FINAL REPORT

SMEs IN KUWAIT: AN EMPIRICAL

SURVEY 2003 TO 2012

SMALL AND MEDIUM ENTERPRISES IN KUWAIT:

THEIR IMPACT AND THE WAY FORWARD

VOLUME III

TE051C
M. Girgis
S. Al-Fulaij

PRIVATE SECTOR DEVELOPMENT (PSD) PROGRAM

TECHNO-ECONOMICS DIVISION (TED)
SCIENCE AND TECHNOLOGY SECTOR (STS)

Submitted to
KUWAIT FOUNDATION FOR THE ADVANCEMENT OF SCIENCES

RESTRICTED

KUWAIT INSTITUTE FOR SCIENTIFIC RESEARCH

P.O. BOX 24885
SAFAT-13109, KUWAIT

APRIL 2018
 ‫استمارة ملخص بحث‬
‫‪ABSTRACT SHEET‬‬
‫‪PUBLICATION TITLE‬‬ ‫(‪ AUTHOR)S‬اسم المنشور‬ ‫المؤلف ‪ /‬المؤلفين‬
‫المشروعات الصغيرة والمتوسطة في دولة الكويت‪ :‬مسح تجريبي‬ ‫د‪ .‬موريس جرجس – شيخة الفليج‬
‫‪2012/2003‬‬
‫‪PROJECT CODE‬‬ ‫‪ PROJECT TITLE‬رمز المشروع‬ ‫اسم المشروع‬
‫المنشآت الصغيرة والمتوسطة في دولة الكويت‪ :‬التأثيرات المتوقعة‬
‫‪TE051C‬‬
‫والتطلعات المستقبلية‬
‫‪DEPARTMENT/PROGRAM‬‬ ‫‪ CENTER/DIVISION‬الدائرة ‪ /‬البرنامج‬ ‫المركز‪/‬اإلدارة‬
‫برنامج تنمية القطاع الخاص‬ ‫إدارة االقتصاد التقني‬

‫‪TYPE OF PUBLICATION‬‬ ‫نوع المنشور‬

‫‪  PROPOSAL‬مقتـرح‬ ‫تقرير نهائي‬ ‫‪‬‬ ‫‪FINAL REPORT Vol. III‬‬

‫)‪  WORK PLAN (SRF‬خطة العمل (خدمة فنية)‬

‫تقريـر فنـي‬ ‫‪‬‬ ‫‪TECHNICAL REPORT‬‬
‫‪  PERIODICAL ARTICLE‬مقالة دورية‬

‫‪  CONFERENCE PAPER‬ورقه بحث في مؤتمر‬ ‫تقرير عن تقدم العمل‬ ‫‪‬‬ ‫‪PROGRESS REPORT‬‬

‫‪SECURITY CLASSIFICATION‬‬ ‫تصنيف أمني‬

‫عـام‬ ‫‪‬‬ ‫‪GENERAL‬‬ ‫مقيـد‬ ‫‪‬‬ ‫‪RESTRICTED‬‬ ‫‪ ‬سـري‬ ‫‪CONFIDENTIAL‬‬

‫)‪ABSTRACT (SUMMARY OF NOT MORE THAN 300 WORDS‬‬ ‫المستخلص (ملخص اليزيد عن ‪ 300‬كلمة)‬
‫يشتمل قطاع المنشآت الصغرى والصغيرة والمتوسطة الحجم في دولة الكويت خالل ‪ 2012‬من ‪ 39,198‬منشأه‪ ،‬قامت بتوظيف‬
‫‪ %16.4‬من إجمالي العمالة‪ ،‬كما أن مساهمتها في الناتج المحلي اإلجمالي تقدر ‪ .%8.6‬إال أن التحليل الكمي ألداء تلك المنشآت يشير‬
‫إلى أنها تواجه صعوبات جمه‪ ،‬فمن ناحيه‪ ،‬تعتبر مساهمتهم في العمالة والناتج المحلي اإلجمالي متدنية مقارنة بنظائرها في كل من الدول‬
‫النامية والمتقدمة‪ .‬وعالوة على ذلك‪ ،‬فإن النتائج تشير أن عدد المنشآت قد انخفض في ‪ 2012‬مقارنة بعام ‪ 2003‬بما مقداره ‪414‬‬
‫منشأة؛ أن معدل نمو االنتاج الحقيقي السنوي لم يزد عن ‪ ،%1.11‬كما أن إجمالي العمالة لم تزد خالل السنوات التسع عن ‪ ،%0.6‬كما‬
‫نمت القيمة المضافة بمعدل ‪ ،%6.2‬ولعل المؤشر األكثر تأثيراً يتمثل في انخفاض عدد العمالة الوطنية في القطاع بمعدل ‪ %2.4‬خالل‬
‫نفس الفترة‪ .‬علما ً بأنه خالل نفس الفترة وتحت نفس الظروف االقتصادية المحلية‪ ،‬استطاع قطاع المنشآت الكبيرة أن يحقق نمواً إيجابيا ً‬
‫في أعدادهم وقدرتهم اإلنتاجية والقيمة المضافة المتولدة لديهم باإلضافة إلى الزيادات الملحوظة في العمالة الكلية والوطنية واألرباح‪.‬‬
‫من خالل البحث عن مسببات األداء الرديء لهذه المنشآت (‪ )MSMEs‬استرعى انتباهنا عامالن مهمان‪ )1 :‬القدرة على تمويل القروض‬
‫محدود جداً‪ ،‬حيث أكدت ‪ 168‬منشأة (‪ )0.4%‬على حصولها على قروض قصيرة أو طويله األجل بالرغم من وجود مؤسسات حكومية‬
‫توفر التمويل للمنشآت الصغيرة والمتوسطة‪ )2 .‬محدودية القدرات اإلدارية الداخلية لهذه المنشآت‪ ،‬حيث تبين أن من إجمالي ‪39,198‬‬
‫منشأة تقوم ‪ 998‬منشأة فقط بإجراء التدقيق المحاسبي‪ 150 ،‬منشأة تقدم برامج تدريبية‪ 80 ،‬منشأة تقوم بمسوحات لألسواق‪ 84 ،‬منشأة‬
‫تستخدم الحاسب اآللي‪ ،‬ومنشأتين فقط لديها براءات اختراع‪ .‬وبوجه العموم فإن مستقبل ال‪ MSMEs‬في الكويت يعتمد على الصياغة‬
‫الفاعلة والتطبيق الشفاف الستراتيجية شاملة طويلة المدى والتي يجب أن تتسق مع المبادرات وآليات الدعم التي اتخذتها والزالت تقوم بها‬
‫العديد من الدول بنجاح لزيادة نمو هذه المنشآت‪ .‬باإلضافة إلى ذلك فإن القانون الحالي )‪ ،(No. 98/2013‬المختص بتطوير وتنمية‬
‫المشاريع الصغيرة والمتوسطة يحتاج الى العديد من التعديالت الجذرية‪ ،‬ال سيما في ما يتعلق بتعريف المنشآت الصغيرة والمتوسطة‪.‬‬

‫‪KEY WORDS:‬‬ ‫أهم المصطلحات‪:‬‬

‫المنشآت المتناهية الصغر والصغيرة والمتوسطة ‪ -‬الناتج المحلي غير النفطي ‪ -‬العمالة الوطنية ‪ -‬القيمة المضافة ‪ -‬القدرات اإلدارية الداخلية‬

‫استمارة ملخص بحث‬

‫‪ii‬‬
 ABSTRACT SHEET

PUBLICATION TITLE ‫ اسم المنشور‬AUTHOR)S( ‫ المؤلفين‬/ ‫المؤلف‬

SMEs in Kuwait: An Empirical Survey
PROJECT CODE
TE051C
DEPARTMENT/PROGRAM
Private Sector Development Program
TYPE OF PUBLICATION
‫ مقتـرح‬ PROPOSAL
M. Girgis and S. Al-Fulaij
‫ رمز المشروع‬PROJECT TITLE ‫اسم المشروع‬
Small and Medium Enterprises in Kuwait:
Their Impact and the Way Forward
‫ البرنامج‬/ ‫ الدائرة‬CENTER/DIVISION ‫اإلدارة‬/‫المركز‬
Science and Technology Sector/Techno-Economics
Division
‫نوع المنشور‬
‫تقرير نهائي‬  FINAL REPORT Vo. III

)‫ خطة العمل (خدمة فنية‬ WORK PLAN (SRF)

‫تقريـر فنـي‬  TECHNICAL REPORT
‫ مقالة دورية‬ PERIODICAL ARTICLE

‫ ورقه بحث في مؤتمر‬ CONFERENCE PAPER ‫تقرير عن تقدم العمل‬  PROGRESS REPORT

SECURITY CLASSIFICATION ‫تصنيف أمني‬

‫عـام‬  GENERAL ‫مقيـد‬  RESTRICTED ‫ سـري‬ CONFIDENTIAL

ABSTRACT (SUMMARY OF NOT MORE THAN 300 WORDS) )‫ كلمة‬300 ‫المستخلص (ملخص اليزيد عن‬
An extensive quantitative examination of the MSMEs sector in Kuwait points to a sector under stress. In
2012, it consisted of 39,198 MSMEs. It employed only 16.4% of total national employment and contributed only
8.6% of non-oil GDP, both of which are significantly lower than their counterparts elsewhere. Their compound
annual growth rates over 2003-2012 show an anemic pattern: i) there were 414 fewer small and medium firms in
2012 than in 2003, ii) real output grew by 1.11%, iii) employment by 0.06%, iv) Kuwaiti employment by – 2.39%, v)
value added by 1.8%, and vi) paid-up capital by 0.18%. Even the number of firms without nationals increased by
1.19% yearly. This pattern, however, was not observed in large enterprises which operate under the same national
economic conditions for those have shown an impressive parallel growth in their numbers, productive capacity,
value added, employment, profits, and Kuwaiti employment.
In searching for explanations for the dismal record of MSMEs, two factors were observed: (1) access to
finance is gravely limited where only 168 firms (or 0.4%) indicate having short- or long-term loans despite the
availability of loanable funds in SMEs-related public institutions and (2) MSMEs’ own limited internal managerial
skills and capabilities, where, out of 39,198 firms, only 998 conduct audited accounts, 150 provide training
programs, 80 undertake market surveys, 84 utilize computers, and only 2 have patents. Moreover, access to the
inexpensive but extremely useful Internet is limited to only 2,554 enterprises.
The future of MSMEs in Kuwait is dependent on the design as well as the transparent and effective
implementation of a comprehensive long-term strategy that emulates the gambit of support mechanisms other
countries have and still are successfully deploying to promote their growth. Additionally, the current SMEs Law (No.
98/2013) requires several substantive modifications, including SMEs definitions, to bring it up-to-date.
KEY WORDS: :‫أهم المصطلحات‬
SMEs in Kuwait; Large versus SMEs, Elasticity of substitution of Kuwaitis for non-Kuwaitis; Market concentration rates of SMEs;
Wages of Kuwaitis versus expats

iii
 Acknowledgements

This is the second in a series of technical reports carried out in conjunction

with KISR’s research project No. TE051C entitled “SMEs in Kuwait, their Impact and
the Way Forward”.
The authors wish to express special thanks to the Central Statistical Bureau
(CSB) for allowing us to access their Establishment Survey databank and for their
instructive feedback on our repeated data-related inquiries. We also wish to
acknowledge and express our appreciation for the financial support from the Kuwait
Foundation for the Advancement of Sciences (KFAS).
The project team members’ analytic capabilities ranging from inspecting to
transforming, organizing and modelling of statistical data as well as their careful
handling of our massive database have made this review possible, for which they
have our sincere thanks. The project team includes Weam Behbehani, Ahmed Al-
Khayat, Mohammed A. Al-Ali, Abdullah F. Al-Jaber, Bashayer Ahmad, Adel Naseeb,
and Maali Al-Burais. Special thanks go to Dr. Mohammad Ramadhan for his overall
management of the project.
The views and conclusions of this report do not necessarily reflect the views
of KISR, CSB, or KFAS.

iv
 Table of Contents

Background .................................................................................................................... 1
Objectives ...................................................................................................................... 3
Report Objectives ................................................................................................... 4
Methodological Notes ..................................................................................................... 5
Data Sources ......................................................................................................... 5
SMEs Definitions .................................................................................................... 7
Number of MSMEs and Their Composition .................................................................. 10
Number of Micro, Small, Medium, Large, and Straddler Enterprises, 2012.......... 10
Evolution from 2003 to 2012 ................................................................................ 15
Cohort Size Shifts between 2003 and 2012 ......................................................... 16
Production .................................................................................................................... 18
Structure by Size and by Sector in 2012 .............................................................. 18
Output per Firm .................................................................................................... 22
Output per Worker: 2012 ...................................................................................... 23
MSMEs’ Output Growth Patterns from 2003 to 2012 ........................................... 24
Average Annual Growth Rates of Output ............................................................. 26
Value Added................................................................................................................. 28
2012 Composition ................................................................................................ 28
Labor Productivity in the Non-Oil Business Sector ............................................... 32
Employment ................................................................................................................. 38
Structure in 2012 .................................................................................................. 38
MSMEs’ Employment Growth Trends: 2003-2012 ............................................... 41
Wages .......................................................................................................................... 42
Structure in 2012 .................................................................................................. 42
Growth of Wages from 2003 to 2012 ................................................................... 46
Do MSMEs Create Job for Nationals?.......................................................................... 49
The Share of Nationals in Total Employment: The Situation in 2012 ........................... 50
Participation Rates of Nationals in Total Employment by Sectors and by Size .... 50
Company Ownership and the Share of Nationals in Total Employment ............... 53
The Kuwaiti/Non-Kuwaiti Dilemma: Firms without Nationals ................................ 54
Shares of Nationals’ Wages in Total Wages, 2012 .............................................. 58
Wage Rates of Kuwaiti and Non-Kuwaiti Workers ............................................... 59
Business Activities with the Highest National Manpower Participation Rates ...... 62
The Shares of Nationals in Total Employment: 2003 to 2012 Trends .......................... 70
v
 Changes in the Number of Firms without Nationals ............................................. 70
Changes in the Marginal Rate of Kuwaiti Participation ......................................... 71
Changes in Nationals’ Shares in Wages .............................................................. 75
The Substitution of Kuwaiti for Non-Kuwaiti Labor: The Facts ............................. 76
The Elasticity of Substitution of Kuwaiti for Non-Kuwaiti Workers ................................ 78
Tradables versus Non-Tradables: A Way to Enhance Job Kuwaitization ..................... 82
Investment Trends from 2003 to 2012.......................................................................... 83
Profit and Profitability ................................................................................................... 86
A Bird’s Eye View of Profits’ Patterns in 2012 ...................................................... 86
Profits and Company Ownership .......................................................................... 88
Profits per Firm ..................................................................................................... 89
Evolution of Profits of MSMEs from 2003 to 2012 ................................................ 90
Return on Equity (ROE) and its Evolution since 2003 .......................................... 95
Access to Finance ........................................................................................................ 98
Ownership .................................................................................................................. 102
Public, Private, and Foreign Ownerships ........................................................... 102
The Gender Factor ............................................................................................. 107
Internal Managerial Capabilities ................................................................................. 110
Training .............................................................................................................. 111
Audited Accounts ............................................................................................... 112
Marketing Research ........................................................................................... 114
Computer Usage ................................................................................................ 115
Internet Usage.................................................................................................... 116
Innovations ......................................................................................................... 117
A Composite Indicator of the Combinations of Several Management Capabilities118
Conclusion ................................................................................................................. 121
References ................................................................................................................. 129
Appendix A ................................................................................................................. 131
Appendix B ................................................................................................................. 134
Appendix C ................................................................................................................. 138
Appendix D ................................................................................................................. 141
Appendix E ................................................................................................................. 148
Appendix F ................................................................................................................ 157

vi
 List of Figures

1. Percentage distribution of MSMEs by size and sector, 2012. ......................... 14

2. Non-oil MSMEs’ output shares. ........................................................................ 20
3. Non-oil output shares classified by size and by classified by Size, 2012 Sector,
2012 20
4. Output per firm vis-à-vis output per labor, excluding oil, 2012. .......................... 24
5. Sectoral contribution to output growth from 2003 to 2012: MSMEs versus LEs
and Straddlers.................................................................................................. 26
6. Annual output growth rates of business sector enterprises by Size, 2003 to 2012.
.............................................................................................................................. 27
7. Annual output growth rates of business sector enterprises by sector, 2003 to
2012. 28
8. Non-oil labor productivity values classified by sector and by size, 2012. ......... 34
9. MSMEs’ sectoral contribution to GDP, 2003 to 2012. ...................................... 38
10. Total MSMEs wages in 2012 classified by sector and by size. ....................... 45
11. Percent of MSMEs without national employees, 2012. .................................. 55
12. Relative economic weights of enterprises (excluding oil) without Kuwaiti
nationals, 2012. .................................................................................................
57
13. Share of Kuwaiti wages in total wages, 2012. ................................................. 59
14. Ratio of Kuwaiti/non-Kuwaiti Non-oil Wage Rates Classified by Size and by
Sector, 2012. ................................................................................................. 61
15. Percentage of firms without Kuwaitis over time: 2003 to 2012. ....................... 71
16. Participation rate (%) of nationals in total non-oil employment: 2003, 2007, and
2012. ..................................................................................................................
75
17. Average wage rate of Kuwaiti employees in MSMEs versus LEs in 2003 and
2012. 76
18. Total capital assets from 2003 to 2012 for each size category. ....................... 85
19. MSMEs’ annual Incremental capital expenditures (investment) classified by
sector, 2003 to 2012. ...................................................................................... 86
20. Total profits, 2012............................................................................................ 88
21. Profits per firm, 2012. ...................................................................................... 90
22. Relative shares of ownership types in major non-oil economic aggregates, 2012.
............................................................................................................................ 106
23. A comparative analysis of growth rates of major economic metrics: MSMEs
versus. LEs and Straddlers, 2003 to 2012. .................................................... 126

vii
 List of Tables

1. Number of Micro, Small, Medium, Straddler and Large Enterprises in 2012 ........ 11
2. Number of MSMEs, LEs, and Straddlers Classified by Sector and by Size, 2012*
................................................................................................................................. 12
3. The Growth in the Number of MSMEs, LEs and Straddlers: 2003, 2007, and 2012
................................................................................................................................. 16
4. Number of Upward, Downward, and Zero Size Shifts from 2003 to 2012 ............ 17
5. Output, Output per Worker, and Output per Firm, Classified by Size, 2012† ....... 19
6. Value of the Output of Major MSMEs Subsectors in 2012 (KD Million) ................ 21
7. Values and Growth rates of Output per Firm for Each Class Size, 2003 to 2012* 22
8. Sectoral Non-Oil Output Growth in Current Prices, 2003 to 2012 (KD million ) .... 25
9. Relative Contribution of MSMEs to Non-Oil GDP, 2012 ....................................... 29
10. Sectoral Value Added and Contributions to GDP, 2012* (KD Million) ................ 31
11. MSMEs’ Contribution to Business Sector’s Value Added Growth, 2003 to 2012 37
12. Non-Oil Employment in MSMEs vs. LEs by Type of Ownership, 2012 ............... 40
13. Distribution of Employment by Firm Size and by Sector, 2012 .......................... 41
14. Non-Oil Employment Growth Classified by Size and by Sector from 2003 to 2012
................................................................................................................................. 44
15. Non-oil Money Wages by Sector and by Size, 2003 to 2012 (KD 000) .............. 47
16. The Share of Wages in Value Added (2003-2012) (%) .................................... 49
17. Number of Kuwaiti Employees by Firm Size and by Sector, 2012 ..................... 51
18. Percent of Kuwaiti Employees in Total Employment by Sector and by Size,
2012† ....................................................................................................................... 53
19. Percent of Kuwaitis in Total Employment Classified by Firm Ownership, 2012† 54
20. Major Economic Characteristics of Enterprises with No National Employees,
2012† .................................................................................................................
56
21.Average Annual Wage Rates of Kuwaiti and Non-Kuwaiti Labor, 2012 (KD) ...... 59
22. Kuwaiti/Non-Kuwaiti Monthly Money Wage Rates Differentials (KD), 2012† ..... 60
23. Ratios of Nationals/Employment by Sector and by Size: 2003, 2007, and 2012†
................................................................................................................................. 64
24. Top Five ISIC Activities with the Highest Kuwaitis/Employment Ratios, 2003 .... 66

viii
25. Top Five Subsectors with the Highest Kuwaitis/Employment Ratios, 2012 ........ 68
26. Activities with High K/E Ratios Across Size Classes, 2003 and 2012 ................ 69
27. Value Added and Employment Shares in Enterprises without Kuwaitis, 2003 to
2012 .................................................................................................................
71
28. Kuwaiti Employment, their Growth and Shares in the Workforce, 2012 versus
2003† .................................................................................................................. 73
29. Kuwaitization of Jobs in 2-Digit ISIC Activities, 2003-2012† ............................. 78
30. Aggregate Sector-Size Elasticity of Substitution Coefficients† ........................... 80
31. Elasticity of Substitution Coefficients between Kuwaiti and non-Kuwaiti Labor†.....
............................................................................................................. 81
32. Percent of Kuwaitis Employed in the Production of Tradeable Goods, 2012† ... 83
33. Investment Growth Rates of MSMEs, 2003-2012 (KD 000) ............................... 84
34. The Decline of MSMEs’ Capital as % of Non-Oil LEs’ Assets from 2003 to 2012
85
35. Total Profits Classified by Sector and by Size Category†, 2012 (KD 000) ......... 87
36. Average Profits per Firm 2012† (KD 000) .......................................................... 90
37. MSMEs Total and per Firm Profits & Losses in 2003, 2007 and 2012 ............... 91
38. Profit Shares: MSMEs versus LEs, 2003, 2007, and 2012 ................................. 91
39. Growth Rates of Profits, Losses, and Profits per Firm, 2003, 2007 and 2012 (%)
................................................................................................................................. 92
40. Changes in Number of Firms, Profits, and Profits per Firm: 2003, 2007, and 2012
95
41. Development of ROEs from 2003 to 2012, Classified by Size Categories (%) ... 96
42. MSMEs’ Access to Finance, Developments from 2003 to 2007, and to 2012 .. 102
43. Ownership Structure of the Business Sector in 2012 ....................................... 105
44. Relative Economic Weights of Private versus Government Enterprises, 2012 107
45. Number of MSMEs Owned by Single and Multiple (1-5) Kuwaitis, 2012† ........ 108
46. Single Kuwaiti Owners of MSMEs Classified by Gender, 2012 ....................... 109
47. Number of MSMEs with Training Programs Classified by Sector and Size, 2012
111
48. Number of MSMEs with Audited Accounts Classified by Sector and Size, 2012
113
49. Characteristics of MSMEs Conducting Market Research, 2012 ....................... 114
ix
50. MSMEs with Computer Applications Use, 2012 ............................................... 116
51. Internet Users among MSMEs, 2012 .............................................................. 117
52. Status of MSMEs’ Internal Managerial Capabilities by Size Category in 2012 119
53. Number of MSMEs & LEs with Multiple Internal Managerial Attributes, 2012 .. 119
54. Developments of Major Economic Aggregates of MSMEs from 2003 to 2012 . 124
55. Developments of Major Economic Aggregates of MSMEs, LEs, and Straddlers
from 2003 to 2012 ............................................................................................. 127

