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Entrepreneurial Ecosystems in OIC Markets

IB Insights
By IB Insights
5 years ago
Special Report by IslamicBanker.com on Creating Vibrant Entrepreneurial Ecosystems In OIC Markets

Ajr , Ard, Arif, Dinar, Islam, Mal, Salam , Taslim

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4 years ago
Associate Partners

A very powerful report and a must read, especially for policymakers in the Middle East, North Africa and South East Asia. (edited)



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  1. Special Report February 2015 Creating Vibrant Entrepreneurial Ecosystems In OIC Markets Supported By
  2. Special Reports IslamicBanker .com provides the highest quality financial and economic intelligence on an industry-leading platform. Our Special Reports are comprehensive reports on the global economy, providing detailed analyses of special topics in Islamic finance and Organisation of Islamic Cooperation (OIC) countries. Produced throughout the year, these reports are available to read and download from our website on: islamicmarkets.com/publications Copyright 2015 © Islamic Banker Limited The contents of this publication are protected by copyright. All rights reserved. The information set forth herein has been obtained from sources which we believe to be reliable but this is not guaranteed. This publication is provided with the understanding that the authors and publisher shall have no liability for any errors, inaccuracies or omissions therein and, by this publication, the authors and publisher are not engaged in rendering consulting advice or other professional advice to the recipient with regard to any specific matter. Images courtesy of Shutterstock. 2
  3. Contents 4Foreword 6 Executive Summary 9 Section 1 : The Ecosystems - Pillars of the Ecosystems - Key Differences Across Countries - Incubators & Growth Power of the Crowd 21 Section 2: The Institutions - Government Role Creating - Entrepreneurial Universities - Growth-Oriented Enterprise Policies 29 Section 3: Trade & Market Access - Trade Liberalisation - Government Policies & Market Access - Infrastructure & Bureaucracy - Doing Business Reforms in OIC Countries 39References 3
  4. Foreword Daud Vicary President & Chief Executive Officer, INCEIF The OIC region is at a crossroads in addressing burgeoning youth unemployment and creating an environment for sustainable and inclusive growth. In October 2014, INCEIF, supported by IslamicBanker.com and Fajr Capital, hosted a plenary session at the 10th World Islamic Economic Forum (WIEF) in Dubai, on how entrepreneurs can address some of the most pressing issues facing the region. As a former banker, I see an urgent need to develop talent. People succeed or fail on talent; which is why addressing skills shortage and creating an ecosystem that supports small businesses must be one of our top priorities. With the global economic outlook remaining uncertain, the OIC region needs its own instruments and levers to spur economic development. In the long term, this development can only be obtained by sustained rise in productivity. And policy makers realise that to achieve these gains in productivity, they must foster an entrepreneurial environment. From Istanbul to Kuala Lumpur, governments are playing an increasingly active role in encouraging small businesses to set up operations and thrive. Hence, the publication of this report is extremely timely. Its findings - especially on building human capital, accessing markets, role of academia and government policies - can form a framework for creating vibrant entrepreneurial ecosystems across the region. 4
  5. Shakeeb Saqlain Chief Executive Officer , IslamicBanker.com The American economist, Paul Krugman, once noted that countries don’t compete - firms compete. Indeed, at the heart of every prosperous and vibrant economy are firms - small and large - that power development, create jobs and are a source of innovation. The findings of this report show how creative and energetic entrepreneurs across OIC markets are leading the charge in transforming their economies. But they face growing challenges in terms of financing, setting up, getting their products to the market and recruiting talented people to sustain their businesses. In the right environment, these small firms will eventually become large and dynamic businesses, playing a central role in economic development and prosperity in the region. We are extremely pleased to present this special report on creating vibrant entrepreneurial ecosystems in OIC countries, following the plenary session held during the World Islamic Economic Forum (WIEF) in October 2014. We hope that the ideas noted here will act as a guide for policy makers and industry leaders to unleash the full potential of startups and high growth firms. 5
  6. Executive Summary The OIC countries have more people under the age of 24 years than anywhere else in the world . This huge potential workforce can drive innovation and development. However, many observers remain concerned, as the economic centre of gravity continues to shift away from the OIC markets. The dilemma facing the whole region is how to create more jobs, leading to sustainable development. However, governments must turn their large youth labour force into an asset, instead of a social obstacle. The youth in OIC markets are dynamic, digitally empowered and tech savvy. By fostering an entrepreneurial climate, policy makers can create a more sustainable local economic environment. And as these startups develop into small and medium enterprises (SMEs), they will not only power future growth and employment in the region, but also act as a source of innovation and progress. The purpose of this report is to understand what drives vibrant entrepreneurial ecosystems and how they can be created in OIC markets. The report is structured around three key aspects, as shown below. 1. The Ecosystems What are the key pillars of entrepreneurial ecosystems and which aspects of these ecosystems are most significant to entrepreneurs? 2. The Institutions What role can the government and academia play in supporting entrepreneurial ecosystems? How can policy makers identify and allocate resources to industries with the most potential? 6
