional societies. Several of the institutions critical to the innovation system are weak in the Arab World (Mohammed bin Rashid Al Maktoum Foundation, 2009).

Managing Growth Sustainably

Underpinned by high fertility rates and increased life expectancy, the population of the Arab World nearly tripled to 359 million growing at an average annual rate of over 2% from 1970 to 2010 (Mirkin, 2010). This growth has increased the demand for basic services such as health, education, housing, water, and sewerage systems which has outpaced the growth rate of national income and government revenues (Rischard, 2009). The Arab World is experiencing rapid urbanization which has resulted in increased poverty, inadequate solid waste collection and disposal, toxic and hazardous waste problems, poor or non-existent sanitation facilities, and degradation of urban environment and coastal areas (United Nations Economic and Social Commission for Western Asia, 2009). Demographic trends are also having a number of societal implications related to marriage and the family, status of women, and care of older people (Mirkin, 2010).

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While employee count, sales, and assets have been used internationally to develop precise definitions of what constitutes a SME, lack of financial data on establishments operating in the Arab countries has resulted in many countries relying primarily on number of employees. In several countries, there is presently no definition of what defines a SME. The data we present below suggests that most firms in the region are under 200 employees. If the EU’s definition of what constitutes a small and medium-sized enterprise is applied (micro firms  <10 employees, small firms 10-49 employees, and medium-sized firms 50 – 250 employees), 92% of firms in the Arab World would be considered as small and medium-sized enterprises with 25% classified as micro businesses, 44% as small businesses, and 23% as medium-sized businesses.

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In our post Arab Corporate Social Responsibility Rapid Appraisal Diagnostic we suggest that lack of financial reporting standards in small firms in the region may also serve as a deterrent to social responsibility reporting

In our post How Skills Gaps are Generated by National Education and Skills Formation Systems we discuss how HR practices in small and medium sized firms may perpetuate the skills gap problem in the Arab World

The data presented below are proxied from World Bank firm-level surveys which draw on a representative sample of an economy’s private sector to shed light on a broad range of business environment topics. Enterprise Surveys are answered by business owners and top managers with input from finance and HR staff. The sampling frame for each country is stratified by business activity, firm size, and location and is confined to formal establishments excluding fully government owned firms. The primary focus sectors include manufacturing and service establishments corresponding to ISIC Revision 3.1 codes 15-37, 45, 50-52, 55, 60-64, and 72.

We analyzed data for 6,257 establishments in Algeria, Egypt, Iraq, Jordan, Lebanon, Mauritania, Morocco, Oman, Palestine, Saudi Arabia, Syria, and Yemen.  While the survey coding frames are very similar across countries, some countries made minor localization changes (such as aggregation of or more specificity for certain industries) as well as added additional questions to the standardized questionnaire in some cases, most notably some countries chose to also survey firm with less than 5  employees while others did not. This distribution reflects the high number of small and medium sized businesses that employ a significant percentage of the workforce in the Arab World. Across these countries, we found 72% of firms were from the manufacturing sector, 22% from the services sector, and the remaining 7% from the construction and transport sectors. Within the manufacturing sector, food and beverage, textiles and garments, and other manufacturing (primarily ISIC Rev. 31. codes 20-23, 30, 33-37) were the largest industries surveyed. Within the services sector, other services (primarily ISIC Rev. 3.1 code 50 and other unspecified services), hotels and restaurants, and retail were the largest industries surveyed.

Company SizeAlgeriaEgypt*IraqJordanLebanonMauritania
1-42%NA9%.4%36%36%
5-928%5%40%15%21%40%
10-2433%34%41%26%24%18%
25-4920%10%7%20%12%4%
50-999%8%2%14%4%2%
100-1995%16%1%11%2%0%
200-2492%4%0%2.4%0%0%
250-4991%9%0%5.8%1%0%
500-9990%6%0%4.0%0%0%
1,000+0%8%0%2.0%0%0%
Company SizeMoroccoOman
Palestine
Saudi Arabia
Syria Yemen
1-4NA2%.5%NA3%NA
5-90%21%36.2%0%14%45%
10-2425%29%35.2%8%26%23%
25-4924%25%13.7%27%17%12%
50-9912%19%9.2%28%16%9%
100-19919%3%3.0%19%12%4%
200-2495%0%.7%6%3%2%
250-49911%0%1%8%7%2%
500-9992%0%.2%2%2%2%
1,000+2%0%.2%1%1%1%
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Given the lack of an unambiguous definition of what constitutes a skills gap in previous surveys and imperfect measurement proxies, Figure 1 below shows that the present understanding of what causes skills gaps is similarly vague. If the intent of national skills surveys is to devise public policy interventions that might affect the behavior of firms in remediating skills gaps, the precision with which the causes of skills gaps are identified is of critical importance. Of the several skills surveys we reviewed, seven specifically ask respondents to identify the causes of skills gaps. From these surveys, four areas of thematic overlap emerge as potential causes of skills gaps: recruitment difficulties; HR practices related to employee development, motivation, and retention; strategic shifts in response to changing business environments; and transitional stages of employee orientation and integration. This section reflects briefly on these four thematic areas to advance a typology which takes into account the present understanding of the source of skills gaps.

