entrepreneurship ecosystem in egypt and tunisia

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Center for International Private Enterprise

Understanding the Entrepreneurship Ecosystem in Tunisia and Egypt

Article at a glance

• Withtheexceptionofinformationonfinancialbarrierstogrowth, there is a considerabledearthof theoretical andempirical knowledge of entrepreneurship in Egypt andTunisiaandthroughouttheMENAregion.

• ThisresearcheffortaimstoproduceempiricalknowledgeaswellascritiquetheconceptualizationsalreadydevelopedforentrepreneurshipinMENAandthedevelopingworldingeneral.

• Given the structural and institutional constraints in theregion, a comprehensive concept of entrepreneurshipshouldtackletheoverallecosystemwithinwhichindividualentrepreneursandenterprisesoperateandexaminewherethey interactwith the regulatory, legal, and institutionalframeworks.

December 16, 2013

Amr Adly, Ph.D.Postdoctoral Fellow, Program on Arab Reform and Democracy, Center on Democracy, Development, and the Rule of Law, Stanford University

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Center for International Private Enterprise 1155 15th Street, NW | Suite 700 | Washington, DC 20005ph: (202) 721-9200 | fax: (202) 721-9250 | www.cipe.org | [email protected]

This essay will be part of an upcoming report called “Reforming the Entrepreneurship Ecosystem in Post-revolutionary Tunisia and Egypt” to be jointly published in Spring 2014 by CIPE and Stanford University

ThereportconcernstheentrepreneurshipecosystemsinTunisiaandEgypt.Theentrepreneurship-as-an-ecosystemapproachisemployedinattempttoanswerthebroaderandmoreabstractquestionsofprivatesectordevelopmentandcapitalisttransformationinbothcountries.Thescopeofthestudycomprisestheinstitutionalconstraintsonprivateentrepreneurship,betheyfinancialornonfinancial,and thewidest variety possible of entrepreneurs and enterprises in the two countries in away thatreflectstherealityandcomplexityoftheentrepreneurialsocio-economicphenomenon.

Thereportdependsonasampleofaroundonehundredrespondentsineachcountry.ThesamplesaredesignedtobeamicrocosmoftheentrepreneurialpopulationinEgyptandTunisia.Theyrepresentthevariouscategoriesandgroupsofentrepreneursinaccordancewiththeirrelativeweightasrevealedby statistical evidence.The samples are divided vertically on the basis of established-entrepreneursandwould-be-entrepreneursandonagenderbasisandhorizontallybetweentheformalandinformalsectorsandonaregionalbasis.Aquestionnaire,focusgroupdiscussionsandindividualinterviewsareallpartofaqualitativestudyofentrepreneurshipthataimstoproduceathickanddetaileddescriptionof the institutional underpinnings of entrepreneurship and a thorough analytical accounts of howdifferentelementsoftheecosysteminteractwitheachother.Thestudyfollowsthelogicofqualitativesurveys.

The Center for International Private Enterprise (CIPE) strengthens democracy around the globe through private enterprise and market-oriented reform. CIPE is one of the four core institutes of the National Endowment for Democracy and an affiliate of the U.S. Chamber of Commerce. Since 1983, CIPE has worked with business leaders, policymakers, and journalists to build the civic institutions vital to a democratic society. CIPE’s key program areas include anti-corruption, advocacy, business associations, corporate governance, democratic governance, access to information, the informal sector and property rights, and women and youth.

Stanford’s Center on Democracy, Development, and the Rule of Law (CDDRL) engages in research, training, teaching, and organizes intellectual and policy dialogues aimed at increasing public understanding of economic and political development. Founded in 2002, CDDRL has collaborated with scholars, policymakers and practitioners around the world to advance collective knowledge about the linkages between democracy, sustainable economic development, human rights and the rule of law. To learn more, please visit: cddrl.stanford.edu

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Center for International Private EnterpriseUnderstanding the Entrepreneurship Ecosystemin Tunisia and Egypt

1. Introduction

Ongoing upheaval in Egypt and Tunisiasince the 2011 revolutions indicates high levelsof dissatisfaction with the political order, andexpressesadeepdesireforadrasticremodelingofthe economic system. Well-educated young menandwomenstillfindthemselvesmarginalizedandexcludedfromthepoliticalandeconomicorderintheircountries.Theirinitialdemandsforfreedomand social justice have hitherto gone unheeded.At the heart of the ongoing political turmoil liesthedemandforasweepingsocio-economicreformthatmayeventuallycreateaneconomythatoffersinclusive-growth,higherlevelsofproductivityandcompetitiveness,andmorejobcreation.However,unlesscertaincomplexandlong-termquestionsaretackled,itisunlikelythatpoliticalreformwillleadtothecreationofstabledemocracies.