  7. 3 . Trade & Access to Markets How can these institutions encourage trade and exports? How can new startups and high growth firms reach a wider market? The key findings of this report are as follows: A. Development of Talent & Creating Entrepreneurial Universities In some of the largest OIC economies, there is significant dependence on the recruitment of expatriates to fill key positions. Over 90 per cent of Gulf CEOs, and 66 per cent of MENA CEOs, rely on expatriates to fill important positions. In order to develop sustainable entrepreneurial ecosystems, talent and people development should be conceived as a long-term strategy, ingrained in the daily operations of companies. Moreover, there is a strong need for OIC countries to develop knowledge based economies, with universities taking the lead in supporting policy makers. B. Differences Across Countries Governments must take into account local environments and differences across countries. What works in Dubai, might not work in Dhaka. Entrepreneurial ecosystem develop in phases, with the level of progress depending on the existing institutional set up, including whether there are existing technology clusters in the country. 7
  8. C . Supporting Women Entrepreneurs One of the biggest challenges facing OIC countries is providing support to women entrepreneurs and in this case, governments will need to consider wider range of policies. For example, in Tunisia, only 13 per cent of entrepreneurs are women, with many highlighting issues such as: access to information; training; and like their male counterparts, capital, is one of the major barriers. D. Trade & Commerce Analysis shows that tariff and non-tariff barriers between OIC member states have weakened regional cooperation, and limited market access for entrepreneurs. Barriers must be structured so that entrepreneurs across the region have enough room to thrive. 8
  9. 1 The Ecosystems Pillars of the Ecosystems Employees , Human Capital & Education Key Differences Across Countries
  10. The OIC Ecosystems Overview of OIC Markets With 57 member states , OIC market is the second largest intergovernmental organisation after the United Nations. Founded in 1969, OIC countries represent a diverse economic area, with a trading region spanning from Indonesia to Morocco. 1.1 Organisation of Islamic Cooperation (OIC) Countries FOCUS: Organisation of Islamic Cooperation (OIC) Countries 10
  11. Section 1 | The Ecosystems Although the region accounts for 20 per cent of the world’s population, its share of Gross Domestic Product (GDP) is much more modest at 8.6 per cent in 20121. The economic disparity and heterogeneity of OIC countries is further illustrated by GDP per capita figures, which range from as low as $415 in Niger to as high as $93,714 in Qatar, according to data from the World Bank. OIC Structure The OIC structure is somewhat similar to the United Nations’ structure, with initial formation based on common political interests, in the late 1960s. However, economic and trade integration has increasingly become more important. The Committee for Economic and Commercial Cooperation of the Organization of the Islamic Conference (COMCEC) started working on a Trade Preferential System (TPS) as early as 1981. More recently, the formation of the International Islamic Trade Finance Corporation (ITFC) in 2008 aims to further bolster trade and economic progress in the member states. However, intra-OIC trade remains stubbornly below 20%, compared with intra-European Union trade touch- ing almost 60%, with delays in operationalisation of these trade agreements2. Furthermore, there is deep concentration of trade by country and product. The top ten countries account for over 70% of intra-OIC trade, with UAE, Turkey and Saudi Arabia leading the way. Significantly, exports are heavily concentrated in primary products like oil, natural gas and metals, with technology intensive manufacturing remaining flat3. According to COMCEC trade liberalisation continues to be one of the major challenges facing OIC countries, with 8 OIC Member States ranking in the bottom 20 countries that apply the highest average tariffs. The good news is that there are some leaders in trade liberalisation within the OIC. Countries such as UAE, Qatar, Oman, Malaysia and Indonesia having lower tariffs than the World Trade Organisation’s (WTO) average. However, there is great disparity in cost of trade, with transport costs for Middle Eastern countries higher than the global average. 11
  12. Section 1 | The Ecosystems Economic Integration entrepreneurial ecosystems as4: “Entrepreneurial actors, organisations (e.g. firms, venture capitalists, banks), institutions (universities, public sector agencies) and entrepreneurial processes (e.g. the business birth rate, numbers of high growth firms, levels of ‘blockbuster entrepreneurship’, number of serial entrepreneurs, degree of sellout mentality The success of these negotiations and further economic integration is key to the future of the OIC and the wider region, for two main reasons. Firstly, stronger economic relationship can lead to greater political unity over some of the most pressing issues facing the region, giving it a louder voice on the international areExhibit 1.2: Entrepreneurial Econa. systems Pillars Secondly, boosting trade and creating an environment for sustainable economic growth will benefit the people of the region and provide an opportunity for jobs and prosperity to the fast-growing youth population. The key growth areas of the OIC region include: intra-OIC trade; Islamic finance market; halal food and lifestyle industry; clothing, fashion and cosmetics sector; media and advertising industry; and pharmaceutical industry. Defining Entrepreneurial Ecosystems Source: World Economic Forum Report (WEF), 2014 within firms and levels of entrepreneurial ambition) which formally and informally coalesce to connect, mediate and govern the performance within the local entrepreneurial environment” The Organisation for Economic Co-operation and Development (OECD), defines 12
