• Home
  • Start-Ups and SMEs: Key Lessons for the GCC from Global Models
Emiratis wearing face masks due to the coronavirus pandemic work on the floor of the Dubai Financial Market in Dubai, United Arab Emirates, Tuesday, July 7, 2020. Dubai reopened its Dubai Financial Market stock exchange Tuesday after closing its floor due to the coronavirus pandemic. (AP Photo/Jon Gambrell)

Start-Ups and SMEs: Key Lessons for the GCC from Global Models

The ambition to diversify the Gulf Cooperation Council (GCC) economies away from their reliance on the fossil fuel industry is a formidable challenge. Fostering a start-up ecosystem is often seen as a promising solution, but this strategy alone cannot replace the vast profits generated by the oil sector. This analysis examines the limitations of start-ups as a cornerstone for economic transformation in the Gulf, highlighting the need for comprehensive policy frameworks, robust human capital development, and a focus on resilient small and medium-sized enterprises (SMEs). By looking at successful models from around the world, such as dual-track education systems and the “Mittelstand” firms of Germany and Switzerland, Gulf states can outline a pragmatic approach to achieve sustainable and diversified economic growth.

Policymakers in the GCC aspire to transform their states into start-up nations, fostering a knowledge economy independent of oil revenues. Initiatives include encouraging venture capital, creating incubators and accelerators, improving higher education, and establishing tax-friendly special economic zones. High-profile events like Expo 2020 and COP28 promote the region’s image of business- and technology-readiness. Start-up unicorns like the UAE’s Careem and Saudi Arabia’s Tabby make headlines. However, doubts remain about the long-term impact and viability of these efforts to replace the lucrative fossil fuel industry.

As I describe in a companion piece, the journey to becoming start-up hubs is competitive, with regions like the U.S., Europe, China, and India benefiting from established ecosystems and top research universities. Although GCC countries are progressing, internal competition and lack of cooperation may hinder growth. Effective policy planning and evaluation are crucial, as many initiatives lack thorough due diligence, monitoring, and follow-up. The region has seen numerous half-finished megaprojects and failed industrial policies driven by hype rather than strategy. For the GCC to transition successfully, nurturing local capacity, fostering a supportive entrepreneurial ecosystem, and investing in R&D are essential. Overcoming internal competition, developing coordinated policies, and focusing on sustainable long-term strategies will enable the Gulf states to achieve a diversified, resilient economy beyond fossil fuels.

Start-Ups aren’t Silver Bullets

Even if each obstacle described above were overcome, a more fundamental problem remains: it is doubtful that a healthy start-up ecosystem could substantially replace the Gulf’s enormously profitable fossil fuel industry. Despite the buzz around start-up culture, researchers debate these businesses’ contribution to economic growth. This has many reasons, in particular the dismal survival rate of start-ups. Many start-ups also end up being acquired by large corporations, which often roll back the positive economic effects the start-up had in the first place.

Another question mark surrounds start-ups’ employment potential, as most start-up employment creation is in low-skilled jobs. For example, the highest-valued start-up in the Middle East, Careem, was sold to Uber for about $3 billion after accruing about $800 million in funding. However, Careem’s permanent employees number in the low thousands. Most of its 1 million “employees” are delivery drivers, who have gained little from their work for the company and often face long hours and precarious conditions. Cases like Careem and Talabat (a delivery app) thus highlight the limited potential for high-quality employment growth through start-ups.

This is not to say that a thriving venture environment would not be desirable. But a focus on start-ups alone will not create the robust, productive post-oil economy that the Gulf states envision. Thus, a revised strategy for achieving post-oil prosperity needs to include not only amendments to remove the roadblocks for innovative start-ups. It also needs to promote holistic industrial and research policies. Neither a strong start-up ecosystem nor a post-oil knowledge economy will be viable without integrated policy frameworks, entrepreneur-friendly capital markets, research and education, as well as a healthy layer of dependable SMEs. On a meta-level, policy decisions can be improved by instituting a thorough, iterative process of policy planning that includes methodical due diligence and continuing, systematic and critical policy evaluation. While such a program sounds daunting, there are many global best practices to draw inspiration.

Human Capital, Research, and Knowledge Transfer

To sustain high-value-added industries, a post-oil economy needs productive human capital that combines theoretical and practical skills. Current education systems worldwide lack programs that develop both kinds of skills and are particularly divorced from the practical realities of entrepreneurship and employment in the private sector. The GCC is no exception. Ironically, even though many higher education institutions in the Gulf focus on teaching students rather than pursuing cutting-edge research, they do not produce readily employable graduates. A running joke in management circles is the fresh IT graduate who cannot handle an Excel spreadsheet.

To produce more employable graduates, GCC countries could emulate an alternative education model that stresses the combination of practical skills and academic capabilities, creating a dual-track education system already present in German-speaking countries. Such a system would place students from high school age in apprenticeships—commonly in SMEs—where they are trained on the job while continuing their education. This dual-track system then continues with higher education at universities of applied sciences (“Fachhochschulen”) and part-time on-the-job training. As a result, graduates form a highly practically qualified and motivated workforce with strong ties with the apprenticing companies.

Another concern regarding the university ecosystem is the two ends of the R&D pipeline: basic research and knowledge transfer. To feed this pipeline, the Gulf states should create a bold, long-term public funding priority for high-quality basic science that is organized through a national science foundation. To carry out this research, local, university-produced research needs a thick layer of mid-tier academic staff—namely native PhDs and postdocs. The Gulf currently lacks enough high-profile graduate schools and research institutes to compete successfully with overseas institutions and the private sector in training and employing these researchers.

