Starting a new business can be daunting, but if you’re in the right city for what you need and the right environment, you’re already off to a good start. The Middle East is home to millions of SMEs (small and medium enterprises) that see the region as a strong place to start and grow a business.

Whether in Dubai, Riyadh, or Doha, one of the biggest advantages for businesses in the region to thrive is that it benefits substantially from connections to “feeder” universities, incubators, accelerators, and VC funds that provide fledgling companies support to scale, drive innovation and thrive in their specialisms.

When it comes to development and expansion, the region’s success has been boosted by a range of dedicated support services, regulatory changes, and a robust  financial services sector. According to the IMF, SMEs in the Arabian Gulf contribute 15-30% of the GDP. 

“We are starting from a less mature base but rapidly catching up with the developed economies. The economic contribution of SMEs in the Middle East is sharply increasing, more so than in the OECD – the environment that created the SME productivity lag in the region is rapidly changing, and that presents many opportunities,” says Anshu Vats, Partner, and Global Lead of Public Sector and Policy Practice, Oliver Wyman.

HEALTHY ENTREPRENEURIAL ECOSYSTEM

The region is home to many unicorns (startups valued at over $1 billion) and reinforces just why the region is ideal for SMEs. The UAE aims to become home to 20 unicorns by 2031, and SMEs represent 94% of the companies and institutions operating in the country, contributing more than 50% to the country’s GDP. 

In October, the Entrepreneurial Nation 2.0 initiative was launched to develop more than 8,000 SMEs and startups by 2030 in the UAE. The first Entrepreneurial Nation initiative was set up in November 2021, with ten programs backed by digital tools and financing solutions and about $5.5 million provided by private-sector partners. 

The number of SMEs in Saudi Arabia jumped by 9.3% in the third quarter of 2022, driven by a healthy entrepreneurial ecosystem.

A report released by the General Authority for Small and Medium Enterprises, known as Monsha’at, showed the number of firms reached about 1 million in the three months to the end of September, up from 892,063 in the second quarter. The venture capital funding in Saudi Arabia in the first nine months of 2022 witnessed a 93% year-on-year increase totaling $820 million.  

Policy changes in the kingdom since 2016 are one of the reasons behind the surge in the number of SMEs. By increasing access to capital and offering increased upskilling, specialized training to help people grow their businesses, entrepreneurial culture has taken root in the kingdom.

In October, top oil producer Saudi Aramco launched the Taleed program to hasten the growth of SMEs in Saudi Arabia and boost their contribution to the country’s economic development.

In Qatar, SMEs represent 97% of registered private sector companies and account for some 15-17%of non-oil GDP. Qatar Chamber chairman Sheikh Khalifa bin Jassim Al Thani said SMEs are the backbone of any economy and drivers of economic diversification and GDP growth. 

To further boost SME performance, he stressed the need to encourage banks to offer solutions suitable for entrepreneurs who seek to expand their business or launch a new one and the importance of enacting legislation to protect, promote and empower SMEs alongside offering services to facilitate the launch of businesses and providing training services and incubation opportunities.

Qatar has launched various initiatives and incubation programs to support SMEs, including funding programs through governmental institutions and guarantee mechanisms such as Al Dhameen. 

A partnership between Qatar University and Qatar Development Bank has resulted in an initiative called Ma’an to support entrepreneurs. 

The Middle East has become the hub of global innovation, according to Ramy Jallad, Group CEO of Ras Al Khaimah Economic Zone (RAKEZ). “As countries across the region have ramped up their diversification strategies – moving away from a dependence on oil-based revenues to fuel modernization in mission-critical sectors such as fintech, manufacturing, transport, technology, retail, and real estate, among others – SMEs in the region have become a key catalyst to sustained and useful innovation.”

REGULATORY CHANGES TO BOOST SMEs

Recently the governments in the region have made targeted changes to regulatory, legal, and financial environments aimed at giving SMEs a substantial boost while also offering safeguards that foster innovation. “For instance, changes in insolvency laws and initiatives such as golden visas in the UAE. The latter has helped the region in offering a level of permanence to best-in-class talent. In addition, sovereign wealth funds in the region have started focusing on promising local and global firms. This is key in terms of creating a very attractive financing landscape,” says Vats.

According to analysts, one of the biggest positive changes for SMEs in terms of financing came in the form of VAT being launched in the GCC. 

“Whilst the tax provides a better fiscal outcome for the governments, another positive outcome of it has been fostering a larger formal economy with much more transparency. With increased transparency, the finance sector can  engage better. As now, with formal and transparent bookkeeping, banks can look at the cash flow and lend with increased confidence,” adds Vats.

EMPLOYMENT GENERATION

With public sector job creation plateauing, SMEs compose the next wave of employment opportunities in the region, and SMEs have become a major macroeconomic driver as a prime source of employment creation, says Jallad.

“Governments in the region have taken cognizance of their contribution to GDP growth. As such, Middle East nations have placed SMEs at the very heart of their non-oil economic growth strategies.”

The dedicated policies to invest in emerging technologies have also triggered innovation and job creation in the SME sector. Speaking at the Top CEO Forum in Dubai in May, Amr Khashoggi, chairman of Amkest Group, said SMEs create 80% of jobs in Saudi Arabia.

Within the UAE, SMEs account for 86% of the private sector’s workforce. Operating extensively throughout the rest of the GCC, too, they employ 43% of Oman’s workforce, 57% of Bahrain’s, 23% of Kuwait’s, and 20% of Qatar’s.

Good enterprise policies should support the growth of all firms – big, medium, and small, but, experts say, it is important to keep in mind that SMEs face challenges such as difficulty in accessing finance, the greater burden from regulatory frameworks, and cost disadvantage to expand in relation with bigger companies.

There’s a need for targeted policies for SMEs, not because they are small but because they are key engines of the economy.

“There are three major buckets of SMEs, and they need different approaches. Bucket one is consumption – retail, F&B, tourism, services, and so on; bucket two is largely around innovation – like startups and the knowledge-based economy, and in bucket three are the tier 3 to tier 4 suppliers to the dominant value-chains globally or locally,” says Vats.

“Bucket one is far more established in the region, but I think a key driver for sustained economic diversification in the Middle East lies in buckets two and three – innovation and the value chain centric,” he adds. “These categories of SMEs create the export potential for the countries and have a significant impact on economic sustainability.”

These two categories, Vats warns, must not be treated the same way as consumption-based SMEs because legal frameworks are not one-size-fits-all. “Take biotech, for example. This region could become a hub in the area, but we need to first focus on things such as data protection and IP rights, which will give operators more confidence to base their innovative operations in the Middle East,” adds Vats.