  13. Section 1 | The Ecosystems “Accessible markets with revenue-paying customers are the lifeblood of all for-profit companies.” “For early-stage companies... as the size of their accessible market increases, so does their ability to build their revenue base.” Developing Entrepreneurial Ecosystems The main rationale for developing any ecosystem is that they allow for better targeting of policies, supporting entrepreneurs in high-growth industries. This is grounded on the understanding that economic activity generally clusters around geographical areas. 38+20+70+55 Exhibit 1.3: Supply of Qualified Labour 70% 55% 38% 20% MENA Gulf Levant North Africa Source: PWC, Arab Human Capital Challenge The challenges facing entrepreneurs in the OIC countries are immense. Governments, policy makers and regulators in these markets have a key role to play in developing the framework for entrepreneurs to thrive. The above pillars of the ecosystem capture the areas of focus for government policy. Access to markets The entrepreneur’s journey starts with an idea, which travels through various stages, from a few lines of code to shipping the product to customers. The effectiveness of this process to a large extent is determined by the ecosystem. Research has shown5 there are eight main sources of an entrepreneurial ecosystem. These are shown in Exhibit 1.2. In Pakistan, the 2nd largest OIC country by population, only 11 per cent of Pakistanis have internet access, according to the World Bank. Moreover, those with access to the internet are reluctant to pay for goods and services online, with one of Pakistan’s most popular site’s Rozee.pk noting that only 10 per cent of customers choose to pay online. This story is repeat- 13
  14. Section 1 | The Ecosystems ed in many OIC countries. The Middle Eastern countries Egypt, Lebanon, Syria and Jordan are all ranked below 110 countries in terms of internet penetration. This lack of infrastructure and development hinders the work of entrepreneurs, impacting how quickly and deeply they can access the market. Access to markets is central to the development of entrepreneurial ecosystems. Hence this section is explored further in Section 3. employ female workers, but are unable to do so because of constraints imposed on employers in relation to logistical issues, special entrance, seating arrangements, separation etc. making it harder to in fact hire females” said Mr. Salah A. Al-Afaliq, Managing Director & Chief Executive Officer, National Trigeneration CHP Company, Saudi Arabia, in a joint PricewaterhouseCoopers (PwC) and Mohammed bin Rashid Al Maktoum Foundation report6. Exhibit 1.4: Dependence On The Recruitment Of Expatriates To Fill Key Positions Source: PWC, Arab Human Capital Challenge Employees, Human Capital & Education With record youth and women unemployment levels, the North Africa region has the world’s lowest employment to population ratio. The problem seems to be compounded in the more conservative OIC markets. “We would like to Whilst appreciating the drive and passion of the youth, leading entrepreneurs have noted recruits missing basic core competencies. For example in the Gulf region only 20 per cent of CEOs surveyed agreed that there was sufficient supply of employees with the right skill set, which leads to recruitment of more expatriates in senior roles. Remarkably, over 90 per 14
  15. Section 1 | The Ecosystems cent of Gulf CEOs, and 66 per cent of the Middle East and North Africa (MENA) region CEOs, rely on expatriates to fill important positions in their countries, as shown by Exhibit 1.4. Some analysts are worried that this could have longterm political, economic and social consequences. Taking note of the problem, Gulf countries have introduced compulsory nationalisation policies, with mixed results. In Saudi Arabia, over 400,000 people are reaching working age every year. To underline the scale of the problem, the country only has 800,000 people in the private sector7. It is clear that the Saudization, or any other nationalisation policies being implemented in the region are not enough. The GCC region and, OIC countries more generally, must invest in their education institutions to train future talent. And these countries need to create a conducive environment for entrepreneurs to innovate and enter new markets. Firms and entrepreneurs are concerned that if labour market policies become more restrictive in OIC countries, it could further undermine future business opportunities. In fact, one of the reasons why the United Arab Emirates has experienced rapid economic development (and increased its position in the United Nation’s Human Development Indicators to 40) is because of it implemented flexible labour market policies during the 1980s to 1990s. There are two important lessons for the wider OIC region here: 1) training and development of the youth and professionals, so they can compete with the brightest and the best; and 2) Allowing entrepreneurs to hire the best from anywhere in the world, so they can create the most competitive businesses, which then go on to employee these young professionals. Finance and Funding Funding for startups and entrepreneurs is crucial to get ideas off the ground. The OIC region is diverse, with countries at various stages of development. Policy makers must recognise that different businesses have different funding requirements such as financing from friends and family; debt facilities from 15
  16. Section 1 | The Ecosystems banks; research and development support from the government; capital in return for equity; crowdfunding and more. For the region to develop entrepreneurial ecosystems, it must cater for the various types of firms and address their unique requirements. The fast developing startup community in Pakistan demonstrates how availability of funding can lead to greater scalability and sustainable growth. To provide startups a helping hand, a group of entrepreneurs and developers came together to launch Invest2Innovate, providing support to early stage startups. Importantly, Invest2Innovate works actively with other stakeholders to improve the entrepreneurial ecosystem in Pakistan. Wamda, one of the largest platforms for entrepreneurs in the MENA market, has launched the Wamda Capital Fund, investing in early stage startups in the region. These initiatives are central developing vibrant entrepreneurial ecosystems in OIC countries. However, linking the funding to the stage of business development must be considered. At the start-up stage, financial support is more important to establish