Over three decades ago, Egypt and TunisiawereamongthefirstArabcountriestoembarkoneconomic liberalization and to open the way fortheemergenceofanationalprivatesector.Thetwocountriesmadedefinitestridestowardsadevelopedprivatesectorinaggregate.Forinstance,theWorldBank1 indicated the private sector’s share of non-hydrocarbon GDP to be 70-75 percent for bothEgypt andTunisia and theprivate sector share inemployment to be 60 percent in Egypt and 80percentinTunisia.

However, despite its overall sizable sharein output and employment, the Egyptian andTunisianprivatesectorswerebynomeansdynamicand productive.The broadest base of the privatesectorinbothcountrieshasbeenmadeupofaverylarge number of very small andmicro-enterprisesthat are either family-owned or employ noworkers.This broad base of enterprises has oftenbeen undercapitalized and under-productive, andoperateswith limited capacity to growand accessmarkets.The literature has referred to this as the“missingmiddlesyndrome”wheremicro-enterprisesaredeniedanyrealchanceofgrowingintosmallormedium-sizedfirms.Athinstratumoflargefirmson the topof theprivate sectorproducesmostof

thevalue-added.Theyusuallyhavestronglinkageswiththeglobalmarketsandforeigninvestment.2

Highbarrierstoentryandgrowththatfacethevast majority of entrepreneurs can help explainthepoorstatusofthebroadestbaseoftheprivatesectorinthetwocountries,aswellasotherMENAeconomies. Many of these barriers can be tracedback to the entrepreneurship ecosystem, whichrefers to the broad institutional and regulatoryframework that governs business entry, exit, andgrowth. Entrepreneurship as an ecosystem canbe employed as an approach to tackle the moreabstractquestionof the failed transition to an allinclusiveanddynamicmarket-basedcapitalism inthetwocountries,despitelongdecadesofeconomicliberalization.

Entrepreneurship is one of the most dynamicapproaches to socio-economic transformationanddevelopment. It is intimately related to privatesector development, micro, small, and medium-sized enterprisepolicies, job creation, innovation,andcompetitiveness.However,unlikethestudyofstaticpolicyandofregulatoryareasorinstitutionsand structures, analyzing the entrepreneurshipecosystem captures a picture inmotion.Tacklingthequestionofentrepreneurship linksmicro-levelanalysis thattouchesupondirectbarrierstoentryandgrowthwithmacro-levelanalysisthatattemptstoexplainthelackofdynamism,lowproductivity,undercapitalization, and the weak prospects ofgrowth in the broadest base of the private sectorintheregion.Moreover,itmayprovideawayoutofthespiraloffaileddevelopmentinwhichEgyptandTunisiahavebeencaughtfordecades.

Why has private entrepreneurship in Egypt and Tunisia remained underdeveloped despite decades of economic liberalization and private sector-friendly incentives and reforms? And how can the entrepreneurship ecosystem in the two countries develop in order to meet the people’s high expectations of having a productive and just socio-economic order?

Ourstudyisanattempttoanswerthebroaderand more abstract questions of private sector

Center for International Private Enterprise Understanding the Entrepreneurship Ecosystemin Tunisia and Egypt

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developmentandcapitalisttransformationinbothcountries.Thescopeofthestudycomprisesalookat the financial and non-financial institutionalconstraintsonprivateentrepreneurshipandincludesthe widest variety possible of entrepreneurs andenterprisesinthetwocountriesinawaythatreflectsthe reality and complexity of the entrepreneurialsocio-economicphenomenon.Thereportdependson a sample of approximately 100 respondentsin each country. The samples are designed torepresent a microcosm of the entrepreneurialpopulation in Egypt andTunisia.They representthevariouscategoriesandgroupsofentrepreneursinaccordancewiththeirrelativeweightasrevealedby statistical evidence. The samples are dividedverticallyonthebasisofestablished-entrepreneursandwould-be- entrepreneurs andon gender basisandhorizontallybetweentheformalandinformalsectors and on a regional basis. A questionnaire,focusgroupdiscussions,andindividualinterviewsareallpartofaqualitativestudyofentrepreneurshipthataimstoproduceadetaileddescriptionof theinstitutional underpinnings of entrepreneurshipandathoroughanalyticalaccountofhowdifferentelementsoftheecosysteminteractwitheachother.Thestudyfollowsthelogicofqualitativesurveys.