Causes of skills gaps implied by survey questionnaires

We reviewed skills surveys from 14 countries and found an ambiguous definition of what constitutes a skills gap and how they are caused.
Sources: (Campbell, Baldwin et al. 2001; Learning 2004; Development 2006; Learning 2007; Office 2008; Zealand 2008; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010)

Recruitment Difficulties: Recruitment difficulties can arise for a number of different reasons such as:  competition from other employers; not enough people are  interested in doing a particular job; long training times to develop skills; limited capacity of training organizations in relevant fields; poor terms and conditions offered for jobs such as unsociable hours, unattractive employment modalities, or low pay; poor prospects of career progression; location in a remote location with poor transportation; attitude, motivation, or personality mismatches etc. The multitude of reasons for recruitment difficulties requires the need to distinguish between situations where there are few people in the labor force who have the required skills, work experience, or qualifications to perform a job (a skills shortage) and situations where there are people in the labor market with the requisite skills, work experience, or qualifications but, due to some reason, are not attracted to a particular job (a recruitment difficulty).

An important consideration, however, is whether skills shortages are a symptom of greater problems involving market and institutional failures in the skills formation system rather than a direct cause of skill gaps. Effective government institutions that prevent underinvestment in skills, provide adequate regulation, and coordinate stakeholders are key elements of effective national skills formation systems. These institutions exist to link economic development with the evolution of education and training systems; ensure qualitative and quantitative supply-demand match between outgoing students and the needs of the labor market; facilitate regular, on-the-job  training provision and  participation in skills formation by the business community; and address policy, informational, or financial sources of individual underinvestment in national workforce skills formation (Schwalje 2011). As governments attempt to influence the technological and industry structure of their countries, the absence or weakness of government mechanisms to coordinate and align skills formation institutions can create a need for skills that cannot be predicted by free market mechanisms which can result in skills shortages.

The effectiveness of formal education and training systems is increasingly measured by production of human capital in the quantity and quality required by the labor market and whether outgoing students meet the expectations of employers (Development 2010). Accessibility to education and training  institutions, quality, and the degree to which education and training systems produce employable students influence the preparation of individuals with the skills, work experience, and qualifications to meet labor market needs.  In this respect, education and training institutions can impact allocative efficiency in labor markets which can result in skills shortages.

Private rates of return explain the motivation of individuals to pursue different levels and types of education to augment natural abilities with skills subsequently sold in the labor market. Individuals engage in an investment optimization process in which they participate in education and training as long as the value stream of future earnings is more than foregone earnings, training, and equipment expenses. However, empirical studies have shown that wage differentials relative to less skilled workers can be affected by sectoral shifts requiring higher skill intensity (Schultz 1975); when expansion of educated labor outpaces expansion in employment (Pritchett 2001); and where technological progress is rapid and government policy is conducive to technological progress and skill intensive development (Rosenzweig 2010). Since the impacts of government industrialization policy may be unknown to individuals, information gaps about the future trajectory of industries and emergent skills needs, the returns to investing in particular skills sets, and projecting the future returns of education and training investments can result in market failure. Skilling investments may also be subject to short-termism in which individuals are unwilling to invest in skills with uncertain and longer-term return horizons. The motivation of the labor force to engage in lifelong learning to ensure continued relevancy of skills may similarly be impacted by return uncertainties. Capital market weaknesses in terms of a lack of funding to finance education and training investments can lead to underinvestment. Externalities and labor market rigidities may also alter the incentives and returns to skilling resulting in sub optimal investment in skills formation. The many factors which can alter the expected return to particular skills or which signal sectoral growth or promise affect individual skilling decisions which may result in skills shortages.

Returning to the proposition that recruitment difficulties due to skills shortages are a symptom of greater problems in the skills formation system, it seems probable that skill shortages can result from market and institutional failures in the governance and institutional quality of skills formation systems, the employability of outgoing students from the education and training system, and  informational or policy-related sources of uncertainty which motivate individual investment in skills development. Market and institutional failures may influence firms to engage in substitution behavior where they hire employees which they know require additional skills to meet firm needs in the face of skills shortages. Similarly, market failures and institutional quality can result in a situation where new entrants to the labor force appear to be qualified but are subsequently found to lack skills. Both of these scenarios can result in skills gaps as firms absorb employees from the external labor market who do not have the required skills, work experience, or qualifications when facing recruitment difficulties attributed to skills shortages.

HR practices related to employee development, motivation, and retention: Firms provide training to increase and maintain workforce skills levels to support core competencies in addition to developing new skills that can form the basis of future firm competencies. The willingness and ability of firms to provide training and development depends on a number of factors. Managerial calculations of the returns to training may be complicated by informational gaps surrounding technology, future skill requirements, and benefits of training (Lall 1999). In situations of market or institutional failure, staff development may require training to retain competitiveness in addition to remediating inadequate pre-employment skills formation. Employee poaching, the tendency of firms to recruit employees with transferrable skills from other firms, and turnover may serve to limit firm-based training since training firms incur the cost of employee training only to lose the employee and resulting benefits of the training to another firm. Depressed levels of training and development due to a variety of factors can lead to skills gaps that erode creation and production of firm competencies jeopardizing the application of workforce skills toward market-oriented business objectives.