a foothold in the market, but as the firm grows, the need for business mentoring and guidance becomes more pressing, in order to rise above the competition. In particular, some research indicates that providing high-potential firms with funding (past the start-up stage), is ineffective, as “new ventures must be exposed early to the rigours of the market …. to ensure that entrepreneurs develop toughness and resourcefulness…. In fact, the hardships of resource-scarce, even hostile environments often promote entrepreneurial resourcefulness.”8 Hence there is a need for balance. This is one of the principles behind Dubai’s Silicon Oasis Founders (SOF), a leading incubator in the MENA region for “high potential ventures in the seed stage.” Recently, Cashnomix, a startup at the Dubai Technology Entrepreneurship Centre (DTEC), was acquired by Singaporean company, ApexPeak, illustrating that with the right policies and investment the region can establish a thriving ecosystems that can hold their weight on a global level. 16
  17. Section 1 | The Ecosystems Key Differences Across Countries Becoming an entrepreneur in any country can be influenced by a number of different factors, such as: age; gender; marital status; capital assets; income; health; Although these indicators vary massively around the world - especially among countries as diverse as the OIC region there are some common and unexpected themes of developing, as shown in Exhibit 1.5.9 Exhibit 1.5: A culture of entrepreneurship entails multiple aspects Source: Aamir A. Rehman, Fajr Capital Advisors and more. Additionally, macro-level factors can have a significant bearing on running a business, including: culture of the country; political, legal and regulatory frameworks. Higher levels of uncertainty can create opportunities for young entrepreneurs by developing more robust and vibrant small firms. Naturally, there are certain limits to government legislation and policy makers must consider “post-mate- 17
  18. Section 1 | The Ecosystems rialism”10, a term developed by political scientist Ronald Inglehart, where societies value immaterial life-goals above material security. Certainty, these values have a fertile ground within the OIC region, where religion has deep historical roots, with Islamic principles of social justice, modesty and asceticism playing a key role in business and commerce. Entrepreneurs If entrepreneurship is a catalyst for sustainable economic growth and develop- ment, then entrepreneurs are the spark for global change. Around the world considerable resources and effort is going into creating environments where entrepreneurs and businesses can thrive. Exhibit 1.6 shows the level of entrepreneurial initiatives by country. Enterprise and entrepreneurs are the twin engines of growth, which drive change and innovation. The word “entrepreneur” can mean different things to different people. For the purpose of this report, we will be using the below defini- Exhibit 1.6: Number of Entrepreneurial Initiatives by Country Source: World Economic Forum, Booz & Company 18
  19. Section 1 | The Ecosystems tion, (from Dorf and Byers in 2007): “An entrepreneur is a person who undertakes the creation of an enterprise or business that has the chance of profit (or success).” Entrepreneurs exist because of three main reasons, according to a World Economic Forum (WEF)11: Although certain skills of entrepreneurs are innate, entrepreneurship cannot take place in a vacuum. Entrepreneurs exist in the context of their environment and culture - this mixture of their geography (transport; labour; technology infrastructure; accessible financing etc.) is referred to as the “entrepreneurial ecosystem”. a) Innovation: where entrepreneurs have a new or an original idea to address an unmet opportunity. b) Opportunity: with entrepreneurs spotting a gap in the market for a good or service. This need to address market gaps leads to innovation and development in countries. c) Necessity: entrepreneurs have been forced due to their local environment to become self-reliant and manage their requirement for food, shelter and security. Which aspects of an entrepreneurial ecosystem are most significant to entrepreneurs? 19
  20. Title 20
  21. 2 The Institutions Government Role Creating Entrepreneurial Universities Growth-Oriented Enterprise Policies
  22. Section 2 | The Institutions T he focus of western governments on entrepreneurship can be traced back to the 1980s, when deregulation and privatisation of public companies moved up the political agenda. There were two implications of this shift in focus. Firstly, large firms started to face more competitive markets forces, with increasing threat from global players entering their “home” markets. This was most acutely felt in the manufacturing industries in Europe. Secondly, smaller and more nimble firms became increasingly more important to policy makers, as economies became information and knowledge based. The trend of “entrepreneurial ecosystems” in OIC countries is relatively recent, but the roots of trade and commerce in the region are historic, with the ancient silk route discovered as early as 1,000 years BC12. As James Caan, a leading UK-based businessman stated at the Euromoney Islamic Finance conference (2015), “entrepreneurship was created in the Middle East”, but today more needs to be done. The region is a diverse and a vast community, representing a population of over 1.6 billion people, spread over one sixth of the world area. The role being played by policy makers today is extremely diverse and is shaping the entrepreneurial ecosystem. Although there is ongoing debate on how effectively the government can facilitate the creation of entrepreneurial ecosystems, there can be no doubt that the right government policies which support high-growth and sustainable companies can transform the entrepreneurial landscape in the region. The relationship between the government, academic institutions and local entrepreneurs is of significant importance in formulating these policies and developing vibrant ecosystems. The question that some analysts are asking is: can entrepreneurship be taught? And if it cannot be taught, then should government policy instead focus on building sustainable institutions, rather than creating more entrepreneurs? The Role of Government Policy In theory, some economists note, the supply of entrepreneurs in a given country is fixed13 over a period of time and what matters more is that governments 22
