Tel: +961 1 780200 Fax: +961 1 780206 P.O. Box 113-6194

Hamra, Beirut 1103 2100 Lebanon

Contact: Ms. Eva Dirany eva.dirany@iktissad.com

Dr. Josiane Fahed-SreihDirector

the Institute of Family and Entrepreneurial BusinessLebanese American University

Lebanon Economic ForumSession II – Outlook of SMEs in the Lebanese Economy and Existing

Challenges

Ways to Stimulate the Innovation Culture

Dr. Josiane Fahed-SreihAssociate Professor of ManagementFounder and Director, Institute of Family and Entrepreneurial BusinessLebanese American UniversityMiddle East Coordinator and Fellow for the Family Firm Institute, USA

Beirut, November 29-30, 2012

Dedicated to the Continuity of Family Businesses

Program Outline-Supporting SMEs and Entrepreneurs

The Lebanese EconomyProfile of Lebanese EntrepreneursSupport for InnovationCreate and Stimulate an Innovation

Culture

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The Lebanese Economy

The economy of Lebanon is a developing economy

The private sector contributes to 75% of aggregate demand

The large banking sector supports this demand.

Lebanon has the 54th richest GDP per Capita in the world.

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Private Sector

The private sector in Lebanon employs most of the workforce, 1,050,000 out of 1,240,000 employment opportunities leaving to the public sector only 190,000 positions.

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Local Work Force: Private vs. Public Sector in Some Selected Arab Countries

Country Total Local Workforce Private Sector Public Sector  

Bahrain 115,800 70% 30%  

Kuwait 127,600 1.6% 92%  

Oman 274,000 57% 43%  

Saudi Arabia 5,000,000 10% 90%  

Lebanon 1,240,000 84.6% 15.4%  

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Source: EIU Reports, 1997Source: Ministry of Economy, Lebanon, 1999

Lebanon’s Highlights

The Lebanese economy is service-oriented; The main growth sectors include banking tourism,

health and education. (attracting international and regional interest -as much as 10K-15K USD/Arab tourists)

There are no restrictions on foreign exchange or capital movement

Lebanon’s estimated GDP per capita is some 8131.50 USD/year/individual.

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The Private sector is financing the Public sector

Lebanon’s debt is between 151-160% of the GDP. 80% of that debt is held by private banks.

What this means is that the private sector in Lebanon is financing the public sector…

In other words, the private sector provides social security and services, funded by the public sector, which in turn is originally funded by the private sector.

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Fuel

The private sector generates 45% of the electricity in Lebanon.

Contrary to established laws, some 5.2 million tons of fuel are imported by the private sector.

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Health Services

As for health service, 80-90% of healthcare services in Lebanon are provided by the private sector.

70% of the funds allocated to the healthcare sector end up in only 110 hospitals across Lebanon, and usually not the hospitals in the poorer areas.

So, even the healthcare system is a privately run, public sector.

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Entrepreneurship in the MENA

Access to capital, regulatory framework and infrastructure and entrepreneurial education are among the main challenges.

Arab youth’s newfound interconnectedness through social media is a game-changer that will help overcome obstacles standing in the way of innovative enterprise.

Source: Arabia Monitor- Economic Research and Strategy- Regional Views – Issue #8 – 07.XI.2012

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SMEs and Entrepreneurship in Lebanon (Cont.)

The majority of private companies are family businesses; these businesses are young , emerging small and medium size organizations SMEs in the first and second generation.

In SMES the family plays a leading role, often serving as the primary source of start-up capital, not to mention low cost labor and know-how.

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SMEs and Entrepreneurship in Lebanon

The family and its kinship network are the central elements powering the socio-economic system in the Middle East

The Family Business is the engine that drives economic development and wealth creation around the world and the ability to foster an entrepreneurial mindset across generations is a major element of their continuity and longevity.

Entrepreneurial-led family firms only have an average life span of 24 years

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Sources of Financing used by Entrepreneurs (%

of those surveyed)

Source: GEM MENA 2009 Regional Report. Percentages >100 as several options accepted in survey.

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Study at LAU

The study explores 112 Lebanese family businesses. The research question posted is: “What are the characteristics, attributes and growth orientations of Lebanese entrepreneurs; and what relationships, roles and contributions do family and culture play in the development of private SMEs?”

Source: -“Family Contributions to Entrepreneurial Development in Lebanon”, (J. Fahed-Sreih with D. Pistrui, W. Huang, H. Welsch), International Journal of Organizational Analysis, Emerald Publishing, 2009 issue 3, 2009, pp 248-261.

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Study at LAU

This study explored four descriptive and predictive dimensions shap ing entrepreneurial characteristics and orienta tions:

(a) the psychographic motives and demo graphic attributes of the entrepreneur,

(b) the types of businesses being started, as well as their ownership structure and method of establish ment,

(c) family and enterprise relationships related to participation and influence including employment, investment, and advice, and

(d) how family participation shapes and influences the growth intentions and expansion plans of Lebanese entrepreneurs.