Thisessayaimstocriticallyengagewiththeextantbodyofliteratureonprivateentrepreneurshipandits socio-political and institutional determinantsandconstraintsintheMENAregion.Thisreviewofliteratureaimstocritiquetheconceptualtoolsthathavebeenemployedinstudyingthephenomenonof entrepreneurship inMENA in general, and inEgypt andTunisia inparticular.The final goal ofthe essay is to set an agenda for future researchbyaddressingthe lacunaeinthepresent literaturewhilecapitalizingonitsfindings.

2. The State of the Art

2.1 Hammering out a concept of entrepreneurship for MENA

Some scholars in the reviewed literature heldthat “entrepreneurship in developing countries isthemostunderstudiedimportantglobaleconomic

phenomenon today”.3 Neither the definitionsnor the approaches developed by diverseWesternscholarlytraditionscaptureallthedimensionsandimplications of entrepreneurial activities in thedeveloping world, including in the Middle EastandNorthAfrica.AsNaudeholds“indevelopingcountries the concern is with (entrepreneurship)startingandacceleratinggrowth,andinprovidingimpetus to the structural transformation ofeconomies; in the advanced economies theconcern is largely with obtaining new sourcesof productivity growth”.4 In the Global south,entrepreneurship cannot be set apart from thequestionsof jobcreation,povertyalleviation,andgrowth-enhancement.Itisnotsimilartothepolicyand academic concerns in the Global north withentrepreneurship as the engineof growth and thesourceofinnovation.

In this vein, The Global EntrepreneurshipMonitor (GEM) has been a forceful attemptto study entrepreneurship in a broad variety ofcountries,includingmanynon-Westerndevelopingcountries.AccordingtoGEM,higherTotalEarly-stage Entrepreneurial Activity rates (TEA) areinversely related to income so that countrieswithlower income, thus poorer developing ones, havehigherTEArates thandevelopedcountries. Inanattempt to remove the possible confusion, GEMdistinguishes between two principal componentsof entrepreneurship based on entrepreneurs’motivation: necessity- versus opportunity-driven entrepreneurship. Indeed necessity-drivenentrepreneurship dominates in most MENAcountries, including Egypt and Tunisia, eventhough GEM indicates that it is much higherin the former than the latter. Necessity-drivenentrepreneursmostdenselyclusterintheinformalsectorandusuallyrunsmallandmicro-enterprises.

The conceptual distinction between necessity-and opportunity-driven entrepreneurship isproblematicformanyreasons.Askingentrepreneursabout their motivation and ambitions cannot betaken as an absolute in itself. Rather, it reflectsenvironment-related restraints. It would betoo simplistic to hold undercapitalization and

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low-productivity as a choice. Necessity-drivenentrepreneurs do not often reflect an intentionormotivation on the part of the entrepreneur toremain small and unprofitable or to operatewithlittletonoaccesstofinanceortocapital.”

Economic opportunity is viewed in the mostformalandabstractwayintermsofagapbetweendemand and supply that an entrepreneur canexploit to create profits, rents, and growth forher enterprise.Yet, the concept of opportunity issubject to many social, economic, and politicaldeterminants, including educational attainment,access to assets that can be used as capital, andaccess to finance. Accordingly, the subsistence-driven entrepreneurship that constitutes thebiggestportionofentrepreneurialactivities in thedevelopingworld is not simply the cause of low-productivityandlow-growthentrepreneurship.Itisalsoaneffectthatdrawsattentiontothestructuraland institutional factors that determine access toopportunity.

Stevenson defines entrepreneurship as asystem that “include entrepreneurs (andpotentialentrepreneurs), institutions and governmentactions [where] the desired policy outcome is anincreased level of entrepreneurial activity….[and]the role of institutions and governments is tofosterenvironmentsthatwillproduceacontinuoussupply of new entrepreneurs”.5 Such a definitionresets the research agenda for entrepreneurshipin developing countries as its focus goes beyondindividual entrepreneurs and enterprises into thebasicdeterminantsofentrepreneurshipasasystemandasabroadsocialphenomenon.Insuchasetting,thedistinctionbetweenentrepreneursonthebasisof motivation, growth potential, and innovationis less relevant. Rather, the principal questionbecomes,underwhichsystemcanentrepreneurshipemergeandgrow?