As mentioned in the discussion on the competence-based view of the firm, it is not enough for a firm to have a highly skilled workforce to achieve competitive advantage. A firm’s human resources pool must also be motivated to act in the interests of the firm. In England (30%), Scotland (7%), Northern Ireland (19%), and New Zealand (16%) many firms cite employee motivation as a cause of skills gaps (Zealand 2008; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010). HR practices are both a way to develop workforce skills as well as to ensure alignment between workforce behavior and firm-level goals. HR practices, through their influence on employee motivation, induce productive employee behavior to apply their skills. Similarly, HR practices can affect employee turnover levels. For example, HR systems which promote employee involvement, participation, training in group problem solving, socializing, high concentrations of skilled employees, and higher average wages have been shown to reduce turnover (Arthur 1994; Delaney and Huselid 1996).

Numerous theories and metatheories of workforce motivation exist which propose various sources of motivation leading to individual behavior. By understanding the sources of motivation, firms can design HR policies to encourage productive employee behavior which enables full deployment of workforce skills. The most commonly researched HR policy areas which impact motivation include rewards (such as compensation and promotional systems); task (aspects of job and task design); management style; and social inducement systems (Leonard, Beauvais et al. 1999). Several studies have found that task complexity and whether a task is considered interesting or not may be more suited to certain types of motivational inducement systems (Gagne and Deci 2005). These findings suggest HR practices require tailoring to specific firm, job, and industry contexts to induce productive employee behavior. The consequence of misalignment of HR practices with sources of workforce motivation can affect employees’ choices regarding the direction, level of effort, and persistence of behavior which can lead to skills gaps.

Strategic shifts in response to changing business environments: The competence-based view of the firm stresses the criticality of consolidating human and other resources into market-oriented competencies that allow firms to adapt to changing environments. The ongoing renewal of competencies has implications on business processes, market positions, and expansion paths (Teece, Pisano et al. 1997). Competency renewal may involve changes in company strategy, goals, markets, business models, products and services, working practices, or technology. Evolving business strategies in response to the competency renewal process may require specialized skills that current employees lack resulting in skills gaps. Similarly, changing job requirements due, for example, to technology adoption or job promotion, might mean that once proficient employees now lack skills to perform new or evolving roles. Increasing and maintaining workforce skills in light of competency building and renewal in response to changing opportunities implies that skills gaps can emerge as firms struggle to respond to internal and external forces that threaten firm competitiveness.

Transitional stages of employee orientation and integration: A large percentage of employers in several countries highlight recent recruitment, post-merger employee integration, and lack of experience as a cause of skills gaps (Development 2006; Zealand 2008; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010). However, it is unclear to what extent temporary, transitional phases associated with the beginning of the employee-employer relationship can be considered a cause of skills gaps since presumably such transitory skill gaps are likely to decrease as employees complete induction training and gain confidence in their roles. Generally induction training is firm specific and focused on acquainting new employees with the company structure, specific job requirements, and organization policies (Bijnens and Vanbuel 2007). A more appropriate indicator of causality would be whether an employee exhibits post-induction training persistence of a lack of skills to perform a job which results in the compromised ability of a firm to meet business objectives. Such an output indicator would then point toward an insufficient induction and integration program, rather than state of completion of the induction or integration program, as a potential source of skills gaps. Nevertheless, firms appear to view transitional stages in the employee induction process as a significant source of skills gaps.

A typology of skills gaps that considers this discussion and captures the present understanding of the source of skills gaps is shown in Figure 2 and explained below:

A typology of the causes of skills gaps

In this figure, we advanced a typology of skills gaps that considers this discussion and captures the present understanding of the source of skills gaps from several national skills surveys.

Market and Institutional Failure Induced Skills Gaps: These are skills gaps which stem from market and institutional failures in the skills formation system. When facing difficulty in recruiting employees from the external labor market under current market conditions due to lack of required skills, work experience, or qualifications a company demands, firms engage in substitution behavior by hiring staff who require further training. Firms may also hire new entrants to the labor market who are apparently trained and qualified for occupations but who are subsequently found to still lack a variety of the skills required. Market and Institutional Failure Induced Skills Gaps are caused by

•Poor Skills Formation Policy: Government coordination of the skills formation system fails to link economic development with the evolution of education and training systems; ensure qualitative and quantitative supply-demand match between outgoing students and the needs of the labor market; facilitate regular, on-the-job training provision and  participation in skills formation by the business community; and address policy, informational, or financial sources of individual underinvestment in skills development or

•Education and Training System Misalignment: Accessibility, quality, and the degree to which education and training systems produce employable students are insufficient to prepare individuals with the skills, work experience, and qualifications to meet labor market needs or

•Insufficient Individual Investment: The many factors which can alter the expected return to particular skills or which signal sectoral growth or promise negatively impact individual skilling decisions.

Human Resources Management Related Skills Gaps: These are skills gaps which are a result of inadequate HR practices related to employee development, motivation, and retention. Human Resources Management Related Skills Gaps are caused by

•Insufficient Staff Development: Depressed levels or inadequately planned training and development that erode creation and production of firm competencies jeopardizing the application of workforce skills toward market-oriented business objectives or

•Poor Retention and Motivation Practices: HR practices that inadequately address employee retention or a misalignment of HR practices with sources of workforce motivation.