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Results of the Study LAU

The findings suggest that Lebanese entrepreneurs are motivated by the need for independent based achievements and by the flexibility independent work gives.

They are also motivated by the security this gives to their families.

Entrepreneurs were found to rely on the support of their families to develop and grow their businesses.

70% of the family businesses surveyed employed at least one member of their families on a full time basis.

Family participation in the form of employment and investment was found to have a positive impact on entrepreneurial growth intentions and expansion plans.

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Barriers to Innovation and Competitiveness of the Private Sector

In this fiercely competitive, fast paced, global economy, creativity is not only an important source for building a competitive advantage, but it is also a necessity for survival

When developing creative solutions to modern problems, entrepreneurs must go beyond merely relying on what has worked in the past.

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Lebanese SMEs

Lebanese SMEs suffer from this fierce competition, from the globalization phenomenon and from structural factors such as:

1- The fragile finance structure of businesses 2- The inflexible business models 3- And the focus of the banking sector on

financing the public debt rather than productive activities.

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Improving Competitiveness

Typically policies to improving competitiveness have focused on three main areas:

1-providing infrastructure such as transportation, telecommunication, water and sanitation

2- Improving public services such as education, health, public services, housing

3- Reducing the cost of doing business by simplifying regulations, such as making it easier to open businesses, pay taxes, hire workers, acquire land and exit from businesses.

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Ease of Starting a New Business

Source: World Bank, “Doing Business Report”, 2012. New firm density is number of newly registered limited liability companies per 1,000 working-age people.

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Land

By comparing the price of land in Lebanon to the region, we find that Lebanon stands among the highest when it comes to the cost of land.

Saudi Arabia for instance, offers land for a symbolic value of 1$ /meter square for every industrial project to be executed in Saudi Arabia to promote the industrial sector and to encourage large multi- nationals to come to Saudi Arabia for investments.

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Fuel

Another comparison is the price of fuel, in Lebanon the price of fuel is L.L.36600 for 20Liters the equivalent of $24.4, for the 95octane and 35900LL equivalent to $23.93 for 98 octane, the government lately decreased it by 5000L.L. the equivalent of $3.33 which is still a way above the regional rates.

In Saudi Arabia for instance, the price is around $0.1/Liter or $2 per 20 liters, which raises the question again, how can the Lebanese Industry compete at a cost level?

In the US the price of fuel is around $0.66/liter or equivalent to $13.2/ 20 liters knowing that the purchasing power of the Americans is far higher than the Lebanese.

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Some Lebanese companies have delocalized to Syria for instance and hence were able to decrease their overall cost structures by 80% as compared to their presence in Lebanon, and mainly the cost of labor which is much lower and the cost of energy

Such examples show that the Lebanese environment still needs a number of action plans and policy reforms and support to be able to compete according to International standards and at least on a regional stand.

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Recent theoretical advances and successful cases suggest that, for a local economy to be competitive in a globalized environment, simply reducing the cost of doing business, while critical, is not sufficient.

One should advise to take actions aimed at adding value to local businesses, by creating an environment that creates incentives for local firms to innovate and learn from each other, to upgrade the level of competitiveness of the overall local economy.

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Understand the Market

The starting point is to understand the local economy and the market.

Interventions to boost competitiveness should start with a clear understanding of the market and the main drivers of economic growth.

It is critical to bear in mind that private firms determine competitiveness, and government intervention should merely complement the market and take effect only in situations where market failure is present.

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Such scenarios include government provision of public goods, mitigation of negative externalities such as environmental pollution and traffic congestion, promotion of positive externalities such as knowledge sharing, and addressing coordination failures.

It is important, however, to recognize the risks associated with these types of intervention.

If they are of the wrong type or scale, or implemented poorly, the possibility of failure is significant.

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Cluster Approach

In practical terms, the “cluster approach” developed by Michael Porter, provides one pragmatic course of action for government action plans for competitiveness.

The cluster approach offers a practical framework for policy makers to organize public and private actions (social capital) centered on competitive market forces.

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Up Grading

The essence of the cluster approach is to foster innovation and upgrading among the members of the existing or emerging clusters in the economy.

There are no guarantees for success, and the risk of government endeavors in economic development is often higher than that of other types of government activities

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Cautious Approach

Forces outside government control are often more important than policy interventions.

It is therefore important to understand the key drivers of growth, both internal and external, and to maintain a cautious approach towards government interventions.

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The 10 suggestions

I, then suggest the following:

Consider Lebanon’s private sector as unique Joint marketing and investment and export promotion Value chain integration Entrepreneurship development and support to SMEs Support research and development Skills upgrading Economic zones Specialized infrastructure or service Community economic development Lower taxes

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1-Consider Lebanon's Private Sector as Unique

In pursuing competitiveness, we must search and formulate a unique set of strategies and actions that are suitable for Lebanon’s situation.

There is no single action that is applicable to all.

In fact, the most important challenge is to propose a unique value proposition and formulate a strategy that differentiates Lebanon from the rest of the Middle East.

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2-Joint marketing and investment and export promotion

We must support activities that expand the demand for local products and services, and attract external foreign or domestic investments.