2.2 Property rights and the rule of law

The literature on property rights and theinstitutional determinants of market-basedcapitalism and subsequently, entrepreneurship,

is relevant and important where it regards theentrepreneurship ecosystem. There is someburgeoning literature on Egypt and Tunisiathat depicts the development of their economicinstitutions during the last two decades and howthisinfluencedtheformofcapitalismthatemergedin the two countries. This literature intersectsconsiderably with many questions regardingaccess to finance, the rule of law, cronyism andcorruption, and the persistent underdevelopmentofadministrativeandjuridicalstructures.

However,thestudyoftheruleoflawinEgyptandTunisiaissparseandoffersmainlyaformalisticandstatisticalexaminationwithlittlein-depthanalysisto informpolicyand institutional reform.Hence,our study should cover this gap by including thebroaderrepresentationofprivateentrepreneurshipin the two countries. Obtaining the accounts ofwould-be entrepreneurs, small and medium-sizedenterprise (SMEs) owners, and members of theinformalsectorregardingspecificruleoflawissuessuchascontractenforcement,propertyregistration,and recourse to adjudication should provide uswiththedifferentwaysofwitnessingtheproblemsoftheweakruleoflawandunderstandingvariousresponsestothem.Moreover,futureresearchshouldtackle the political roots of the weak rule of lawandpropertyrightsprotectionandhowtheregimechange that took place in the two countries ofstudyislikelytoimpactthedriveforinstitutionalreform.

2.3 Financial barriers to growth

How did the literature address the barriersto growth and entry?There is a broad consensuswithintheliteratureonMENAthatalackofaccessto finance is a major barrier to growth for themajority of entrepreneurs throughout the regionincluding in Egypt and Tunisia. The problemdoes not seem to be in the overall access of theprivatesector tocredit.Rather, it seemstobetheuneven distribution of this access, which falls infavor of the larger andmore established firms tothe exclusion of the broadest base of the privatesectorofyoungentrepreneurs,nascententerprises,


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and micro, small, and medium-sized enterprises.MENAfinancialsystemsareprimarilybank-based.Thevastmajorityofentrepreneursarenotbankableand constitute too much of a risk for banks.Additionally, the financial system is not designedinawaytobreaktheviciouscirclewherethelackof capital only leads to more lack of capital. Onthesupplyside,banksarenotequippedsufficientlyforprojectevaluationandriskassessment,sotheyavoidriskaltogether.Banksratherpreferconfiningtheirlendingtogovernmentsorbigbusiness.

The literature has attributed the problems ofaccessingfinancetoavarietyofcauses.Someheldthat the real cause of the problemwas the faileddevelopmentofalternativestodebtfinancingsuchas venture capital, secondary stock markets forSMEs, and leasing andmortgage systems.Othersunderlined that the banking sector is inherentlybiased against new market entrants and SMEs.However, some literature indicates that it is amanifestation of poor rule of law, weak contractenforcement, and insufficient property rightsprotection.A fourth scholarly trendheld that therealproblemwaswiththestate-ownedstructureofthebanking system in theMENAregion.Tunisiaand Egypt still have banking sectors that aredominatedbypublicbanks,asdomostcountriesintheregion.Thesebanksweredeemedasinefficient,notcompetitive,andpronetocronyism.

Althoughtheliteraturehasextensivelyexaminedthefinancialbarrierstogrowth,somegapsremain.Little has beenwritten about the informalmeansoffundingthroughnetworksoffamilyandfriendsthat do not pass by the formal financial system.Revealing the mechanisms of trust and exchangecanbequiteuseful in informingpolicy reformersand to involve stakeholders in any future reform.ThesecondgapthatwasoverseenbytheliteratureistheimpactofthefinancialsectorreforminMENAregionontheSMEandyoungentrepreneurs’accessto finance. There is some evidence that suggeststhat reform has limited further access to financefor the vastmajority of private enterprises in theregion.

2.4 Non-financial barriers to growth

Little attention was paid to the non-financialbarriers that enterprises face, especially nascententerprises, young entrepreneurs, small andmedium-sized firms, and those operating in theinformal sector. Other non-financial barriers togrowth such as taxation policies and institutions,laborregulations,andaccesstoinfrastructurehavebarely been addressed in any of the literature onentrepreneurship, SME-promotion, or privatesector development in MENA. This gap in theliterature persists despite the significance ofthese factors in explaining the scope and pace ofdevelopment of entrepreneurship in the region.Hence, they should be prioritized in any futureresearchonentrepreneurship.