x
 List of Abbreviations

APEC Asia Pacific Economic Cooperation

ASY Annual Statistical Yearbook, Kuwait
CCI Chamber of Commerce and Industry, Kuwait
CSO Central Statistical Bureau, Kuwait
EU European Union
GDP Gross Domestic Product
GoK Government of Kuwait
IBK Industrial Bank of Kuwait
ICT Informatics, Communications, and Technology
IFC International Finance Corporation
IMF International Monetary Fund
K/E Ratio of Kuwaitis in total employment
K/Nk Ratio of Kuwaiti to non-Kuwaiti workers
KD Kuwaiti Dinar
KFAS Kuwait Foundation for the Advancement of Science
KSPD Kuwait Small Projects Development Company
LEs Large establishments
MNC Multinational Corporations
MSMEs Micro, small and medium-sized enterprises
OECD The Organization for Economic Co-operation and Development
p.a. Per annum
PACI Public Authority for Civil Information, Kuwait
Q/E Output per unit of labor
Q/F Output per firm
SBA Small Business Administration, USA
SMEs Fund National Fund for the Development of SMEs, Kuwait
SMEs Small and Medium-sized Enterprises
UK United Kingdom
USD US Dollar
VR & AI Virtual Reality & Artificial intelligence
WEF World Economic Forum

xi
 Executive Summary

The task of enabling Small and Medium-sized Enterprise (SMEs) is complex

and multi-dimensional. It differs across countries and over time depending on their
current situation, long-term targets, and resources made available to them. One of
the basic ingredients required to design a SMEs development strategy in all cases is
the availability of a ‘base knowledge’ of the sector’s characteristics: structure,
capabilities, and constraints.
The government of Kuwait (GoK) declared its open support for SMEs from the
early 1970s. The support focused, however, on the provision of subsidized loans
only. Very little else was offered. This resulted in the implementation of an
incomplete SMEs promotion plan, especially when compared to the universal gambit
of assistance schemes offered elsewhere. Partially contributing to this outcome has
been the lack of a deliberate, long-term SMEs development strategy, which itself
stemmed from the absence of reliable knowledge about the SMEs sector, among
others. Until today, very little is known about SMEs in Kuwait, a collateral outcome
that resulted from the absence of an official definition of SMEs. This report intends
to negate this void.
As a first step, one must tackle the issue of definitions: the recent SMEs law,
which was enacted in 2013, provided official definitions for ‘small’ and ‘medium’
enterprises, among other statutes. However, it inappropriately conflated
‘qualification’ and ‘definitions’. It defines, for example, a ‘small’ firm as having four or
fewer national workers. By so doing, the law excluded more than 90% of small firms
in the country that do not employ nationals and, in addition, defined firms with
thousands of employees as ‘small’ because they employed only one Kuwaiti worker.
As such, the law misrepresents the sector in a way that precludes useful regional
and international comparisons.
To redress this central deficiency, an extensive study was undertaken at the
Kuwait Institute for Scientific Research (KISR) in 2015 to search for more
appropriate definitions. The study concluded by suggesting that Kuwait would be well
advised to optimally have three size categories: micro firms with 1–10 workers; small
firms with 11–49 workers; and medium firms with 50-249 workers. Capital (or
turnover) requirements were added in amounts similar to the thresholds stipulated in

xii
the law. The 3-way size classification is the norm in most countries including all the
Gulf Cooperation Council (GCC) countries, most nations in the Middle East and
North Africa (MENA) region and the European Union (EU)-27. Thus, the suggested
definitions are regionally and internationally compatible and, when tested
quantitatively, fit well in Kuwait’s special socioeconomic settings. They also restore
the accepted, universal notions about SMEs and eliminate the ambiguity and
potential misuse of the law’s provisions. Next, the project team proposed delinking
definitions from qualifications, thereby sidestepping the pitfalls imbedded in the
current law without in any way changing the original intent of the law.
The study on ‘definitions’ also offered a new and more measured eligibility
conditions for receiving governmental support. However, the final decision is left to
the newly established SMEs Fund and its government-appointed board of directors.
The Fund must have the flexibility to change the eligibility condition as business
conditions change and as the new SMEs targets set by the government and/or the
Parliament are propounded. The Fund should also be able to periodically give
advantage to specific activities with proven records of contributing to national
priorities to the exclusion of others. Having this flexibility would also enable it to
attract foreign direct investment should it promise solid contribution to job creation for
nationals, as an example.
The diagnosis of the SMEs sector in this study is fundamentally statistical in
nature. It is based on the Central Statistical Bureau’s (CSB’s) official dataset
collected annually from registered firms from 2003 to 2012. The results of the smaller
sized firms, which are sampled, are enlarged based on their sampling coefficients.
The business sector is defined to include MSMEs, large, and straddler firms; the
latter consists of firms that meet the MSMEs’ employment but not the capital
condition. Due to the dominant influence of the oil sector, the results differentiate
often between oil and non-oil enterprises. The base dataset is immense because it
encompasses data on more than 8,500 firms each year for 10 years and covering 50
variables in each. A summary of the salient features that emerged from the analyses
of the enlarged MSMEs sector is given below.
1. Number of MSMEs: There were 41,265 registered non-oil firms in 2012, most
of which (39,198 firms or 95%) are MSMEs. Among MSMEs, 93.4% are micro
enterprises, with most of the micros (64.8%) engaged in the trade sector. In

xiii
 comparison, MSMEs in the Organization for Economic Co-operation and
Development (OECD) countries make up about 99% of registered firms.
2. Growth of the number of MSMEs: In 2003, there were 38,636 registered non-
oil firms, of which 37,197 or 96.3% are MSMEs. Of the latter, 34,190 or 91.9%
are micro enterprises. From 2003 to 2102, the number of registered firms
increased by 2,628 firms. Of these, 2,001 firms or 76% belonged to MSMEs.
The growth in the size of MSMEs is not uniform, however, in that micros
expanded by 2,415 firms, while small and medium firms shrank by 367 and 47
firms, respectively. The growth was not uniform among sectors either for 93%
of it emerged from two sectors only: 85% from the trade sector and 13% from
the manufacturing sector. Contemporaneously, non-oil large enterprises
(LEs) doubled their numbers from 161 to 327 firms and straddlers grew by
36%, from 1,279 to 1,740 firms.
3. Employment of MSMEs: MSMEs employed 243,799 workers in 2012. The
largest employer is the trade sector at 101,975 followed by non-finance,
71,886. Between these two typically retail-oriented activities, they make up
almost three fourth (71.3%) of all employees in the MSMEs sector. MSMEs’
share in the workforce of the non-oil business sector in 2012 was 35.7%,
which represented a decline of 11.2% from its previous share in 2003.
Between 2003 and 2012, the size of the workforce expanded by 164,921
(from 517,260 to 682,181), of which MSMEs contributed only 1,247 new jobs
or 0.76% of the total. While LEs nearly doubled their employment and micros
expanded by 9.1%, small and medium enterprises were engaged in job
destruction to the tune of 11,684 jobs.
4. MSMEs’ contribution to job creation: MSMEs’ share in the country’s total
employment is estimated at 10.6% in 2012. If, however, the unusually large
personal household employment was excluded for the sake of international
comparisons, MSMEs’ share in total employment would rise to 16.4%, which
is still quite modest by international standards. By contrast, MSMEs’
employment share in national employment in other countries in 2012 ranged
from 86.5% in Greece, 79.3% in Malta, 73.9% in Spain, 62.5% in Germany,
53% in UK, to 48.4% in the US in 2011. Even among 99 developing countries,
the available evidence shows that MSMEs (2006-2010) employed 66.8% of
the national full-time labor force.
xiv
5. Structure of Output: MSMEs generated output (in current prices) worth
KD1.94 billion in 2003, which represented 26.4% of the non-oil business
sector’s total output. In 2012, their output rose to KD2.6 billion but their
corresponding share fell to 15.3%. Of the change in total output from 2003 to
2012 (KD9.658 billion) in the business sector, MSMEs contributed only KD659
million or 6.8%. During the same period, LEs tripled (3.03 times) and
straddlers doubled their output (1.87 times). Within MSMEs, micros and
medium firms’ output grew by about 42% compared to only 8% in small firms
over the 9-year period. Also, manufacturing and non-finance accounted for
most of the output growth in MSMEs. The clear disparity in output expansion
levels between LEs and straddlers, on the one hand, and MSMEs, on the
other, point to the existence of a dual economy with distinct patterns of
growth.
6. Output growth: The compound annual growth rate of nominal output from
2003 to 2012 is 13.3% for the business sector, which ranges from a negative
1.37% in micros to 4.59% in MSMEs and to 14.09% in LEs. However, when
output values are deflated by the wholesale price index, the real growth rates
fall to 9.82% in the business sector, - 4.85% in micros, 1.11% in MSMEs, and
10.61% in LEs.
7. MSMEs’ contribution to GDP: Economists gauge the relative importance of
MSMEs in an economy by measuring their contribution to GDP. In Kuwait in
2012, they contributed only 8.6% of non-oil GDP, a substantially low level by
international standards. In contrast, MSMEs’ contribution to GDP in the EU-27
countries in 2012 was 58.1% vis-à-vis 41.9% for LEs. In the US, the average
share of SMEs in private non-agricultural GDP from 1998–2004 was around
50%.
8. Value added: A purer measure of a firm’s real business growth is its value
added. As in the results of output, value added results show a similar profile:
MSMEs’ share in total non-oil value added fell from 25.9% in 2003 to 14.5% in
2012; and its contribution to the net increase in value added of the non-oil
business sector over the same period was only 4.1%. LEs, once again,
expanded their value added by 177.5% in contrast to only 17.4% for MSMEs;
and within MSMEs, micros expanded by 26.5%, medium firms by 18.9%,
whereas small firms contracted by - 9.3%. Manufacturing activities realized
xv
 the highest growth among MSMEs, and the finance sector, dominated by
commercial banking, topped the growth in LEs.
9. Investment, wages, profits, access to finance: Similar outcomes and patterns
of growth are also obtained when the analysis is extended to cover the
composition and evolution of other important economic aspects such as
investment and capital accumulation, wages and wage rates, profits and
profitability rates, and access to finance. These results lend credence to the
notion that there is i) a clear dichotomy between MSMEs, on the one hand,
and the rest of the business sector and especially LEs, on the other, and ii)
MSMEs, and especially small and medium enterprises, albeit at a more
modest level, are under stress. Indeed, there is an overwhelming evidence
showing a prosperous large (and straddlers) establishment sector side by side
with a sizable MSMEs sector that is struggling to stay afloat, all of which affirm
the signs of a dual economy with its known attendant negative impact on the
process of economic development.
10. MSMEs are stagnant: The combination of MSMEs’ anemic growth of capital
(1.6%) and employment (0.5%), over the 9-year period, indicates the
presence of a sluggish growth of their two principal factors of production: labor
and capital. Output, when adjusted for price inflation over the same period,
yields a real growth rate of 1.11% annually, which is commensurate with the
growth of labor and capital, reinforcing the notion that the MSMEs sector in
Kuwait is stagnant.
11. MSMEs lack rudimentary managerial skills: An important source of MSMEs’
difficulties lies within their inadequate managerial skills and practices.
Quantitatively, the evidence shows that out of 39,198 MSMEs, only 150 firms
provided training opportunities, 998 had their accounts audited externally, 80
conducted marketing studies, 84 used computer applications/programs, 2,554
had access to the Internet, and only 2 had patents. The number of MSMEs
that had access to the Internet, had audited accounts, provided training, used
computer programs are: only 1 micro, 2 small, and 6 medium firms, which
reflect that the basic elements of must-do managerial practices are severely
lacking. A comparison with the same managerial capacities in 2003 yields a
similar pattern, implying a lack of tangible upgrading of managerial skills and

xvi
 techniques during the decade. The findings influence, and are influenced by,
the anemic growth, which was alluded to in the preceding paragraphs.
12. Kuwaitization of Jobs: Kuwait accords a high priority to raising the
participation rate of nationals in total employment, especially in the private
business sector. The findings show an MSMEs’ trend that is moving in the
opposite direction. Of every 100 workers in MSMEs in 2003, only 3.1 jobs
were held by Kuwaitis; this low percentage fell even further to 2.5 in 2012. In
2003, MSMEs employed 28.2% of all Kuwaitis in the non-oil business sector;
in 2012, the percentage fell to 16.2%. While the number of employed
nationals in the non-oil business sector (78.8% of whom are employed in
100% privately owned enterprises in 2012) increased by 10,591, MSMEs
eliminated 1,453 Kuwaiti-held jobs. Even though the percentage of nationals
in total employment is size-dependent within MSMEs; yet, the fact that it is
only 7.1% in LEs attests to the presence of more structured factors in play
besides size. These include technical competencies, soft skills, job security,
compensation packages, and the allure of government jobs.
13. MSMEs’ ownership affects the share of nationals in the labor force: Another
reason for the imbalanced Kuwaiti participation rates has its roots in firm
ownership. While 100% state-owned enterprises retain 63.3% Kuwaitis in their
total employment, 100% private sector enterprises employ only 3%. When the
government owns enterprises jointly with the private sector, firms with a
government majority employ 21.9% Kuwaitis, while firms with a private sector
majority employ 12% Kuwaitis.
14. Money wages affect the share of Kuwaitis in total employment: The money
wage rate is an important index of the disparity of Kuwaiti ratios in
employment. Wage rates of Kuwaiti workers in LEs are 6.4 times higher than
their Kuwaiti cohorts in MSMEs. The same is true in respect of non-Kuwaitis:
those in LEs receive 1.7 times the wage rate of non-Kuwaitis in MSMEs.
Overall, a Kuwaiti/non-Kuwaiti wage ratio in LEs is 5.8 compared with 1.5
times in MSMEs. These findings clearly indicate that nationals (and non-
nationals) are better off working for LEs (or straddlers) than for MSMEs, which
explains nationals’ preference to seek employment in LEs rather than in
MSMEs, holding other things equal.

xvii
15. MSMEs dilemma: firms without Kuwaiti employees: The widespread
phenomenon of Kuwaiti firms without any national workers is unique to Kuwait
and perhaps other GCC countries. In 2012, 87.8% of the business sector
firms had no Kuwaiti workers, up from 83.9% in 2003. The absence of Kuwaiti
workers varies among firm sizes, ranging from 91.8% in micros, 68.9% in
small, 34.3% in medium, 55.3%, in straddlers and 8% of LEs. Moreover, 70
to 78% of jobs, value added, capital investment, output, and profits are
generated in firms without national workers. This clearly signifies the crucial
role of foreign workers in shaping Kuwait’s business sector. Over time, the
relative economic weight of the Kuwaiti-employee-free firms expanded among
micro enterprises and contracted (improved), in varying degrees, among the
other size categories.
16. Top ranked activities with high ratios of Kuwaiti employment: Employing a
three-pronged technique to identify activities that stand out as being naturally
attracted to hiring nationals, the following subsectors maintain the highest
Kuwaitization rates among (i) other activities in the same economic sector
category, (ii) across different size categories, and (iii) over time: manufacture
of machinery and equipment; publishing and printing; travel agencies; real
estate; computer and ICT; manufacture of chemicals; sales of motor vehicles;
and health and insurance. The most common characteristic among these
diverse activities is that they are typically skill and technology intensive,
conditions that, obviously, advantage nationals over foreign workers. They
also corroborate the central recommendation that came out of the extensive
1989 economic strategy study for Kuwait (the Harvard-MIT-KISR CMT report),
which advocated the pursuit of a high value added strategy to elevate the
participation rates of nationals in the country’s workforce.
17. The straddlers: An in-depth analysis of the 1,740 straddler firms in 2012
indicates that they were mostly engaged in economic activities that require
large sums of capital assets, a condition that disqualifies them from becoming
part of the MSMEs. In 2012, there were more than 600 straddlers with a labor
force of ≤ 10 laborer in each. Other countries dealt with this anomaly by
providing different accommodating definitions that are unique to their
circumstances. It is recommended that Kuwait follow suit by keeping the
employment categories as is while raising the capital thresholds. Not only
xviii
 would this provide a level playing field for straddlers, Kuwait would also
benefit greatly because straddlers have a proven record of doing more than
MSMEs in meeting the national priorities set by the government. The following
definitions for the group of straddlers is recommended:
1. Micro: Employment of ≤ 10 workers and a capital or turnover ≤ KD 10
million;
2. Small: Employment of 11-49 workers and a capital or turnover ≤ KD
25 million; and
3. Medium: Employment of 50-249 workers and a capital or turnover ≤
KD 50 million.
By so doing, 770 of 799 micros (96.4% of all straddler micros), 436 of 474
small (92.0%), and 366 of 384 (95.3%) medium firms would qualify for
inclusion among MSMEs, thereby reducing the 951 straddlers to only 79
firms or 8.3% of all straddling MSMEs.
18. The Missing middle: The phenomenon of the ‘missing middle’ is quite visible
in Kuwait’s business sector in that there are only 450 medium-sized firms or
1.15% of all 39,198 MSMEs in 2012. Natural progress is gauged by the extent
to which small expand into medium and medium into large firms. This process
is likely to be stifled by, not only the mortality rates of small and medium
MSMEs but also by the hollowness of middle, which forms the likely
candidates to expand into large firms, thereby nurturing the economic
development process.
In sum, Kuwait is endowed with abundant oil reserves and has long managed
its wealth to eliminate illiteracy, improve health care, establish basic social and
economic institutions, and maintain well defined property rights. Kuwait’s economy is
robust. It exhibits an educated national manpower; stable macroeconomic policies;
vast financial accumulations by individuals, institutions, and the central government;
and a generous, all inclusive, national welfare system. Economies that are similar to
Kuwait’s would ordinarily show a vigorous MSMEs sector with major contributions to
job creation, economic growth, and entrepreneurship, all of which is powered by a
friendly business environment conducive to competition and private sector growth.
The statistical evidence presented thus far points to a markedly different
performance of MSMEs.

xix
 While this conclusion may lead to questioning the rationale for subsidizing
MSMEs since not only many of the standard objectives pursued in emerging nations
are less urgent in the Kuwaiti context (e.g., economic growth, job creation, poverty
alleviation, regional development, and gender equality) but also since MSMEs
performance so far has been suboptimal. The answer to this, however is not to
abandon the MSMEs sector, for its performance should be judged in light of the
following influences:
Despite the presence of entangled restrictions and government regulations from
inception to operation to termination, private investors have taken the risk and
invested their private funds in the Kuwaiti economy to the tune of some 40,000+
enterprises, KD805 million in invested capital and created value added of worth
KD1.3 billion, and
Had MSMEs received similar financial and technical support, which their
counterparts in OECD or Asian economies had received, their contribution to
non-oil GDP would have probably been much bigger, the economy more
diversified, and the unemployment rate among nationals lower?
There are two overriding benefits/objectives that stand out above all others in
Kuwait: i) job creation for nationals and ii) economic diversification. The other soft
objectives such as innovation, self-employment, and the encouragement of private,
individual initiatives and entrepreneurship are important but would follow naturally
from the attainment of the previous objectives. Given the very limited scope of public
policy and institutional support offered to MSMEs and based on the compelling
successful experiences of MSMEs globally, discernible improvements in the
performance of MSMEs could, and would, take place if a cohesive and well-targeted
set of policies and institutions are put in place. Towards this end, there are some
necessary conditions that must be met such as lowering entry and exit barriers,
promoting modern managerial skills and practices, and formulating a well-designed
set of incentives to meet the country’s two top priorities. Additionally, institutions that
are tasked to help MSMEs at different phases of their project cycle, from startup to
operation, marketing, risk mitigation, micro-financing, and credit bureaus, among
others, are required. The sufficient conditions that guarantee the effective
implementation of public policies consist basically of strict adherence to fairness and
transparency in policy implementation.

xx
 Background

Little is known at the present time about small and medium sized
establishments (SMEs) in Kuwait. The main reason for this lies mainly in the
absence of official definitions, which have had the effect of stifling research,
statistical surveys, and investigative studies of the sector1. Concurrently, the
government of Kuwait (GoK) continued to make known its open and full support for
SMEs as evidenced by its frequent official pronouncements and the establishment of
institutions specifically designed to support small enterprises. This incongruity
between unknown facts about SMEs versus public policies designed to support them
continued unchecked for well over four decades2.
Ideally, a government strategy to encourage the development of SMEs should
have been based on a factual, analytical review of the sector. It should have started
off with a basic statistical investigation of the sector, taking stock of its characteristics
and vital signs in a static setting such as their numbers, sizes, output, value added,
labor employment, employment of nationals, locations, ownership, sales, wage
structure, managerial capabilities, innovation, exports, and internal growth
deterrents, among others. It should have evaluated their time-based contributions to
economic growth, job creation, market competitiveness, and knowledge spillovers.
Such a background check is critical to unravel the sector’s structure, growth
obstacles, strengths, weaknesses, and potential in terms of addressing national
priorities. Not only that, envisioned long-term plans to encourage SMEs should be
cognizant of the lessons learned from relevant experiences in other nations that
have preceded Kuwait in this endeavor. These steps are unavoidable because the
task of promoting SMEs is complex, multi-dimensional, and constantly changing,
and, hence, should be based on current, factual diagnostic assessment of all
aspects of the sector’s characteristics, performance, and weaknesses. These steps
combined would generate an integrated strategy of policies and institutions that
could be translated into a long-term strategy with a temporal, sequential action plan
with dated anticipated benefits and outcomes. This is the approach that was