Taking Brazil as an example with its trade fair and how the Ceará Footwear Technology Trade Fair (FETECC) had an impact that went beyond commercial promotion.

This fair although considered as a marketing tool to promote cluster sales, FETECC had served as a learning opportunity for local firms, as it brought into the region new technologies, inputs and machinery, which most local producers would otherwise not have a chance to become familiar with.

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2-Joint marketing and investment and export promotion (Cont.)

As a specialized trade fair, FETECC brought together suppliers, buyers, local producers and support agencies, and is one of the best opportunities to do business during the year, and is an essential tool for sales promotion, marketing and networking initiatives.

The event allowed participants to be in close contact with clients and to reach visibility on the local and national scene. Numbers were remarkable.

During its first year (1998), a total of 54 firms participated in the event, which resulted in sales of approximately US$6 million.

Ten years later, nearly 120 firms took part in the event (FETECC 2007), including some operating in footwear business in other states of Brazil, selected countries of Latin America, and China. In that year, reported sales reached US$77 million and the number of visitors reached 12,000.

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3-Value Chain Integration An important feature of today’s global economy is the presence of

global value chains, where the R&D, design, manufacturing of different components, and marketing are undertaken in a highly integrated fashion but from different locations and by different firms.

One way to quickly catch up in productivity is to enter into such a value chain, often starting with a less lucrative segment of the chain and then moving on to higher value-added ones.

Value chain analysis helps the policy maker to identify the bottlenecks in the productive chain and to determine which bottlenecks deserve priority attention of government, which can be expected to be resolved by the private sector and which require public-private partnership.

In Lebanon, the major bottleneck in the process is the high cost of labor relative to the regional market, and high cost of land in addition to the high cost of energy.

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4-Entrepreneurship development and support to SMEs

Significant scope exists for public policies and actions, to address market failures that limit supply of finance, business development services and training, industrial real estate, information problems faced by start-up enterprises, and non- competitive market structures dominated by one or a small number of firms.

In Lebanon, most of those problems were addressed by ELCIM, however what is still left is to address the problem of industrial real estate.

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5-Support Research and Development

By expanding well-focused, applicable R&D expenditure, motivating university-industry linkage, supporting targeted business incubators, and attracting talents.

The University /industry linkage is part of the project, however, identifying interesting business incubators and supporting them is of relevance to improve the competitiveness of the private sector.

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6- Skills Upgrading

Two of the highest priorities of almost any cluster’s plan should be the availability of experienced and skilled labor, and the customized and specialized education and training that produce, upgrade, and deepen skills and knowledge.

This is performed by ELCIM but could be enhanced with other educational projects

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7- Economic Zones

The economic zones offer a combination of benefits: by facilitating the land assembly process for industrial development; providing specialized infrastructure;

facilitating inter-firm learning, exchanges and collaboration through physical co-locating of firms; and creating a “cluster” identity.

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8- Specialized infrastructure or service

High quality infrastructure, such as transport, power, water and telecommunications, are in themselves important for Lebanon’s economy.

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9-Community Economic Development

In advancing the competitiveness agenda, we need to look for solutions to address livelihood and job needs of low-income communities.

actively engaging in slum-upgrading activities to improve services

The challenge is to identify the critical relationships among the many agents that are likely to shape the future economic, social, political and environmental quality of Lebanon

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10- Lowering Taxes

Increasing taxes would lead to a structural damage at a time when the economy is facing its hardest conditions.

Lowering taxes for starting a business and encouraging entrepreneurship would over the long term increase public revenues, while creating a climate that would enhance investments and attract Middle Eastern investments.

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Achieve a common vision

The process of strategic planning is to identify the unique, hidden, intangible capacities of Lebanon, to achieve a broad-based agreement on the unique value proposition and direction for the country, and to arrive at an actionable roadmap to achieve a common vision.

We should respond to how Lebanon can be distinctive, and what is its economic role in its region. In which cluster can Lebanon build a competitive advantage, and what aspects of Lebanon are crucial to success when compared to other locations.

For Lebanon to attract investments to the region it needs to offer a unique mix of strengths in terms of business environment conditions and cluster positions; the mere absence of weaknesses is not enough.

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Action Plan

The establishment of a platform to allow SMEs to implement innovative ideas more easily

The establishment of the special service platform to ensure safety, proper packaging, labeling, branding etc.

Support SMEs by providing an E-Platform Support franchising activities for SMEs. Support the establishment of new ventures and production capacity Support the use of Innovative strategies  The establishment of a link between IRI/ELCIM and SMEs for applied

research projects and development. Support research studies for SMEs- Support educational programs for SMES Capacity building and awareness raising- 

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Contact Details

Dr. Josiane Fahed-SreihAssociate Professor of Management,Founder and Director, Institute of Family and

Entrepreneurial Business, Lebanese American University

Middle East Coordinator and Fellow, Family Firm Institute, USA

Mobile: 961-3 411 811Fax: 961-9 740 163Email:jsreih@lau.edu.lb;cpi@cyberia.net.lb;