2.5 The question of informality and entrepreneurship

Some of the reviewed literature focused onprivatesectordevelopment.Theconceptofprivatesector in this context often refers to aggregatedand abstract macroeconomic indicators suchas the private sector share in total GDP, value-added, investment, exports, and employment.Such indicators and measurements are importantindescribing theoverall transformation that tookplaceincountrieslikeTunisiaandEgyptafterthreeor more decades of privatization and trade andcapitalliberalization.

Theproblemwiththeapproachoutlinedaboveis that it is too static and aggregated. It does notshowthedynamicsbehind theunderdevelopmentof the private sector and its limited contributionto the growth generation and export basediversification.Addingastudyofentrepreneurshipprovides a very dynamic approach to analyzingprivatesectordevelopmentandtheongoingprocessoftransitioningintoamarketeconomyinthatpartoftheworld.

Another relevant branch of knowledge ison economic informality in the MENA region.Informality is a predominant feature of private

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entrepreneurshipinthevastmajorityofdevelopingeconomies in total output, employment, andthe number of economic enterprises. Schneiderestimates thepercentageof the informal activitiesinEgyptandTunisiatobe40-60percentand25-35percentrespectively.6

Informal economic enterprises, usually ofvery small scale, constitute a sizable percentageofprivateentities inEgyptandTunisia.However,despite its overwhelming share in employmentgeneration and business creation, the informalsector is characterized by the literature with lowproductivity, meager wages, and little growthpotential, and thus little contribution in thegenerationofoveralleconomicwelfare.TheWorldBank7notesthattheinabilityoftheprivatesectorin the MENA region to globally compete is dueto the high level of informality.Operating in theinformal sector denies entrepreneurs significantopportunities: “Informality opportunity costincludeslimitedaccesstopublicservices,noprofitexpansion,limitedaccesstofinancialandbusinessdevelopment services and limited possibilities tocooperatewithformalsector.”8

The many challenges in the private informalsector shouldnotbe takenasagivenoranaturalconstraint. There are deep institutional, socio-economic, and political restraints that create astatusquowhere thebiggest chunkof theprivatesectorisofamicro-sizeandoperatesintheshadowswithlow-productivityandlowpotentialtogrow.

Futureresearchshouldincludearepresentativesample of informal entrepreneurs and shouldaim to answer these questions: How do formalinstitutional and regulatory settings impactinformality in the two case studies? How doinformal entrepreneurs respond to this impact(informal funding, mentorship, networking, andtrust)?What can thegovernmentdo, if anything,to support suchmechanisms and enable informalenterprises to reach their potential? Why hasformalization in MENA lagged despite the factthatinitiativeshavebeenadoptedtoformalizetheinformal sector since the mid-1990s? What are

the political underpinnings of the formalizationprocessorofthelackofit?

2.6 Female entrepreneurship

Theliteraturehasmaintainedthatgenderdoeshave a tremendous impact on entrepreneurshipin theMENAregion.Femaleentrepreneurship inMENAingeneral,includingEgyptandTunisia,hasstartedtoreceiveresearchattentioninthelastfewyears.ThereisabroadconsensusthatoverallfemaleparticipationineconomicactivitiesisquitelowintheMENAregionascomparedtootherpartsofthedevelopingworld.TheOrganizationforEconomicCo-operationandDevelopment(OECD)estimatesthat“only32%ofwomenofworkingageinMENAparticipateinthelaborforceascomparedto56%inlowandmiddleincomecountriesandover61%inOECDcountries.The rateof self-employmentforwomenishalfthatofmen.”9

As a matter of fact, the Global Gender Gapreport10 indicated that the MENA region rankedlast in closing the gender gap. The Gender GapscoreinMENAwas58percentascomparedto64percentforSouthAsiaandSub-SaharanAfrica,and67percentforLatinAmericaandEasternEurope.