Structural Skills Gaps: These are skills gaps which are a result of strategic shifts in response to changing business environments that lead to a mismatch between current workforce skills and the requirements of employers. Structural Skills Gaps are caused by

•Strategic Shifts in Response to Changing Business Environments: Failure to increase and maintain workforce skills to build and renew firm competencies in response to changing business opportunities that may involve adjustments in company strategy, goals, markets, business models, products and services, working practices, or technology. Structural skills gaps can be viewed as a strategy-skills lag in which current workforce skills lag new or expanded skills required by alternative strategic directions associated with competency renewal. Causal ambiguity and environmental complexity makes it difficult for managers to determine the sufficiency of the current human resources pool relative to desired states of the human resources pool to achieve adapted or future business outcomes.

Transitional Skills Gaps: These are skills gaps attributable to the beginning of the employee-employer relationship whether due to recent recruitment or post-merger employee integration. Presumably transitory skill gaps are likely to decrease as employees complete induction training and gain confidence in their roles.

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With increasing attention on a growing “skills gap” in many countries, it is important to ensure that there is conceptual clarity surrounding the term. The term “skills gap” is often incorrectly used as a catchall term describing both quantitative shortages in external labor markets as well as qualitative skills deficiencies internal to the firm.

A multicountry, practice-based review of employer surveys reveals a distinction between skills deficiencies found in the external labor market (‘skills shortages’) and those applicable to a firm’s existing workforce (‘skills gaps’). Previous employer surveys conducted primarily in the UK define a skills shortage as an expressed difficulty in recruiting individuals from the external labor market under current market conditions with a particular skill set due a low number of applicants caused by least one of the following reasons: lack of required skills; lack of work experience a company demands; or lack of qualifications a company demands (Shah and Burke 2003; Paterson, Visser et al. 2008; Education Analytical Services 2010; Shury, Winterbotham et al. 2010). Because skills shortages apply to the external labor market while skills gaps apply internally to the firm, these survey approaches imply the two concepts of a skills shortage and a skills gap are separate and distinct phenomena.

The Inadequacy of the Pricing Mechanism in Solving Skills Deficiencies

The view that skills deficiencies are ephemeral and disappear as labor markets adjust is widely held (See for example Hay, Faruq et al. 2011). Underpinning this view is a belief that the pricing mechanism, exercised through expected wage returns and premia that motivate individual investment in particular types of skills and the ability of firms to increase extrinsic pay to obtain particular skills, leads to allocative efficiency within labor markets. However, persistent skills deficiencies over the last decade reported in several countries that began instituting national skills surveys in the early 2000s challenge the assumption that skill deficiencies are short lived and the effectiveness of the pricing mechanism in reducing the occurrence of deficiencies (Shah and Burke 2003; Paterson, Visser et al. 2008; Education Analytical Services 2010; Shury, Winterbotham et al. 2010).

The cobweb theory explains how labor market adjustments related to professions requiring training that delays labor market entry might mitigate the effect of the pricing mechanism on skills supply and complicate reaching market equilibrium. Shifts in the underlying supply of and demand for skills require time to reestablish market equilibrium due to the lag in time it takes to develop particular skills. For example, in analyzing the markets for lawyers and engineers, Freeman (1975; 1976) finds that the duration of the training period to obtain particular labor market skills and accompanying lag in labor market entry due to the training period can result in cyclical shortage-surplus cycles in professional labor markets. Freeman employs the cobweb model to show that supply of particular labor market skills is highly related to the economics of a profession, such as expected salary, and other forces that signal ongoing job opportunities and the state of the market such as R&D, output levels, and competition from others with similar skills. An important finding of Freeman’s model is that forces signaling professional opportunity and market health are more influential in motivating the supply of particular skillsets than salaries. Various factors are at play that signal increasing demand for a particular skillset, but the supply of individuals with those skills is delayed by the amount of time training to acquire a particular skills set takes. The time lag between the duration of the training period and labor market entry may potentially explain how labor market adjustment caused by adaptive expectations could potentially lead to endogenous cyclical cycles of skills shortages. While there is no similar theory regarding skills gaps, empirical studies also cast doubt on the pricing mechanism as a corrective measure to eliminate internal skills deficiencies. In skills surveys across a number of countries, firms consistently rank increasing pay or relying on the market mechanism amongst the least used measures to overcome skills gaps (Young and Morrell 2006; Management 2009; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010).

Given the questionable role of price adjustment in remedying immediate labor market skills deficiencies, such as skills gaps, ensuring conceptual clarity, understanding the causes and consequences, and considering potential solutions is critical. Rather than an ephemeral shock, skills gaps have been a persistent issue immune to corrective market forces that affect the workforce of firms in many countries.

Tahseen Consulting’s Related Work on Education and Skills Formation

Creating National Skills Formation for Knowledge-based Development

How Skills Gaps Impact Firm Performance in the Arab World

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Knowledge-based economic development has become closely intertwined with national competitiveness and economic policies that support integration and diversification, innovation, technology development, entrepreneurship, workforce skills development and job creation, adoption of high performance organizational structures, and ICT infrastructure development (Planning 2010). Through the engagement of international organizations such as the World Bank and the UN with the region, the concept of knowledge-based economy has taken on an expanded meaning in the Arab region. The Arabized concept of knowledge economy is also fused with other development challenges not part of the Western conception of the term such as large-scale education and training system reform; environmental sustainability; social and cultural development including issues surrounding identity, language, equality; political participation and reform; and healthcare reform (Program 2002; Program 2003; United Nations Educational 2005; Bank 2007; Foundation and Program 2009).