1
This is unusual since Kuwait has long been known for its extensive statistical publications
and wide coverage of economic and social statistics since the 1950s.
2
From 1973, when the Industrial Bank of Kuwait was established, to 2013, when the 2013
SMEs Law was issued.
1
generally followed by national governments in Korea, Japan, United States (US), and
the European Union (EU).
None of these steps were taken in Kuwait. Instead, the GoK established the
Industrial Bank of Kuwait (IBK) in 1973 to bolster industrial development initially and,
afterwards, to support SMEs, especially in small farming projects. It also
incorporated the Kuwait Small Projects Development Company (KSPDC) in 1997 to
energize small enterprises3. These two institutions focused mostly on providing loans
to SMEs, on the premise that access to finance was the overriding obstacle to
growth. In addition, the Chamber of Commerce and Industry (CCI) and the Kuwait
Foundation for the Advancement of Sciences (KFAS), among other institutions,
offered training opportunities to aspiring young Kuwaiti entrepreneurs.
Thus, since the early 1970s, startup Kuwaiti entrepreneurs with potentially
promising project ideas could find support through only one of the two venues: 1)
IBK for small farming and industrial activities subject to strict conventional banking
standards or 2) KSPDC with which they would share in the financing as well as the
ownership of their projects, and where the entrepreneur becomes a paid employee
of the lending institution4.
It was only in late 2013 that the government issued a new SMEs law (Law
98/2013), which included definitions of small and medium enterprises for the first
time. The law also set up a new institution, the National Fund for the Development
of SMEs (SMEs Fund), with a paid-up capital of about KD 2 billion along with an
apparent responsibility of overseeing and developing the entire SMEs sector. The
Fund is empowered to provide the full gambit of technical, financial, marketing,
training, and research support schemes. Some of its statutes include the provision
of financial loans up to 80% of the project’s cost (not to exceed KD500K) with a 1- to
3-year grace period. The most attractive benefits lie in i) the provision of incubators,

3
KSPDC was established through the Kuwait Investment Authority (KIA) with a capital of
KD100 million. It was designed to establish SMEs (defined as having a paid-up capital of ≤
KD500K), take equity, employ the entrepreneur as manager, pay him/her a salary, and
share in profits/losses. It defined microenterprises as having a paid-up capital of < KD60K
in which case it would assume 50-50 equity participation. It provided additional functions
besides financing projects. See KSPDC.com. It has been subsumed in 2015/16 by the SMEs
Fund.
4
In contrast, Korea in the 1970s and 1980s offered its SMEs sector a wholesome strategy
that included 38 specialized institutions along with a multitude of public policies starting
from the preparation of a business plan to packaging, product design, and marketing.
2
ii) making of available land plots (considered a major stumbling block in Kuwait given
land scarcity and thus its costly acquisition), and iii) the Fund’s legal mandate to
obtain all government approvals and licenses within 30 days5.
Objectives

The impetus to carry out this research project stems from the current gap that
exists between the GoK’s serious and genuine interest in supporting SMEs, on the
one hand, and the unavailability of any information about the SMEs sector, on the
other. The absence of a well-articulated long-term SMEs development strategy is
another impetus. This study intends to address the information gap by presenting,
for the first time, the most comprehensive statistical profile of SMEs, whereas other
studies are planned to follow at a later phase by conducting i) a qualitative
exploratory investigation of the SMEs’ views based on structured field interviews of
sampled SMEs, ii) a regional and international benchmarking of the performance of
SMEs in Kuwait vis-à-vis their counterparts in other countries, which is expected to
yield a package of the most relevant governmental policy measures taken elsewhere
that will effectively spur the growth of SMEs in Kuwait and help draw up a long-term
growth strategy, and iii) formulation of a concrete long-term SMEs development
strategy.
More specifically, four objectives are targeted:
1. To present SMEs’ advocators and promoters with a detailed narrative of
the structure, strengths, and weaknesses of the sector based exclusively
on an empirical, quantitative analysis of existing official statistics,
2. To help guide policy makers in devising relative and effective policy
instruments and institutional mechanisms to maximize the sector’s
potential and ameliorate its weaknesses based on the factual
characterization of its nature, which has heretofore been unknown,
3. To draw up regional as well as international comparisons for the purpose
of benefiting from lessons learned and successful experiences gained in
other countries, especially those with similar socioeconomic conditions,
and

5
However, the Law does not delineate the legal mechanism through which the Fund could
implement the 30-day approval condition.
3
 4. To develop a short as well as long-term SMEs development strategy with
timed action plans based entirely on the findings of the preceding three
tasks.
Ultimately, the four tasks/objectives combined should contribute to rendering
public policies more specific, inclusive, and cost-effective and, by so doing, optimally
energize innovations, expand self-employment opportunities, strengthen the role of
the private sector, diversify sources of income, foster economic growth and, more
importantly, identify activities that intrinsically create meaningful job opportunities for
Kuwaiti nationals, especially young entrants into the labor market. If such a proper
strategy is developed and implemented, Kuwait’s SMEs would assuredly follow the
successful paths traveled by their counterparts in other countries and regions such
as Korea, Japan, US, and EU.

Report Objectives
This report takes up the first step by presenting a comprehensive statistical
profile of SMEs. Specifically, the approach will be composed of two types of
analyses: (1) a static analysis of the sector’s status quo in 2012, the most recent
dataset available 6, and (2) a dynamic analysis tracing its growth patterns since
2003. The narrative is eclectic as it presents measurements of the sector’s
multifarious attributes; the objective is clear: to uncover useful information that would
result in accurate diagnosis and reliable characterization of the sector.
That said, it should be mentioned at the outset that this effort barely scratches
the surface for it is but a first step. Much more quantitative and, especially,
qualitative research is required to begin to fully comprehend SMEs’ status, potential,
and areas of deficiencies, and to ultimately identify the best path forward. This
study’s breadth as well as credibility, it should be emphasized, will depend largely on
data availability and reliability, an area that deserves further scrutiny and
enhancements in future statistical surveys of SMEs7.

6
The most recent dataset available is for 2012; however, initial 2013 data were being readied
at the time of writing this report. CSB’s surveys select registered firms based on an
establishment framework built on data for the year 2000. Only new firms with employment
> 20 are added each year. Non-responding and/or failed firms are replaced by others with
three similar characteristics: ISIC classification, location, and employment size.
7
There is a strong need to conduct a statistical survey specifically for SMEs with additional
information that the current CSB’s Establishment Surveys do not provide.
4
 Methodological Notes

Data Sources
The Central Statistical Bureau (CSB) conducts annual Establishment Surveys
of all registered business enterprises in the country. It divides the ‘business sector’
into five major sectors: manufacturing (ISIC 11-37), construction (ISIC 45), trade
(ISIC 50-52), non-finance (ISIC 55-93) and finance (ISIC 65-67)8. Towards this end,
CSB’s sector-specific questionnaires were reviewed and a list of approximately 50
variables was selected, which make up the team’s SMEs dataset’ upon which the
results are entirely based. The dataset is massive in that it consists of 50 variables X
10 years (2003 to 2012) X some 4,500 to 5,800 firms, depending on the year in
question. The SMEs dataset consists of two types of data: samples and full
population surveys. Specially, there are three categories: i) samples from firms with
1-10 employees, ii) samples from firms with 11-19 workers, and iii) firms with
employment ≥ 20 are surveyed in full. The sample sizes of groups (i) and (ii) are
7.3% and 48.9%, respectively. To generalize results based on sampled firms, the
results are enlarged to the level of all firms using CSB’s sampling coefficients at the
5-digit International Standard Industrial Classification (ISIC) level9.
To the extent that the interest lies in the SMEs sector at large, the results
reported herein relate to the ‘enlarged’ dataset, unless stated otherwise.
Furthermore, in view of the dominance of the oil sector in the Kuwaiti economy, a
distinction is made between oil and non-oil sectors. Most of the findings are shown

8
Broadly, the trade sector consists of retail and wholesale activities; the non-finance
encompasses hotels, restaurants, transport, storage, leasing, real estate, education, health
and communications, and the finance sector includes commercial and specialized banks,
insurance, financial and investment intermediation, stock market brokers, financial
brokerage, and foreign currency exchangers.
9
The sampling coefficients were set up in the year 2000 when CSB conducted its last
comprehensive survey of all operating firms, thus, creating its ‘2000 Establishment
Framework’. When the 2000 coefficients are applied to 2012 data, the results are
underestimated to the extent to which there has been a net growth in the number of firms
from 2000 to 2012. Currently, CSB is updating its old framework.
5
excluding the oil sector10, unless it is stated otherwise. The ‘non-oil’ sector is defined
as all registered firms excluding oil and gas extraction (ISIC 11) and oil refining11.
This procedure eliminates the distortive influence of the enormous oil sector on the
relative weight of SMEs in the economy and permits a proper comparison of SMEs’
performance in Kuwait vis-a-vis their counterparts in other non-oil economies.
Enlarged results are reported at either the five-sectoral level or at 2- or 5-digit ISIC
levels, depending on the subject under discussion12. All aggregated data are
reported at the sectoral levels and for each size category (micro, small, medium [i.e.,
MSMEs], large [LEs], and straddlers). To the extent that straddlers (i.e., firms that
qualify based on the employment criterion but not on the capital criterion – see next
section) would fit in the SMEs classification if the capital condition were eliminated,
reference will be made to them in the course of comparing SMEs with LEs. Finally,
most of the investigated features are presented across sectors during 2012 and then
over time from 2003 to 2012.
It is inevitable in such an extensive and multifaceted empirical study to run
into seemingly odd outcomes. To explain such occurrences, it is instructive to depart
from the standard dual SMEs definitions (using employment and capital assets) by
relying on the employment criterion only or include ‘straddlers’ or, in other cases,
conduct further research to unravel other forces that are tacitly responsible for such
seemingly puzzling results. In cases that defied explanation based on the dataset
alone, additional infield investigative research would be required to resolve
inconsistencies. Additionally, a few economic phenomena that intersect with SMEs
are researched at the national level to shed light on the SMEs sector and place its
performance in perspective.

10
CSB does not exclude oil refining from non-oil GDP estimates. If it were, the oil sector’s
2012 value added per CSB would have been KD31.764 billion rather than the KD33.16
billion estimate. See CSO booklet, 2016, “A Statistical Glance, 2015”, No. 38 (in Arabic).
11
Specifically, only three firms are excluded: two oil & gas extraction firms (ISIC 11101)
and one petroleum refining firm (ISIC 23201). Because these firms come under LEs and
belong to the manufacturing sector, oil and non-oil results will be identical except in
regard to manufacturing LEs.
12
MSMEs are void of any oil sector firms, as defined in this study. Hence, MSMEs’ output,
value added, etc. are the same with or without the oil sector.
6
SMEs Definitions
Until a formal definition of SMEs was issued by GoK in 2013, SMEs
definitions were left to IBK and KSPDC. As well, different institutions adopted
different definitions including government ministries, banks, statistical bureaus13, and
researchers. The absence of a formal definition can be ascribed in part to GoK’s
piecemeal approach to promote SMEs14. When, finally, a definition was selected
and sanctioned officially in the 98/2013 SMEs law, the lawmaker inappropriately
conflated eligibility with definitions, thereby distorting the nature and structure of
SMEs per se. A detailed statistical assessment of the new definitions was carried
out in 2015. It concluded that the new definitions not only would steer government
policy in the wrong direction but also misrepresent the SMEs sector and preclude
any reasonably compatible regional or international comparisons15. Large firms with
thousands of employees and a handful of national workers would become ‘small’
enterprises based on the new definitions and, among other pitfalls; a clear majority of
small registered firms would be excluded from the list of SMEs. Most importantly,
these definitions would shroud the program with uncertainty and confusion among its
clients regarding what is and what is not a ‘small’ enterprise, especially when
generous financial benefits are at stake. To explain briefly, the 2013 law specifies
only two sizes: (1) small firms defined as having 1 ̶ 4 Kuwaiti employees and a
capital ≤ KD250K (USD875K) and (2) medium firms defined as having 5 ̶ 50 Kuwaiti
employees and a capital ≤ KD500K (USD1.75 million).

13
CSB has yet to carry out a statistical survey specifically designed to cover SMEs. Its
breakdown of firms’ population into three subgroups based on employment sizes (1-10;
11-19; ≥ 20) is dictated exclusively by statistical surveying considerations.
14
IBK manages a KD50 million portfolio provided by KIA. It defines MSMEs as having
capital ≤ KD500K. Its small business program provides loans at 2.5% interest rate,
financing up to 80% of the project’s cost, with a grace period of 1–3 years. It pays a
monthly stipend to the entrepreneur for 2 years (KD1000). Among its many loan
conditions, the most restrictive is the availability of business premises. Ernest Kock
reports that IBK “disbursed (only) 50% over the last 10 years mainly because of the
stringent qualification requirements”; see UNDP/ Kuwait, 2011, “Challenges to SME
Development in Kuwait”.
15
For more details, See Maurice Girgis and Shaikha Al-Fulaij (June 2015), “SMEs
Definitions in Kuwait: Revisited”, Technical report, KISR; and Maurice Girgis (ed.),
2014,” Towards Invigorating SMEs in the Arab World”, Proceedings of the Second Arab
Development Symposium, World Bank, and the Arab Fund.
7
 Statistically, when the law is applied to the 2012 dataset, SMEs in Kuwait
would consist of 3,825 ‘small’ and 191 ‘medium’ firms when in fact, using the same
1-50 workers’ yardstick of the SMEs law, there are 38,749 ‘small and medium’ firms
with an employment of < 50 (total) workers, regardless of their nationalities. The
narrow definition of size based on ‘Kuwaiti nationals rather than ‘employees’ leads to
the exclusion of 34,733 enterprises or about 90% of SMEs16. Clearly, the lawmaker’s
intention is to reward firms that employ nationals and to exclude firms that do not
employ Kuwaitis. While this reflects the country’s national priorities, the definitions
have unintended consequences. Instead, the law should have separated ‘definitions’
from ‘eligibility’ conditions by following standard regional/international benchmark
definitions while delineating ‘qualifying’ or ‘eligibility’ conditions to which government
support will be directed, as it sees fit17.
Consequently, a new set of definitions are clearly needed. The existing
definitions modified by: (i) delinking definitions from eligibility conditions, (ii)
maintaining a measure of congruence with the government’s expectations from
SMEs, and (iii) keeping a sense of comparability, but not conformity, with regional
and international definitional standards. Thusly, the team explored multiple
alternative definitions to gauge their suitability by quantifying their impact statistically
and then selecting those that are congruent with Kuwaiti socioeconomic conditions
and the three preceding criteria. The findings show that, optimally, Kuwait will do
well to adopt the following size and definition categories:
1. A new ‘micro enterprise’ category should be introduced, defined as employing
1–10 workers with a paid-up capital or annual sales < KD150K,
2. Small enterprises to be defined as employing 11-49 workers with a paid-up
capital or annual sales < KD250K,

16
See Appendix A for a detailed quantitative comparison of the impacts of applying the
SMEs definitions stated in the SMEs 98/2013 law versus those of the new proposed
definitions listed herein.
17
A detailed review of SMEs definitions in other countries shows that there is a wide variety
of definitions adopted in different economies. See M Girgis and S Al-Fulaij, op cit.
However, none led to such a distortion and very few drew a distinction between definitions
and qualifications. Different nations routinely invoke qualifying conditions to serve
specific national targets such as the promotion of new technologies, promotion of women
in the business sector, rural development, the use of locally abundant raw materials,
exports promotion, etc.
8
 3. Medium enterprises to be defined as employing 50-249 workers with a paid-
up capital or annual sales < KD 500K,
The introduction of two criteria/conditions (employment and capital assets or
turnover) necessarily generates a few firms that meet one condition but not the
other, in which case they drop from the list of SMEs. In the case, this would include i)
micro firms that have ≤ 10 workers but show a capital ≥ KD150K, ii), small firms with
11–49 workers but show a capital ≥ KD250K, and iii) medium firms with 50–249
employees and a capital ≥ KD500K. The team calls these outlier firms the
“straddlers” 18.
Based on the employment criterion, there were 1,740 straddlers in 2012, most
of which (1,657) belong to MSMEs. These firms are engaged in activities, which, by
their nature, require substantial working capital and/or inventories and/or plant and
equipment (e.g., foreign exchange dealers; investment and financial intermediaries,
jewelries; auto sales, real estate, trade in household appliances, private hospitals
and schools, etc.). Other countries dealt with this group by delineating separate
definitions for them19. Not only are they small but available evidence in Kuwait
indicates that they also outweigh MSMEs’ economic significance, they distinguish
themselves as superior to MSMEs in respect of managerial skills and practices, and
more importantly, perhaps, they employ more nationals as evidenced by their high
ratio of Kuwaitis in total employment, which is greater than twice the ratio of MSMEs.
In sum, they are key players in the business sector. Consequently, while comparing
enterprises by size category in this report, straddlers are treated throughout as a
stand-alone subgroup vis-à-vis micro, small, medium, MSMEs, and large groupings.

18
This is a common phenomenon in all countries or regions (i.e., EU) where two criteria or
more are stipulated simultaneously.
19
For a fuller review of straddlers, see Appendix E.
9
 Number of MSMEs and Their Composition

Number of Micro, Small, Medium, Large, and Straddler Enterprises, 2012

Following the definitions given above, the business sector20 is divided into five
‘size’ subgroups: micro, small, medium, straddler and large enterprises (LEs). The
first three add up to the ‘MSMEs sector’, while the five subgroups together define the
‘business sector’.
All firms operating in 2012 are shown in Table 1 based on the employment
criterion only; i.e., including straddlers. Next, the number of firms based on the dual
definitions is shown. The number of straddlers is also shown (subgroups I, II, III).
The CSB surveyed only 5,817 firms, whereas there were 41,268 firms
operating in Kuwait in 2012; the difference is mostly due to the 7.3% sampling
ratio of micro enterprises,
Employees-only-defined MSMEs represent 99% of all firms. When dual
definitions are applied, the percentage rises to 99.17% due mainly to the
exclusion of straddlers,
When capital is added to MSMEs definitions, 1,657 straddler firms become
outliers and hence ‘undefined’21; their distribution among micro, small, and
medium firms is shown in the table,
Also, 83 large firms, defined as having more than 250 employees, are
straddlers because their paid-up capital is ≤ KD500K, and
Although outliers/straddlers represent a small percentage of the total
population of each size category, in a small economy like Kuwait’s, it is
important to eventually bring them into the qualification basket of enterprises,
especially, as showed in Appendix E that they tend to contribute more to
national interests than MSMEs.

20
The ‘business sector’ is defined in this report as consisting of all registered MSMEs, LEs,
and straddlers. It encompasses all commercial activities per the UN nomenclature from
ISIC 11 to ISIC 99. Some commercial activities that come under ISIC classification in
other countries such as the production and sale of water and electricity are excluded since
they belong to the public sector in Kuwait. These omissions underestimate the size and
role of MSMEs in Kuwait.
21
For a fuller treatment and analysis of the group of straddlers, see Appendix E.
10
 In sum, the 2012 enlarged MSMEs dataset consists of 39,198 MSMEs, of
which 93.4% are micros, 5.5% are small, and 1.2% are medium enterprises. When
non-oil LEs (327) and straddlers (1,740) were added to MSMEs, the estimated
number of firms operating in Kuwait in 2012 was 41,265 enterprises.
Table 1. Number of Micro, Small, Medium, Straddler and Large Enterprises in
2012
Definitional Criteria of MSMEs
Size No. of Employees Employees and capital
Sample Enlarged Sample Enlarged
Micro 2,735 37,404 2,603 36,605
Small 1,836 2,617 1,401 2,143
Medium 833 833 449 449
MSMEs 5,404 40,854 4,453 39,198
LEs 413 413 330 330
Total 5,817 41,268 4,783 39,528
Straddlers Sampl Enlarge
e d
Straddlers I: Micro firms with 1-10 workers and capital ≥ KD150K 132 799
Straddlers II: Small firms with 11-49 workers and capital ≥ KD250K 435 474
Straddlers III: Med firms with 50-250 workers and capital KD ≥ 384 384
500K
Sub-Total: MSMEs 951 1,657
Large firms with > 250 workers and capital < KD 500K 83 83
Total 1,03 1,740
4

An analysis of the sectoral distribution of firms, shown in Table 2, - reveals the

following facts:
The manufacturing sector is made up of a few of all micros (11.6%); about
1/4th of small; 1/4th of medium, and 17% of LEs and straddlers,
The construction sector consists of only 1.6% of micros; 20-23% of small
and medium firms, and 10% of LEs and straddlers,
The trade sector envelops 65% of micros; 22% of small and medium firms
and about 1/3rd of LEs and straddlers,
The non-finance sector takes up about 22% of MSMEs regardless of the
size category and a larger share (31%-32%) of LEs and straddlers,
0.1% to 0.4% of micros, small, and medium firms come under the finance
sector in contrast to 10% of LEs and straddlers.

11
 Of the total of 41,265 non-oil enterprises, the trade sector accounts for the
largest share, 60.4%, followed by non-finance, 23.2%; manufacturing,
12.8%; construction, 3%; and finance, 0.5%. This structure portends the
significant weights the trade and non-finance sectors have within MSMEs,
as will be observed in the proceeding sections,
24,938 of the total 41,265 firms are engaged in trading activities; and of
those, only 54 and 580 are large and straddler firms receptively,
MSMEs in each sector except finance account for 93.3% to 97.5% of all
firms in their corresponding national business sectors.
MSMEs’ finances represent only 17.3% of the country’s financial
enterprises. Owing to the crucial role the size of the firm’s capital assets
(i.e., working as well as plant and equipment) plays in financial
intermediaries, MSMEs’ finance companies exert only a marginal influence
on the role of MSMEs. Its presence is felt in the group of straddlers as they
take in 73.3% of all finance firms,
Straddlers are a few, representing 4.4% of MSMEs. Sectorally, however,
they represent < 7% of the number of firms in manufacturing, trade, and
non-finance. In activities that require sizable amounts of working capital,
such as construction and finance, they make up 13.8% of construction and
423.8% of finance, and
LEs account for < 1.5% of enterprises in manufacturing, trade, and non-
finance.

Table 2. Number of MSMEs, LEs, and Straddlers Classified by Sector and by

Size, 2012*
Sector Mediu LE Straddler
Micro Small MSMEs Total
m s s
Manufacturin 286
4,256 554 103 4,914 69 5,269
g
Construction 478 431 104 1,013 71 140 1,224
Trade 23,73 24,30 580 24,93
471 102 54
1 4 8
Non-Finance 8,104 683 138 8,925 110 556 9,591
Finance 36 4 2 42 23 178 243
Total 36,60 2,14 39,19 1,740 41,26
449 327
5 3 8 5
Excluding the oil sector.

12
 Focusing on MSMEs alone, additional size-based analysis provides new insights:
1. MSMEs are dominated by micro firms: 36,605 out of a total of 39,198 MSMEs
or 93.4% are micro firms compared to 5.5% of small and only 1.2% of medium
firms. This reaffirms the presence of the ‘missing middle’ phenomenon,
2. The sectoral distribution is also imbalanced in that there are 24,304 firms or
62% of all MSMEs in the trade sector. Of that, 23,731 or 97.6% are micros.
That is, MSMEs are mostly made up of trading outfits employing 1 to 10
workers22. Next, non-finance has 8,925 firms or 22.8%; manufacturing, 12.5%;
construction, 2.6%; and finance, 0.1%,
3. The dominance of micros is not limited to the trade sector: 85% to 97.6% of
MSMEs in the five sectors are micros except in construction where labor
intensity is typically high and hence is not likely to fit into the micro enterprise
parameters,
4. The largest number of small firms is in the non-finance sector (683), followed
by manufacturing (554) and trade (471). The same pattern is true among
medium enterprises: 138 in non-finance, 104 in construction, and 103 in
manufacturing, and
5. In each economic sector, the relatively larger medium-sized firms are a
minority: 10.3% in construction, followed by finance, 4.8%; manufacturing,
2.1%; non-finance, 1.5%, and trade, 0.4%, as shown in Fig. 1.

