SME Development in Oman –1.The Case of the Missing Middle

As organised commercial activity emerges in an economy, it typically commences through small informal 'units' run by individuals, families or trade groups and catering to customers in the neighbourhood. As the economy 'emerges' products and services get more sophisticated, division of labour takes root, the market grows in terms of purchasing power and the economic 'units' grow and formalise and are now able to service not only local markets but those further away as well. This trend appears to continue through the various stages of evolution of the market, and ultimately results in the development of mega transnational corporations that straddle the globe. Such corporations become the flag bearers of progress andthe 'holy grail' of developing economies.

The Missing Middle: However, research by the World Bankshows that small and medium enterprises (SMEs)contribute over 50% of GDP in high income countries whereas, contrary to common expectation, the contribution is much lower in Middle and Low Income nations; Prof. Lant Pritchett of Harvard calls this gap the missing middle. In Oman, much has been done to develop the sector, yet its contribution to GDP stands at13-14%, as per recent statements carried by the press.
The statistics are even more compelling when considering employment (the next article in the series, 'The Myth of the Mighty', elaborates); SMEs contribute over 60% of employment in high income countries and just under that figure in middle income countries – figures for Oman are not encouraging. While averages clearly have their limitation and a country's aspirations have to be tempered by its particularcultural, physical and economic circumstances, the numbers reflect the potential that can be unleashed by developing the SME sector.
Considering Oman's GDP of over RO 30billion, the 'missing middle' represents an opportunity to addover RO 10 bill to GDP, figures for employment are likely to be even more compelling.
Causes: The reasons for the missing SME sector are myriad and need to be studied carefully. However, initial indications are that common problems include:

Vulnerability –small businesses have low tolerance thresholds. Small setbacks lead to failure; impediments and delays, which are handled easily by large firms, are enterprise threatening for the SME. Unfortunately, their lack of 'contacts', size and stature exposes SMEs to a disproportionate share ofthese obstacles.

Management and staffing- the issue has two dimensions, SMEs by virtue of image and scale are unable to attract or remunerate talent, especially local talent which often requires expensive training;at the same time, owners often do not appreciate the importance of finance, marketing or indeed professional management and do not invest in these, to their peril.

Finance -both the availability and cost of debt and equity are often the most significant impediment to SME development. Information opacity and structural weakness of SMEs makes them unattractive to traditional sources of finance and the Muscat Stock Exchange's current minimum capital regulations place the capital markets out of the reach of SMEs

Lack of 'Entrepreneurship' – Oman had a tradition of entrepreneurship, however, with the new found prosperity; there is a perception, reportedly confirmed by an academic survey at the SQU, that some of this spirit of 'entrepreneurship' has been replaced by a notion of 'entitlement'. The problem is aggravated by a shortage of 'role models' and of training; consequently young entrepreneurs have unrealistic expectations, which leads to poor contingency planning and failure.

Barriers to entry – business in Oman is often perceived to be a big boys club. Who you know often determines where the order goes and how soon you get paid. In such a situation, orders and timely payments go to the established players with new, small players facing inordinate barriers.

A Call to action: Omanis admirably placed to develop a vibrant, productive, SME sector, with most of the enabling factors in place. These comprise a young and educated population; the development oftechnical, vocational and tertiary institutions across the country; excellent infrastructure; world class logistics; the development of industrial clusters across the country and above all, the emphasis placed on SME development by the government and the Public Authority for Small and Medium Enterprises.Research by the IFC Washington suggests that piecemeal solutions to bridging the 'Missing Middle' have been unsuccessful and an integrated, comprehensive solution of adequate scale is required. The SME Development Fund (under formation), being established in the private sector, with support from the government, aims to provide this comprehensive solution, with the cooperation of all stakeholders.

By Raphael Parambi, CEO of National Company for Projects & Management which is implementing the SME Development Fund, capitalised at RO 100 million and aimed at financing and supporting the SME sector in Oman

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