Challenges Facing The Lebanese SME Sector

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Challenges facing the Lebanese SME SectorZeina El KhouryHead of Enterprise TeamMinistry of Economy and Trade5/16/20131

What is an SME? There is no universal definition of SME; different countriesfollow different criteria, but all agree that they are enterprises with considerablegrowth potentialDefinition of SMEsEuropean UnionMicroSmallMedium 10 employees 2 M Turnover or 2 M Balance Sheet 50 employees 10 M Turnover or 10 M Balance Sheet 250 employees 50 M Turnover or 43 M Balance Sheet 20 employees 100 employees 500 employees 5 employees 15 employees 50 employeesUnites StatesEgyptSouth KoreaManufacturing SMEService SME 300 employees 200 employeesSME 300 employees 100 M TurnoverSingaporeLebanon5/16/2013?2

SMEs contribute substantially to their economies and play a central role inenhancing economic dynamism, job creation and innovationSMEs Contribution to EconomiesIGenerate employmentIIIncrease output with value addedIIIIncrease household incomeIVIncrease firms and national competitiveness and productivityVSpur innovationVIIncrease exportsVIIGenerate fiscal revenuesVIIICreate competitionIXNurture entrepreneurship culture including that of women and youth5/16/2013Increase GrowthDecrease Poverty3

Worldwide, they represent more than 95% of enterprises, employ around 68% ofdeveloped countries working population, their share of exports amounts to 37% ,and they contribute to 53% to their GDP on averageSMEs Contribution to Employment, Exports and GDPSMEs share of Total WorkforceKorea88%Germany79%SMEs share of China58%Japan57%69%79%ChinaSMEs contribution to UAE22%Malaysia50%42%16%38%25%68%Developed CountriesUNESCSAP, OECD, SBA country factsheets, CAS ped CountriesUAEKSA30%25%53%Developed Countries4

Given their importance and potential, most countries have included SMEdevelopment in their growth strategies, thus shaped large scale support mechanismsand created agencies to develop this sectorSME “ Funding support – a rangeof grants, loans, creditguarantees and coinvestments– Export assistance - localmarket information– Support companies tobecome leaner– Incentives to stimulate incompany R&D– Assistance with R&Dcollaboration– Training and mentorship– Connections andintroductions to customersoverseas– All their advisory servicesare sector specific– Innovation support andfunding, favoringtechnology transfer andinnovative projects withgenuine market potential– Guarantees for bank loansand equity contributions– Financing for investmentsand working capitalrequirements– Advisory services andcustomized advised toSMEs to enhanceproductivity– Support innovation throughfive research andpolytechnics centers, andthrough innovationvoucher– Training for SMEs onleadership, branding,customer service, design, IPmanagement and marketing– Service ExcellencePrograms– Grants relating toconsultancy, training, andcertification– Funding, loans and creditguarantee schemes– Interest subsidized loanfor export activities,working capital,employment– Financial support fordomestic fairs,consultancy, training,energy efficiency,industrial property rightsand business trips abroadand R&D– Loans for IndustrialImplementation SupportProgram– Applied EntrepreneurshipTraining Program– Supports financially andtechnically SMEs bygetting them into capitalmarket5/16/20135

Supporting this sector is key to help Lebanon overcome its challenges, mostimportantly, JOB CREATIONPressing Challenges Facing Lebanon1Unemployment3– 45% of the Lebanese population areyoung– Lebanon will need to create 23,000 jobsper year, 6 times more, to absorb the newentrants to the Labor market*– Unemployment is 11%, 35% among theyouth (1 out of 3)2Loss in National Competitiveness– Increasing operational and productioncosts– Depleting InfrastructureEconomic Slowdown– 1.5-2% in 2012 and forecasts around 2%in 2013, well below Lebanon’s potential4Substantial Brain Drain– High rate of youth and skilled emigration– Brain drain losses are huge and outweighthe benefits, mainly remittances– Lebanon ranks 120 out of 144 countriesin the world in brain drain losses,according to the Global CompetitivenessIndex“Good Jobs Needed: The Role of Macro, Investment, Education, Labor, and Social Protection Policies ”, World Bank, Dec 20125/16/20136

Despite the existence of several scattered policies and initiatives to support SMEs,they still face challenges. To overcome those, a COMPREHENSIVE SUPPORTSTRATEGY needs to be formulatedSME Strategy Formulation and Implementation1234Assessment of the CurrentStatePolicy and InitiativeFormulationImplementationMonitoring andEvaluation– Take stock of alreadyexisting initiatives– Assess Lebanon’sstanding in BusinessEnvironment indicators– Define drivers for SMEdevelopment– Assess drivers andidentify challenges– Transform challengesinto prospect initiatives– Consult withstakeholders and securebuy in– Assign owners forinitiatives– Agree on timelines andimplementation plans– Track and reportprogress of initiatives– Implement initiatives asper agreed-upon actionplans and timelines– Identify potentialimprovementopportunities– Adjust implementationaccordinglyFocus of this presentation5/16/20137