100
90
80
70
60
50
%

40
30
20
10
0
Manufacturing Construction Trade Non-Finance Finance

Micro Small Meduim LEs

22
There are 1,880 firms employing only one employee, 8,699 with two employees, 16,117
employing 3-5 employees, and the remaining 8,910 employing 6-10 workers, all of which
indicate that 3/4th of all MSMEs employ ≤ 5 workers only.
13
Fig. 1. Percentage distribution of MSMEs by size and sector, 2012.

A quick review of the detailed level of economic activities at the 2 and 3-digit
ISIC levels reveals the following features:
1. Micro manufacturing concerns are mostly made up of artisan industrial
activities such as tailor shops (2,457 firms), metal tanks (523), and furniture
(259), all of which add up to 76.1% of all manufacturing firms,
2. 91.3% of the trade sector is concentrated in two activities: auto repair (3,228)
and retail trade stores (18,427),
3. About 14% of finance firms are small and medium; the rest are micros,
represented by auxiliaries in insurance, financial intermediation, and foreign
exchange dealers (30 out of 36),
4. Due to the broad range of activities in the non-finance sector, it is difficult to
identify a common factor that explains its structure per se. However, one
observes a few activities with a relatively strong presence, e.g., 2,081
restaurants; 632 property leasing; 269 legal, accounting, and tax offices; 351
advertising; and 188 travel agencies,
5. About one third of the large firms (110) are in the non-finance sector, mostly in
education (15), restaurants (12), land transport (12) and property leasing (10),
6. The bulk of the finance sector is large commercial banks and insurance firms
(19),
7. In the trade sector, large firms are in the sales of motor vehicles (11) and
specialized retail trade (17),
8. Economic activities that do not rely on economies of scale and those that are
characterized by a flat-bottomed average cost curve are most likely to show
shared dominance across all size categories. This is particularly true when
one considers the limited size of the market, limited export potential, and
weak product differentiation. Examples of such activities include private
schools, wholesale trade, furniture, fabricated metals, publishing and recorded
media, and the manufacture of food products & beverages,
9. The “missing middle” is often referenced in the SMEs literature in the context
of emerging economies where SMEs are dominated by micros and some
small firms and only a few medium enterprises. In Kuwait, this phenomenon is
present and is best reflected by the few medium firms numbering 449 firms or

14
 1.2% of MSMEs. To the extent that the natural evolution of businesses
transforms small into medium and medium to large, there are only 449
potential medium firms that could expand into LEs, and
10. Regarding straddlers, they are noticeable in retail trade (330 firms), real
estate (264), wholesale trade (166), construction (140), non-metallic minerals
(51), and fabricated metals (50). In finance, there are 42 MSMEs and 23 LEs,
whereas there are 178 straddlers. Typically, these activities are characterized
by either large fixed investments and/or large working capital requirements,
which pushed them into the straddlers’ sphere.

Evolution from 2003 to 2012

In principle, an increase in the number of firms over a certain period would
signal a growing economy, other things being equal. Furthermore, a change in the
number of firms would mask dynamic factors at play as it entails firms that failed and
exited along with new firms that entered the market. Unfortunately, such information
is not available. To evaluate the growth in the number of firms, therefore, emphasis
is placed on net change in the number of MSMEs, regardless of the forces that lie
behind the change. A comparison of their numbers in 2012 against 2007 and 2003 is
reported in Table 3. The results indicate the following structural changes:
1. The number of micro enterprises grew at a faster rate during the latter half of
the period than in the earlier half. All in all, there were 2,415 more micro firms
in 2012 than in 2003,
2. The number of small firms fell, and their decline accelerated in the latter
period,
3. Medium firms experienced a similar negative growth, especially during the
years from 2003 to 2007. There were 47 fewer medium companies in 2012
than in 2003,
4. The population of MSMEs grew quite modestly (5.4%) during the 9-year
period, all of which stemmed from the growth of micros,
5. The most impressive growth occurred among LEs, which more than doubled
between 2003 and 2012,

15
Table 3. The Growth in the Number of MSMEs, LEs and Straddlers: 2003, 2007,
and 2012
Micro Small Medium MSMEs Large Straddler Total
s
2003 34,190 2,510 496 37,197 164 1,279 38,63
9
2007 35,835 2,422 461 38,718 250 1,566 40,53
4
2012 36,605 2,143 449 39,198 330 1,740 41,26
8
Rate of change
2003-2007 4.8% -3.5% -7.1% 4.1% 52.4% 22.5% 4.9%
2007-2012 2.1% -11.5% -2.6% 1.2% 32.0% 11.1% 1.8%
2003-2012 7.1% -14.6% -9.5% 5.4% 101.2% 36.1% 6.8%

6. Straddlers grew significantly by 461 firms or by 36.1% over the 2003-2012

period,
7. The number of firms in the business sector increased by 6.8% over the period
under study. Of the net increase of 2,629 firms, 91.9% or 2,415 firms were
micro enterprises. The rest came from LEs,
8. Unlike the 2007-2012 period, the earlier period is characterized by better
growth performance across all sizes, and
9. Small firms experienced a greater exodus during 2007-2012 than in the earlier
period: 279 versus 88 firms, respectively.
10. Despite the increase in the overall number of micro enterprises, the decline in
the number of small and medium sized firms is a cause for concern for it has
the effect of widening the ‘missing middle’ gap.
That said, one may counterargue, however, that the observed changes above may
be the result of firms shifting sizes as over time. This possibility is examined next.

Cohort Size Shifts between 2003 and 2012

As one breaks down firms by size, a third force is recognized: firms may
change their size classification by either expanding into a larger size or contracting
into a smaller size, therefore altering the number of firms at the terminal year. To
uncover such dynamic changes in the composition of the MSMEs sector, each
surveyed firm was traced individually, based on its unique ID code, from T 2003 to
T2012 to find out if it i) expanded into a larger size, ii) contracted into a smaller size or

16
iii) stayed at the same size23. This analysis excludes the 645 firms, which started
operations after 2003 to maintain data comparability. The results are shown in Table
4.
Based on the 5,817 firms surveyed in 2012 and the 645 firms that are
excluded, the firm population totals 5,172 enterprises. Upward size shifts are
specified as moving from micro ► small ►medium ►straddler ►large. Downward
size shifts move in the opposite direction. Diagonal cells give the number of firms
that stayed at the same size. Size shifts in the table are shown row-wise, from left to
right. Taking ‘small’ enterprises as an example, 316 firms contracted to micros, 148
expanded into medium-sized firms, 166 expanded into straddlers, and 15 firms
became LEs. The totals of size shifts experienced by small firms are shown in the
right hand shaded section where 329 firms had expanded, 316 firms had contracted,
and 910 had stayed the same.
In general, micro enterprises appear to exhibit more resistance to change in
that 84.6% stayed the same compared with 48.5% of medium, 46.3% of LEs, and
49.9% among straddlers. Small enterprises, in contrast, are not far off micros as
their ‘stay the same’ ratio is 71.9%. For the business sector, 17.2% of the firms
experienced growth, 11% contraction, and a sizeable proportion stayed the same,
71.8%.
In a buoyant economy, one would expect more firms to expand and move
upwards and fewer to contract and move downwards. In the Kuwaiti economy, this
scenario should be the ‘normal’ business condition given the length of the period
under consideration and the concomitant rising inflows of major oil revenues and
their salutatory influence on public and private spending. At the same time, the only
discernible economic setback during this period lies in the impact of the global 2008
recession on the Kuwaiti financial sector.

Table 4. Number of Upward, Downward, and Zero Size Shifts from 2003 to 2012
Contr
Fro

No
m

To Micro Small Medium Straddler LEs Expansion actio

change
n
Micro 2,124 235 11 62 2 310 0 2,124
Small 316 910 148 166 15 329 31 910

23
Temporal size shifts may be attributed in part to parallel shifts in market concentration
ratios, an issue that is investigated and the results reported in Appendix B.
17
 6
Medium 12 63 188 128 34 162 75 188
Straddler 56 39 373 88 88 15 373
57
2
LEs 2 2 2 19 120 0 25 120
Total 1,266 388 748 259 889 56 3,715
2,511
8

The findings point to two important conclusions:

1. About 10% of MSMEs have encountered growth difficulties, culminating in the
contraction of 391 firms: small (316 firms or 20.3% of all small firms) and
medium-sized enterprises (75 firms or 17.7% of all medium firms), both of
which demonstrate an MSMEs sector encumbered by hidden underpinning
growth impediments, and
2. The fact that out of 5,172 firms, 3,715 or 71.8% stayed the same (i.e., no
growth) and 568 firms or 11% contracted (i.e., negative growth) show that
almost three-fourth of all business sector firms have not experienced an
upward size shift from 2003 till 2012.
Production

Structure by Size and by Sector in 2012

The total value of output generated in 2012 is KD63.9 billion, of which MSMEs
account for KD2.6 billion only, or 4.1%. Straddlers contribute KD3.2 billion or 5%.
When the oil sector is excluded, the total output drops precipitously to KD17 billion
and the percentage contribution of MSMEs increases to 15.3% and straddlers’ to
18.7% (see Table 5). The substantial drop in gross output and the resultant four-fold
increase in MSMEs’ contribution underscore the considerable influence of the oil
sector in obscuring the true role of MSMEs in an oil-based economy like Kuwait’s.
That said, the overall contribution of only 15.3% is still quite modest by international
standards24.
For the non-oil business sector, the manufacturing sector is by far the largest
(KD4.9 billion) followed closely by non-finance (KD4.5 billion) and finance (KD3.5
billion). The smallest are trade (KD1.9 billion) and construction (KD2.2 billion). LEs’

24
To avoid the influence of varying utilization rates of raw materials in outputs as well as the
well-known double counting problem, value added is used next in place of output for
international comparisons.
18
output is 4.3 times that of MSMEs and 3.5 times that of straddlers. LEs’ key
contributors are manufacturing (KD3.6 billion) and finance (KD2.7 billion). While
60.4% of all firms are in the trade sector, they contribute only 11% to the gross
output of the business sector. In contrast, finance firms make up a meager 0.59% of
all firms but their output is sizable at 20.9% of the gross business sector’s output.
Of the three size categories within MSMEs, micro enterprises contributed the
most to output. Their output of KD1.4 billion is more than half of the output produced
by all MSMEs. This seemingly puzzling result, even though it underpins their
significant role in MSMEs, is explained by their substantial numbers (36,605)
compared to the number of small (2,143) and medium enterprises (449). In contrast,
small enterprises produced the smallest output (KD472.6 million), while medium
enterprises contributed KD714.5 million.

Table 5. Output, Output per Worker, and Output per Firm, Classified by Size,
2012†
Straddler
Micro Small Medium MSMEs LEs Total
s
Output (KD million) 3,178.0 17,000.
1,411.0 472.6 714.5 2,598.1 11,224.8
8
% in MSMEs 54.31 18.19 27.50 100.00
% in Total 8.30 2.78 4.20 15.28 66.02 18.69 100.0
Output/Worker (KD) 9,122 10,892 15,627 10,657 34,513 28,087 24,921
Output/Firm (000 KD) 39 220 1,591 66 34,327 1,826 412
† Excluding the oil sector.

The output of micro enterprises in trade, non-finance, and manufacturing

sectors makes up 96.3% of the total output of all micro enterprises and their
dominance extends beyond micros in that their output constitutes 87.7% of MSMEs’
overall output (see Figs. 2 and 3).

27.50%

54.31%

19
18.19%

Micro Small Medium

Fig. 2. Non-oil MSMEs’ output shares.

100
90
80
70
60
50
40
30
%

20
10
0
Micro Small Medium LEs

Manufacturing Construction Trade Non-Finance Finanace

Fig. 3. Non-oil output shares classified by size and by Sector, 2012

The top five MSMEs subsectors at the 2-digit ISIC level that contributed the
most to output are listed in Table 6, divided into services and products sectors.
Excluding construction, the bulk of the volume of output produced in 2012 belongs to
services rather than goods, an expected outcome in high income countries in
general.

20
Table 6. Value of the Output of Major MSMEs Subsectors in 2012 (KD Million)
Services Sectors Products Sectors
Retail trade 598.2 Construction 311.8
Hotels and restaurants 268.7 Fabricated metals 105.3
Travel agencies 150.9 Manufacture of apparel 99.7
products
Sales of motor vehicles 118.1 Nonmetallic minerals products 79.1
Education 64.2 Manufacture of food products 67.8

By way of explaining the sectoral results presented above, the performance of

MSMEs at the 2-digit ISIC level (based on the enlarged non-oil dataset) is carried out
to identify the specific dominant subsectors25. The review points to the following:
The subsector with the highest level of output in the micro category is retail
trade (KD501.8 million) followed by KD179.2 million in hotels and
restaurants; KD104.1 million in sales of motor vehicles; KD91.9 million in
travel agencies, and KD89.1 million in the manufacture of wearing apparel,
Among small enterprises, the top ranking activities consist of construction
(KD102.9 million) followed by KD48.7 million in hotels and restaurants; and
KD30 million in retail trade and fabricated metals, and
Dominant economic activities in medium enterprises are construction
(KD159.7 million); KD65.8 million in retail trade; KD56.3 million in education;
KD48 million in non-metallic minerals; and manufacturing of furniture.
Economic subsectors whose output levels surpass other activities across all
three MSMEs size categories are construction, real estate, and hotels and
restaurants. Other sectors, such as the manufacturing of wearing apparel, are
typically leading in the microenterprise category only. Interestingly, the level of output
in a few specific economic activities appears somewhat of equal value regardless of
size: the manufacture of food and beverages outputs ranges from KD24.7 million in
micros to KD21.6 million in both small and medium establishments. Clearly, he size-
based ranking of economic activities obscures the influence of the number of firms in
each size class, for the average output per micro firm is KD38.6K compared to
KD220.5K in small and KD1,591.4K in medium establishments.

25
CSB’s Establishment Survey details data for 42 2-digit ISIC categories, of which 18 come
under the manufacturing sector alone, followed by the non-finance sector.
21
Output per Firm
While micros as a group create twice the amount of output of all medium
establishments, their average firm generates less than 2.5% of the amount of output
produced by a medium-sized enterprise. The same is seen in small versus medium
enterprises, albeit less pronounced. For non-oil LEs, the average output per firm is
KD34.3 million26. This means that for every KD1 of output produced in a micro
enterprise, an average small, medium, and large enterprise would produce KD5.7,
KD41.3 and KD890.5 of output, respectively.
Through the period 2003 to 2012, there has been a strong growth in the
average level of nominal output per firm in the non-oil business sector, as shown in
Table 7 where it realized an annual growth rate of 9.0%. Both LEs and straddlers
exhibit a relatively healthy growth performance reaching 4.5% and 3.6% p.a.,
respectively. However, MSMEs in general and micros and small enterprises in
particular portray a sluggish growth relative to all other size classes. The exception in
MSMEs is medium firms whose economic performance tops all other groups. The
results also point out to a marked economic growth difference between the two
periods shown in the table: from 2003 to 2007, the non-oil business sector enjoyed
an economic surge in output growth per firm (17.4% p.a.) compared to the
subsequent period from 2007 to 2012 (2.7% p.a.).

Table 7. Values and Growth rates of Output per Firm for Each Class Size, 2003
to 2012*
Output per Firm (KD 000) Cumulative Annual Growth rate (%)
2003-
2003 2007 2012 2007-2012 2003-2012
2007
Micro 29.5 31.8 38.6 1.9 4.0 3.0
Small 174.2 209.5 220.5 4.7 1.0 2.7
Medium 997.5 1,271.9 1,591.4 6.3 4.6 5.3
MSMEs 52.1 57.6 66.28 2.5 2.8 2.7

Straddlers 1,326.7 2,906.1 1,826.4 21.7 - 8.9 3.6

LEs 23,020.0 31,745.1 343,26.5 8.4 1.6 4.5

Total 190.0 360.8 412.0 17.4 2.7 9.0

* Excluding the oil sector.

26
When the oil sector is included, it is 176.1 KD million.
22
 Considering the growth pattern of MSMEs, the one single group that lagged
behind is small enterprises: their growth rate through the entire period ranked last 27.
Such findings should guide future MSMEs support schemes.

Output per Worker: 2012

In contrast to output per firm (Q/F), the inter-sectoral differences of output per
worker (Q/E) are much less pronounced. Excluding the oil sector, the level of output
per worker in MSMEs is KD10.7K compared to KD34.5K in large enterprises,
KD28.1K in straddlers, KD15.6K in medium, KD10.9K in small and KD9.1K in micro
enterprises28. The spread between the two coefficients of output per firm and output
per unit of labor is displayed in Fig. 4. Q/E in LEs is only 3.2 times its counterpart in
MSMEs, whereas their Q/F is 517.8 times the level in MSMEs. The disparity attests
to i) the high output/labor ratio in LEs compared to MSMEs (KD34.5K versus
KD10.7K), but it also confirms the considerable size difference between them
(KD34.3 million versus KD66K). The evidence shown in Fig. 4 leaves little doubt that
output per labor ratios is size-dependent. The results consistently confirm the
conventional wisdom that larger firms generally maintain higher labor productivities
(Q/E) than their smaller counterparts. In absolute terms, Q/E of MSMEs is KD10.7K,
while LEs’ and straddlers’ are, respectively, KD34.5K and KD28.1K. The large
differences in productivity levels between MSMEs, on one hand, and LEs and
straddlers, on the other, signify the important influence of economies of scale.

27
A detailed, single-firm-based analysis into the growth path of each firm from 2003 to 2012
is carried out to determine if the firm moved up to larger size class, stayed the same, or
contracted. The results are given below.
28
When oil is included, the business sector’s average rises from KD24.9K to KD91.5K and
large firms’ from KD34.5K to KD170.2K.

23
 40 40,000

35 35,000

30 30,000
Q/E (KD 000)

Q/F (KD 000)

25 25,000

20 20,000

15 15,000

10 10,000

5 5,000

0 0
Micro Small Medium MSMEs LEs Straddlers Total

Output per Worker (Q/E) Output per Firm (Q/F)

Fig. 4. Output per firm vis-à-vis output per labor, excluding oil, 2012.

Inter-sectorally, Q/E in the finance sector (KD115.7K) tops all other activities
regardless of size; the largest spread is between medium (KD13.3K) and LEs
(KD127.1K). Excluding the finance sector, however, the business sector’s
manufacturing activities exhibit higher Q/E ratios than in all the other sectors; this is
true in small, medium, LEs, and straddler firms. Thus, if realizing the highest levels
of output per worker is set as a national priority target, the favored economic
activities would be, in a descending order, manufacturing in all size classes29 except
micro manufacturers, followed by non-finance in all size categories.

MSMEs’ Output Growth Patterns from 2003 to 2012

Output levels of each economic sector along with their compound annual
growth rates over the 9-year period are shown in Table 8. The most important
features of the results are outlined in the following:
1. Generally, gross output – at current prices – grew throughout the period, whether
the oil sector is included or not. However, the growth is inconsistent. For one,
output grew annually by 16.1% including the oil sector, but grew by 9.8% when it
is not. The substantial difference is attributed to large increases in oil prices and,

29
Knowing that the majority of those employed in the manufacturing sector are foreign
workers (Ek/E is only 1.5% in MSMEs, 2.6% in straddlers and 5.5% in LEs), giving
preference to this sector would conflict with another national objective; namely, to raise
Ek/E.
24
 to a lesser degree, to oil output increases. Nevertheless, both rates reflect a
strong growth record for the business sector,
2. As the non-oil business sector grew by 9.8%, MSMEs grew by only 3%,
3. The share of MSMEs in the non-oil business sector’s output dropped from 26.4%
in 2003 to 15.3% in 2012, revealing the fast growing LEs in contrast with MSMEs’
slow growth,

Table 8. Sectoral Non-Oil Output Growth in Current Prices, 2003 to 2012 (KD
million)
Business Sector MSMEs
Sectors 2003 2012 CAGR* 2003 2012 CAGR* % Share†
Manufacturing** 1,379.9 4,902.0 15.1% 370.7 564.7 4.3 5.5%
Construction 1,069.2 2,194.4 8.3% 265.7 311.8 1.6 4.1%
Trade 1,160.7 1,875.8 5.5% 681.1 806.3 1.7 17.5%
Non-finance 2,387.6 4,482.0 7.2% 602.2 907.7 4.2 14.6%
Finance 1,344.5 3,546.8 11.4% 19.7 7.6 (9.1) -0.5%
Total 7,341.9 17,001.0 9.8% 1,939.4 2,598.1 3.0 6.8%
* Compound annual growth rate (%); **) Non-oil; † % contribution of MSMEs in the
business sector’s total output growth.

4. The bulk of the overall growth occurred in LEs: of the incremental output increase
of KD9.66 billion in the non-oil business sector, LEs added KD7.52 billion or
77.8% and straddlers added KD1.48 billion or 15.3%. MSMEs added KD0.66
billion or 6.8%. This implies that for every KD100 increase in output, MSMEs
added only KD6.8. See Fig. 5 for an intersectoral comparison of their
contributions to output growth,

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%
Manufacturing Construction Trade Non-finance Finance
-10.0%

LEs & Straddlers MSMEs

25
Fig. 5. Sectoral contribution to output growth from 2003 to 2012: MSMEs
versus LEs and Straddlers.

5. The most impressive growth occurred in the manufacturing even when the oil
sector is excluded, for it still exhibits a remarkable 15.1% p.a.,
6. The trade sector exhibits a laggard growth trend in that its growth is the lowest at
5.5% in the business sector and only 1.7% among MSMEs,
7. The worst performing subsector is MSMEs’ finance where it shows a negative
growth of 9.1% p.a., while its counterpart in the business sector expanded by
11.4% p.a.,
8. All MSMEs’ subsectors show positive output growth except finance, and
9. The pattern of growth among the five MSMEs sectors is not in synch with the
overall non-oil business sector growth pattern, e.g., MSMEs’ finance sector
actually contracted while it expanded substantially in the LEs with construction
performing worse in MSMEs than in its LEs.
In absolute terms, the pattern of growth of MSMEs versus LEs and straddlers,
depicted in Fig. 5, exhibits dissimilarities between them. The major variance is
noted in the performance of the finance sector. Also, non-finance contributed 19.9%
in the former group compared to 46.4% or almost half of the total output growth of
MSMEs. The same is noted in the case of the trade sector where its corresponding
estimates are 6.6% versus 19%, respectively.
Rather than attributing the differences to prevailing common economic trends,
there are structural differences between the two groups. Most probably, LEs and
straddlers are geared towards the production of intermediate goods, exportables,
and activities that necessitate larger sizes to be profitable (e.g., commercial banks,
insurance, and wholesalers), while MSMEs are geared towards retail trade shops.
The observed sectoral performance differentials add credence to the proposition that
MSMEs, on one hand, and LEs and straddlers, on the other, are dichotomous; they
reflect two distinct, yet weakly related, business and market segments.

