Image Credit: Niño Jose Heredia/©Gulf News

In Saudi Arabia, small and medium enterprises (SMEs) contribute 33 per cent to the country’s gross domestic product (GDP) and employ 25 per cent of its local workforce according to a Capita Group International (CGI) 2011 report. In the UAE, SMEs contribute 30 per cent to the country’s GDP and employ 86 per cent of its total workforce. The CGI report indicates that SMEs contribute 35 per cent to 45 per cent to the global GDP and an estimated 40-60 per cent to global employment. SMEs employ 52 per cent of the US private sector workforce and they contributes 64 per cent and 44 per cent to the GDP of Spain and Austria, respectively. This shows that small firms in GCC are relatively inefficient. Their share of employment is far greater than their share of GDP. According to the National Commercial Bank (NCB) report, most of the businesses in the GCC, especially SMEs, are saddled with low efficiency, low growth, little innovation and weak management.

Many business literature linked the level of innovativeness and the growth of an economy to the level of preparedness and the effectiveness of its entrepreneurs. In order to ensure growth and continuity of GCC business firms, three important factors must be taken seriously by the GCC governments and their supporting institutions. These factors are — entrepreneurs’ education, entrepreneurs’ management development and the firms’ corporate governance.

In the GCC, entrepreneurship and small business management education are very limited. Most of the universities do not offer more than one introductory course in their undergraduate business programmes and there are very few graduate and concentration programmes in this area. Business community involvement and institutional research are very limited. Many scholars argue that business schools cannot neglect entrepreneurship and small business management education in the 21st century. They assert that business schools, at the global level, need to devote serious attention to this area. Since the GCC has lacked the academic and business developments which more established regions of the world possess, this devotion must be taken even more seriously. This can be achieved through an integrated effort of the governments through their initiatives and education programmes; by the educational institutions through their curricula and research; and the business community through its creation of business opportunities and training.

The challenge of management development is equally shared by the global and GCC markets. Generally, SMEs are not managed as professionally as big firms. SME business owners and managers generally do not spend much money on self-development and human resource training. Leadership, communication, productivity and efficiency are all related to the extent to which managers and employees are educated and trained. A majority of SMEs in the GCC employ semi-skilled or even unskilled labourers with low wages and benefits. Training and development-minded business owners and managers are few, which in turn, reflects on the shortage of well-trained leaders and subordinates. Government initiatives designed to encourage startups to boost the growth of SMEs must emphasise the importance of management development. Increasing the managerial qualities of the SMEs’ human resources will lead to building trust between SMEs and their stakeholders.

As SMEs grow from their entrepreneurial phase to a professionally-managed phase, it is essential for them to adopt the concept of corporate governance. In the GCC, this issue can be seriously applied to the large and matured family businesses. Within the GCC, more than 90 per cent of all commercial activity is estimated to be controlled by family firms. It is estimated that the number of large family firms is in excess of 5,000. The continuation of these firms depends on how well they are managed and governed, either before or after the death of the founder. Those firms are an excellent example for the new generation of entrepreneurs to observe how SMEs can grow and become major players in the market. They have a strong market grip and solid financial base, which make them a credible change agent in the area of business development, education and innovation.

Many of these firms have embraced the concept of professional management, but very few have adopted corporate governance practices. In an unprecedented step, Majid Al Futttaim Holding, one of the GCC’s leading family businesses with a base in the UAE, has adopted these practices. The company is run by five separate professional and independent boards. It is divided into four independent and separate entities with a group holding board. Each entity is governed by a completely independent board. To ensure growth, development and continuity, family firms must embrace the direction that Majid Al Futttaim has taken. A step like this can limit the general global phenomenon which says only 30 per cent of family businesses survive into the second generation and fewer than 6 per cent survive beyond the third generation.

Dr Khalid M. Alkhazraji is a UAE academic and former undersecretary of labour. He is the chairman of Al Kawthar Investment. You can follow him on Twitter at www.twitter.com/Dr Alkhazraji. This article is the fifth of a six-part series.