  23. Section 2 | The Institutions develop institutions that support entrepreneurs. For much of the last century industrial policy makers around the world have been preoccupied with large scale production and the benefits of economies of scale. This included hands on approach in terms of regulation, antitrust laws and nationalisation of strategic companies. Entrepreneurship-specific policies was generally excluded from these considerations. From around 1980s14 onwards, with increasing enthusiasm, governments have developed tools and poured resources into creating entrepreneurial ecosystems. This included privatisation of nationalised firms and deregulation of markets. This shift in policy gained further momentum, as leading economies become knowledge and information-based. What can policy makers in OIC countries learn from this experience? The first lesson here is that governments must take into account local environments and cultural norms. What works in Dubai, might not work in Dhaka. Entrepreneurial ecosystem develop in phases, with the level of progress depending on the existing institutional set up, including whether there are existing technology clusters in the country. One good recent example has been Indonesia’s Masterplan for the Acceleration and Expansion of Economic Development 2011-2025, which aims to transform the country into one of the top ten economies in the world, within 14 years. The economic plan, which is centered on the country’s key strengths - abundance of natural resources, geographical location, large population or purchasing power - aims to develop several industry clusters to power development in coming years. Notably, some countries - such as Jordan - which have a high number of startups, still experience scarcity when it comes to converting these small businesses to large, high-growth companies. The experience from non-OIC markets sheds important light on this issue. Both Denmark and the Netherlands have developed extensive frameworks for supporting startups, leading to some of the most active entrepreneurial climates for 23
  24. Section 2 | The Institutions startups. However, neither of countries have translated this success into larger pool of high-growth firms. Crucially, findings show that the environment for start-ups and high-growth firms are different. Each type of firm needs support that is unique to its requirements. Small firms need funding to get their ideas off the ground, whereas larger, high-growth firms need guidance and strategic insights. Ultimately, policy prescriptions must be mainly bottom-up, involving government and non-government participants15. Women Entrepreneurs One of the biggest challenges facing OIC countries is providing support to women entrepreneurs and in this case, governments will need to consider wider range of policies. For example, in Tunisia, only 13 per cent of entrepreneurs are women16, with many highlighting issues such as: access to information; training; and like their male counterparts, capital, is one of the major barriers. The issue of “access to information” seems to be a common problem across OIC, as starting businesses in many countries is a long and drawn-out process. Again in Tunisia, 57 per cent of women found it difficult to get information on setting up a new business, compared to only 12 per cent for men. Governments can facilitate in creating an entrepreneurial environment through implementing policies which make it easy for entrepreneurs to set up businesses and access resources. Exhibit 2.1 shows examples of traditional and growth-oriented entrepreneurship policies. However, a wider approach is needed, including: engaging with leading universities in the region; setting up incubators that are supported at the private and public level. This collaboration between the public sector, academia and industry will lay a strong foundation in creating sustainable economic development. Creating Entrepreneurial Universities Entrepreneurs are innovators, by nature. They create jobs and develop products that can transform markets. Most importantly, entrepreneurs are a source creativity and development for a country. How can we measure this level of 24
  25. Section 2 | The Institutions creativity or innovation in a country? And what role can universities play in boosting the level of entrepreneurial activity? Patent filings are a good barometer of Not all start-ups have the same ‘economic value’. Policy makers must develop instruments that support highgrowth start-ups. Exhibit 2.1: Traditional and Growth-Oriented Entrepreneurship Policy Traditional Enterprise Policies Growth-Oriented Enterprise Policies Main unit of focus is on specific actors, such as individuals, entrepreneurs, geographic clusters of firms Main unit of focus is on specific types of entrepreneurs, networks of entrepreneurs or ‘temporary’ clusters Policy objectives is generate more entrepreneurs and grow more new ventures Policy objective is to focus on the high potential or ‘blockbuster entrepreneurs’ with the largest economic potential Policy actors are targeted by specific focused Policy is targeted at connecting components within interventions aimed at parts of entrepreneurial ecosystems to enable the system to better function (i.e. systems (i.e. non-systemic) systemic) Main forms of assistance are ‘transactional forms Main forms of assistance are ‘relational forms of supof support such as grants, tax incentives, subsidies port such as network building, developing connections etc. between entrepreneurial actors, institutional alignment of priorities, fostering peer-based interactions Main push by policy makers is to generate and Recognition that different businesses have differpromote entrepreneurial sources of finance aimed ent funding requirements such as debt finance, peer at start-ups, particularly in the form of venture to peer, crowdfunding etc. As businesses grow and capital and business angel funding upscale different firms require access to a ‘funding escalator’ and ‘cocktails’ of different funding sources The generation of new firm-based intellectual Focus on developing innovation systems and fosterproperty and innovation was seen as vitally iming connections with customers, end users, suppliers, portant. The focus was very much on R&D and the universities etc. Increasing recognition of unprotected protection of intellectual property rights. Strong and ‘open’ sources of innovation. Innovation is porous encouragement to technology and innovation transcending many sectors and industries - both new within high-tech sectors and traditional The level of policy making is mostly ‘top down’. The bulk of systemic policies are enacted at the regionThe implementation of policy is mostly underal or local level. Multi-scalar policy frameworks are taken at national level but some initiatives are emerging. devolved. Source: OECD, Entrepreneurial Ecosystems And Growth Oriented Entrepreneurship, 2014. 25