Average Annual Growth Rates of Output

Having examined the sectoral growth record of the output of the business
sector in comparison with MSMEs above, the focus here on the compound annual
rate of output growth (using a time series from 2003 to 2012) of micro, small,

26
medium, MSMEs, straddlers, LEs, and the business sector altogether. Additionally, a
comparative analysis of inter-sectoral growth patterns is computed with the results
shown in Figs. 6 and 7.

16.00
14.09
14.00 13.33

12.00
10.00
8.00 7.43

6.00 4.59
3.99
4.00
2.49
2.00
0.00
Micros Small Meduim MSMEs LEs Straddlers All
-2.00 -1.37
-4.00

Fig. 6. Annual output growth rates of business sector enterprises by Size,

2003 to 2012.

The evidence presented above points to an unstable growth pattern of micro

enterprises as it shows a (small) negative rate of - 1.4%. The team’s log linear
coefficients also indicate that the overall business sector growth rate is 13.3 % per
annum. LEs show the highest growth record in comparison with all other size
categories including straddlers. MSMEs achieved a slightly stronger growth than
straddlers, and small enterprises fared worse than all other categories with rates > 0.
Sector wise, while manufacturing topped all other sectors, mainly due to
growth in LEs, the remaining four sectors’ growth fluctuated within a narrow range:
from 4% in finance to 8.6% in trade, all of which gives rise to a strong economic
performance (see Fig. 7).

27
 16
14
12
CAGR (%)

10
8
6
4
2
0
Manufacturing Construction Trade Non-finance Finance All

Fig. 7. Annual output growth rates of business sector enterprises by

sector, 2003 to 2012.

In assessing the economic performance of MSMEs over the period 2003 to

2012, the output results shown above defy the employment and capital growth
results in that while the latter variables experienced anemic growth, output shows a
healthy growth rate of 4.59% per year for MSMEs. This asymmetry, however, can be
explained when one eliminates the influence of price inflation on output values.
According to the World Bank’s databank, the wholesale price index (2010 = 100)
increased from 80.687 in 2003 to 106.004 in 2012, which implies an average growth
rate of 3.48% per annum. When one deflates nominal growth rates by the WPI,
assuming that all sectors are impacted uniformly, real output growth rates drop to
only 1.11% p.a. for MSMEs; - 4.85% for micros; - 0.99% for small; 3.95% for
medium; 10.61% for LEs; 0.51% for straddlers; and 9.85% for the business sector.

Value Added

2012 Composition
MSMEs’ contribution to GDP in Kuwait can be measured in three alternative
ways. The first would measure it as the percentage of MSMEs’ value added in GDP.
The second would eliminate the influence of the oil sector and relate the value added
to non-oil GDP. The third would expand the definition of MSMEs to include the
straddlers and then measure the share of their value added in non-oil GDP. Each
approach has its pros and cons. Suffice it to say, MSMEs’ contribution would

28
increase as one moves from the first to the second to the third approach. All three
results are presented in Table 9 but will select the second as it is in line with this
report’s approach to assess the role of MSMEs without the oil sector.
Regarding the first, the value added generated by MSMEs in 2012 is KD1.33
billion and GDP is KD48.7 billion; hence, their contribution amounts to 2.7% of GDP.
Non-oil GDP is estimated by excluding oil and gas (KD31.9 billion) and petroleum
refining (KD1.3 billion) from GDP, resulting in KD15.559 billion. The second
approach indicates that MSMEs’ contribution is 8.6% of non-oil GDP. The third
approach specifies that the sum of MSMEs’ and straddlers’ value added (KD3.246
billion) would make up 21% of non-oil GDP.
By adopting the second approach, it would be safe to report that MSMEs, in
general, have generated about 8.6 percent of the non-oil GDP in Kuwait in 201230.
Table 9. Relative Contribution of MSMEs to Non-Oil GDP, 2012
MSMEs Straddlers LEs HH Others Total

Value (KD billion) 1.331 1.915 5.903 0.983 5.335 15.559

Share 8.6% 12.3% 38.0% 6.3% 34.3% 100.0%

By international standards, the MSMEs’ 8.6% contribution in Kuwait is

considerably small. The Edinburgh Group reports in a recent publication that SMEs’
contribution to GDP is 17% in low income countries, 35% in middle income
countries, and 53% in high income countries31.
Such a comparison however should be tempered by the following caveats:
1. The Kuwaiti economy is a rentier economy, which has long relied on oil
revenues to fund government expenses and its sizable welfare system. This
has had the effect of dampening the urge of MSMEs owners and managers
to continuously strive to compete and expand, relying instead on government

30
Measuring the contribution to the non-oil GDP facilitates comparisons with other non-oil
exporting, developing, and industrial economies. It should be noted that the selected
estimate shown above is slightly underestimated to the extent to which the value added of
the agriculture and fisheries sector, which belongs to the MSMEs sector in Kuwait, is
excluded due to data unavailability.
31
Edinburgh Group, 2014, “Growing the Global Economy through SMEs”. When the
informal MSMEs sector is added, the abovementioned shares increase, respectively, to
62%, 69% and 65%.
29
 procurements and on the direct and indirect financial influence of the
government’s extensive welfare programs and their attendant impact on
raising disposable incomes and augmenting consumers’ spending, and
2. The MSMEs sector grew over time despite the lack of government support
and against cumbersome bureaucratic procedures, confirmed by the recent
World Bank’s Doing Business report32.
Hence, MSMEs’ limited contribution to the economy may be misleading when
considered against other economies. Current literature abounds with examples of
extensive programs and schemes, which governments of developed countries have
instituted in the past – and to the present time - to promote their then infant
MSMEs33. In fact, such programs are still pursued currently in advanced economies
such as the US (the SBA’s extensive support programs), the UK, and the EU. In
defense of the important role played by MSMEs in Kuwait, despite their relatively
limited contribution to GDP, several conclusions are worth emphasizing:
The contribution of the many micro enterprises is much larger in magnitude
than small and medium enterprises combined34, as shown in Table 10. Micro
enterprises do play a critical role in the Kuwaiti economy,
Despite the familiar restrictive government regulations, private MSMEs
investors have taken the risk and invested their private funds in the Kuwaiti
economy to the tune of some 40,000+ enterprises, KD805 million in invested
capital and value added of KD3 billion, and
Had MSMEs received similar financial, technical, and procedural support,
which their counterparts in OECD or Asian economies had received, their
contribution to non-oil GDP, other things being equal, would have probably

32
The 2017 World Bank “doing Business’ report ranks Kuwait 102nd among 190 countries.
Also, the 2016/2017 World Economic Forum’s “Global Competitiveness Index” ranks
Kuwait 38th from 138 countries. However, WEF also ranked Kuwait’s institutions 59th and
singled out “government inefficient bureaucracy” as the most problematic factor for doing
business.
33
Perhaps the most commonly quoted example of extensive government support schemes for
MSMEs is Korea’s, where in the mid-1970s, it had 36 agencies set up to help SMEs in
practically every aspect of business operations including designs of finished products and
packaging of sold goods. See Sung-Sup Kim (2006),” Korea’s Policies for SMEs”, 2006
APEC SME Innovation Leadership Workshop.
34
There are 36,605 micros compared to 2,143 small and 449 medium- sized enterprises in
2012.
30
 been much bigger, the economy more diversified, and the unemployment rate
among nationals lower.
The structure of the gross value added generated in 2012 in each segment of
the business sector is delineated in Table 10. Some of the noteworthy features are:

Table 10. Non-Oil Sectoral Value Added and Contributions to GDP, 2012* (KD
Million)
Micro Small Medium MSMEs LEs Straddlers Total
Manufacturing 100.1 52.6 56.0 208.6 1,118.0 198.0 1,524.4
Construction 15.9 37.4 50.4 103.7 465.6 95.6 664.9
Trade 431.1 41.2 78.1 550.3 454.9 350.8 1,355.9
Non-Finance 262.0 80.3 121.0 463.2 1,488.3 604.0 2,555.4
Finance 1.9 1.9 1.2 4.9 2,376.5 667.1 3,045.6
Total 810.9 213.3 306.5 1,330.7 5,903.3 1,915.3 9,149.3
% of MSMEs 60.94 16.03 23.03 100.00
% of Total 8.86 2.33 3.35 14.54 64.52 20.93 100.00
% of GDP 5.21 1.37 1.97 8.55 37.94 12.30 58.8

The MSMEs sector reaffirms its relatively modest contribution to the national
economy as it makes up only 14.5% of the business sector’s total of KD9.2
billion. The lion’s share is taken up by LEs (64.5%) followed by straddlers
(20.9%),
The finance sector contributes the most at 33.3% (with only 200 firms). The
weakest is construction at 7.3%. Large banking, leasing, and insurance firms
appear to be doing quite well in Kuwait, as would be expected in a high-
income economy,
Within MSMEs, trade once again dominates their overall value added
structure as it accounted for 41.4% of the total. In fact, it even outweighs the
LEs’ trade sector, a unique phenomenon among all sectors,
Among LEs, the order of economic significance differs from that of MSMEs in
that the prominent sector is finance followed by non-finance and then
manufacturing. The smallest is trade,
That non-finance and finance sectors jointly generate 60% of LEs’ total value
added, this signifies the importance of the service sectors and their
contribution to non-oil GDP, and

31
 Some of the highest sub-sector value added ratios are found in micro trade,
medium non-finance, and large finance. At the other extreme lie micro, small,
and medium finance and micro construction.
Turning to which 2-digit ISIC MSMEs dominate other subsectors within size-
specific categories, where dominance is defined as capturing more than 75% of the
total value added, the team’s findings show that the 5-top dominant subsectors are
as follows:
1. Micros: basic metals (100%), apparel (91%), sales of motor vehicles (88%),
textile (85%), retail trade (84%), and real estate (77%),
2. Small: tanning (100%), medical and precision tools (100%), air transport
(100%), civil society organizations (90%), and the manufacture of transport
parts (82%), and
3. Medium: electric machinery (97%), education (88%), rubber and plastics
(82%), and telecommunications (80%). In parallel, medium enterprises
contribute zero value added in the following activities: tanning, wood products,
basic metals, medical and precision tools, finance, insurance, civil society
organizations, manufacture of transport parts, and air transport, and
4. Of the 19 dominant subsectors mentioned above, 8 are in manufacturing, 3 in
trade, and 8 in the non-finance sector.
In sum, the trade MSMEs and the non-finance and finance LEs and straddlers
show a leading role, as do micros, in contributing to GDP growth.

Labor Productivity in the Non-Oil Business Sector

Labor productivity is measured as the ratio of value added to labor
employment. Since it does not incorporate intermediate goods and their varying
impacts on output, it is a more indicative measure of labor productivity than is the
output/labor ratio. As such, they traditionally impart important information about
sources and prospects of economic growth. Besides that, recent advances in the
SMEs economic literature refer to their potential impact on LEs. André Van Stel et
al. investigated this issue based on data from the EU-27 for the period 2002-2008
and concluded that increases in labor productivity in SMEs contribute to increases in
LEs’ labor productivity, especially in medium firms where they show the largest
influence quantitatively. The study also concludes, perhaps more relevantly, that the

32
relationship is notably stronger among EU countries with relatively lower levels of
economic development35.
Given the role of labor productivity as the lynchpin that determines the pace
and speed of economic growth, Kuwait, which has been ranked recently behind
other MENA economies by the World Economic Forum (WEF), would benefit from
improving its labor productivity levels to elevate it to a higher economic status among
nations36. Improving levels of labor productivity, especially in MSMEs, is likely to
propel Kuwait to join other GCC countries, which are classified as either in transition
to or in the “innovation-driven stage” of economic development. Overall, the results
show that labor productivity level in the non-oil business sector is KD13,412 in 2012,
or about KD1,100 per worker per month. Though this estimate is significant in itself,
it masks important differences among sectors and size classes (see Fig. 8). The
finance sector’s LEs, for instance, show an estimate of KD111,893, while
manufacturers’ micros is merely KD4,03237.
Stylized facts suggest that larger sized firms are characterized by higher
levels of labor productivities than smaller sized firms. The results by size show that:
Small enterprises exhibit a lower productivity level (KD4,916) than micros
(KD5,242), which runs counter to conventional wisdom. It also explains in part
their relatively slow growth and low profitability, as shown elsewhere in this
report38,

35
See André van Stel, Nardo de Vries and Jan de Kok, 2014,” The Effect of SME
Productivity Increases on Large Firm Productivity in the EU-27. http://www.uni-
klu.ac.at/sozio/downloads/ Van_Stel_De_Vries_ De_Kok_ Klagenfurt_ECFED_ 2014
.pdf.
36
Specifically, WEF classifies Kuwait as a country in “the transition stage from factor-
driven to efficiency driven stage”. WEF ranks Kuwait behind Egypt, Jordan, Morocco, and
Tunisia, which are in the advanced stage: “Efficiency driven”; and behind Lebanon,
Oman, and Saudi Arabia, classified in the next transition stage to the innovation driven
stage; and behind Bahrain, Qatar, and the UAE, which are classified amongst the world’s
advanced economies in the “innovation driven” stage.
37
Not only is the latter the lowest in all categories, it is also lower than the average of all
micros (KD5,242).
38
A 2012 study commissioned by the US Small Business Administration (SBA) contends
that the average labor productivity in US multinational SMEs (MNS) demonstrate higher
labor productivity across all economic sectors than all SMEs as a group. Further, the
difference in productivity between MNCs and all firms is considerably more pronounced
for SMEs than LEs. See https://www.usitc.gov/publications/332/US_SME_ Multinational
33
 Medium firms are not far off from micros at KD6,704,
LEs’ labor productivity stands out at KD18,151 or 2.7 times that of medium
firms, the largest operating firms in the MSMEs sector,
Straddlers, much like LEs, have a high level of productivity at KD16,927,
The higher labor productivity levels in LEs and straddlers compared to all
other size classes in MSMEs are not unusual in that the same phenomenon is
observed in US and the EU, albeit at a lesser degree. For example, the
overall average labor productivity in the EU-27 in 2008 was €57K in LEs
compared to only €33.2K in SMEs39 (or 1.7 times), and the inequality between
SMEs and LEs prevailed in all countries except in Bulgaria.

25,000

20,000

15,000
(KD)

10,000

5,000

0
Micro Small Medium Large Total

Manufacturing Construction Trade Non-finance Finance Total

Fig. 8. Non-oil labor productivity values classified by sector and by size, 2012.

_Companies.pdf. Unfortunately, the CSB’s Establishment Survey does not collect

information on exports.
39
MSMEs classification in this study is identical to the classification adopted herein.
34
 In terms of productivity levels of different economic sectors, the finance sector
categorically dominates all other sectors in all sizes, as seen in Fig. 8. Looking at the
productivity matrix (3 size classes x 5 sectors), only 4 categories exceed the overall
average (KD13,412), which are small and large finance firms, large manufacturing,
and large trade. The rest (11 cases) falls short of the overall average.
It is noteworthy that while micro, small, and medium manufacturing firms
exhibit comparatively low labor productivity levels, large manufacturing firms
recorded the second highest productivity level among LEs, which is perhaps a
reflection of the important role of economies of scale in manufacturing 40.
Manufacturing industries, which are likely to be engaged in competitive export
markets as well, especially to the zero-tariff GCC markets, must maintain competitive
labor productivity levels. Similarly, the low productivity levels in micro, small, and
medium firms may be caused in part by their absence from external markets. It may,
in addition, be due to the lack of product differentiation, price competitiveness, weak
marketing, and inadequate salesmanship41.
Focusing on MSMEs, labor productivity levels at the 2-digit micro ISIC
subsectors show that only 4 of the 20-manufacturing subsectors (i.e., manufactures
of plastic products, non-metallic minerals, basic metals, and trailers and semi-
trailers) have higher levels than the average maintained within all micro enterprises.
The other nonmanufacturing 16 subsectors, whose productivity levels are higher
than the average micro level, belong to the service sector, notably insurance, health
and social work, and travel agencies. Only one single micro firm exceeded the
overall productivity level: insurance at KD46,057.
Much like micro enterprises, small and medium firms show similar results. In
the case of small enterprises, of the 19 subsectors that realized productivity levels
higher than the average for the group of small enterprises, 3 are manufacturers
(paper products, chemicals and non-metallic minerals), and the remaining 16
subsectors are in the services sector, notably insurance, auxiliary financial
intermediation (essentially non-bank financial activities), and communications.
Compared to micros, though, there are seven small sized enterprises whose
productivity levels exceeded the overall business sector average (e.g., real estate

40
Note that both oil and gas extraction and oil refining come under the manufacturing sector.
41
Empirical evidence is presented below showing the prevalence of weak managerial
capabilities among MSMEs.
35
activities, health and social work, and air transport). The stand out medium firms are
textiles, manufacturing of machinery, leasing, communications, travel agencies, and
wholesale trade and real estate activities, among other 13 other subsectors whose
productivity levels topped their group average.
In sum, excluding the financial intermediation subsector, the overwhelmingly
private trade and non-finance businesses show the highest levels of labor
productivity across all size categories. Relatively lower productivity levels are
observed in construction and manufacturing MSMEs, however. A clear majority of
above average productivity performance is found in the services sector (trade, non-
finance, and finance).

MSMEs’ Contribution to GDP from 2003 to 201242

At this juncture, one may ask: have MSMEs been influential in fostering the
overall level of economic development in Kuwait? Empirical research on developed
and developing countries leaves little doubt that MSMEs do play an important, if not
critical, role in determining the pace and magnitude of economic growth 43. In Kuwait,
their contribution is demonstrated in Table 11 where total value added in 2003 and
2012 (in current prices) for each of the five economic sectors is shown for MSMEs
and the non-oil business sector.

42
A more detailed examination of production interrelatedness cum outsourcing is reported in
Appendix C.
43
See OECD, 2004, ‘Promoting Entrepreneurship and Innovative SMEs in the Global
Economy’; http://www.oecd.org/cfe/smes/31919278.pdf, P.11.
36
Table 11. MSMEs’ Contribution to Business Sector’s Value Added Growth,
2003 to 2012
Value added Business Sector MSMEs
(KD million) 2003 2012 ACGR 2003 2012 ACGR % Share*
Manufacturing 569.4 1,524.4 11.6% 148.0 208.6 3.9% 6.3%
Construction 338.1 664.9 7.8% 93.7 103.7 1.1% 3.0%
Trade 882.1 1,355.9 4.9% 496.3 550.3 1.2% 11.4%
Non-Finance 1,360.9 2,555.5 7.3% 380.6 463.2 2.2% 6.9%
Finance 1,233.1 3,048.6 10.6% 15.2 4.9 -11.8% -0.6%
Total 4,383.6 9,149.3 8.5% 1,133.8 1,330.7 1.8% 4.1%
* Percent contribution of MSMEs in business sector value added growth .

The results depict a healthy economic growth record for the business sector
where the annual compound growth rates are positive. However, the growth rate of
the non-oil business sector, which also includes straddlers, is several times that of
MSMEs’ (8.5% versus. 1.8%)44.
In comparison with the business sector, MSMEs’ growth rates are much
slower: they range from a high of 3.9% in manufacturing to a low of negative 11.8%
in finance, averaging a slow 1.8% annual growth rate for all MSMEs. Parallel to the
lackluster growth in output noted earlier, MSMEs’ value added growth is equally
sluggish. This factor paints a profile of a seemingly struggling sector operating in the
shadows of an energized and oversized LEs and straddlers sector. Moreover, it is
evident that they have not benefited much from the oil boom windfall. This implies
perhaps weak production and financial interlinkages between LEs and MSMEs, for it
appears that there exists a dichotomy between them.
Sectorally, manufacturing led the rest of the sectors followed closely by
finance, construction, non-finance, and trade. In terms of sectoral MSMEs
contribution to the net increase in non-oil value added generated in the business
sector from 2003 to 2012, the trade sector appears to have contributed the most as it
generated 11.4%, as shown in Table 11 and Fig. 9. One of the main reasons for its
solid performance, compared to the other sectors, is private consumption, which
favors buying from smaller, nearby retail trading outfits. It may also be attributed to
their price competitiveness (smaller overhead costs) and to the inability of LEs to

In reality, when the oil sector is included, the manufacturing sector’s growth rate rises from
44

11.6% to 19.6%, and the subsequent rate increase of the business sector is from 8.5% to
16.4%.

37
diversify their products when, in many cases, MSMEs can differentiate their products
and services. These arguments apply also to the non-finance sector whose
contribution is 6.9%. On the other hand, the contributions of the manufacturing and
construction sectors are modest compared with the finance sector’s negative 0.6%.

MSMEs

Finance

Non-Finance

Trade

Construction

Manufacturing

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Fig. 9. MSMEs’ sectoral contribution to GDP, 2003 to 2012.

Employment

This section tackles the important issue of employment and job creation from
four different prisms: sector-wise, size-wise, ownership (public versus private), and
developments over time. In the next section, the issue of national manpower
participation – their numbers in different sectors, sizes, ownership, and over time – is
investigated.