The literature has given mixed accounts onthe discrimination against female entrepreneursin MENA. According to the World Bank11 thereare high barriers to entry and growth in theMENAregionfacingbothmaleandfemale-ownedfirms, rather than outright discrimination againstfemale entrepreneurs. Conversely, El-Hamidi andBaslevent12heldthatfemaleentrepreneursinMENAare indeed discriminated against. However, theytraced the high barriers to entry and growth thatfacefemaleentrepreneursoutofthedirectbusinessenvironment and into the broader regulatory andlegal frameworks that impactwomen’s status. Forinstance, they suggest that inheritance laws inEgypt result in fewer assets available for womento startwith, and“thus fewercollateral in faceofacquiringcredit.Womennormallydon’tholdland,house,orvehicletitles,whichismorechallengingin rural areas where women’s assets are confined


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to jewelry or furniture, and do not meet therequirementofformalloansofbanks.”TheStateoftheFieldinYouthEconomicOpportunitiesreporttakesthesamepositiononwomen’sinaccessibilitytoassetsandthustocapital.Oneinterestingpointthatthisreportbringsupisthatthegendergapsinlegal rights do not necessarily closewith income:“Even women in formal sector employment withhighlevelsofeducationfindthemselvesvulnerable.Advocacy on this front can affect women in allincomestrataandacrossagegroups.”13

Thegenderdimensionsofentrepreneurshiparestarting to become a focus of studies in MENA.However, our upcoming study aims to addmuchto the available information about the topic.Noneof the literaturehasprovidedthoroughanddetailedaccountsofhowanentrepreneur’sgenderaffects market entry and the potential to grow.Future research should use representative samplesof women across all subsections by examiningdivisionsofregional,sectoral,orformalstatus,forexample. This should provide better descriptionand analysis of the different ways throughwhichfemale entrepreneurs in different regions andsectorsexperiencegender-relatedobstaclestoentry,growth,andexit.

2.7 SMEs and entrepreneurship

Despite the many similarities, the literatureholdsthatthereareratherbigdifferencesbetweenthe two categories of SMEs on the one handand entrepreneurship on the other. Both SMEsand entrepreneurs share the broader ecosystem.Indeed,“mostnewfirmsaresmallfirms,sothatasubstantial part of the entrepreneurship literatureis concerned with the dynamics of SMEs”.14Thesameobservation isbrought forward in theGEMreport on Egypt that states: “the vastmajority ofearly-stage enterprises and established businessesare small-sizedenterprises:68%,60%and55.9%of nascent, baby and established enterprises,respectively.”15

Despitetheirnumericalsuperiority,SMEssufferfromeconomicdeficienciessuchaslow-productivity,lowcapitalizationrate,andameagershareintotal

output and value added. Such deficiencies arequitecommonthroughthedevelopingeconomies.UnlikeOECDcountries,“wheresmalltomediumenterprisesgenerate55%oftheGDP,inthepoorestcountries,GDPisoftendrivenbygovernmentandlargebusiness;theylacktheeconomicenginethatSMEscanprovide”.16ThisanalysisappliestomostMENA countries, including Egypt and Tunisia,where large companies that have better access tofinancialandnon-financialresourcesproducemostoftheoutput.

This calls to our attention a phenomenonunderlined by the extant body of literature onMENA, which is that of the “missing middlesyndrome.” There was special reference to thisphenomenon in the introductory section of thisarticle.Themissingmiddle syndrome reflects theinabilityofmostprivate enterprises togrow fromthe micro-size to occupy the rank of small andmedium-sized enterprises. This usually implies abroadvarietyofconstraintsandbarrierstogrowth.

Most of the extant literature has producedvaluableanddenseknowledgeabout the financialbarriers that SMEs face in MENA. El-Kabbaniand Kalhoefer17 hold that “the limited access toexternal funding, which is mainly represented indebt – especially bank loans – is associated withthe unattractiveness of SMEs from the creditorpoint of view. Bank loans require credit history,collateral,andprojectionsoffuturecashflowsthattypicallyareunavailable forSMEs”.Becausemostsmallandmedium-sizedenterprisesare located innon-capital-intensive sectors such as commerceandlightindustries,theyoftenlackassetsthatcanbe used as collateral.18The authors estimate that95percentofEgypt’sSMEsdonotmaintainbankaccounts,andthusinformalsavingmechanismsaretheirmainfundingsourceforstart-upandcapital.19Accordingtothesurveytheyconducted,100percentofsurveyedmicro-enterprises(employinglessthanfiveworkers)pointedoutaccesstofinanceastheirnumber one problem compared to 43 percent ofsmall enterprises, 30 percent for medium-sizedenterprises,andnoneinlargeenterprises.20

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Theliteraturehasshownthatmostofthepolicyremedies to the barriers facing SMEs in MENAhave been in the area of credit-provision. Theseremediesattempttofillthegapleftbythefinancialand banking system by establishing special fundsandagencies.

