How is Egypt’s entrepreneurship ecosystem faring? The Global Entrepreneurship Monitor tracks the key indicators

The launch of the Global Entrepreneurship Monitor’s Egypt National Report 2016-2017, published by the AUC School of Business.

Entrepreneurship in Egypt has significantly grown over the past few years and noticeable improvements in relevant trends have worked to create a more concrete, supportive ecosystem. However, some persistent challenges remain, along with core issues that need to be addressed by both the government as well as the organizations that work in this sphere.

“Overall, there is a positive trend compared to previous years: early-stage entrepreneurship has increased, entrepreneurial intentions are growing, societal perceptions are improving and there is higher opportunity recognition, where more individuals recognize good market opportunities for a new business,” according to the Global Entrepreneurship Monitor’s Egypt National Report 2016-2017.

The findings of the report highlight a need to look more closely at micro enterprises and ones that operate in the informal economy, given the sheer volume of activity happening in this space. Egypt also has a large amount of ground to cover when it comes to improving entrepreneurial education.

When it comes to gender, there are some gaps that need to be addressed and there is considerable work to be done when it comes to supporting women while taking into consideration the local context, as the report finds varying degrees of support based on location and social segment.

Published by the American University in Cairo’s School of Business, the report measures key indicators and provides analysis of entrepreneurship activity to provide a holistic view of how the space is developing and what is needed for improvement.

The findings of the expansive report are based on a nationwide survey conducted in 2016 among 2,528 respondents aged 18-64 in 64 economies as well as a survey of 47 national experts in 65 countries.

The authors of this year’s report include Ahmed Tolba, associate provost for Strategic Enrollment Management and associate professor of marketing at AUC School of Business, and Ayman Ismail, director of the Center for Entrepreneurship and Innovation as well as AUC Venture Lab, who presented the key findings last week.

A large section measuring government support and the regulatory framework draws some key findings when it comes to the role of government in the space.

“Government should support programs instead of implementing them so as not to create more bureaucracy,” Ismail said, adding that there are around 300 new entrepreneurship support organizations opening soon that need to learn from the experience of existing ones.

There is also an important role to be played by large corporations, which need to do more “impact sourcing” from startups in the value chain.

How is entrepreneurship perceived?
“When it comes to societal perceptions of entrepreneurship, there has been a consistent positive image of entrepreneurs in the market,” said Ismail.

According to the survey, entrepreneurship is perceived as a great career choice by 83.4 percent of Egyptians, both a strong increase from the previous year’s 73.6 percent and a high ranking of fourth place among other GEM countries.

Successful entrepreneurs are perceived as having high social status by 87.1 percent of Egyptians, which the report notes, highlights “the difference in perception between entrepreneurs, who are often perceived as courageous, hardworking and risk-taking as opposed to large business owners, who are often perceived less favorably.”

While societal perceptions are important in creating an encouraging climate, how people personally perceive entrepreneurship also affects whether someone would consider starting a business.

The first step in this process is recognizing an opportunity. In Egypt, 53.3 percent of the non-entrepreneurially active population sees good opportunities in starting new ventures, “which is the highest [ranking] in the Arab region,” said Ismail.

Despite this, “self-confidence gap” still exists, Ismail explained. According to the report, Egyptians’ perception of their own capabilities to open new businesses declined to 46.6 percent in 2016 (ranking 38th among GEM countries), which is a drop from a much higher 63.4 percent in 2010.

The report goes on to explain that this “may be attributed to the challenging political and economic environment and limited access to finance.”

On the other hand, at just 33.2 percent, fear of failure is not a primary barrier for entrepreneurs. This is evidence by a whopping 65.5 percent of Egyptian non-entrepreneurs who expressed interest or intention to start a business within the next three years.

“This has changed substantially and is the highest globally (more than 2.5 times the global average),” said Ismail, which can be explained by an increasing number of programs targeting entrepreneurial awareness among youth.

Getting into entrepreneurship
The main indicator to benchmark, according to Ismail, is total early-stage entrepreneurial activity (TEA), which in 2016, came in at 14.3 percent, ranking 17 among GEM countries and higher than the global average of 12.3 percent.

TEA activity reflects the percentage of people either involved in actively setting up a new business or that have started a business that is younger than 3.5 years.

Nascent entrepreneurship, or the percentage of people currently involved in setting up a new business that they own or co-own, has risen significantly to 8.2 percent in 2016 from 4.0 percent in 2015 and 2.1 percent in 2010.

A similar pattern exists when measuring the ownership rate for new businesses younger than 3.5 years, which recorded 6.6 percent in 2016. Meanwhile, 6.1 percent of individuals aged 18-64 are currently owners or managers of an established business that is older than 3.5 years.

Business discontinuation
Another key indicator is the rate of business discontinuation, which, despite the generally positive trend in other indicators, has also increased in the past five years. In 2016, this rate was 7.3 percent, putting Egypt in third place among GEM countries.

“One explanation is that there are a lot more startups opening, so the chances of some closing are higher,” said Ismail. “Another is the economic conditions — it’s probably a bit of both,” he adds.