Structure in 2012
A measurement of the role of MSMEs in job creation faces several statistical
and definitional challenges in Kuwait. For one, CSB’s Annual Statistical Yearbook
(ASY) reports a private sector employment of 1,159,987 employees, including
595,587 or 51.3% listed as “private households with employed persons’; i.e., private
household service providers such as cooks, maids, drivers, etc.45. which, if included,

45
This phenomenon is unique to Kuwait for it represents 25.8% of total employment. Inter-
country comparisons will be distorted by this disproportionately large number of
38
is likely to distort international comparisons with other non-GCC countries. Moreover,
multiple official employment figures are published by CSB and the Public Authority
for Civil Information (PACI), employing different definitions to serve different
functions. In addition, the agriculture sector employs 37,751 individuals who are
likely to belong to MSMEs but are excluded from the database due to incompatible
nomenclature. Finally, even though the military should be included in total
employment estimates, it is not clear if it is included in either CSB’s or PACI’s totals.
Nevertheless, the analyses will rely on CSB’s data, which estimate the total
national employment in Kuwait in 2012 (CSB, Statistical Review, 2014) at 1,553,210
individuals (government sector, 331,333 and private sector, 1,221,877). For the
business sector, the results will be based entirely on the official dataset generated by
CSB (Establishment Surveys), which reports a total of 698,509 employees engaged
in private and public jobs in the business sector including the oil sector.
Taking this information as the base, MSMEs’ employment (243,799)
represents 15.7% of the national labor force. However, when employment in the
agriculture sector is added to MSMEs’ and personal household employment is
subtracted from national employment to align the results with other countries’,
MSMEs’ contribution to employment would rise to 29.4%.
Even with these adjustments, the 29.4% contribution of MSMEs to national
employment is significantly lower by international standards. The corresponding
estimates in other countries in 2012 range from a high of 86.5% in Greece, to 79.3%
in Malta, 73.9% in Spain, 62.5% in Germany, 53% in UK, and 48.4% in the US in
201146. Furthermore, the 29.4% contribution is particularly small when one considers
the generous government program that has been providing ample wage subsidies
since 2000 to private sector employers to hire Kuwaitis47. Even though the latter
program is designed specifically to reduce the cost of hiring nationals and thus

household employees in that it reduces the share of MSMEs in total employment. This
phenomenon is shared with all other GCC countries.
46
Eurostat, 2015, “2012 Statistics on Small and Medium-Sized Enterprises” and Small
Business Administration, 2016, “Small Business Facts Data”, USA.
47
An outline Eurostat, 2015, “2012 Statistics on Small and Medium-Sized Enterprises” and
Small Business Administration, 2016, “Small Business Facts Data”, USA.47 An outline
and a preliminary assessment of the job Kuwaitization program are provided in Appendix
E.
39
encourage substituting nationals for foreign workers, it should also exert a positive
influence on the demand for labor as it reduces labor cost.
Tables 12 and 13 present key facts about the critical issue of job creation through
MSMEs, based on the 2012 data:
The business sector employs 1.77 times the number of employees in the
government sector (331,333)48, which is likely to reflect more of an overstaffed
government than a small private sector,
The government employs 1.36 times the employees in all 39,198 MSMEs
enterprises,
Employees in MSMEs (243,799) represent 35.7% of the total employment in
the business sector including straddlers;
Overwhelmingly, employees in MSMEs work in the private sector (99.85%),
Most LEs are privately owned (92.33%)49, and
95% of all jobs created in the corporate business community belong to wholly
owned private sector firms50. The latter employs 648,168 workers compared
to 23,643 in State Owned Enterprises (SOEs). Alternatively, for every 100
employees in the business sector, SOEs employ 3.5 workers while wholly
private firms employ 95 workers,

Table 12. Non-Oil Employment in MSMEs vs. LEs by Type of Ownership, 2012
Joint Joint Domestic/
Public Private Foreign Total
public private foreign
MSMEs 0 164 243,426 0 96 113 243,799
LEs† 23,643 1,391 404,742 7,495 410 700 438,381
Total 23,643 1,555 648,168 7,495 506 813 682,180
% of MSMEs 0.00 0.07 99.85 0.00 0.04 0.05 100.00
% of LEs† 5.39 0.32 92.33 1.71 0.09 0.16 100.00
% of Total 3.47 0.23 95.01 1.10 0.07 0.12 100.00
† Includes straddlers.

48
If straddlers were included, the ratio would increase to 2.11.
49
In contrast to the government’s oil sector taking up the lion’s share in GDP (65.2%) in
2012 (CSB, Statistical Review, 2015), its share in national employment during the same
year is only 23% (CSB, Annual Statistical Yearbook).
50
In contrast to the government’s oil sector taking up the lion’s share in GDP (65.2%) in
2012 (CSB, Statistical Review, 2015), its share in national employment during the same
year is only 23% (CSB, Annual Statistical Yearbook).
40
 Even in LEs and straddlers, 92.3% of their employees are in wholly privately
owned firms compared with 99.85 of MSMEs, and
Joint foreign/private and foreign-owned enterprises’ role is quite limited, for
their combined share in total employment in the business sector is 0.53%.
The presence of locally operating multinational corporations in Kuwait is
scarce.
Considering the composition of employment by sector and by size class, note
the following facts (see Table 13):
Among MSMEs, micro enterprises contribute the most (63.4%); the remainder
is split about evenly between small and medium enterprises (17.8% and
18.8%, respectively).
Sectorally, the trade sector dominates all other economic activities (41.8%)
followed by non-finance (29.5%).

Table 13. Distribution of Employment by Firm Size and by Sector, 2012

Micro Small Medium MSMEs LEs Straddlers Total
Manufacturing 24,815 11,503 9,420 45,738 53,224 20,138 119,100
Construction 3,378 9,854 10,608 23,840 88,301 15,968 128,109
Trade 82,591 8,806 10,578 101,975 33,499 39,055 174,529
Non-Finance 43,754 13,129 15,003 71,886 128,972 28,938 229,797
Finance 149 96 115 360 21,239 9,047 30,646
Total 154,688 43,388 45,724 243,799 325,235 113,146 682,181
% in MSMEs 63.45 17.80 18.75 100.00
% in Total 22.68 6.36 6.70 35.74 47.68 16.59 100.00

For each individual MSMEs sector, the leading job creators are
o micros in the trade sector (81%),
o micros in non-finance (60.9%),
o micros in manufacturing (54.3%),
o medium firms in construction (44.5%), and
o micros in finance (41.4%).
These findings reaffirm the positive dynamic effects of micro enterprises in
energizing the non-oil business sector in Kuwait.

MSMEs’ Employment Growth Trends: 2003-2012

Over the 9-year period, total employment increased by 164,921 jobs in the
non-oil business sector, most of which (155,509 or 94.3%) happened in LEs, as
41
reported in Table 14. In contrast, MSMEs added only 1,247 jobs or in an average of
139 new jobs per year. This reaffirms the anemic output and value added growth
trends observed earlier.
Furthermore, two of MSMEs’ five sectors show fewer workers in 2012 than in
2003: i) construction lost 3,488 laborers and ii) finance lost 186. The largest net
gainer by far has been manufacturing where it added 2,571 workers followed by
1,650 in trade and 701 in the wide-ranging non-finance sector. Size-wise, micros are
the only group that experienced positive job growth. Small and medium
establishments shed thousands of jobs, especially medium sized firms, hence
slowing down the overall growth in employment due to their contractions, especially
small firms, which laid off about 10 thousand workers.
In sum, during the period under study, we observe that
The employment growth rate in MSMEs’ is negligible (0.06% p.a.), while it is ≤
1% in medium firms, manufacturing, non-finance, and trade. Finance and
construction experienced negative growth,
Among LEs and straddlers, all sectors experienced positive employment
growth (except non-finance in straddlers, - 5.3%).
The previous results on the overall sluggish growth in the number of firms and
of output are reinforced by the value added growth results shown above.
Wages
Structure in 2012
Wage payments in 2012, excluding the oil sector, are KD2.914 billion, of
which KD595 million originated in MSMEs. LEs paid out KD1.783 billion, while
straddlers added KD536 million51. While MSMEs accounted for 35.7% of total non-oil
business sector employment52. they accounted for only 20.4% of total non-oil wages;
the variance is due to the significant disparity in wage rates and employment levels
between LEs and MSMEs53.
An analysis of the composition of the non-oil 2012 business sector wage
structure reveals that the non-finance sector employed and paid out the most.

51
Including oil, wage payment is KD3.545 billion, of which KD569 million or about 16.8%
was paid out by MSMEs. LEs contributed the remaining KD2.414 billion or about 68.1%
and straddlers wages came to KD536 million or 15.1%.
52
The employment share of MSMEs in the 2003 business sector total employment is 46.9%.
53
Wages/output ratio in 2012 is 23% in MSMEs versus only 15.9% in LEs.
42
Moreover, its shares in total employment and wages are identical (33.7%) in contrast
with finance, which employs 4.4% of total employment and pays out 20.2% of total
wages. Clearly, wage rates differ drastically between the two sectors.

43
Table 14. Non-Oil Employment Growth Classified by Size and by Sector from
2003 to 2012
Micro Small Medium MSMEs LEs Straddlers Total
2003
Manufacturing 21,502 13,412 8,253 43,167 29385 15,235 87,787
Construction 3,327 11,029 12,973 27,329 46626 10,686 84,641
Trade 74,649 13,689 11,987 100,325 13958 26,380 140,663
Non-Finance 42,150 14,742 14,293 71,185 69050 47,376 187,611
Finance 127 208 211 546 10707 5,304 16,557
Total 141,756 53,079 47,717 242,552 169,726 104,982 517,260
2012
Manufacturing 24,815 11,503 9,420 45,738 53224 20,138 119,100
Construction 3,378 9,854 10,608 23,840 88301 15,968 128,109
Trade 82,591 8,806 10,578 101,975 33499 39,055 174,529
Non-Finance 43,754 13,129 15,003 71,886 128972 28,938 229,797
Finance 149 96 115 360 21239 9,047 30,646
Total 154,688 43,388 45,724 243,799 325,235 113,146 682,181
Annual Compound Growth Rates from 2003 to 2012
Manufacturing 1.6% - 1.5% 0.6% 6.8% 3.1% 3.4%
1.7%
Construction 0.2% - -2.2% -1.5% 7.4% 4.6% 4.7%
1.2%
Trade 1.1% - -1.4% 0.2% 10.2% 4.5% 2.4%
4.8%
Non-Finance 0.4% - 0.5% 0.1% 7.2% -5.3% 2.3%
1.3%
Finance 1.8% - -6.5% -4.5% 7.9% 6.1% 7.1%
8.2%
Total 1.0% - -0.5% 0.1% 7.5% 0.8% 3.1%
2.2%
Contribution of MSMEs to Total Employment Growth from 2003 to
2012
MSMEs' growth Total change MSMEs' contribution
Manufacturing 2,571 31,313 8.21%
Construction -3,488 43,469 -8.02%
Trade 1,650 33,865 4.87%
Non-Finance 701 42,185 1.66%
Finance -186 14,089 -1.32%
Total 1,247 164,921 0.76%
Contribution of MSMEs by size, 2003 to 2012
MSMEs growth Total change MSMEs' contribution
Micro 12,932 7.84%
Small -9,692 -5.88%
Medium -1,993 -1.21%
MSMEs 1,247 0.76%

44
LEs 155,509 94.29%
Straddlers 8,165 4.95%
Total 164,921 100.00%

Specific to the MSMEs sector, noted the following:

The trade sector paid out the largest sum as shown in Fig. 10, most of which
originated in micro enterprises. This phenomenon lends credence to Kuwait’s
old and traditional image as a dynamic trading hub. It also reaffirms the trade
sector’s leading role among the economy’s five sectors,
Non-finance shows relatively high percentage contribution within small
(38.7%) and medium (42.7%) enterprises; however, its overall share in
MSMEs is slightly less than the trade sector’s (36.1%). It stands overall as the
second most prominent in terms of MSMEs’ total wages,

180,000
160,000
140,000
120,000
KD 000

100,000
80,000
60,000
40,000
20,000
-
Manufacturing Construction Trade Non-Finance Finance

Micro Small Meduim

Fig. 10. Total MSMEs wages in 2012 classified by sector and by size.

In summary, the largest MSMEs spending subgroups on wages in 2012 are

micros in the trade and the non-finance sectors; and, except for the trade sector, LEs
generate at least thrice the wages of MSMEs, ranging from a high of 227 times in

45
finance to a low of 2.7 times in manufacturing. Straddlers’ total wage bill is almost
equal to that of the MSMEs54.
Growth of Wages from 2003 to 2012
Considering the non-oil business sector first, total wages over 2003-2012
have more than doubled - from KD1.33 billion to KD2.91 billion or by 219%, as
shown in Table 1555. The cumulative average annual rate of growth MSMEs’ wages
is 2.64% compared to 13.26% in LEs and 7.39% in straddlers. A closer look shows
that the bulk of the increase in wages (76.1%) belongs to non-oil LEs compared to
16.1% from straddlers and 7.9% from MSMEs. This means that straddlers’
contribution is more than double that of all MSMEs.
Table 15 provides non-oil inter-sectoral growth comparisons: it shows that the
business sector’s finance outpaced all other economic activities as it realized the
highest annual growth rate (14.5%) despite a negative growth (- 4.6%) in the same
sector within MSMEs. Similarly, MSMEs’ manufacturing registered a slow growth but
due to LEs’ manufacturing high wage growth, the performance of the business
sector’s manufacturing sector showed a 7.85% annual growth rate. Wages of the
remaining sectors experienced similar growth rates, ranging from a low of 6.9% in
trade to 8.7% in non-finance. It is noteworthy that the largest variance in the growth
rates of wages of MSMEs versus. LEs lies in the trade sector where it realized 1.7%
rate in the former compared with 20.3% in the latter.
All in all, three sectors moved in lock step: manufacturing, construction, and
trade; they contributed similar percentages in total wages in the range from 14.7% to
18.5% in 2012 and grew at narrow rates ranging from 6.9% to 8.5% p.a. Finance, on
the other hand, made up 20.2% of total wages and experienced a remarkable
expansion in wages reaching 14.5% p.a., the highest among all sectors. One third of

54
Straddlers compensated their 7,290 Kuwaiti employees with KD109.2 million compared
with only KD22 million paid by MSMEs to their 5,981 Kuwaiti employees.
Proportionately, straddlers spent 20.4% of their wage bill on nationals compared to only
3.7% among MSMEs. Besides wage differentials that explain such large disparities
between MSMEs and straddlers, differences in their workforce also explain it further: the
latter had 105,633 employed expats versus 234,261 in MSMEs.
55
When the oil sector is included, the corresponding estimates rise to, respectively, KD1.50
billion and KD3.54 billion, which signifies the considerable influence of the oil sector on
economic aggregates including
46
the total wages originated in the non-finance sector, which experienced a relatively
fast growth rate estimated at 8.7% p.a.
To sum up, total wages of MSMEs contributed only 7.9% of the increase in
total wages. The bulk of the increases stemmed from the growth in employment and
increases in wage rates in straddlers and non-oil LEs. The non-finance sector was
the major contributor as it shared about half the wage increases in MSMEs.
Alternatively, the services sector (non-finance, trade, and finance) added 3/4th of the
overall contribution of MSMEs to the increase in the wage bill.

Table 15. Non-oil Money Wages by Sector and by Size, 2003 to 2012 (KD 000)
2003

Micro Small Medium MSMEs LEs Straddler Total

Mfg 29,551 21,774 18,619 69,945 101,621 45,133 216,699
Construction 5,634 19,175 28,339 53,147 103,077 24,604 180,828
Trade 133,769 26,356 32,232 192,357 35,520 68,994 296,871
Non-Finance 71,479 37,518 43,063 152,060 224,660 88,669 465,389
Finance 369 1,296 1,310 2,974 116,730 54,723 174,427
Total 240,801 106,119 123,563 470,483 581,608 282,123 1,334,215
% MSMEs 51.2 22.6 26.3 100.0
% Total 18.0% 8.0% 9.3% 35.3% 43.6% 21.1% 100.0%
2012
Mfg. 46,241 23,756 27,318 97,315 262,593 67,954 427,862
Construction 7,494 20,998 28,674 57,166 270,779 48,346 376,291
Trade 168,507 20,480 34,533 223,519 186,917 129,121 539,557
Non-Finance 105,465 41,698 67,877 215,040 620,543 146,293 981,876
Finance 656 750 542 1,949 442,261 144,040 588,250
2,913,83
Total 328,363 107,682 158,944 594,989 1,783,092 535,754 5
% MSMEs 55.2 18.1 26.7 100.0
% Total 11.3% 3.7% 5.5% 20.4% 61.2% 18.4% 100.0%

Relative shares of the increase in total wages from 2003 to 2012 classified by firm size
category
(a) Business sector
Micro Small medium MSMEs LEs Straddler Total
5.54% 0.10% 2.24% 7.88% 76.06% 16.06% 100.00%
(b) MSMEs
70.33% 1.26% 28.42% 100.00%
Relative shares of the increase in total wages from 2003 to 2012 classified by
economic sector
(a) Business sector
Mfg. Constru Trade Non- Finance Total

47
 ct Finance
13.37% 12.37% 15.36% 32.70% 26.20% 100.00%
(b) MSMEs
Non-
Mfg. Constr. Trade Finance Total
Finance
21.98% 3.23 25.03 50.58 -0.82 100.00%
Note: Number of enterprises in 2003 is 37,138 and 39,525 in 2012.

The Impact of Inflation on Money Wages since 2003. A temporal

comparison of money wages across sectors, assuming structural stability as shown
above, is valid per se. Nevertheless, it is worth assessing the changes in the real
value of money wages over the period to gain insight into the purchasing power of
the wage earners, in absolute terms. How much has inflation impacted the
purchasing power of the average wage?
Available evidence shows that the average real wage rate per worker has not
changed and, in some cases, has declined. The overall consumer price index in
December 2012 stood at 153.7 (base year is 2000), while the data show that the
average annual nominal wage rate in the business sector increased from KD2,579 in
2003 to KD4,271 in 2012 or by 65.6%. For MSMEs, the comparable figures are,
respectively, KD1,940 and KD2,441 and 25.8%. Likewise, LEs’ corresponding
estimates are KD3,427, KD5,483 and 60%. Without delving deeper into this issue,
suffice it to say that the real wage rate in MSMEs has declined appreciably because
while money wage rates increased by 25.8%, inflation index rose by 53.7% over the
same period. In the business sector and LEs, real wage rates increased only slightly
since 2003 for their money wages increased by 65.6% and 60%, respectively, while
price inflation was up 53.7% during the same period56.
The Share of Labor in the Economic Pie. The net economic gain of a
business activity is measured by its value added, which consists of payments to its
four primary factors of production: labor (wages), capital (depreciation), land (rents),
and entrepreneurship (profits). Conventionally, wages and profits make up the lion’s
share in value added; the distribution of one against the other has long been debated
in the literature as a reflection of an economic system’s income equality. The labor
share in controlled economies is typically much higher than in free market

56
If one assumes that CPI in 2003 is the same as in the base year 2000, inflation-adjusted
wage rates in MSMEs have fallen by about 27.9% while real LEs’ wage rates have
increased by 10.1%, both over the 9-year period.
48
economies. Until recently, that share in an open economy has fluctuated around a
1/3rd of the value added until the mid-1990, after which it started to decline mostly
due to the introduction of labor-saving technologies. In contrast, available data about
the Kuwaiti business sector indicate that wages as a percentage of value added
have increased slightly from 2003 to 2012, as shown in Table 16.

Table 16. The Share of Wages in Value Added (2003-2012) (%)

Micro Small Medium MSMEs LEs* LEs oil Straddlers Total*
2003 37.6 45.1 47.9 41.5 27.3 8.8 25.1 30.4
2012 40.5 50.5 51.9 44.7 30.2 6.2 28.0 31.8
* Excluding oil.

From the table, also note the following developments:

Wages/value added ratios are much higher in MSMEs than in LEs, reflecting
their relatively high labor intensity,
There is a greater similarity in the pattern of wages/value added ratios in
straddlers and LEs rather than between each and MSMEs,
Wage shares across all size categories increased from 2003 to 2012, except
in oil LEs, which can be readily attributed to the increased share of profits in
value added of crude and refined oil products,
For the business sector, wages represent less than a third of the value added
throughout the period, and
The highest ratio is observed in medium firms, followed by small and then
micros.

Do MSMEs Create Job for Nationals?

Unlike economies of emerging nations, Kuwait’s economy is a robust one,

thanks to its abundant oil resources; educated national manpower; stable
macroeconomic policies; vast financial accumulations by individuals, institutions, and
the central government; and a generous, all inclusive, national welfare system. It is
natural then to question the rationale for supporting the development of MSMEs
since many of the standard objectives pursued elsewhere are less urgent in the
Kuwaiti context such as economic growth, job creation, poverty alleviation, regional
development, and gender equality. Instead, there are two alternative overriding

49
objectives that stand out in Kuwait: job creation for nationals and economic
diversification. Other soft objectives such as innovation, self-employment, and the
encouragement of private, individual initiatives and entrepreneurship are important
but they take a secondary role behind job creation for nationals and diversification.
Of the latter two, in fact, creating meaningful job opportunities for Kuwaitis takes
precedence, rendering it the central core objective behind the promotion of MSMEs.
In this section, an eclectic investigation of the relationship between MSMEs
and job creation for nationals is undertaken utilizing the massive micro data, which
detail their performance since 2003. Sectoral Kuwaiti/non-Kuwaiti ratios (K/NK),
wage ratios, and substitutability of Kuwaitis, for non-Kuwaitis were examined and
identified the economic activities that are naturally apt to maintain an above industry
average of Kuwaiti nationals in total employment. At a later stage in the project, an
attempt will be made to identify the factors that are strongly associated with, and
may result in, high rates of national manpower participation rates and vice versa 57.
The results of such an effort would serve as a guidepost for MSMEs as well as their
advocators.

The Share of Nationals in Total Employment: The Situation in 2012

Participation Rates of Nationals in Total Employment by Sectors and by Size

The relationship between MSMEs and job creation for nationals is analyzed
from three angles: among economic sectors, class sizes, and firm ownership. The
non-oil business sector employed 682,181 workers in 2012. Of these, 36,934 (or
5.4%) jobs were taken up by nationals. For MSMEs, they employed 5,981 Kuwaitis
or 16.2% of all Kuwaitis in the non-oil business sector; second, MSMEs’ Kuwaiti
employees represent only 2.45% of their total employment, which clearly signifies
that MSMEs play only a marginal role in terms of creating job opportunities for
nationals, as shown in Table 17. For every 100 workers in MSMEs, only 2.5 jobs are

57
Non-tradables such as construction, trade, finance and other services (non-finance) must
locate practically all production links at home.
50
held by Kuwaitis, including business owners, and 97.5 jobs are manned by non-
Kuwaitis58.

Table 17. Number of Kuwaiti Employees by Firm Size and by Sector, 2012
Micro Small Medium SMEs LEs Straddlers Total
Manufacturing 311 136 230 677 2,909† 530 4,116
Construction 215 388 239 842 1,457 325 2,624
Trade 1,887 129 498 2,514 1,353 2,335 6,202
Non-finance 893 349 676 1,918 8,637 1,682 12,237
Finance 8 21 1 30 9,307 2,418 11,755
Total 3,314 1,023 1,644 5,981 23,663 7,291 36,934
% MSMEs 55.4% 17.1% 27.5% 100.0%
% Total 9.0% 2.8% 4.5% 16.2% 64.1% 19.7% 100.0%
† Excluding the oil sector. When it is included, LEs’ manufacturing jumps to 15,022
Kuwaitis.

