The start-up agenda develops traction

17 March 2019
Jarmo Kotilaine of the Bahrain Economic Development Board explains how the region's entrepreneurial agenda has evolved to focus on more productive sectors that offer attractive job opportunities

Entrepreneurship has established itself as an ever-more central priority for economic policymakers in the Gulf over the past decade. But the entrepreneurial agenda has also evolved. The erstwhile generic focus on new company formation has increasingly given way to a strong preference for dynamic start-ups.

Indeed, one of the key focus areas across the region in recent years has been investments in creating a holistic start-up ecosystem. This has involved initiatives ranging from events to electronic portals, as well as infrastructure facilities such as incubators and accelerators.

Funding solutions have also received a great deal of attention. Progress has been encouraging, with rapid growth in the number of new initiatives and start-ups.

Sector progress

So what exactly has changed? The initial entrepreneurship agenda was a driven by a cluster of ambitions linked to economic diversification and job creation.

On most indicators, the regional small and medium enterprise (SME) sector seemed to lag behind the global norm and a combination of awareness-building, mentoring and funding was used to encourage and popularise more participation in this area.

While much progress did indeed materialise, it was clear that the overwhelming majority of the newly established companies were micro enterprises focused on their domestic market.

Moreover, they had a strong preference for sectors such as retail, hospitality and construction (sub-contracting), which are typically characterised with relatively low levels of productivity.

Therefore, regional SMEs tended to rely heavily of low-cost labour, which had limited appeal for local job-seekers.

The focus of the start-up agenda, by contrast, is to identify and support dynamic, growth-oriented business that are unpinned by innovative ideas that cater to market gaps, as well as by modern technology.

These are companies with scalable business ideas, high levels of productivity and an inherent outward orientation. Their ability to contribute to job creation and diversification – ultimately, their economic impact – is typically far above the average of their SME peers.

Regional agenda

The start-up focus is reshaping the regional development agenda, in keeping with the specific needs and aspirations of such companies. There has been growing emphasis on regulatory innovation, novel funding solutions and a range of non-financial support mechanisms, such as export development.

But much like the companies it targets, the start-up development agenda is inherently very dynamic. After the initial wave of innovative energy, attention is beginning to focus on the actual impact of the steps taken to date.

This involves efforts to evaluate the performance of the existing initiatives with a view to zeroing in on particular pain points, where novel solutions can deliver a systemic impact. But the broader agenda also has to keep moving forward.

Building momentum

While good progress has indeed materialised, much of effort is required to further build on this momentum. The needs inevitably include new funding solutions, not least because – in spite of impressive advances to date – there are still elements of the entrepreneurial journey where funding remains more of hurdle than it should.

Developing a broader venture capital community will be critical for achieving sustainable growth in this space. After all, the ability of innovative companies to scale up for impact is critically linked to their ability to tap capital.

Bahrain’s Al-Waha $100m fund of funds is among the new innovations designed to alleviate such constraints while driving the growth of the venture capital (VC) cluster.

Socio-economic impact

Human capital remains a constraint across the region and the way this issue is tackled will have major implications for the broader socio-economic impact of the start-up endeavour.

To a large extent, the challenges in this area go back to some structural limitations of the regional education system, which are still generally deemed to attach inadequate attention to the so-called science, technology, engineering and mathematics (Stem) subjects. This is reflected even at the tertiary level, where a strong bias in favour of humanities and business studies persists.

Regional economies are responding to this with new, flexible training solutions and bespoke university programmes. But there is also recognition that, in order to succeed, this industry has to be competitive on a global scale.

Part of targeting human capital comes from bringing in entrepreneurs and qualified professionals from other jurisdictions. Critical preconditions include provisions such as 100 per cent foreign ownership and attractive residency rules, which are available in start-up hubs globally, from Silicon Valley to Singapore.

Regulatory framework

Regulation is of critical importance for start-ups. It should not only make it easy to set up and swift and painless to fail and move on. It should, moreover, be provided through an efficient, transparent and consistent digital interface, rather than government officials.

Given the dynamism and global mobility of innovative start-ups, they tend to gravitate toward jurisdictions where they feel welcome and where the regulatory environment can help them grow.

A number of regional economies, Bahrain included, have in recent years introduced new bankruptcy and insolvency laws that remove the traditional stigma and costs associated with business failures that, after all, are common among innovative start-ups.

The new laws typically permit restructuring, but also make it easier to wind up companies more quickly and at a lower cost, so as to enable entrepreneurs to move to new ventures with the benefit of more experience.

Regional outlook

Even as the GCC start-up narrative remains at a relatively early stage, the prospects are beginning to look increasingly promising. The region can capitalise on its attractive location and competitive connective infrastructure.

Regulations have evolved to accommodate investor aspirations and there is a strong commitment to make regulatory reform a key, dynamic competitiveness driver going forward.

Human capital is being developed through a range of solutions, while financial capital is beginning to flow in the direction of new, innovative ideas.

This is a particularly promising development for one of the world’s most capital-rich regions.

Aligning the regional capital markets with this compelling economic opportunity promises significant benefits for the broader economy and society.

But this project remains inherently a work-in-progress and the best rewards accrue to the nimblest, most dynamic players and jurisdictions. A commitment to ongoing review of progress and a pursuit of new opportunities is thus critical for longer-term success.

start-up columnist

About the author

Jarmo Kotilaine is chief economist at the Bahrain Economic Development Board

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