The top three reasons cited for business discontinuation were: lack of profitability (47.7 percent), family or business reasons (20.5 percent) and problems getting financing (11.7 percent).

Lack of profitability is a “catch-all explanation” that covers a broad range of reasons, from challenges in the business environment to whether entrepreneurs have the ability to conduct proper financial planning.

While access to finance is often cited as a top challenge for new businesses, it is a lower 11.7 percent, which according to the report, “may be explained by the fact that a majority of the businesses established are micro and small enterprises that are often financed by the entrepreneurs and their family and friends, with limited expectations of institutional funding.”

What sectors are seeing more entrepreneurship?
More entrepreneurs in Egypt are driven by opportunity (61.2 percent) than necessity (31.3 percent). Opportunity-driven entrepreneurs have grown since 2010 along with the growth in the ecosystem and awareness.

Still, a substantial 31.3 percent of Egyptian early-stage entrepreneurs started their own business due to the absence of other work alternatives. Most of these have started a small or micro enterprise that is often informal, a lot of which is in the retail or agri-business space, sectors which have lower barriers to entry, Ismail said.

A breakdown of early stage entrepreneurs shows that the top three sectors are wholesale and retail distribution (50.3 percent), agriculture (13 percent) and manufacturing 12.9 percent. Collectively, these sectors make up more than 76 percent of all early stage entrepreneurs in Egypt.

“This can be explained with the proliferation of informal micro enterprises, such as small workshops or agri-businesses, as well as a fragmented retail distribution sector,” according to the report.

“These types of businesses (retail, agriculture and manufacturing) typically have low barriers to entry, are labor intensive, do not require substantial capital or knowledge, can be quickly started and are created by necessity entrepreneurs.”

Other sectors are more difficult to get into. As Ismail says, “In Egypt, there is a limited knowledge economy.”

Sectors such as the information and communication technology (ICT), finance, professional services, administrative services, mining, healthcare and education — typically dominated by opportunity entrepreneurs with capital and knowledge needs — are all below the global averages.

Gender and age
“The gender gap in Egypt is a lot higher” than other places, said Ismail.

The authors of the report note that the “gender gap has been consistent in Egypt over the past years, highlighting systematic challenges facing women entrepreneurs in starting and running their own businesses.”

Women participation in early stage entrepreneurship is 7.5 percent (ranking 36) compared to 21 percent men. This ratio is even worse for more established businesses, where women business owners are 1.8 percent compared to 10.3 percent men

“The widening gender gap between early stage business owners and established business owners is also an indicator for higher business discontinuation rates among women entrepreneurs, i.e. women-led businesses are more likely to fail than men-led businesses,” the report finds.

However, these numbers do not paint a full picture, Ismail notes, given the evident number of women-led households in Egypt. “The women are business owners but they may not know how to answer the questions,” Ismail said. Many of this activity is more informal and the percentage of micro businesses is probably a lot higher.

Interestingly, entrepreneurial activity has picked up in the 18-24 age segment, where the findings show a significantly higher percentage of early stage entrepreneurs at 16.2 percent, compared to a global average of 10.6 percent.

Early stage entrepreneurs constitute 17.7 percent in the 25-34 age bracket and 15.4 percent of the 35-44 age bracket.

Creating jobs
Overall, less than half of early stage entrepreneurs expect to add new jobs to their business within the next five years, which reflects the large percentage of “self-employment” businesses more common with necessity-driven informal micro enterprises, according to the report.

“If you want to create jobs, it’s about looking at companies at the growth phase that have been around for a few years,” Ismail said.

“It is ironic that we try to support new companies when the old ones are dying,” he notes, adding that companies in the informal economy need to be better targeted.

Going global
The rate of internationalization among early stage businesses is only 9 percent and still a low 10 percent among established businesses. Both of these figures are below the global average and make sense in the context of the larger segment of the economy that is driven by informal micro businesses focusing on local markets.

Egypt’s market is big enough to drive entrepreneurs to think local first, Ismail said, as opposed to a country like Jordan, for example. However, he adds, entrepreneurs need to start thinking more regional and global, exploring export-driven opportunities, especially after the devaluation.

Driving innovation
Early stage entrepreneurs in Egypt are more innovative compared to established businesses, with 18.2 percent basing their market expansions plans on new technologies compared to 14.8 percent of established businesses. These also enjoy a higher adoption rate of latest technologies (22 percent).

A total of 41.2 percent of early stage entrepreneurs consider their products unfamiliar or new to all or some of their customers, compared to 28.2 percent of established companies.

Government and the regulatory framework
The GEM report’s Entrepreneurial Framework Conditions (EFC) measures nine metrics, which the 47 respondents in the National Experts Survey rank on a scale of 1 (highly insufficient) to 9 (highly sufficient).

These areas are: financing, government policy, government programs, education and training, R&D transfer, physical infrastructure, commercial infrastructure, market openness as well as cultural and social norms.

Overall, experts’ recommendations include Egypt resolving regulatory bottlenecks that constrain the growth of startups, especially in areas related to licensing, permits and tax collections. There also needs to be a bigger focus on building an entrepreneurial culture and skill set through basic education. Finally, there has to be a push toward creating new vehicles for financing startups as well as micro and SMEs.