MSMEs employ 5,981 Kuwaitis or 16.2% of all Kuwaitis in the non-oil

business, whereas they employ 234,261 or 36.5% out of 641,330 non-Kuwaitis. That
is, MSMEs’ share in all non-Kuwaiti business sector workers is more than twice their
share of Kuwaiti workers. As noted earlier, LEs and straddlers exhibit similar
tendencies: their Kuwaitization rates are 7.28% and 6.44%, - in contrast with 2.45%
in MSMEs – even though LEs employ 23,663 Kuwaitis, straddlers employ only
7,291.
Regarding which business size category contributes the most to job creation
for nationals, in absolute terms, micro enterprises employed 3,314 Kuwaitis out of
154,688 employees, or 2.1%. Small and medium enterprises employed 1,023 and
1,644 Kuwaitis out of, respectively, 43,388 and 45,724 employees or 2.4% and
3.6%, respectively. Most Kuwaitis employed in MSMEs are in micro enterprises
(55.4%), which are mostly in the labor-intensive services sectors: trade, 42.0%, and
non-finance, 32.1%. Other than the immaterial finance sector, manufacturing
MSMEs appear to have the largest lost potential for hiring Kuwaiti nationals, by
outsourcing their production link overseas, since they filled only 677 jobs by Kuwaitis
from amongst their 45,738 employees. In contrast, LEs are the leading employers of

58
These findings should be viewed while keeping in mind the current government subsidies
program designed to hire Kuwaitis in the private sector. See Annex C for a preliminary
evaluation of the program.
51
Kuwaitis; they employ 64.1% of all Kuwaitis working in the business sector and they
maintain 7.3% of their total employment by Kuwaitis.
Non-finance and finance, combined, employ almost two thirds of all Kuwaitis
in the non-oil business sector. Of the 23,992 nationals working in these two sectors,
only 1,948 belong to MSMEs and the rest are in LEs and straddlers. Among MSMEs,
the trade sector followed by non-finance symbolizes the best of MSMEs in that they
employ 74.1% of all Kuwaitis in the MSMEs sector.
Table 18 details the share of Kuwaiti employees in total employment classified by
sector and by size. Some of the important facts that emerge from the table are as
follows:
The highest Kuwaitization rate realized among MSMEs’ size categories
belong to medium firms at 3.6%,
Micros, which employed more Kuwaitis than small and medium firms
combined, have the lowest ratio of Kuwaitis in total employment, at 2.14%,
The four firms that make up the small finance subsector employ more than
one national for every five employees (21.9%),
Excluding the small MSMEs finance sector, the construction sector recorded
the highest rate at 3.9%, followed by non-finance,
In contrast with manufacturing’s low wage and low skill work force,
construction is typically characterized by high wage and high skill manpower
outside the building part of their trade, which may explain the latter’s relatively
higher Kuwaiti participation rate than the manufacturing sector. It also appears
that construction MSMEs tend to be more involved in the planning, design,
supervision, and architecture functions than large construction firms that
maintain a low rate of 1.7% due to their relatively heavy bias towards
construction activities,
In non-oil LEs, which are owned overwhelmingly by the private sector, the
corresponding figure is 7.28%, which is more than triple the ratio of MSMEs 59.

59
When the oil sector is included, three outcomes change: LEs’ manufacturing rate expands
from 5.5% to 21.6%, the manufacturing average for in the business sector increases from
3.5% to 12% and the overall average business sector also rises from 5.4% to 7%.

52
Table 18. Percent of Kuwaiti Employees in Total Employment by Sector and by
Size, 2012†
Mediu MSME Straddler
Micro Small LEs Total
m s s
Manufacturing 1.25% 1.19% 2.44% 1.48% 5.47% 2.63% 3.46%
Construction 6.35% 3.94% 2.25% 3.53% 1.65% 2.04% 2.05%
Trade 2.28% 1.46% 4.71% 2.47% 4.04% 5.98% 3.55%
Non-Finance 2.04% 2.66% 4.51% 2.67% 6.70% 5.81% 5.33%
Finance 5.37% 21.88% 0.87% 8.33% 43.82% 26.73% 38.36%
Total 2.14% 2.36% 3.60% 2.45% 7.28% 6.44% 5.41%
† Excluding the oil sector.

Looking at the cascaded ratios of K/E across the five size categories, it is fair
to conclude that nationals’ participation rate is size-dependent. This is an important
gauge for those responsible for funding/supporting MSMEs. As one moves across
the size scale from micros to straddlers to LEs, so does the rate of participation of
nationals. Nevertheless, this conclusion may suffer from the fallacy of composition
(i.e., what is true for the part is not necessarily true for the whole) in that the rate is
quite low in MSMEs as well as LEs. It would be more accurate to contend therefore
that the variance in the rates of participation can be most probably predicted by
differences in sectoral wage ratios, skill requirements, work attitudes – and
ownership, rather than by size alone.
In sum, by far the largest business concerns that create jobs for Kuwaiti
workers are LEs followed by straddler firms. MSMEs exhibit an extremely heavy
reliance on foreign workers at the rate of 96.1 non-nationals for every 100
employees. Among economic activities, two service sectors stand out: finance and
non-finance, especially those that come under LEs and straddler groups. Within
MSMEs, micros hire more Kuwaitis but exhibit the lowest Kuwaiti/employment ratio.

Company Ownership and the Share of Nationals in Total Employment

The question of whether government-owned enterprises have a different
demand function for Kuwaiti labor in contrast with private sector’s demand is
explored in Table 19. Here, noted that 27.3% of the employees in large non-oil
public sector firms are Kuwaitis compared with only 5.6% among their private sector
counterparts. The same disparity is noted among MSMEs where joint public firms
maintain a 6.1% Kuwaiti ratio compared with only 2.5% in privately owned MSMEs.
The influence of government pressure and/or persuasion can be seen clearly in large

53
joint private firms where the ratio is 13.3% versus only 5.6% without government
influence or directives - in 100% privately owned large enterprises.
The highest participation rates are observed in large oil companies, which are
wholly owned by the government (21.6%), and in large banking companies 60 (43.8)
where wages are higher and training opportunities more abundant, which in turn
improve skills and work attitudes. Interestingly, straddlers often maintain much
higher ratios of Kuwaitis amongst their workforces compared with LEs except SOEs.

Table 19. Percent of Kuwaitis in Total Employment Classified by Firm

Ownership, 2012†
Micro Small Medium MSMEs LEs Straddlers Total
100% Public 0.0 0.0 0.0 0.0 27.3 15.6 27.0
Joint Public* 0.0 0.0 6.1 6.1 1.9 44.5 10.6
Joint Private 0.0 0.0 0.0 0.0 13.3 37.5 14.1
100% Private 2.1 2.3 3.6 2.5 5.6 6.1 4.5
Joint Foreign/local 0.0 8.3 0.0 1.0 0.0 7.9 0.8
100% Foreign 0.0 12.2 0.0 9.7 4.6 48.4 28.9
† Excluding the oil sector; * Joint Public is defined as having >50% ownership (based
on paid up capital) with the private sector while Joint private denotes >50% private
vis-à-vis government ownership.

In sum, ownership matters. Next to the highest Kuwaitization rates observed

in SOEs are joint public/private ownerships where the government exerts varying
degrees of influence on the respective hiring decisions.

The Kuwaiti/Non-Kuwaiti Dilemma: Firms without Nationals

The low participation rates of Kuwaiti workers in the private sector are seen,
alternatively, by observing the number of firms that do not employ nationals. Fig. 11
shows the 2012 percentage of MSMEs without nationals in the total number of non-
oil firms, classified by sector and by class size. The results show that:

1. 89.9% of MSME firms do not employ Kuwaiti workers,

2. 90.2% to 91.6% of MSMEs in manufacturing, trade, and non-finance sectors
do not employ nationals,

60
When the oil sector is excluded, the share of Kuwaitis in total employment in the
manufacturing sector drops from 21.6% to 5.5% while, clearly, their share in the finance
sector stays the same at 43.8%.
54
 3. The lowest ratio is noted in manufacturing micro firms where 93.3% do not
employ nationals,
4. 34.3% of medium firms have zero nationals, whereas small’s rate is 68.9%
and micros’ is 91.8%, and
5. The finance sector has the highest percentage (73.8%) followed by
construction (40.7%). The high percentages in the finance sector are
deceptive in that they magnify the influence of a handful of firms in the sector:
there are only four small-sized firms, which have Kuwaiti employees and
hence show 100%.

LEs, on the other hand, show a diametrically different profile in that at least
90% in each of the five economic sectors employ national workers. In fact, all firms in
the LEs’ finance sector (23 enterprises) do employ nationals, and as a result it had
0% of firms without nationals. Straddlers, on the other hand, maintain an overall
average of 55.3%. In terms of fulfilling the government’s objective of increasing the
numbers of Kuwaitis working in the business sector, LEs and, to a lesser extent,
straddlers do meet the target handily. Yet, at the national level, the fact remains that
a few firms hire national workers: for every 100 firms operating in Kuwait in 2012,
only 12.25 firms employ national workers.

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Manufacturing Construction Trade Non-Finance Finanace

Micro Small Medium Straddlers LEs

Fig. 11. Percent of MSMEs without national employees, 2012.

This conclusion is best judged by examining the extent to which these firms
that do not employ nationals are significant in the business sector. To evaluate this

55
issue, it is sized up the value of their major economic variables in relation to the
overall levels attained in the entire business sector. Table 20 presents the results,
classified by their numbers and their relative shares in employment, value added,
capital assets, profits, and output. The relative economic weights of enterprises,
excluding oil, without Kuwaiti nationals in 2012 are shown in Fig. 12.

Table 20. Major Economic Characteristics of Enterprises with No National

Employees, 2012†
Number of Firms Employment Value Added (KD 000)
No. Total % No. Total % Value Total %
Micro 33,592 36,605 91.8% 136,426 154,688 88.2% 731,778 810,920 90.2%
Small 1,477 2,143 68.9% 28,297 43,388 65.2% 138,749 213,294 65.1%
Medium 154 449 34.3% 13,742 45,724 30.1% 83,228 306,520 27.2%
MSMEs 35,223 39,198 89.9% 178,465 243,799 73.2% 953,755 1,330,734 71.7%
LEs 26 327 8.0% 11,770 325,235 3.6% 167,124 5,903,276 2.8%
Straddlers 962 1,740 55.3% 28,741 113,146 25.4% 421,819 1,915,264 22.0%
Total 36,211 41,265 87.8% 218,976 682,181 32.1% 1,542,698 9,149,275 16.9%

56
Table 20. (Cont’d).

Paid-up Capital (KD 000) Profits (KD 000) Output (KD 000)

Value Total % Value Total % Value Total %

90.4 376,52 90.8 1,270,34 90.0
529,213 585,421 414,551 1,410,994
Micro % 5 % 8 %
63.3 66.1 64.1
72,324 114,293 54,328 82,147 303,093 472,588
Small % % %
29.1 30.6 34.9
30,690 105,568 30,866 100,968 249,541 714,519
Medium % % %
78.5 461,71 77.3 1,822,98 70.2
632,226 805,281 597,667 2,598,102
MSMEs % 9 % 2 %
12,231,50 2,607,48 11,224,76
179,236 1.5% 19,430 0.7% 282,615 2.5%
LEs 9 3 3
Straddler 1,560,43 17.9 174,78 44.3 21.6
8,700,180 394,252 686,004 3,177,964
s 6 % 9 % %
2,371,89 21,476,97 11.0 655,93 3,599,40 18.2 2,791,60 16.4
17,000828
Total 8 0 % 9 2 % 1 %
†Excluding the oil sector.

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
No. of firms Employment Value added Capital Profits Output

Micro Small Medium Straddlers Large Total

Fig. 12. Relative economic weights of enterprises (excluding oil) without

Kuwaiti nationals, 2012.

The evidence presented in Table 20 and Fig. 12 shows that:

90% of the total output produced by micro enterprises is generated in firms
that do not employ Kuwaitis versus 64.1% in small and 34.9% in medium. In
LEs, only 2.5% is generated in such firms,
The symmetry of the pattern pertaining to all six economic variables leads to
the unmistakable conclusion that, given the ratio of nationals in total
employment, the smaller the firm size the bigger the economic weight and
vice versa,

57
 Except for the number of firms, 70% to 78% of MSMEs’ jobs, value added,
paid-up capital, profits, and output are generated in companies that do not
employ nationals,
For LEs, the corresponding estimates are only 0.7% to 3.6% and when the
oil sector is excluded, the range narrows slightly to 0.3% to 3.4%, and
While straddlers and LEs are alike in terms of output and profits, straddlers
take up the middle position between MSMEs and LEs in relation to the rest
of the economic variables; i.e., number of firms, employment, value added,
and capital. That is, the pattern of employing nationals yields similar output
and profit results in LEs and straddlers but not so regarding the other
economic aggregates.

Shares of Nationals’ Wages in Total Wages, 2012

It is instructive to begin by positing the hypothesis that, a priori, sectors with
higher ratios of Kuwaiti employment (K/E) would exhibit higher wage payouts to
Kuwaitis (Wk/W), implying a symmetrical wage structure of Kuwaiti workers across
economic sectors. A Pearson correlation analysis of the data based on 44 economic
subsectors at the 2-digit classification confirms the hypothesis with a correlation
coefficient of 0.963, statistically significant at the 0.01 level. Intuitively, firms may be
attracting a uniform set of Kuwaiti skills regardless of size or sector. If wage ratios
between nationals with these skills and expats with similar skills are similar across
sectors and sizes, there will be a strong correlation across the board between (Ek/E)
and (Wk/W).
Earlier, it was pointed out that the proportion of nationals in total employment
in 2012 was 2.5% in MSMEs, 7.3% in LEs, and 5.4% altogether, excluding oil. The
corresponding ratios for wages paid to Kuwaiti workers are, respectively, 3.7%,
31.2%, and 23.6%61. See Fig. 13. Statistically, the disparity between the two
parameters is attributed to wage rates’ differentials.

Business sector

23.6%

61
Straddlers’ corresponding ratio is 20.4%, or five times the ratio in MSMEs.
76.4%
58

Kuwaiti wages Non-Kuwaiti wages

 Fig. 13. Share of Kuwaiti wages in total wages, 2012.

In the non-oil business sector, national workers received KD687.4 million, or

23.6% of the total wage payments of KD2.913 billion. MSMEs in contrast paid out to
nationals KD22 million or 3.7% of their total wages. LEs paid out 31.2%; and
straddlers spent 20.4% of their wages to Kuwaiti workers. Thus, even with their
relatively higher wage rates, nationals do still receive a relatively small percentage of
total wages, especially in the MSMEs sector.

Wage Rates of Kuwaiti and Non-Kuwaiti Workers

Besides hiring more nationals, LEs and straddlers also offer higher wages
than MSMEs. The evidence presented in Table 21 shows that LEs and straddlers
offer higher wages to their Kuwaiti employees than MSMEs offer their Kuwaiti
cohorts in every sector. In fact, the same is also true in the case of non-Kuwaitis,
albeit less pronounced.
Besides Kuwaitis and non-Kuwaitis receiving, in absolute terms, higher wage
rates in LEs and straddlers than in MSMEs, there are other disparities within the
business sector that are worth noting:
Nationals in LEs and straddlers receive 7.87 times the wage rate of
expatriates (K/NK),
Kuwaitis employed in LEs and straddlers earn annual wages that are 5.24
times more than what their cohorts receive in MSMEs (K/K),
Non-Kuwaitis in LEs and straddlers are paid 1.66 times the wages that their
compatriots receive in MSMEs,
Table 21.Average Annual Wage Rates of Kuwaiti and Non-Kuwaiti Labor, 2012
(KD)
MSMEs LEs† & Straddlers (LEs† & Straddlers) / MSMEs
Sector
K* NK* K* NK* K/K* K/NK* NK/NK*
Manufacturing 4,903 2,103 16,614 3,763 4.00 8.17 1.70

59
Construction 2,244 2,470 8,720 2,966 3.89 2.69 1.20
Trade 1,808 2,245 7,752 4,177 4.29 2.38 1.90
Non-finance 6,157 2,933 19,714 3,821 3.2 6.00 1.42
Finance 13,500 4,721 29,885 12,710 2.21 6.32 2.69
Average 3,673 2,446 21,497 4,062 5.85 7.61 1.66
* K denotes annual wage rates of Kuwaiti and NK, non-Kuwaiti employees. †
Excluding the oil sector.

In terms of K/NK wage ratios, the results show that the ratio is >1 across all
size categories,
The biggest variance between LEs and straddlers and MSMEs is found in the
manufacturing sector where Kuwaitis in the former earn 8.17 times the wage
earned by non-Kuwaitis in the latter,
The nearest to equality is among non-Kuwaitis in the construction business
where their counterparts in LEs and straddlers receive only 1.2 time their
salaries in MSMEs,
Disparities in general are much narrower among non-Kuwaitis in both
categories than Kuwaitis in the same two categories, and
Finance stands out as the most consistent in differentiating between nationals
and non-nationals: K/K and NK/NK ratios are not too dissimilar as in the case
of other sectors: they are 2.21 and 2.69. This perhaps may be interpreted
based on the tight similarity in banking and insurance business functions
compared with manufacturing or trade.
That wage rates of Kuwaiti workers are higher than non-Kuwaitis’ is an
expected phenomenon; what is not is the reverse, which appears to be the case in
micro enterprises (K/NK = 0.49), shown in Table 22. Further research into the nature
of their respective job qualifications, education, skills, job description, and
supervisory functions (as well as observational errors) would have to be explored to
explain this anomaly62.

Table 22. Kuwaiti/Non-Kuwaiti Monthly Money Wage Rates Differentials (KD),

2012†
Micro Small Medium MSMEs LEs Straddlers Total

62
This deviation from the norm may be explained in part by the apparent reliance of a small
group of micros on highly skilled foreign workers in areas such as architecture, IT, legal
services, and (Arabic language) printing and publications.
60
K* 89.0 345.4 719.3 306 1,959 1,248 1,551
NK* 182.2 206.3 274.5 204 339 337 289
K/NK 0.49 1.67 2.62 1.50 5.78 3.71 5.36
†Excluding the oil sector. *K denotes wages paid to Kuwaiti and NK, non-Kuwaiti
employees.

Kuwaitis employed in LEs receive, on average, 5.78 folds the average salary
paid to non-Kuwaitis. Even among straddlers, they earn 3.71 times the average
salary paid to expatriates. Because of the dominant weight of LEs, the national
average is not far off LEs’ average wage: 5.36 versus 5.78. All in all, nationals and
non-nationals employed in LEs and straddlers are better compensated than their
counterparts in MSMEs.
As to the actual monetary compensations paid from MSMEs to nationals, and
excluding the unimportant finance sector, the non-finance sector tops the list among
medium, small, and even micro enterprises, followed by the trade sector, as shown
in Fig. 14. It also appears that the construction sector with its typically low skill
intensity pays the least to Kuwaiti employees as it relies mostly on foreign workers.

9.0 7.0
8.0 6.0
7.0
5.0
K/NK Wage Ratio

6.0
K/NK Wage ratio

5.0 4.0
4.0 3.0
3.0
2.0 2.0
1.0 1.0
0.0
0.0

Fig. 14. Non-Oil Ratio of Kuwaiti/non-Kuwaiti Wage Rates Classified by Size

and by Sector, 2012.

Now, if one were to postulate that Kuwaitis earn higher wage rates because
scarcity creates value, this would be misleading considering the 19,061 unemployed
Kuwaitis seeking job opportunities in 2012 (CSB, Statistical Review, 2014). It is
more likely that their observed higher wages reflect skill differentials and/or a
cognizance on the part of Kuwaiti employers of the need to meet Kuwaiti reservation

61
wage rates if they were to hire and retain nationals in their work force. The GoK has
also pursued a strategy of moral persuasion and even legislated legal quotas for
decades to coax employers into increasing the share of Kuwaitis in total
employment63. However, the results, with a few exceptions, have thus far failed to
bear fruit for a variety of reasons, which lie outside the scope of this study.

Business Activities with the Highest National Manpower Participation Rates

Following the preceding analyses regarding the participation ratios of Kuwaiti
nationals in total employment, the analysis is extended to identify the activities that
are relatively more intensive in the use of nationals. Which economic activities tend
to rely naturally on Kuwaitis than on non-Kuwaitis; that is, which activities tend to hire
more Kuwaitis without government (regulatory and/or persuasive) interventions or
ownership?
Earlier, it was observed that government firms (100% SOEs and > 50%
government/private ownership) tend to hire more nationals. If so, then which non-
government business activities tend to possess both the ‘push’ and ‘pull’ recruitment
factors; i.e., they favor nationals to foreign workers and, at the same time, nationals
favor them over public companies? The team defines a sector that demonstrates a
ratio higher than the overall average ratio of nationals in total employment (K/E) in its
own industry as being “naturally inclined to favor nationals” and vice versa. Rather
than using the overall national average of K/E as a single yardstick to gauge all 45 2-
digit ISIC activities, sector-specific averages are estimated to remove the influence
of skill asymmetry and production functions’ heterogeneity among different sectors.
Hence, there are potential 25 outcomes: a matrix of 5 economic sectors x 5 size
categories (micros, small, medium, straddlers, and large non-oil enterprises). The
results for the years 2003, 2007, and 2102 are shown in Table 23. Straddler firms
are included because their role in hiring Kuwaiti nationals is important to consider.
To identify the private economic activities that are “naturally inclined to favor
nationals”, two complementary approaches are followed. The first identifies and
compares subsectors with the highest K/E ratios relative to their sector-specific
average K/E. This is done in two steps: Step 1: estimate K/E for the abovementioned

63
The GoK has instituted a subsidization program to encourage private sector firms to hire
Kuwaiti workers. A preliminary assessment of the program is reported in Appendix E.
62
matrix for 2003 and follow up by an examination of the same during 2007 and 2012
to trace any development that has taken place during the interim period (see Table
23) and Step 2: isolate the top five subsectors and identify them as those with the
highest level of concentration of nationals even if they employ only a handful of
Kuwaitis, since reaching the top 5-level accords them the “naturally inclined to favor
nationals” label, regardless of the absolute numbers involved (see Table 24).
The second approach seeks to ascertain the resilience of the top-ranking
subsectors by finding out the number of times a specific subsector attains top
ranking across several or all size classes. The more it does, the more inclined it is in
intrinsically maintaining high employment ratios of nationals compared to other
subsectors and vice versa.