 

Influenced by the gradual adoption of knowledge-economy as a widespread regional policy goal beginning in the early 1990s and the work of international organizations, in January 2007 the Planning Council of Qatar and Qatar Foundation sought the assistance of the World Bank to perform a knowledge economy assessment and articulate a vision for Qatar. At the time, a background analysis for the World Bank report observed the following education and training issues “few links and formal relationships between the training institutions and the needs of the labor market; education and training institutions are highly separated with little coordination; no linkages between training and job career prospect; and most of the training centers lack human and financial resources. In general, there is a lack of an overall strategy for workforce development in Qatar (Institute 2007).”

 

The Qatar National Vision 2030 advances a broad vision for the education and training system: “Qatar aims to build a modern world-class educational system that provides students with a first-rate education, comparable to that offered anywhere in the world.” The National Development Strategy 2011-2016 describes the underlying thrust of the education and training system in both economic and socio-cultural outcomes. In terms of fostering economic development towards a diversified, knowledge-based economy, innovation in science, medicine, and industry is emphasized along with upgrading and deepening the education, knowledge, and skills of Qataris for increased private sector employment participation. In terms of catalyzing socio-cultural outcomes, the skills formation system is linked with outcomes  such as religious, moral, and ethical values, national identity, preservation of traditions and cultural heritage, a well-rounded and engaged citizenry, a cohesive, participatory society, improved decisions about health, marriage, parenting,  and social responsibility (Planning 2011).

 

Primarily receiving technical assistance for institutional capacity development as aid from international organizations, the Qatari government, through the Supreme Education Council, serves as the regulator, provider, and funder of the education and training system while playing a strong role in defining industrial economic development policy. Thus, the Qatari government is in a unique position of coordinating education and training outputs with economic development needs without relying on external financial assistance. In this respect, the Qatar National Vision sets three system-wide education and training policy objectives to achieve world-class standards:

Education and Training System Policy Principles in Qatar

These policy principles are at the heart of the advanced performance management framework for K-12 education system reform that aligns ministry and sector strategies with the development goals established by the Qatar National Development Strategy 2011-2016 and the Qatar National Vision 2030

By defining specific policy areas for education reform, a performance management framework was devised to track delivery upon goals set out in the National Development Strategy at two levels to ensure that  empirically supported socio-cultural and economic benefits attributable to education and training are achieved:

  • Policy-based key performance indicators measure system performance relative to the achievement of the overarching policy aims of quality, equity, and portability;
  • Output KPIs measure the effectiveness of the education and training system in terms of achieving academic, social, and economic outcomes which are precursors to the future development of Qatar.

Tahseen Consulting’s Related Work

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UNESCO’s 2012 Education for All Global Monitoring Report on Youth and Skills: Putting Education to Work cites Tahseen Consulting’s work on national skills formation and skills gaps in Latin America.

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Arab companies make up just 1% of the 4,650 organizations which are registered and have filed reports on the Global Reporting Initiative’s Sustainability Disclosure Database. Global Reporting Initiative registration and filing statistics point towards adoption of reporting standards in only a select few countries, primarily in the Gulf, in the oil and gas, construction, financial services, and telecom sectors and to a more limited extent in the government and healthcare sectors. Even with the growing acceptance of the Global Reporting Initiative’s standards, at least amongst large Arab companies, as a common reporting framework, how and what is being reported differs substantially between companies making the standards more a benchmark of content rather than a framework that enables cross organizational comparison of actual economic, environmental, and social performance. A list of the companies which have registered and filed at least one report is included at the end of this post.

The Dominance of Small and Medium Enterprises Suggests A Reason Why the Global Reporting Initiative’s Corporate Social Responsibility Reporting Standards are Not Widely Used in the Arab World

Though the reasons for the lack of adoption of Global Reporting Initiative standards in the region are unclear, the industrial structure of the region in which small and medium sized enterprises dominate economic activity is one plausible explanation. Much has been written about small and medium sized enterprise opacity in the Arab World stemming from weak financial infrastructure, lack of use of accounting and financial reporting standards, and lack of human resources to implement financial and accounting standards (see for example the 2011 report on the Status of Bank Lending to SMEs in the Middle East and North Africa Region or the reports of the intergovernmental working group of the United Nations Conference on Trade and Development on international accounting and reporting standards). The Global Reporting Initiative mission “to make sustainability reporting by all organizations as routine as, and comparable to, financial reporting” suggests a critical causal link between the adoption of financial and accounting reporting standards and corporate social responsibility reporting that allows us to conclude with reverse causal inference that widespread adoption of financial and accounting standards is likely to precede adoption of corporate social responsibility reporting in the region. In this way, the limited use of Arab small and medium sized of financial and accounting standards likely serves as a limiter for the adoption of corporate social responsibility reporting. This logic chain potentially explains why the Arab companies which have registered and have filed reports on the Global Reporting Initiative’s Sustainability Disclosure Database tend to be comparatively large, publically listed companies which have strong capabilities in applying international financial and accounting standards to regulatory filings.