  26. Section 2 | The Institutions the entrepreneurial activity of a country and its businesses. And the numbers make extraordinary reading. Almost 95 per cent of global patent filings are from only 15 countries. According to data from Fajr Capital and the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC)17, out of the total patent filings 2.35 million patent filings around the world, between 2000 to 2012, only 34,933 are from OIC member states. That is, the region that represents almost a quarter of the world’s population only accounts 1.50% of its patents. Even within the OIC region there is great disparity: out of the 34,944 patent filings, almost 70 per cent of these were from just four countries: Malaysia; Iran; Indonesia; and Turkey. Writing in the Jakarta Post, Nick Redfearn and Richard Litman note18: “This asymmetry in the global use of the patent system may explain the deficit of knowledge based economic growth found throughout the developing world.” Growth in patent filing can lead to sustainable economic development and cre- ation entrepreneurial ecosystems. There is a strong need for OIC countries to develop knowledge based economies, with universities taking the lead in supporting policy makers. Indonesia’s economic Masterplan recognises the development of University research centres to encourage innovation in the country. However, the country has one of the lowest research and development (R&D) expenditures in Asia-Pacific Economic Cooperation (APEC) region, with only 0.08 per cent of Gross Domestic Product (GDP) spent on R&D, compared with over 4 per cent in South Korea. What role can universities play? As noted earlier in the report, with a rapidly growing youth population, higher-education in OIC countries is facing extraordinary challenge. Universities that have entrepreneurship at their core will embrace graduate entrepreneurship and provide support to young students on setting up businesses, applying for funding and getting talent. Universities must become places where new and innovative ideas are incubated, breakthrough technologies are explored and then taken to the market. For example, a recent survey 26
  27. Section 2 | The Institutions shows that almost 40,000 companies can trace their roots to one institution in the United States: Stanford University. Incredibly, these companies have created over 5.4 million jobs and global revenues of $2.7 trillion, according to research from Sequoia Capital19. This is the power of an entrepreneurial university. A blanket policy focus on start-ups is not always necessary. Governments in OIC markets need to adopt growth-oriented entrepreneurship policies (Exhibit 2.1) that support start-ups that have potential. To place universities at the heart of entrepreneurial ecosystems in OIC countries there are six key success factors: 1) faculty and university leadership and vision 2) engagement with industry and sponsorship; 3) long term commitment; 4) access to significant financial resources or government support; (5) curriculum and programs that support entrepreneurship; (6) collaborating with students and young professionals in taking ideas to the market. These are some of the key factors that underpin the success of university-based entrepreneurial ecosystems, like Stanford University, or University College London (UCL) in the United Kingdom. The challenge facing OIC countries is to replicate this model on a local level, where companies and people can thrive. 27
  28. 3 Trade & Market Access A remarkable rise in Trade Liveralisation wealth Government Policies & Contribution of the Market Access developing world Infrastructure The family business
  29. Section 3 | Trade & Market Access T he OIC was founded with the aim of achieving “economic integration leading to the establishment of an Islamic Common Market” (ICM), based on trade liberalisation20. The role of start-ups and high growth firms is central to achieving this aim. These firms are creators of wealth, employing people, generating competition and breaking barriers to market entry. ened regional cooperation. Economist Kabir Hassan states21, “countries with unstable and narrow export bases offer little encouragement to potential regional partners for any long-term economic relations. Similarly, their dependence on non-member countries, both for exports and imports, tends to marginalize their relationship with the OIC member countries”. When reviewing the current trade structure of OIC state members, relative to trade liberalisation, it is quite obvious that members must enhance their economic cooperation. Barriers such as tariffs, quotas and other non-tariff barriers (transport costs, linguistic and institutional differences) must be overcome so that entrepreneurs across the region have enough room to thrive. This will result in economic cooperation and increase in intra-OIC trade. Exhibit 3.1 shows how cost of starting a business in the MENA region compares to the OECD. Agriculture is one of the many industries that has the potential to generate opportunities for entrepreneurs. Analysis shows that labour is shifting out of agriculture and into other sectors22. Yet OIC countries have the highest percentage of land used for agriculture, 44.5 per cent, which is more than the rest of the world at 37.5 per cent23. With the correct framework and policies, intra-OIC trade could improve significantly. This will not only lead to more jobs, but also increase innovation. Recent analysis shows that OIC state members do not benefit as much as rest of the world from trade liberalisation undertaken within the region. The tariff and non-tariff barriers have also weak- A case study by COMCEC examines the impact of market access for farmers in OIC countries24. 37 per cent of the population in OIC countries rely on farming as their livelihood, so the development of infrastructure and access to market is 30