MostoftheworkonSMEsinMENAhasfocusedonthebarrierstogrowthfrompurelytechnicalandeconomic angles. Little attentionwas paid to thedeeppolitical,institutional,andpolicyrootsofthecurrent status ofmicro, small, andmedium-sizedenterprises. SMEs stand for almost the totalityof the private sector in terms of employmentand number of firms. According to Stevenson’sestimates,21theshareofenterpriseswithfewerthan50 employees accounts for at least 95 percent ofprivate sector enterprises in MENA. Accordingto Central Agency for Public Mobilization andStatistics (CAPMAS)data in1996, inEgyptone-person establishments constituted slightly morethan50percentofallenterprisesfollowedbytwo-person establishments accounting for 26 percentof all private enterprises. “This meant that 76%of all private sector enterprises had fewer than 3employees.TheaveragesizeofallEgyptianprivatesectornon-agriculturalenterprisesin1996was2.9employees.”22AWorldBankreport23estimatedtheshare of micro, small and medium-sized firms oftotal enterprise population inTunisia to be 97.8percent. However, they suffer from extremelylow-productivity, and limited capitalization andoutput.Not only has the literature held that thehighbarriers toentryandgrowththat faceyoungentrepreneurs and SMEs is related to the poorperformanceoftheoveralleconomiesofEgyptandTunisia, but some also suggested a link betweenthesebarriers and the exclusionary andpoliticallyunsustainabledevelopmentmodelthatcollapsedinthewakeofthe2011revolts.24

The available literature does suffer fromlimitations.Muchofitfocusesonfinancialbarriersto entry and growth such as start-up capital andaccess to credit.Littlehasbeenwrittenabout thenon-financial obstacles that can prove to be asproblematicasthefinancialones.Hence,ourstudywill focus on typical non-financial barriers such

as taxationpolicies and regimes, labor regulation,education and vocational training, competition,and access to infrastructure. Accordingly, ourstudyshouldaddtheexaminationofnon-financialbarrierstothestudyofSMEs.

Beyondfirmsize,theliteraturehasnotaddressedthequestionofregionaldisparitiesandtheirimpacton entrepreneurship in MENA. Most studies,reports, and statistics have primarily focused onthecapitalcity(asisthecasewithDoingBusinessreportbytheWorldBank).Futureresearchshouldgobeyondthecapitalcityintootherurbancentersin the provinces to examine whether they facesimilar or different barriers and whether thesebarriersareassociatedwithanylocationalfactors.

3. Setting the agenda for future research

The previous sections have provided abrief critical review of the general literature onentrepreneurship in the MENA region. It hasoutlined the top-level findings as well as thelacunaeinthatbodyofliterature.Thissectionaimsto employ the above critique in order to set theagenda for future researchonentrepreneurship inMENA and to guide the intended joint study byCIPEandStanford.

Thestudydependsonasampleofapproximately100respondentsineachcountry.ThesamplesaredesignedtorepresentamicrocosmofentrepreneurialpopulationinEgyptandTunisia.Itrepresentsthevarious categories and groups of entrepreneurs inaccordancewiththeirrelativeweightasrevealedbystatisticalevidence.

As small as the samples may be, they do notaim to quantitatively describe the principalcharacteristicsoftheentrepreneurialphenomenonor at establishing statistical correlations betweendifferent phenomena that belong to the universeofstudy.Forthishasalreadybeenthesubjectofaratherbignumberof studies, reports, and indicessuch as the Global Entrepreneurship Monitorreport (GEM), the Global Entrepreneurship andDevelopment Index (GEDI) and theWorldBank


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DoingBusinessreport.Itisalreadywell-establishedthat the entrepreneurship ecosystems in MENAarenotconducivetobusinessentryandgrowth.Itwouldhardlybeacontributiontoaddtothelonglist of policy and academic material yet anotherpiecethatprovestheobviousandalreadyproven.

Rather, the study aims to use the surveytogetherwithextensivefocusgroupdiscussionsandindividualinterviewstoproduceathickanddetaileddescription of the institutional underpinnings ofentrepreneurship on the one hand, and thoroughanalyticalaccountsofhowdifferentelementsoftheecosysteminteractwitheachother.

The study’s expected contribution lies in itscomprehensiveness and attempt to provide aclear picture of how things are on the groundfor average entrepreneurs in Egypt and Tunisia.This perspective is key in understanding theactual barriers in theory andpractice and thus inunderstandingtheinstitutionalandpolicyareasforreforminsuchpoliticalcontext.