A Rapid Approach to Appraising the Corporate Social Responsibility Initiatives of Arab Companies  

Given the scattered use of Global Reporting Initiative standards in the region, Tahseen Consulting has developed an Arab Corporate Social Responsibility Rapid Appraisal Diagnostic based on analysis of a representative sample of 128 regional CSR initiatives and previous literature. Our diagnostic is based on a matrix by which we assess corporate social responsibility initiatives along two dimensions, social and business impact, while balancing philanthropic aspirations with commercial objectives. We view social impact as a sequential path that ranges from charitable activities that are bound by the activities of social sector partners to social investments that facilitate social sector innovation and initiative scaling while building the capabilities of social sector institutions. Similarly we view the business impact of social sector investments as ranging from charity-based initiatives with little business impact to more transformative social sector investments that allow companies to influence social, political, and strategic business factors such as trained workers, R&D, supporting industries, quality of life, and infrastructure.

Tahseen Consulting has developed an Arab Corporate Social Responsibility Rapid Appraisal Diagnostic based on analysis of a representative sample of 128 regional CSR initiatives and previous literature. Our diagnostic is based on a matrix by which we assess corporate social responsibility initiatives along two dimensions, social and business impact, while balancing philanthropic aspirations with commercial objectives.

Our aggregate data analysis of publically available accounts of 128 of the region’s corporate social responsibility programs reveals several key findings about corporate social responsibility in the Arab World:

  • There are few programs that address social and business goals simultaneously
  • Most Arab companies have diffused, unfocused giving
  • Companies are offering small cash donations for operating expenses
  • The emphasis of many CSR programs is publicity, not social impact
  • There are many examples of cause marketing aimed at goodwill over social impact
  • There is very little partnership with other entitles that also have corporate social responsibility programs
  • Many companies support the same entities with little emphasis on innovation

An Example: Appraising the Corporate Social Responsibility Initiatives of Majid Al Futtaim Holding

Since 2010, Majid Al Futtaim Holdings, a large family-controlled retail and hospitality conglomerate based in the UAE with operations in several countries in the Arab region, has had a corporate social responsibility strategy in place. Based on publically available sources, Majid Al Futtaim Holding devotes approximately $7.4 million to corporate social responsibility annually which includes both cash and significant in kind donations of commercial space. Based on an analysis of the annual report for their property division which is likely indicative of the practices across other divisions, Majid Al Futtaim Properties has a number of corporate social responsibility policy aims but its current disclosures do not provide sufficient level of detail to adequately assess social impact of their programming or link their programs to the achievement of specific stated social aims. Based on press accounts, Majid Al Futtaim Holdings has approximately 31 corporate social responsibility programs in three focus areas: resource efficiency and sustainability, community and economic development, and employee wellbeing, attitude, and identification. These initiatives are targeted at customers, tenants and suppliers, local communities, and their employees. A list of their CSR initiatives is shown below.

Majid Al Futtaim Holdings Resource Efficiency and Sustainability CSR Activities

Resource Efficiency and Sustainability CSR Activities

Majid Al Futtaim Holding's Community and Economic Development CSR Activities

Majid Al Futtaim Holding’s initiatives are targeted at customers, tenants and suppliers, local communities, and their employees.

Majid Al Futtaim Holding’s Employee Wellbeing, Attitude, and Identification CSR Activities

Based on publically available sources, Majid Al Futtaim Holding devotes approximately $7.4 million to corporate social responsibility annually which includes both cash and significant in kind donations of commercial space.

Though we do not have sufficient information for a detailed social impact assessment of Majid Futtaim Holding’s corporate social responsibility initiatives, we are able to determine that a number of their programs are at the partner-driven stage or represent investments that might require work to more effectively engage the social sector to develop institutional capabilities and more innovative approaches to social challenges. Significant effort must also be placed on scaling innovative activities across the 10+ countries they operate in the region. We have included our assessment of Majid Futtaim Holding’s corporate social responsibility activities using the Arab Corporate Social Responsibility Rapid Appraisal Diagnostic below.

Arab Corporate Social Responsibility Rapid Appraisal Diagnostic for Majid Al Futtaim Holdings

Though we do not have sufficient information for a detailed social impact assessment of Majid Futtaim Holding’s corporate social responsibility initiatives, we are able to determine that a number of their programs are at the partner-driven stage or represent investments that might require work to more effectively engage the social sector to develop institutional capabilities and more innovative approaches to social challenges.

Arab Companies Which Have Filed Reports on the Global Reporting Initiative’s Sustainability Disclosure Database

UAE (28 companies)

Abraaj Capital

Abu Dhabi Gas Liquefaction Company

Abu Dhabi International Centre for Organizational Excellence

Abu Dhabi National Oil Company (ADNOC)

Abu Dhabi Tourism Authority (ADTA)

Abu Dhabi Water & Electricity Authority

ADCCI (Abu Dhabi Chamber of Commerce & Industry)

Aldar Properties

Borouge

CEMEX UAE

Department of Economic Development – Abu Dhabi

Department of Municipal Affairs, Abu Dhabi

Department of Transport Abu Dhabi

Dolphin Energy

DU

Dubai Customs

Dubai Properties Group

Emirates Foundation

Energy Management Services

Environment Agency Abu Dhabi (EAD)