To start with, a review of Lebanon’s standing in key business environment andcompetitiveness indicators was conducted - highlighting a backsliding performanceBusiness Environment Snapshot: Key Competitiveness Indicators2013Ease of Doing BusinessInternational Finance Corporation115Enterprise SurveyWorld BankGlobal Competitiveness Indicator, WorldEconomic ForumIndex of Economic FreedomHeritage leTop 3 Constraints/Problematic Factors– Dealing with construction permits– Resolving insolvency– Enforcing contractsNot Applicable– Political stability– Electricity– Access to finance91– Inadequate supply of infrastructure– Inefficient government bureaucracy– Government Instability9089899289– Property rights– Freedom from corruption– Business freedom8

Furthermore, a detailed assessment of the SME sector was undertaken based on thekey drivers of SME development and startup creationFramework for SME DevelopmentInstitutional upportPrograms andInstitutionsInfrastructureRegulatory Frameworkand EnforcementPoliticalStabilityPolicy Efficiency DriversBusiness Environment DriversStatisticsand ResearchRegularand ConsistentDataand Research5/16/2013Firm Competitiveness DriversCore Driver9

Firm Competitiveness DriversAccess to finance is considered to be one of the top constraints SME development, inspite of the significant improvements in the last decadeAccess to FinanceChallengesKey Illustration– SME share of total loans amounted to 16% in2010, significantly lower than 26% in developedcountries– High levels of collateral needed– Very limited venture capital deals, equity andangel investments. One reason is the lack of exitstrategies for these investments due to Weak capital markets Lack of an efficient insolvency framework forbusinesses and bankruptcy law Family owned nature of SMEs is reluctant toequity investments (77.6% of firmsinterviewed by MoET in 2007 found equityfinancing unattractive)– Low microfinance penetration, with a largemarket gap estimated by IFC in 2008 to be around88%– Substantial number of informal firms– Limited access to finance for womenentrepreneurs, 51% of female business owner soughtloans but only 17% were granted. (IFC survey 2011)Value of collateral needed for a loan (% of the loan)Yemen, , 0Egypt, Arab Rep.86Malaysia65124Proportion of investments financed by equity or stock sales9. Europe High-income Latin America& Central AsiaOECD& CaribbeanLebanonMiddle East &North AfricaWorld Bank Enterprise Survey, 20095/16/201310

Firm Competitiveness DriversDespite the high level of education in Lebanon, there is a mismatch between thesupply and demand for skills and SMEs face difficulties in finding skilled workersSkilled Human CapitalChallenges– Persistent gap or mismatch between the skillsacquired at university and the requirements ofbusiness– Relatively under-developed Vocational Educationsystems and no link between businesses andvocational education– No forward looking vision or sectoral studies tohelp determine the future market needs and thelabor demand to align with university policiesand degreesKey IllustrationPercent of firms identifying an “InadequatelyEducated Workforce” as a major constraint55.535.829.529.322.2– Low levels of employee training on the job21.821.7World Bank Enterprise Survey, 20095/16/201311

Firm Competitiveness DriversDespite high levels of creativity among entrepreneurs and the sophisticatedconsumer behavior, SMEs still lag behind in terms of innovation and technologyTechnology and InnovationChallenges– Low levels of R&D investments– Low research collaboration between universitiesand industry– Low levels of technological sophistication amongnew startups and SMEs (MoET study in 2007shows that only 15% of firms use state of arttechnology)– Weak state of cluster development (Lebanon ranks109 according to the GCI 2012, and 108 in GII2012)Key IllustrationInnovation Pillar –Global Competitiveness Indicator(119/144)Availability of scientists and engineersPCT patents, applications/million pop.University-industry collaboration in R&DCapacity for innovation376795114Company spending on R&D122Quality of scientific research institutions129Gov’t procurement of advanced tech products141Innovation and Use of Technology among Early StageEntrepreneursNew Some1618Latest New1423None66Novelty inProductsNot New62Use of LatestTechnologyGlobal Competitiveness Index, 2012. Global Entrepreneurship Monitor, 20095/16/201312