Egypt’s score in government policies came in at 3.6 percent for support and relevance and 3.1 percent for taxes and bureaucracy.

The government is getting into entrepreneurship more and more, with growing interest among several ministers in supporting entrepreneurship over the past year. These efforts include regulatory reforms and new policy initiatives, modifications to the investment and bankruptcy laws as well as plans to create a new entrepreneurship and MSME agency.

“The new entity to support entrepreneurship…we hope it is more of an enabler and less of a regulator,” said Ismail.

There is a low and declining score for the ability to acquire required licenses and permits in a timely manner, at 2.3 in 2016. “While plans for a new law to reform the licensing and permits requirements is in progress, the majority of this area is controlled by the local municipalities, with endemic levels of corruption,” the report notes.

Similarly, on the issue of taxation side, it is less about high levels of taxation and more about the way taxes are applied, “which often lacks predictability, consistency and transparency in rules and applications,” the report reads.

Commercial and legal infrastructure gets a score of 3.9 (ranking 64) while internal market dynamics is 5.1 (ranking 27), with entry regulations scoring 4.

“At one point, the government has to decide whether this is a state-led economy or a private sector led one. Both can’t be successful at the same time, right now the choice is not visible,” Ismail said.

Egypt’s score in government entrepreneurship programs is 3.3, which is a ranking of 58 among GEM countries. These programs score low in terms of availability, reach and effectiveness, however, there is a noteworthy exception in the area of business incubators and science parks.

In this space, government programs score an increasing 4.8, “which may be attributed to the growth of support programs for early stage startups especially in areas of ICT as well as science and technology through a number of government agencies.”

Entrepreneurial education
One area that needs significant work is education. As Ismail said, “We are at the floor of entrepreneurial education globally.”

Egypt ranks at the bottom of all GEM countries for both school level (1.7, ranking 66) and post-school level entrepreneurship education (3.1, ranking 66).

“There is an acknowledgement among experts that entrepreneurship education, while a top priority for Egypt, is dismal. Teaching methods do not encourage behaviors that are associated with entrepreneurs such as creativity, independence or personal initiative. Teaching content does not provide an understanding of the functioning of a market economy or an understanding for the process of business creation,” according to the report.

Egypt’s score in research and development transfer is 2.8, where the link between industry and universities and public research centers has consistently been very low.

Infrastructure
When it comes to physical infrastructure, Egypt scored 6.5, making it the strongest area among the entrepreneurship framework conditions.

Internet speed and access, however, have become significantly less competitive.

“Internet speed quality has been flat, we used to be more competitive in this, and internet access cost has increased for new businesses,” Ismail said. Egypt used to be more competitive in both of these areas, but this has changed to the point that “now we might lose jobs in the outsourcing industry,” Ismail said.

Access to finance
While access to finance is consistently identified as a persistent challenge, especially among entrepreneurs looking to grow their business, the survey shows that Egypt has made progress in improving access to finance for startups as well as micro and SMEs. Egypt scored 3.9 in entrepreneurial finance, which remains low but is an improvement over previous years

Funding from informal investors such as family and friends is still the most available source of finance for early stage, but there has been an improvement in access to both equity and debt funding for both new and growing firms.

“Part of this improvement, especially on the debt side, may be attributed to an initiative by the Central Bank to push commercial banks to increase lending portfolios to SMEs and provide subsidized interest rates,” the report highlights.

Social and cultural norms
Egypt scored a 4 when it comes to social and cultural norms, putting it in 47th place among GEM countries, with an improving albeit small trend in supporting entrepreneurship.

Support for women entrepreneurs is average among GEM countries, at 4.7, and the authors of the report note that it is important for policy makers or organizations designing intervention to support women entrepreneurships to take into consideration the local context and culture.

Support for women entrepreneurs varies significantly depending on social class and location, the study finds.

Moreover, while the number of women-led households is substantial, it is rarely captured in formal data as they usually work informal jobs and do not consider themselves business owners, according to the report.

Areas that scored high include the availability of targeted programs to inspire and support women entrepreneurs, similar access to finance and networks as men and social acceptance of women running their own business. Areas that scored lower include availability of social services, favoring women in policy and legislative framework and equal encouragement to start a business and exposure to opportunities.

 

*Authors of the report also included Shima Barakat, research and teaching fellow and head of Entrepreneurial Learning Programs and Engagement at the University of Cambridge, and Seham Ghalwash, GEM report researcher at the AUC School of Business.

**The report is also supported by the United States Agency for International Development (USAID) through its Strengthening Entrepreneurship and Enterprise Development (SEED) project.

    Knowledge Partners

    CONTACT US

    School of Business
    American University in Cairo
    AUC Avenue – P.O. Box 74
    New Cairo 11835
    Egypt
    Email: BusinessForward@aucegypt.edu

    Copyrights © 2017 The American University in Cairo School of Business • All Rights Reserved

    Copyrights © 2017 The American University in Cairo School of Business • All Rights Reserved