Jordan Energy Management Services

Jumeirah Group

Metito

National Bank of Abu Dhabi (NBAD)

RAK CERAMICS

Sama Dubai

Sorouh

Zones Corp

 

Jordan (9 companies)

Arab Bank

Jordan River Foundation (JRF)

Nuqul Group

Aquaba Container Terminal (ACT)

Aramex

Electricity Distribution Company EDCO

Zain Jordan

Schema

Jordan Aircraft Maintenance (Joramco)

 

Saudi Arabia (7 companies)

Dr. Soliman Fakeeh Hospital

Majid Society

Saudi Aramco

The National Commercial Bank (NCB)

The Saudi Investment Bank (SAIB)

International Medical Center (IMC)

Zain KSA

 

Kuwait (5 companies)

Burgan Bank

Kuwait Finance Housing

National Bank of Kuwait

Agility

National Real Estate Company

 

Qatar (3 companies)

Qtel

RasGas

QAFCO

 

Oman (2 companies)

National Bank of Oman

Tawasul/Global Connections Center

 

Bahrain (1 company)

Gulf Petrochemical Industries Company

 

Palestine (1 company)

Paltel Group

 

Egypt (1 company)

SEKEM Group

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A global economic development narrative based on the transition to knowledge-based economies and accompanying high wage, high skill jobs emerged in the Arab World in the early Nineties very similar to that in the US. Schwalje (2011) shows that seventeen of the twenty-two countries in the Arab World have adopted development of a knowledge-based economy as a medium to long-term economic policy objective. The appeal of an economic development trajectory and policy prescription that promised high skills, high wage jobs was perhaps irresistible in a region facing a youth bulge in which the number of youth 18 – 24 is expected to grow to 88 million by 2030 representing approximately 20% of the population (Secretariat 2008).

The Embrace of Knowledge Economy as an Economic Development Strategy in the Arab World

Schwalje (2011) shows that seventeen of the twenty-two countries in the Arab World have adopted development of a knowledge-based economy as a medium to long-term economic policy objective.

Related Blog Post: In our blog post Knowledge Economy in the Arab World: The Arabization of the Concept of Knowledge Economy we discuss the historical origins of the concept in the region and why the majority of Arab countries have adopted this economic development trajectory in their national development strategies

Initiated under the patronage Zine El Abidine Ben Ali, the former President of Tunisia, the World Bank hosted a conference in 2009 that led to the ‘Tunis Declaration on Building Knowledge Economies.’ Referencing the need for the Arab World to create 5 million jobs per year for the next 20 years, the declaration draws a causal relationship between knowledge-based economic development and ensuing job creation which will create the need for increased supplies of high skill workers. The declaration implies that, assuming the Arab World can develop a  “solid education base, a dynamic information infrastructure, an effective innovation system, and a solid economic and institutional regime (Institute 2009),” economic diversification will lead to increased private sector job creation. Unfortunately, for  the 21 signatory countries (Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, United Arab Emirates, Yemen) many of these results have not materialized.

In addition to high skill, high wage job creation, however, the Arabization of the concept of knowledge-based economy infused economic development with a host of other development issues such as economic integration and diversification, innovation, entrepreneurship, education and training system reform, environmental sustainability, identity, language, gender equality, and political participation and democratic reform. As in the US, the importation of the knowledge economy concept to the Arab region was accompanied by a similar emphasis on the welfare of individuals being tied directly to their success in gaining and maintaining higher qualifications and skills which could be sold in the labor market to match high wage employment opportunities expected to be generated by emerging high skill, knowledge-based industries.

Related Blog Post: In our blog post Many Arab Countries Are Headed Towards Knowledge-based Economies.. But What are Knowledge-based Industries? we explore how the concept of Knowledge-based industries and economies lacks a clear definition. Defining the size and growth of knowledge-based industries is especially difficult in the Arab region. 

The concept of Knowledge-economy has helped to highlight and promote policy dialogue on key development challenges that the Arab World faces and brought coherence to a variety of socio-economic development discourses. While the Arab countries were good students, as evidenced by their embrace, implementation, and localization of reforms towards knowledge-based economic development, there is, however, little evidence that suggest meaningful job creation as a result of pursuing reforms towards knowledge-based economy.

Employment in Knowledge-based Industries in the Arab World

Over the last decade, human capital investments do not seem to have led to significant increases in job creation in knowledge-based industries. Employment rates in knowledge-based Industries in the Arab World have remained virtually constant.

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Registered Users is a Poor Proxy for Active Users

eBay is notoriously guarded about statistics on its user base. From 1996 to 2006, the company released statistics regarding its total number of registered users. Starting in 2001, eBay published a new “active user” metric which was defined as any user who had bid, bought, or sold in the trailing twelve month period. From 2001 to 2006, however, both the total registered number of users and the active user metric were published in official filings which provides an interesting insight into the number of registered users on an online marketplace relative to the number of users who actively use the site. In the case of eBay, on average 42% of its total registered user base actually conducted a transaction on the site annually based on 2001 to 2006 data. A perhaps disturbing finding is that the number of active users showed a declining trend over the few short years that both metrics were made public. This finding shows that publicized numbers of total registered users can be misleading if active users are in fact only a small portion of the registered user base. Since most of the online retailers in the Arab World are private companies, published statistics typically reflect total registered users.

eBay’s Registered Users Versus Active Users

Publicized numbers of total registered users can be misleading if active users are in fact only a small portion of the registered user base. Since most of the online retailers in the Arab World are private companies, published statistics typically reflect total registered users.