Firm Competitiveness DriversA number of support programs and institutions exist, but offered support is small inmagnitude and uncoordinated leading to missed opportunities of synergiesSupport Programs and InstitutionsChallengesKey Illustration– Limited awareness of different support initiativesUncoordinated Support Along Various Components ofSME Development– Insufficient training and advisory services forSMEs– Business development centers focus more onstartups and have limited financial capacity inoffering support– Little mentorship initiatives despite recentprogressQualityFinancial SupportTraining– Little business matching opportunities are offered– Limited impact evaluation to assess the efficiencyof these programsIncubators Export SupportBusiness MatchingResearch5/16/2013Networking13

Firm Competitiveness DriversAccess to markets and internationalization are still problematic for SMES,hampering their benefits from the different trade agreements in placeAccess to MarketsChallenges– Customs and trade regulations are a majorconstraint for their business and export– Limited levels of compliance with internationalstandards hindering the export potential of firms.(According the 2009 WBES, only 17.9% of firmshave an internationally-recognized qualitycertification)– Narrow access to information on standards,regulations and customs reporting requirementsdue to scattered and multiple sourcesKey IllustrationPercent of firms identifying customs and traderegulations as a major constraintLebanon36.6Sub-Saharan Africa21.9Latin America & Caribbean19.7Middle East & North Africa18.7Eastern Europe & Central Asia14.4East Asia & PacificHigh-income OECD12.77.3World Bank Enterprise Survey, 20095/16/201314

Business Environment DriversIn addition, business regulations, political situation, infrastructure readiness, andmacro-economic environment are not conducive for investmentsRegulatory Framework & EnforcementEase of Doing Business 2012-13 Ranking172453020474610Dealing withConst. PermitsGlobal Competitiveness Index 2012144 countries1271251191051.9869InfrastructureEase of Doing Business, 2012. World Bank Enterprise Survey, 2009. Global Competitiveness Index 20125/16/201358BusinesssophisticationFinancial marketdevelopmentMarket sizeInnovationTechnologicalreadiness4.64Labor marketefficiencydue to waterInstitutions4.05Infrastructure8.6766due to poweroutageMacroeconomicenvironmentdue tocommunicationoutage93483632Health & primaryeducation1351.57 1.55Goods marketefficiencyLosses Incurred by Businesses as % of SalesHigher education& ing aBusinessRegisteringPropertyGetting ngElectricityPaying Taxes36Good 37Top Business Environment Constraints for Firms(% of 009516150PoorExcellentPolitical StabilityMacroeconomic Environment15

Policy Efficiency DriversWeak institutional linkages between the different institutions and programstargeting SMEs are leading to suboptimal resultsInstitutional StructureChallenges– No clear framework for policy with institutionalroles and mandates among stakeholders involvedin policy setting– Minimal public private dialogue andcoordination resulting in lack of awareness of thesupport offered and challenges not addressedKey IllustrationSegmented Approach for Policy Settingfor SME SupportChambersand nancialAssociations5/16/2013Universities16

Policy Efficiency DriversThere is a severe dearth of statistics and research on SMEs and entrepreneurs inLebanon hindering the formulation of evidence based policies and targeted supportStatistics and ResearchChallengesKey Illustration– Lack of statistics that map the size of enterpriseswith any other variable Access to finance Number of start ups Technology Sector Performance Training needs SMEs lifecycleIndicators and Reports available and used– Lack of sectorial studies that take into accountcompetitive advantage, sector potential, marketopportunity, value added and employmentmultipliersInternational Indicatorsand ReportsLocal Indicators andReports– World Bank EnterpriseSurveys (2009)– Doing Business(Yearly)– Global CompetitivenessIndex (Yearly)– World Bank, OECD,IMF reports anddatabases (Yearly oroften)– Census of Building andEstablishments, CAS(1996, 2004)– Industrial Survey,MoI/UNIDO (2010)– Performance andMarket Review, MOET(2007)– Executive Opinionsurvey (2012)– Kafalat, Subsidizedloans (not mapped tosize) (Yearly)SME Performance Review (Yearly)5/16/201317

Given that we have identified the challenges facing SMEs, what is most importantnow is to transform these challenges into initiatives and this is the purpose of ournext presentation.SMEs are the key to unlock the vast potential of the Lebanese economy!A CALL FOR COLLECTIVE ACTION!Thank you for your attention!5/16/201318

Micro Small Medium ? 10 employees 2 M Turnover or 2 M Balance Sheet 50 employees 10 M Turnover or 10 M Balance Sheet 250 employees 50 M Turnover or 43 M Balance Sheet 20 employees 100 employees 500 employees 5 employees 15 employees 50 employees Service SME Manufacturing SME

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