On the other end of the pipeline, university-based research must be transferred to industry – start-ups or corporations. The nascent technology-transfer ecosystem in the Gulf can learn from many inspiring role models across the globe. However, none of the GCC countries is large enough on their own to achieve the critical mass for a global R&D cluster. The Gulf states need to overcome the current insular and internecine strategies and coordinate and pool efforts across borders to achieve the network effects necessary to succeed. Again, inspiration can be gained from successful existing examples for such regional research cooperation and coordination.

The Right Kind of SMEs

While high-risk, high-reward start-ups should be the icing on the cake, national industrial strategies should focus more on robust and innovative SMEs. The most prominent example of this kind of business are “Mittelstand” firms, which form the backbone of the German, Swiss, and Austrian economies. By focusing on world-class manufacturing, many of these SMEs have become global household names, such as electro-engineering company Bosch, pen manufacturer Lamy, jigsaw puzzle maker Ravensburger, headphone specialist Sennheiser, and chainsaw manufacturer Stihl.

Intimately entwined with the vocational, dual-track education system in their respective countries, these firms are profoundly locally-rooted yet globally-operating, family-owned businesses. Their combination of unified owner-management, a highly qualified and productive workforce, innovative and premium-quality products, a long-term-oriented investment strategy, and a close relationship with their customers has been a boon for their economies. They excel at carving out niches in the global market and providing local high-skill, high-wage employment and training to their loyal employees. By adapting the Mittelstand qualities to their own, rich family business tradition, Gulf countries can create a dependable foundation for the post-oil economy.

Compared with spectacular moon-shot megaprojects and tech hypes that draw global attention, these policies might seem underwhelming. However, they promise robust growth and high-quality non-oil exports for Gulf governments, and high-productivity employment for Gulf citizens. If policymakers take the long view, they should realize that prudent investments like these will prove more worthwhile than the glittering headlines of today.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Issue: Economy & Innovation
Country: GCC

Obstacles to Unleashing the Gulf’s Entrepreneurial Potential

May 31, 2024

The Gulf Cooperation Council (GCC) countries have long striven to become less dependent on oil revenue and, in the process, make their citizenry less dependent…

Geopolitics and Challenges in Iraq’s Quest for Regional Connectivity

May 28, 2024

Last month, after Turkish President Recep Tayyip Erdogan visited Baghdad, Iraq announced that it would join the region-wide “Development Road” project, which will link the…

New Year’s Woes: Five Worrying Trends for Iranian Households

March 20, 2024

March 21 marks the turn of the Persian calendar. Iranians welcome the Persian New Year as people worldwide celebrate the start of the Gregorian calendar:…

GCC

Start-Ups and SMEs: Key Lessons for the GCC from Global Models

Commentary

The ambition to diversify the Gulf Cooperation Council (GCC) economies away from their reliance on...

GCC

Gulf States and Diplomatic Challenges Post-Gaza War: Paving the Way for Peace

Commentary

Discussions about “day after” scenarios for Gaza have dominated diplomatic circles ever since Israel launched...

GCC

Obstacles to Unleashing the Gulf’s Entrepreneurial Potential

Commentary

The Gulf Cooperation Council (GCC) countries have long striven to become less dependent on oil...

GCC

Normalization at What Cost? The Risk of Pushing Amid the Gaza War

Commentary

As Israel’s war on Gaza approaches its ninth month and its aggressive tactics have come...

GCC

Gulf States’ Interests in Mediating Ukraine Peace Initiatives

Commentary

Once again, Qatar finds itself in the international spotlight for its high-profile international mediation efforts....

GCC

The GCC’s Joint Security Vision: Reading Between the Lines

Commentary

On March 29, Jasem Mohamed Albudaiwi, the Secretary General of the Gulf Cooperation Council (GCC),...

Dr. Frederic Schneider holds a PhD in economics from the University of Zurich. He specialises in labour economics and consults on Middle Eastern economic policy, particularly post-oil economic transition in the GCC. He has held posts at Yale University, the University of California at Berkeley, and the University of Cambridge. His academic research has been cited over 800 times and published in world-leading journals such as the Proceedings of the National Academy of Sciences, the American Economic Journal, the Economic Journal, and the Journal of the European Economic Association. His policy analysis has appeared in news outlets like the Washington Post, Al-Monitor, Orient XII, and The National, and with institutions such as the Arab Gulf States Institute in Washington, the Washington Institute for Near East Policy, the Anwar Gargash Diplomatic Academy, and the London School of Economics’ Middle East Centre.


GCC

Start-Ups and SMEs: Key Lessons for the GCC from Global Models

Commentary

The ambition to diversify the Gulf Cooperation Council (GCC) economies away from their reliance on...

GCC

Gulf States and Diplomatic Challenges Post-Gaza War: Paving the Way for Peace

Commentary

Discussions about “day after” scenarios for Gaza have dominated diplomatic circles ever since Israel launched...

GCC

Obstacles to Unleashing the Gulf’s Entrepreneurial Potential

Commentary

The Gulf Cooperation Council (GCC) countries have long striven to become less dependent on oil...

GCC

Normalization at What Cost? The Risk of Pushing Amid the Gaza War

Commentary

As Israel’s war on Gaza approaches its ninth month and its aggressive tactics have come...

GCC

Gulf States’ Interests in Mediating Ukraine Peace Initiatives

Commentary

Once again, Qatar finds itself in the international spotlight for its high-profile international mediation efforts....

GCC

The GCC’s Joint Security Vision: Reading Between the Lines

Commentary

On March 29, Jasem Mohamed Albudaiwi, the Secretary General of the Gulf Cooperation Council (GCC),...

Subscribe to Receive Latest Updates from GIF.