Entrepreneurship helps drive Dubai's economy

 

Small and medium-sized enterprises (SMEs) dominate Dubai’s economy, accounting for around 95% of companies operating in the emirate, according to Dubai SME, the Dubai Department of Economic Development’s SME agency. They also generate nearly 40% of the economy’s value added and 42% of employment. The value-added figure breaks down into a contribution of 17% by medium-sized firms, 14% by small firms and 8% by micro-enterprises.

Dubai SME defines a manufacturing or services SME as a firm with turnover under Dh250m ($68.1m) and an employee headcount of less than 250. Trading firms must also have less than Dh250m ($68.1m) in annual turnover, but no more than 75 employees. Trading SMEs account for the lion’s share of the segment’s value added, at 47%, followed by services firms (41%) and manufacturers (13%). Based on enterprises holding membership with Dubai SME, around 60% of SMEs in the emirate operate in retail.

Confidence Metrics

Business confidence in the SME segment appears positive. In the second quarter of 2017 Dubai SME’s Business Confidence Index – based on a survey of local firms’ outlook for the third quarter of the year – stood at 107.3, suggesting SMEs were optimistic about the near future, as anything above 100 indicates a positive outlook. While this was down from 117 the previous quarter, it was roughly in line with 109.6 at the start of 2016. Some 43% of firms believed revenues would increase in the third quarter of 2017, compared to the 14% that foresaw a decrease and another 43% that predicted no change. Manufacturing SMEs were particularly optimistic, with 64% forecasting an increase in revenues. SMEs in the emirate had a slightly less positive outlook than large companies (112.9). Smaller firms were more optimistic regarding volumes and net profits, but less so about hiring and selling prices.

Government Backing

Local authorities aim for the segment’s economic contribution to rise further. As part of plans to diversify the emirate’s activities, Dubai Plan 2021, the medium-term development plan for the emirate, seeks to increase SMEs’ contribution to GDP from 40% in 2017 to 45% by 2021.

In keeping with these efforts, the government has taken measures to facilitate this development through entities such as Dubai SME, which, among other activities, operates the Mohammed bin Rashid Al Maktoum Fund to finance Emirati-owned SMEs, particularly early-stage firms. The fund provides a variety of financing solutions for young firms, including seed capital of up to Dh1m ($272,000) and credit advances of between Dh1m ($272,000) and Dh3m ($817,000). It also operates the START competition for Emiratis with ideas to launch innovative new businesses. The 2017 competition, which was completed in August of that year, awarded 10 winners financial support worth a total of Dh1m ($272,000).

Local content provisions are a key tool the authorities are using to support locally owned firms. An amendment to the emirate’s SME law approved in November 2016 requires government entities and firms in which the government has more than a 25% equity stake to allocate 10% of purchases to Emirati-owned businesses. It also exempts locally owned SMEs from fees for preferred supplier status.

Accessing Finance

The government is also working to improve smaller firms’ access to funding. As in many jurisdictions, this can be a struggle for SMEs, and 80% of respondents to a study conducted by Dubai SME, covered in its 2013 report “The State of Small and Medium Enterprises in Dubai”, said their own savings were the main source of funding for their business, with 23% having taken a bank loan during the previous five years. Such loans become rarer for smaller firms, and trading-oriented SMEs have the least difficulty obtaining bank financing.

The second half of 2016 saw the official launch of the Dh2bn ($544.4m) Mohammed bin Rashid Innovation Fund, distinct from the Mohammed bin Rashid Al Maktoum Fund operated by Dubai SME, to provide guarantees to lenders to encourage credit provision to companies and residents testing out innovative ideas, as well as lower collateral requirements for borrowers. The fund is open to individuals and companies of all sizes, but is likely to be particularly popular for SMEs and start-ups, given their greater difficulty obtaining bank financing.

While bank credit is generally the first port of call for SMEs seeking external financing, the authorities are keen to promote other options. In 2016 Dubai SME issued a report titled “The State of SME Equity Financing in Dubai” that highlighted the potential of equity investment as a means of funding smaller businesses and start-ups. The level of such investment in smaller firms is currently low, with total early-stage investment standing at $30m in 2014. Investment is more common in knowledge-led sectors such as ICT and health care than in the main SME sectors of wholesale and retail trading.

Of smaller firms with equity-based financing, the report found that 70% received support from angel investors, while 41% were funded by an incubator or accelerator, and 33% by a venture capital firm. Only 4% used crowdfunding, though this is likely to have risen as the method has gained international popularity, and local crowdfunding platforms such as Beehive and Eureeca have developed.

Ratings Scheme

January 2017 saw another move to support the segment: Dubai SME launched a new ratings scheme for smaller businesses operating in the emirate, known as RATE SME. The initiative is an extension of a previous scheme operated by the agency, known as SME 100. Participation is voluntary at a cost of Dh5000 ($1360) per business. The scheme rates firms across the five categories of business performance, innovation, corporate governance and excellence, international expansion and corporate social responsibility. The initiative aims to help well-managed firms – which will achieve higher ratings – obtain benefits like lower credit costs. Better-rated firms will also receive faster payments from government clients. Participating companies will be offered follow-up services based on their ratings.

Business Environment

Other recent reforms are improving the business environment for smaller firms. Prominent among these is a bankruptcy law implemented at the end of 2016, which allows firms in distress or facing insolvency to apply for restructuring. The changes are anticipated to reduce the number of so-called “skips” – the practice of individuals or company owners with insurmountable debts leaving the country – which has particularly affected the SME segment. This should improve banks’ confidence in lending to the segment. “The government is doing a good job of changing the legal infrastructure in order to establish a more entrepreneurial ecosystem,” Rajai Ayyash, managing director and Gulf regional executive for global client management at financial services holding company BNY Mellon, told OBG, citing changes such as the new bankruptcy law.

In addition to its impact on government revenue and consumer prices, the introduction of a value-added tax (VAT) across the GCC on January 1, 2018 was expected to have positive implications for the operating environment throughout the UAE – particularly for SMEs (see analysis). “Many SMEs do not keep proper accounts, but the VAT introduction will require them to do so and will in turn improve other aspects of their operations, such as human resources,” Sudhir Kumar, senior partner at professional services firm Morison Menon, told OBG. Improved transparency and accounting standards are likely to help SMEs access bank credit, which is often hindered by poor record keeping.

Start-Ups

According to remarks made to media in April 2017 by Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, crown prince of Dubai and chairman of the Dubai Executive Council, the emirate hosts more than 100 start-ups and small businesses with yearly revenues below $20m. A network of accelerators and incubators is developing, many of which are based in free zones, facilitating the launch of more start-ups in the future (see ICT chapter). The Dubai 2021 plan foresees the creation of 40,000 new start-ups over 2017-21, generating 370,000 new jobs.

Successful local start-ups are working with the authorities to help others follow in their footsteps. In June 2017 Beehive, a Dubai-based peer-to-peer lending platform, signed an agreement with the Mohammed bin Rashid Al Maktoum Fund to help Emirati-owned SMEs access credit through its service, including the provision of loan guarantees of up to Dh500,000 ($136,000). In July 2017 Souq.com, a Dubai-based e-commerce retailer, signed a memorandum of understanding with Dubai SME to help smaller businesses sell their products through its platform by providing workshops on various matters such as online branding, payments and logistics.

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The Report: Dubai 2018

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