  30. Section 3 | Trade & Market Access Exhibit 3.1: Cost and Difficulty of Starting a Business Source: World Economic Forum, Doing Business Reports; Booz & Company analysis vital. The expansion of infrastructure aims to improve and strengthen supply chains among farmers and markets. But in order to increase the reliability of supply chains, investment should also be directed towards logistics. For example, the improvement of telecommunications will allow farmers to have access to the latest information essential for business, such as prices and distribution. Latest telecommunication technology will also allow farmers to have access to information on financial and agriculture ad- vice, leading to a more conducive environment for entrepreneurs. Further, as noted by COMCEC an alliance of small farmers could provide more opportunities for farmers: “A four-step approach that organizes farmers, links them to markets, provides technical assistants and provides production investments, can be effective.” 31
  31. Section 3 | Trade & Market Access Islamic Common Market and ultimately, this is the aim of the OIC. Could the establishment of ICM benefit and boost the trade between OIC countries? The North American Free Trade Agreement (NAFTA) is now one of the largest free trade zones in the world. The treaty between Canada, the United States and Mexico enhanced trade and economic opportunities for the region. The trade between the countries accumulates to US$2.6 billion on a daily basis, with employment increasing by 23 per cent or 39.7 million jobs25. An Ernst & Young discussion document on G20 Entrepreneurship Barometer for tax and regulation notes the importance of entrepreneurs having communication with regulators and policy makers:26 Policies The reason for the success of NAFTA is due to the simplicity of procedures and the trade friendly regulations. Similarly, OIC members should simplify procedures and increase regulatory standards to help protect exporting entrepreneurs. More importantly, members countries should implement policies specific to their own country needs, rather than having standard set of policies What NAFTA essentially did was give entrepreneurs and businesses a much larger access to markets by reducing barriers; “Entrepreneurs want more of a say in defining regulation, but they lack the lobbying resources of large companies. By listening to entrepreneurs through forums and other feedback mechanisms, governments can do more to ensure entrepreneurs are not overlooked. In this way, governments can also minimize the impact of unintended consequences from new rules.” Infrastructure An OIC framework laying down guidelines and standards for basic infrastructure can play a central role in enhance intra-OIC trade27. Developing effective infrastructure, such as quality of roads, railways, air transport, and ports in addition to reliable 32
  32. Section 3 | Trade & Market Access energy supply and robust telecommunications network - is the most important ingredient in getting goods to markets and improving productivity. Moreover, good infrastructure can increase private investment and reduce social inequality. The development of infrastructure will also depend on governmental and bureaucratic efficiency. Standard Chartered’s report on ‘Economic Reform’ argues that much of Indonesia’s infrastructure is currently out-dated and it is focused on the western area of the country, Java and Sumatra. The report also highlights that lack of government support has affected the development of infrastructure. There are a low number of skilled project managers, legal uncertainty and corruption problems. The effectiveness of infrastructure development to a large extent will be determined by the success of reforming Indonesian bureaucracy28. In this regard the government has introduced a ban on recruitment, offered early retirement and increased the levels of education. Further progress is being made in relation to the legal framework around land ownership. Education Countries such as Saudi Arabia have come to the realisation that their natural resources will not last forever. The late King Abdullah launched the ‘King Abdullah Scholarships Programme’ to encourage students to study at some of the world’s best universities. The thought behind this scheme was that students will return back to Saudi Arabia and work in their chosen industry, or start their own business. This shows the steps some of the OIC members are taking to continue the growth of their economies by providing their people with the right skills and education to assist them achieve larger access to markets. However, across OIC markets, the primary and secondary education sectors continue to lag behind other regions. Taslima’s Story Taslima Miji in Bangladesh started her hardware supplying company with great difficulty. In an interview29 she talks about how her lack of business experience made it “difficult to have innovative ideas and implementing them”. Detail- 33
