Shifting Sands: Recent growth highlights the Middle East's technology potential

Jordan's budding IT industry got a big boost recently with the announcement of a new fund intended to help meet the financing needs of the country's growing crop of startup firms. Backers aim to launch the fund in 2010 with a combination of local enterprise and bank resources, along with support from the government and multinational investors in Jordan. The country's leader, King Abdullah, has made growing Jordan's $900 million technology industry a key part of his economic policy and is supporting the fund's creation. Initiatives like this are intended to give a further lift to indigenous firms and raise Jordan's status as a hub for the Arab technology industry, a position highlighted by Yahoo's recent acquisition of Amman-based Maktoob, the leading Arabic Internet portal.

These developments underscore the emergence of Middle Eastern countries as players in the global technology and communications industries as they try to diversify their economies. Abu Dhabi's Advanced Technology Investment Company (ATIC) made a big splash with its multi-billion dollar investment in AMD/GlobalFoundries and Chartered Semiconductor this year, while the brand new King Abdullah University of Science and Technology and its $10 billion endowment are attracting leading talent to Saudi Arabia. Mobile penetration has skyrocketed across the region and homegrown companies like Egypt's Orascom and Kuwait's Zain have become major operators both inside and outside of the Middle East.

The growth of Middle Eastern markets presents opportunities and challenges to multinationals. As noted above, companies based in the region are raising their profile both as acquirers and targets for foreign acquisition. Arab countries' populations are growing quickly and are disproportionately young, which makes them attractive markets for products and services in areas like education and entertainment. Despite recent liberalization, though, countries like Egypt, Morocco and Algeria remain heavily regulated in many aspects of their economy. The region is culturally diverse and politics remain a fault line. Learning the ins and outs of each national market may enable firms to better capitalize on this growing and multifaceted region.

Small and Medium-sized Businesses Gain New Attention as Pillars of Emerging Market Economies

China's state-owned banks are showing unprecedented increases in their lending to small and medium-sized businesses (SMBs). This expansion is part of a trend in which emerging-market governments are increasingly active in supporting the SMBs within their economy. Jamaica and Russia are also making a concerted effort to recognize and support SMBs and to help them grow, especially as millions of laid-off workers look for ways to rejoin the formal economy.

Giant multinational corporations (MNCs) such as Huawei in China and Wipro in India often get the lion's share of attention in discussions about emerging-market business. Yet, SMBs form the backbone of most of these countries' economies. Data from the World Bank indicates that SMBs employ about three quarters of all workers in countries as diverse as Turkey, Mexico, Egypt, China and Bangladesh. During economic downturns, the role of SMBs comes into sharper focus. They are often particularly hard hit due to their precarious financial position and reduced access to sources of credit.

SMBs in emerging markets are often underserved and overlooked by MNCs because it can be difficult to identify, size and characterize this target market. Additionally, MNCs are often unsure of how to reach developing-country SMBs or provide purchase financing, especially in nations with weak or non-existent credit systems (Google.org notes the "missing middle" between microfinance and traditional commercial finance). MNCs would do well to investigate local partners who could provide SMBs with innovative payment methods. Industry associations or specialized businesses can also be an effective avenue for targeting these often diffuse businesses. Such focused efforts may provide both MNCs and their SMB customers with the edge they need during these challenging economic times.

Why Microfinance Matters to Big Tech

Last week, Forbes published a comprehensive article delving into the recent growth and associated growing pains of microfinance institutions (MFIs). The explosion of small lenders and the entry of more established financial institutions have combined to increase competition, drive down margins, and shift the industry’s focus from local empowerment to corporate profitability. Such rapid growth may be creating a ripe environment for inefficiency or fraud. For example, with little communication between lending agencies, some loan recipients have borrowed multiple times against the same collateral. But so far the industry’s expansion has been healthy, and MFIs even seem to be insulated from the credit crunch in mature markets.

Why does the rapid expansion of microfinance institutions matter to technology companies? First, this exponential growth presents direct opportunities for more technology sales to this sector. The increased number of clients and services and the need to integrate data with other members of the financial services eco-system can stress the paper or spreadsheet-based systems commonly used by microfinance institutions that were originally designed for small community-based lending schemes. With profitability based on volume transactions, the need to cost-effectively and efficiently track and manage millions of small pieces of data is integral to continued growth and competitiveness. This is good news for IBM, SAP and others. These companies are in a good position to increase efficiencies and support greater demands for data tracking and management.

Improved access to financing presents indirect opportunities for other technology companies, as well. In many developing countries, lower-income consumers are now able to own previously unaffordable technology products such as a PC, mobile phone or Internet connection. These products and services have an advantage over “old technologies” such as TVs and radios because they could be used to expand a business and increase productivity (thereby contributing to the repayment of the loan). In this new financing environment, successful technology companies will market their devices to certain market segments as business tools in order to facilitate microfinance-funded purchases. The perceived utility of mobile phones and the potential for tapping into local lending schemes (i.e., MFIs, agricultural cooperatives, RoSCAs, and others) is explored more in Vital Wave Consulting’s recent report, Strategies to Accelerate Handset Financing in Emerging Markets.

Also in the news:

• Red Hat nixes desktop plans
• OLPC's Walter Bender resigns
• Dell offers low-cost computer