The Costs of Maintaining an Active User Base have Increased Dramatically

The data points above highlight two issues of potential concern to online retailers in the Arab World: In order to expand their user bases, they must appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods. At the same time, if consumers are not active on their sites they may be unable to gain efficiencies in operating costs and the costs of acquiring new customers which could adversely impact their businesses. In fact, an Elance posting from 2010 seeking a survey design consultant from Souq.com describes exactly the same issue unfolding in the region:

“One of the issues that Souq.com is facing and that we wish to solve through this study is the stagnation of repeat users. In the last year, we have noticed that if the number of registered users keeps going up, the number of repeat users is not. We are looking for explanations for this phenomenon and to find whether it is related to the brand, the services or the product (site) or a mix of issues.”

Turning back to our eBay example, we observe that sales and marketing expenses, for what eBay calls its “sustaining marketing phase” in which its primary objectives are to create a more managed brand message, acquire new users, and increase the activity of existing users, have increased 72% from 2001 to 2011. As of 2011, eBay spent $24.25 per active user on sales and marketing. However, while sales and marketing has increased dramatically, revenue per active user only increased 30% from 2001 to 2011. While sales and marketing expenses have grown, revenue per active user has exhibited decreasing returns to scale. This is a particularly important lesson for emerging online marketplaces in the region,  suggesting that the “sustaining marketing phase” to maintain an active user base is costly and requires ongoing spending that does not always lead to higher revenue, even for very large marketplaces.

The Costs of Maintaining an Active User Base have Increased Dramatically

While sales and marketing expenses have grown, revenue per active user has exhibited decreasing returns to scale for eBay. This is a particularly important lesson for emerging online marketplaces in the Arab region, suggesting that the “sustaining marketing phase” to maintain an active user base is costly and requires ongoing spending that does not always lead to higher revenue, even for very large marketplaces.

Will Surging Regional Internet Penetration Rates in the Arab World Lead to E-commerce Growth?

In the Arab World, increased internet penetration rates are often cited as a key driver of the potential of e-commerce in the region. However, this assumption ignores economic development trends in the region concerning the growth of middle class consumers over the last decade that heavily influence the buying power of the population in a number of countries.

While internet use increased 27 times to 82 million users over the last decade, the fastest regional growth rate in the world, regional per capita gross domestic product adjusted for purchasing power grew at an annual rate of only 4% to $8,507, with the strongest growth in the Levant and North Africa. However, with the region’s quickly growing population, this growth rate trailed all other developing regions of the world (Bank 2010). Although several of the Arab countries have placed amongst the fastest growing countries in the world, only 105 million, or approximately 30% of the population, are estimated as middle class based on a definition which includes the number of people with daily expenditures between $10 to $100 per day.

It is estimated that the Arab World represents only 6% of the world’s middle class, and spending represents just 4% of total spending by the world’s middle class. By 2030, the middle class is expected to grow to 234 million or 44% of the Arab population, representing 5% of the world’s middle class and 4% of global middle class consumption.  While such estimates are not exact, these figures suggest that large growth rates are slowly producing a growing middle class and eliminating rampant income inequality, but other regions like East and Southeast Asia have made huge gains compared to the Arab World (Secretariat 2008; Kharas and Gertz 2010).

The slow growth of the Arab World’s middle class, who are likely potential users of online marketplaces, makes the assumption that increasing internet penetration rates alone will fuel e-commerce significantly less convincing in the majority of countries in the region. It seems more probable that increasing internet penetration rates might drive registered users, but household income growth trends in a number of countries across the region will ultimately determine how active these users will be. The low level of middle income households in a number of countries in the Arab World suggests that revenue from active users may in fact be much lower in quantitative as well as transaction value terms than international benchmarks like eBay. The lack of a middle class in several Arab countries also suggests a potentially limited geographic target market in the region for online marketplaces.

Estimating the Number of Active Users on Souq.com and MarkaVIP

Based on the eBay assumption that an average of 42% of registered users are active users and publicly available press accounts of the number of registered users, we estimate that Souq.com has approximately 273,000 active users. This means that eBay’s user base is 154 times larger than that of Souq.com. Using the same assumptions, MarkaVIP, which recently hit the 2 million registered user mark, would have an estimated 840,000 users.  However, Groupon’s recent quarterly public filings suggest the registered to active user ratio for daily deal sites may in fact be as low as 20% of registered users with revenue per active customer in the low $70s range (about $26 higher than eBay per active user). Similar to eBay years ago, Groupon stopped releasing figures on its number of registered to active users in February. This means sites like Souq.com could have as low as 130,000 active users, and MarkaVIPs 2 million registered users would potentially be reduced to only 400,000 active users. Though many variables are unknown, it remains uncertain if these rather small active users bases can sustain viable marketplaces without consolidation.

Estimating the Number of Active Users on Souq.com and MarkaVIP

Based on the eBay assumption that an average of 42% of registered users are active users and publicly available press accounts of the number of registered users, we estimate that Souq.com has approximately 273,000 active users.

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