  33. Section 3 | Trade & Market Access Exhibit 3.3: Doing Business reforms: OIC Countries Country Better / Worse Description Afghanistan Starting a business: Afghanistan made starting a business more difficult by increasing the publication fees and prolonging the time required for registration. Albania Starting a business: Albania made starting a business easier by lowering registration fees Paying taxes: Albania made paying taxes more costly for companies by increasing the corporate income tax rate. Trading across borders: Algeria made trading across borders easier by upgrading infrastructure at the port of Algiers. Starting a business: Azerbaijan made starting a business easier by reducing the time to obtain an electronic signature for online tax registration. Paying taxes: Azerbaijan made paying taxes easier for companies by introducing an electronic system for filing and paying social insurance contributions. Algeria Azerbaijan Bahrain Registering property: Bahrain made registering property easier by reducing the registration fee. Bangladesh Trading across: borders Bangladesh made trading across borders easier by introducing a fully automated, computerized customs data management system, ASYCUDA (Automated System for Customs Data) World. This reform applies to both Chittagong and Dhaka. Protecting minority investors: Benin strengthened minority investor protections by introducing greater requirements for disclosure of related-party transactions to the board of directors and by making it possible for shareholders to inspect the documents pertaining to relatedparty transactions and to appoint auditors to conduct an inspection of such transactions. Trading across borders Benin made trading across borders easier by reducing the number of documents needed for imports. Paying taxes: Brunei Darussalam made paying taxes easier for companies by allowing joint filing and payment of supplemental contributory pension and employee provident fund contributions and by introducing an online system for paying these 2 contributions. Benin Benin Brunei Darussalam 34
  34. Section 3 | Trade & Market Access Burkina Faso Côte d’Ivoire Djibouti Egypt Gambia, The Indonesia Iran Jordan Kazakhstan Protecting minority investors: Burkina Faso strengthened minority investor protections by introducing greater requirements for disclosure of related-party transactions to the board of directors and by making it possible for shareholders to inspect the documents pertaining to relatedparty transactions and to appoint auditors to conduct an inspection of such transactions. Starting a business Côte d’Ivoire made starting a business easier by reducing the minimum capital requirement, lowering registration fees and enabling the one-stop shop to publish notices of incorporation. Trading across borders Côte d’Ivoire made trading across borders easier by simplifying the processes for producing the inspection report and by reducing port and terminal handling charges at the port of Abidjan. Dealing with construction permits: Djibouti made dealing with construction permits less time-consuming by streamlining the review process for building permits. Protecting minority investors: The Arab Republic of Egypt strengthened minority investor protections by introducing additional requirements for approval of related-party transactions and greater requirements for disclosure of such transactions to the stock exchange. Starting a business: The Gambia made starting a business easier by eliminating the requirement to pay stamp duty. Paying taxes: Indonesia made paying taxes less costly for companies by reducing employers’ health insurance contribution rate. This reform applies to both Jakarta and Surabaya. Trading across borders: In Indonesia trading across borders became more difficult because of insufficient infrastructure at the Tanjung Priok Port Jakarta. This change applies to both Jakarta and Surabaya Getting electricity: Iran made getting electricity easier by eliminating the need for customers to obtain an excavation permit for electricity connection works. Trading across borders: Jordan made trading across borders easier by improving infrastructure at the port of Aqaba. Registering property: Kazakhstan made registering property easier by introducing effective time limits and an expedited procedure. 35
  35. Section 3 | Trade & Market Access Kuwait Mauritania Morocco Pakistan Tajikistan Tunisia Turkey United Arab Emirates Trading across borders: Kazakhstan made trading across borders easier by opening a new border station and railway link that helped reduce congestion at the border with China. Starting a business: Kuwait made starting a business more difficult by increasing the commercial license fee. Starting a business Mauritania made starting a business easier by creating a one-stop shop and eliminating the publication requirement and the fee to obtain a tax identification number. Trading across borders: Morocco made trading across borders easier by reducing the number of export documents required. Trading across borders: Pakistan made trading across borders easier by introducing a fully automated, computerized system (the Web-Based One Customs system) for the submission and processing of export and import documents. This reform applies to both Lahore and Karachi. Starting a business: Tajikistan made starting a business easier by enabling the Statistics Agency to issue the statistics code for the new business at the time of registration. Trading across borders: In Tunisia trading across borders became more difficult because of a deterioration in port infrastructure (for example, in loading and unloading equipment) and inadequate terminal space. Starting a business: Turkey made starting a business more difficult by increasing the notary and company registration fees Registering property: The United Arab Emirates made transferring property easier by introducing new service centers and a standard contract for property transactions Source: World Bank, Doing Business 2015 - Going Beyond Efficiency. For selected OIC countries and reforms30. 36
  36. Section 3 | Trade & Market Access ing a common story for new entrepreneurs, she talks about how the banks refused her financing because she was a female and her business was fairly new. Without any funding and support, Taslima found it difficult to get her products and services to the market: market. “Unfortunately, in Bangladesh banks don’t welcome new entrepreneurs; moreover, if you are a woman than things are going to be extra [hard] for you.” Taslima’s story is common across the region. In some market entrepreneurs are facing increasing barriers from policy makers, and as a result ideas and products remain on the drawing board. However, having the right policies can change the future of small businesses. In 1988 the government of Bangladesh introduced BASIC Bank Limited. The aim of this bank is simple, help entrepreneurs in the private sector get the right amount of financing needed in order to develop and start a business. They also offered technical support so that enterprises are not only successful, but they have the support to extend their reach to a wider 37
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