Endnotes

1WorldBank(2009)From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa,WashingtonDC:TheInternationalBankforReconstructionandDevelopment/TheWorldBank,p.26

2Stevenson,L(2011)Private Sector and Enterprise Development: Fostering Growth in the Middle East and North Africa,Northhampton(USA):EdwardElgarpublishing,p.81

3Lingelbach,DelaVina,andAsel(2005)“What’sdistinctiveaboutgrowth-orientedentrepreneurshipindevelopingcountries?”,UTSACollegeofBusinessCenterforGlobalEntrepreneurshipWorkingPaperNo.1.,p.7

4Naudé,W.(2008)“Entrepreneurshipineconomicdevelopment”.ResearchPaper,UNU-WIDER,UnitedNationsUniversity(UNU),No.2008/20,p.8

5Stevenson(2011),p.45

6Schneider,F,Buehn,A.andMontenegroC.(2010)“ShadowEconomiesAllovertheWorld:NewEstimatesfor162Countriesfrom1999to2007”,PolicyResearch

WorkingPaper5356,TheWorldBankDevelopmentResearchGroupPovertyandInequalityTeam&EuropeandCentralAsiaRegionHumanDevelopmentEconomicsUnit,p.515

7WorldBank(2009),p.197

8Attia,S.(2009)“TheinformaleconomyasanengineforpovertyreductionanddevelopmentinEgypt”,Munich Personal RePEc Archive,Onlineathttp://mpra.ub.uni-muenchen.de/13034/MPRAPaperNo.13034,posted27.January200914:43UTC,p.21

9OrganizationofEconomicCooperationandDevelopment(2013)“CompetitivenessandPrivateSectorDevelopment:NewEntrepreneursandHighPerformanceEnterprisesintheMiddleEastandNorthAfrica”,Paris:OECD,p.14

10GlobalGenderGapReport(2011),Geneva,Switzerland:WorldEconomicForum,p.15

11WorldBank(2007)The Environment for Women’s Entrepreneurship in the Middle East and North Africa Region,Washington,D.C.:TheWorldBank,p.x

12El-Hamidi,F.andBaslevent,C.(2010),“ThegenderedaspectsofMSESinMENA:EvidencefromEgyptandTurkey”,Cairo:TheEconomicResearchForum(ERF),WorkingPaper535,p.20

13State of the Field in Youth Economic Opportunities: A Guide for Programming, Policymaking, and Partnership Building(2012),MakingCentsInternational,GlobalYouthEconomicOpportunitiesConference,SEPTEMBER11-13,2012,Inter-AmericanDevelopmentBank’sConferenceCenter1330NewYorkAve.,NW,Washington,p.187

14Naude(2008),p.3

15GlobalEntrepreneurshipMonitor(GEM)(2010)EgyptEntrepreneurshipReport

16StateofthefieldinYoutheconomicopportunities(2012)

17ElKabbani,R.andKalhoefer,C.(2011)“FinancingResourcesforEgyptianSmallandMediumEnterprises”,Cairo:IDEASworkingpaperNo.28,TheGermanUniversityinCairo,p.1

18Ibid,p.5

19Ibid

20Ibid,p.11

– 9 –


21Stevenson(2011),p.81

22Stevenson,L.andAbdelAziz,M.(2008)Influencing Policy Key Factors in the Case of a SME Policy Project in Egypt,Cairo:InternationalcouncilforSmallbusinessworld,p.1

23WorldBank,(2009)Policy Notes on SMEs Access to Finance in Tunisia,WashingtonDC:TheInternationalBankforReconstructionandDevelopment/TheWorldBank.WorldBankFinanceandPrivateSectorDevelopmentEconomicandSocialDevelopmentDepartmentMiddleEastNorthAfricaRegion,p.6

24DeSoto,Hernando,dialogueonthecouncilofforeignaffairs,24April,2012,availableonline:http://www.youtube.com/watch?v=mg2773QYrrY

_____________________________________________________________________________

Amr Adly is a Program on Arab Reform and Democracy (ARD) postdoctoral fellow at Stanford University. He earned his Ph.D. from the European University Institute-Florence, Department of political and social sciences. Before joining Stanford, he worked as a senior researcher at the Egyptian Initiative for Personal Rights, heading the unit of social and economic rights, and at the Ministry of Foreign Affairs as a diplomat. At Stanford, he is leading a research project on reforming the regulatory environment governing entrepreneurship after the Arab Spring in Egypt and Tunisia, which will result in policy papers as well as conferences

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