63
 Table 23. Ratios of Nationals/Employment by Sector and by Size: 2003, 2007,
and 2012†
2003
Sector Micro Small Medium MSMEs Straddler LEs Total
Manufacturing 0.63% 1.34% 1.11% 0.95% 6.94% 2.72% 3.26%
Construction 7.44% 3.34% 1.26% 2.85% 0.65% 1.09% 1.42%
Trade 3.31% 2.37% 4.02% 3.27% 8.19% 4.01% 3.89%
Non-finance 4.66% 3.35% 3.14% 4.08% 10.51% 2.35% 6.01%
Finance 3.94% 16.35% 12.80% 12.09% 39.60% 23.08% 33.40%
Total 3.40% 2.64% 2.54% 3.07% 8.83% 3.74% 5.09%
2007
Manufacturing 0.91% 1.41% 1.32% 1.15% 4.14% 1.64% 2.40%
Construction 8.42% 3.65% 1.58% 3.29% 1.37% 1.61% 1.80%
Trade 2.30% 1.89% 3.83% 2.41% 5.55% 7.29% 3.89%
Non-finance 4.38% 3.38% 2.72% 3.84% 6.99% 3.83% 5.21%
Finance 8.39% 18.02% 8.84% 10.81% 26.39% 22.44% 24.80%
Total 2.83% 2.62% 2.41% 2.71% 6.24% 6.04% 4.82%
2012
Manufacturing 1.25% 1.19% 2.44% 1.48% 5.47% 2.63% 3.46%
Construction 6.35% 3.94% 2.25% 3.53% 1.65% 2.04% 2.05%
Trade 2.28% 1.46% 4.71% 2.47% 4.04% 5.98% 3.55%
Non-finance 2.04% 2.66% 4.51% 2.67% 6.70% 5.81% 5.33%
Finance 5.37% 21.88% 0.87% 8.33% 43.82% 26.73% 38.36%
Total 2.14% 2.36% 3.60% 2.45% 7.28% 6.44% 5.41%
† Excluding the oil sector.

The results, shown in Table 24, are described in the following outcomes:

1. There are certain activities with relatively high Kuwaiti labor intensities that are
unique to their size such as chemical industry in LEs, financial intermediates
in small, leather manufacture in medium, and oil and gas in straddlers. Here,
the nature of the industry, its production scale, capital and skill requirements,
market size and pay scale, among others, dictate a specific ‘ideal size’, which
happens to attract a relatively high percentage of Kuwaitis,
2. Flexible production platforms often allow for optimality in varied scales. For
example, real estate ranks first in micro, small, and straddler enterprises;
electrical machinery in micro and small; recreational activities in medium,
straddlers, and LEs; and publishing in straddlers and LEs. Such resilience
across firm sizes points to activities with the highest probability of maintaining
an above average K/E ratio, and

64
 3. All top ranking straddlers are technology- and capital- intensive activities such
as telecommunications, publishing, finance, and oil and gas.

After isolating the top performers across ISIC activities, the next step will be to
identify and isolates the top performers over time to ascertain if the structure stayed
the same or deviated and, if so, in which way(s). The intersection of the two findings
would produce a list of high K/E ranking activities across sectors and over time,
which are “naturally inclined to favor nationals”.

By focusing on the number of laborers (excluding firm owners), the important

developments that have taken place between 2003 (Table 24) and 2012 (Table (25)
are summarized below:

1. The structure in 2012 is clearly dissimilar from that of 2003,

2. New top-ranking activities surfaced, such as insurance, sales of motor

vehicles, recycling, travel agencies, and air transport (Kuwait Airways), which
may reflect structural shifts in the market in response to changes in consumer
preferences. If so, this points out to a natural, market-driven movement
towards economic activities that relatively favor the employment of nationals,

3. Some of the favored old activities reappeared in 2012 such as chemicals,

electric machinery, publications and printing, computer and ICT, health,
recreational services, and real estate,

4. Some activities stand out as leading in the quest for hiring nationals: the sale
of motor vehicles does not appear among the top-ranking K/E activities in
2003; however, in 2012 it employed 811 Kuwaitis amongst its 16,192
employees with a K/E ranking of 2.14; i.e., more than double the average K/E
ratio in non-finance micro enterprises category,

5. Other activities reduced the number of employed Kuwaitis, but, due to an

overall reduction in the sector’s K/E average, it shows an improved ranking in
2012. A case in point is real estate activities: in 2003, they employed 459
nationals out of a total of 1,788 or 25.7% and realized a K/E ranking of 5.29
times the average in non-finance micros (Table 26). In 2012, they employed

65
 367 nationals out of 2,808 (13.1%) with a K/E ranking of 6.32. In other
words, despite the reduction in the K/E ratio by almost 50%, the ranking rose
slightly from 5.29 to 6.32 because the micro non-finance average fell from
4.85 in 2003 to 2.07 in 2012, as shown in Table 25,
6. The extent to which the top five subsectors exceeded their averages varies in
2003 from 2012. The overall average of the ranking of the top five subsectors
in 2003 compared to their counterparts in 2012 shows that, except in the
category of small enterprises where it increased from 3.1 to 4.61, the average
fell in the remaining four size categories. The sharpest decline occurred in
micros (from 11.3 to 4.1) followed by medium firms (from 6.03 to 2.4), which
underscores a softening in their level of intensity in outranking other
subsectors during this period.

Next, the attention is turned to those specific subsectors whose high K/E
rankings appear across different class sizes. Table 26 shows the activities that
occurred three, four and five times in 2003 and 2012. Here, it is noted as follows:
The most outstanding activity with a higher K/E ratio than its industry-specific
average across all five class sizes, regardless of size, in both 2003 and 2012,
is publishing and printing,

Table 24. Top Five ISIC Activities with the Highest Kuwaitis/Employment
Ratios, 2003
Top ISI Top
ISIC Description K E Description K E
K/E C K/E
Micro enterprises Small
Transport
35 9 70 20.7 85 Health 32 253 3.8
equipment
Electrical Precision
31 1 9 17.4 33 5 104 3.6
machinery instruments
22 Publishing 5 107 7.4 31 Electrical machinery 2 53 2.8
Non-metallic
26 3 88 5.7 70 Real estate 24 253 2.8
minerals
70 Real estate 459 1788 5.3 67 Fin’l intermediaries 19 42 2.7
Medium Straddlers
17 Membership orgs. 51 130 12.4 64 Telecom 38 255 6.3
Recreational
19 54 251 6.6 70 Real estate 376 3,630 4.8
activities
Manufacture of Recreational
91 4 62 6.3 92 52 510 4
leather activities
Textile
92 2 61 3.2 22 Publishing 92 1,178 2.9
manufacture
Machinery &
29 3 109 2.5 11 Oil and gas 14 196 2.6
equip.

66
 Large
101 1,70
24 Chemicals 8.8
4 9
5,21
62 Air transport 3,908 7.13
1
2,71
64 Telecom 905 3.2
6
Sales of Motor 3,26
50 613 2.3
Vehicles 4
1,63
22 Publishing 197 1.7
2

67
 Table 25. Top Five Subsectors with the Highest Kuwaitis/Employment Ratios,
2012
Top IS Top
ISIC Description K E Description K E
K/E IC K/E
Micro enterprises Small
70 Real estate 367 2,808 6.3 91 Membership orgs. 5 20 9.4
85 Health 91 797 5.5 29 Machinery & Equip. 4 75 4.5
91 Membership orgs. 1 12 4.0 24 Chemicals 5 112 3.8
66 Insurance 2 16 2.3 85 Health 14 185 2.8
50 Sales of autos 811 16,192 2.1 74 Other business NES 186 2,594 2.7
Medium Straddlers
Recreational
92 60 320 4.2 91 Membership orgs. 67 132 8.7
activities
Recreational
72 Computer & ICT 10 96 2.3 92 95 561 2.9
activities
29 Machinery & equip. 4 76 2.2 37 Recycling 12 198 2.3
63 Travel agencies 99 1,148 1.9 29 Machinery & equip. 13 240 2.1
Other business,
74 182 2,483 1.6 70 Real estate 341 3,216 1.8
NEC
Large
1,22
24 Chemicals 3812 5.9
6
1,22
64 Telecom 3,120 5.9
6
1,29
62 Air transport 4,841 4.0
8
61 Water transport 560 2,302 3.63
Electrical
31 304 3,031 1.8
machinery

Next, the recreational activities subsector is another Kuwaiti labor-intensive

activity, regardless of size during 2003; however, it did not exhibit the same
stature in 2012, even when the bar is lowered to occurrences in 3 out of 5 size
classes,
Among the 4 out of 5 occurrences in 2003 are soft, high tech businesses such
as telecommunications and ICT and private education. These are typically
high value added activities that have long been prescribed as the most
suitable long-term strategic activities in which high national manpower
participation rates can be readily attained64. During 2012, the same two high
value added activities reappeared among the 3 out of 5 occurrences category
in addition to other similarly high value added activities such as health, travel,
insurance, and banking. This reaffirms the ‘High Value Added’ strategy

64
CMT, 1998,” Long Term Development Strategy for Kuwait”, KISR.
68
 suggested in the 1998 CMT’s study to realize high K/E ratios without
government interventions,
The services sectors (trade, non-finance, and finance) appear to outnumber
the commodities sector (manufacturing and construction) as they show higher
abilities to maintain relatively higher ratios of Kuwaitis in their total
employment.

Table 26. Activities with Highest K/E Ratios Across Size Classes, 2003 and
2012
2003 2012
3 out of 5 occurrences
Manufacturin
Chemicals Chemicals
g
Manufacturin
Sales of motor vehicles Non-metallic minerals
g
Trade Machinery and
Retail trade
equipment
Telecommunications
Trade Sales of motor vehicles
Non-finance post
Other business activities Computer and ICT
Education
Non-finance
Health
Membership NES orgs
Finance Financial intermediation Finance Insurance
4 out of 5 occurrences
Manufacturin
Electrical machinery Trade Retail trade
g
Real estate Travel agencies
Non-finance Computer and ICT Non-finance Real estate
education Other businesses
Finance Final intermediaries
5 out of 5 occurrences
Manufacturin
Publishing Manufacturin
g Publishing
g
Non-finance Recreational activities

The combined findings of the preceding two approaches yield economic

activities that are a) among the highest K/E ranking and b) are not size-sensitive.
The emerging results therefore point to specific economic activities that are owned
and managed by the private sector and which stand out as the ones with high K/E
ratios relative to their counterparts, regardless of size. Most of the activities, shown

69
in Table 26, are typically high value added activities that require high skills and
hence offer relatively high wages that attract Kuwaiti employees.
The overlap of such activities from Tables 24 to 26 for 2012 consists of the
following list of activities:
1. Manufacture of machinery and equipment
2. Publishing and printing
3. Travel agencies
4. Real estate
5. Computer and ICT
6. Manufacture of chemicals
7. Sales of motor vehicles
8. Health
9. Insurance

The Shares of Nationals in Total Employment: 2003 to 2012 Trends

Changes in the Number of Firms without Nationals

The number of firms without nationals should decrease, a priori, during the
period 2003 to 2012 owing to the robust government’s program to subsidize the
employment of Kuwaitis in the private sector, which was initiated in 2000. The
results, however, are inconclusive. At best, the number of micros increased, the
number of small firms improved in 2007 but got worse in 2012, and the number of
medium and large firms improved (see Fig. 15. As to the economic significance of
that block of Kuwaiti-less firms, their value added and employment results over the
period are shown in Table 27.

70
100.0%

80.0%

60.0%

40.0%

20.0%

0.0%
Micro Small Medium MSMEs LEs Straddlers Total

2003 2007 2012

Fig. 15. Percentage of firms without Kuwaitis over time: 2003 to 2012.

Table 27. Value Added and Employment Shares in Enterprises without

Kuwaitis, 2003 to 2012
Value added (%) Employment (%)
2003 2007 2012 2003 2007 2012
Micro 84.0 86.2 90.2 81.8 84.5 88.2
Small 64.0 57.4 65.1 60.7 57.5 65.2
Medium 41.1 41.7 27.2 42.3 38.6 30.1
Large 1.1 0.6 0.4 13.9 8.3 3.4
Straddlers 22.2 10.6 22.0 31.9 27.8 25.4

The trend that emerges is not dissimilar from the profile of the number of firms
without Kuwaitis explored above in that micro and small enterprises without Kuwaitis
generated more value added and employed more workers in 2012 than they did in
2003. Medium firms experienced the opposite and the progress made in LEs was
even more pronounced while straddlers showed inconsequential improvement in
value added and a discernible progress in employment as the percentage fell from
31.9% to 25.4%.
Thus, micro enterprises are increasingly relying on foreign workers as well as
small firms to a lesser extent. Medium, large, and straddler firms move in the
opposite (right) direction as higher percentages of operating firms hire nationals over
time.

Changes in the Marginal Rate of Kuwaiti Participation

As companies grow over time, do they hire more Kuwaitis at the margin,
therefore raising the share of Kuwaitis in total employment, hire fewer or maintain the
same ratio? Conversely, does the share (K/E) rise, fall, or remain the same as the

71
company contracts? Also, are there discernible differences in such outcomes
among specific 2-digit ISIC activities and/or firm sizes? This section aims at gauging
the extent to which labor substitution of Kuwaitis for non-Kuwaitis has been occurring
in the business sector, with emphasis on the performance of MSMEs.
The results reported in Table 14 indicate that total employment in the non-oil
business sector rose from 2003 to 2012 (517,260 to 682,181 or by 31.9%) as did the
employment of Kuwaitis (26,343 to 36,934 or by 40.2%). During the same period, the
percentage of Kuwaitis in total employment inched up slightly from 5.09% to 5.41%,
which implies that the trend has been of a modest substitution of Kuwaitis for non-
Kuwaitis at the margin. However, in which sector and in which firm size class did the
substitution occur, or was it uniform?
Employment in non-finance, for example, increased from 187,611 to 229,796
with the number of employed Kuwaitis also increasing (slightly) from 11,274 to
12,237; however, the share of Kuwaitis fell from 6.01% to 5.33%, suggesting a
lessened inclination to hire Kuwaitis in place of non-Kuwaitis. The same
phenomenon occurred in the trade sector. The manufacturing, construction, and
finance, on the other hand, showed positive expansion in all three categories: total
employment, Kuwaiti employment, and the share of Kuwaitis in total employment in
varying degrees, indicating that some substitution of Kuwaitis for non-Kuwaitis had
taken place. The most impressive substitution occurred in the finance sector where
the share rose from 33.4% to 38.4%, the largest observed elevated margin among
all sectors65.
A comparison of the contributions of the non-oil business sector versus
MSMEs in terms of creating jobs for Kuwaitis is made for the period 2003 to 2012,
the results of which are presented in Table 28. Looking at the business sector first,
note the following:
1. Total employment rose by a sizeable 32.7%; and when the oil sector was
included, the growth rate fell to 32.3%,
2. Against their base values in the non-oil sector (26,343 Kuwaitis versus
484,893 non-Kuwaitis), new jobs created for Kuwaitis grew by 40.2% versus
32.3% for non-Kuwaitis during the 9-year period,

65
Further research is required to ascertain the reasons for such diverse trends.
72
 3. The share of Kuwaitis in total employment over the same period rose slightly
from 5.15% to 5.45%. With the oil sector included, the share increased from
6.5% in 2003 to 7% in 2012, and

Table 28. Kuwaiti Employment, their Growth and Shares in the Workforce, 2012
versus 2003†
Excluding oil sector Including oil sector
2003 2012 % Change 2003 2012 % Change
Business sector
Number of enterprises 38,636 41,265 6.8% 38,639 41,268 6.8%
Employment 511,236 678,264 32.7% 528,000 698,509 32.3%
Kuwaitis 26,343 36,934 40.2% 34,278 49,047 43.1%
Non-Kuwaitis 484,893 641,330 32.3% 487,698 645,545 32.4%
Kuwaitis/employment (%) 5.15% 5.45% 0.29% 6.5% 7.0% 0.5%

2003 2012 % Change

MSMEs
Number of enterprises 37,197 39,198 5.4%
Employment 236,907 240,342 1.4%
Kuwaitis 7,434 5,981 -19.5%
Non-Kuwaitis 229,473 234,261 2.1%
Kuwaitis/employment (%) 3.13% 2.49% - 0.64%
Contribution of MSMEs to changes from 2003 to 2012 (%)
Excluding oil sector Including oil sector
Number of enterprises 76.1% 76.1%
Employment 2.0% 2.1%
Kuwaiti employees -13.7% -9.8%
Non-Kuwaiti employees 3.1% 3.03%
†Employment numbers exclude the number of Kuwaiti owners.

All in all, the business sector did hire more Kuwaitis at a somewhat faster
pace than it did non-Kuwaitis. However, this did not translate into a clear trend to
substitute nationals for foreign workers as the overall ratio in MSMEs fell while it
inched up gingerly in the rest of the business sector.
Against this backdrop, MSMEs’ performance can be described in the following:
1. Their anemic (real) output and value added growth are matched by an anemic
employment growth. MSMEs’ total employment estimate has barely moved; it
rose by 3,335 workers or only 1.4%,
2. The total number of jobs held by Kuwaiti nationals fell, in absolute terms, from
7,434 in 2003 to 6,732 in 2007 and to 5,981 in 2012, or by – 19.5% from 2003
to 2012,

73
 3. More importantly, perhaps, there is the drop in the share of nationals in
MSMEs’ workforce from 3.13% to 2.5%,
4. The overall contribution of the MSMEs sector to job creation in Kuwait
amounted to only 2.0%; to wit, for every 100 new jobs created in the business
sector from 2003 to 2012, MSMEs added only 2.0 jobs,
5. MSMEs’ contribution to the national target of employing nationals in the
private sector is a negative, -13.7%,
6. The non-oil LEs and straddlers, many of which are privately owned, hired an
additional 12,045 Kuwaitis while adding 151,649 non-Kuwaiti workers, and
7. The oil sector increased its Kuwaiti workforce from 7,935 in 2003 to 12,113 in
2012, or by 52.7%.
Intuitively, therefore, one would infer the presence of complex but consistent
forces in MSMEs pointing to i) a ‘push’ factor against nationals in these privately-
owned firms, ii) a simultaneous ‘pull’ factor in favor of non-Kuwaitis whose numbers
rose by 4,788 jobs (from 229,473 to 234,261, or by 2.1%), and iii) a ‘pull’ factor
among Kuwaiti workers towards finding jobs in LEs and straddlers, especially those
that are owned by the government.
That the share of nationals in total MSMEs employment has been steadily and
generally declining since 2003 can be clearly seen from Fig. 16. In fact, except for
medium enterprises where it increased from 2.5% to 3.6%, mainly due to the modest
progress from 2007 to 2012, the share declined in the case of micros (3.4% to
2.1%), small (2.6% to 2.4%), MSMEs as a group (3.1% to 2.5%), and even non-oil
LEs (8.8% to 7.3%).
These results point to the existence of a built-in hesitance to hire nationals in
the private sector. Because this analysis presents the ‘what is’ status, further
research is needed to unravel the forces that contributed to this outcome, which,
once identified, should guide government policies in designing appropriate policy
instruments that will effectively reverse this trend.

74
 10
9
8
7
6
5
4
3
2
1
0
Micro Small Medium MSMEs LEs Total
2003 2007 2012

Fig. 16. Participation rate (%) of nationals in total non-oil employment: 2003,
2007, and 2012.

To conclude, the following attributes are observed among the 39,198 MSMEs
in 2012:
1. Only 3,975 firms or 10.1% indicate having any Kuwaiti employee;
2. The number of hired Kuwaitis is 5,981 individuals in toto;
3. 3,557 firms are identified as having ownership of Kuwaiti nationals ranging
from 1 to 5 individuals per firm, and
4. For single owners, there are 283 firms owned by Kuwaiti females and
2,892 firms owned by Kuwaiti males, and
5. If Kuwaiti business owners are excluded from the number of Kuwaitis
employed, the number of ‘hired’ Kuwaiti employees would drop to 2,424
individuals, or to 0.994% of the total number of ‘hired’ employees in
MSMEs.

Changes in Nationals’ Shares in Wages

Over time, data reveals a probable cause of the continued unwillingness of
Kuwaiti nationals to work in MSMEs: the average wage rate of a Kuwaiti worker in
LEs is 7.5 times his/her wage rate in MSMEs in 2003; the difference becomes wider
(8.0 times) in 2012 (see Fig. 17).

75
 3000
2500
2000
1500
1000
500
0
MSMEs LEs MSMEs LEs
Including Oil Excluding Oil

2003 2012

Fig. 17. Average wage rate of Kuwaiti employees in MSMEs versus LEs in 2003
and 2012.

The same pattern holds when the oil sector is excluded, except that the
difference is slightly smaller (6.4 times) in both years. The data also indicate that,
unlike total money wages in MSMEs, wage rates of Kuwaitis in LEs increased by
more than 100% over the period 2003 to 2012.

The Substitution of Kuwaiti for Non-Kuwaiti Labor: The Facts

The degree to which Kuwaitis are being substituted for non-Kuwaitis over the
period from 2003 to 2012 is investigated next. Regardless of the minute changes
that occur in the interim, this period is sufficiently long to gauge the presence, if any,
of an overall trend in what is considered the most pressing national objective.
Ultimately, substitution is realized only when the Kuwaitis/total employment (K/E)
ratio is increased. This outcome however represents only the ‘critical minimum
outcome’ since real, noticeable progress would occur only with sizable increases in
the K/E ratio.
To discern the pattern of job Kuwaitization over the period, a two-step inquiry
is undertaken. The first would determine the direction of change that occurred in K/E
in response to changes in i) total employment, ii) the number of Kuwaitis, and iii) the
number of non-Kuwaiti employees. The second step would measure the extent to
which the substitution has taken place by calculating the elasticity of substitution.
Earlier, K/E ratios were compared in 2003 and 2012 (Tables [24] and [25] ) to
uncover activities that favored hiring national workers, relative to other activities,
without government interventions. The analysis focused on the base and terminal
ratios only. The focus here is on the process during the interim period by identifying
the forces that are responsible for the change in K/E in 2012.

76
 As a first step, the analysis is carried out at a disaggregated level, (the 2-digit
ISIC level which covers 44 subsectors in Kuwait). For each of the subsectors, the
Kuwaitization of jobs (i.e., when K/E increases) occurs when one of the following
three developments takes place: i) if K increases and E stays the same, or ii) if E
declines while K stays the same or increases, or iii) if K increases (decreases) at a
higher (lower) rate than E. By tracing changes that occurred in the three variables: E,
K, and K/E, the analysis gauges the presence and the direction of the substitution.
The results, shown in Table 29, are thus classified into six outcomes, each of which
represents a possible direction of change in all three variables. Of the six, three
reflect positive substitution (Outcomes 1, 5, and 6), while the other three reflect
negative substitution. A brief outline of each is given below66.
First. Economic activities that realized positive substitution of Kuwaitis for
non-Kuwaitis: The more likely (and most favored) outcome given a decade of growth
is if employment increases, so too would Kuwaiti employment and their share. Of
the 44 subsectors, 20 such outcomes occurred (Outcome No. 1). Outcome Nos. 5
and 6 reached the same goal. The share of Kuwaitis in Outcome 5 increased despite
experiencing declines in total employment and in the number of Kuwaitis 67, while in
Outcome 6, employment fell but the number of Kuwaiti employees increased, raising
K/E ratio. In all three cases, the results point to a positive substitution of Kuwaitis for
non-Kuwaitis. Of 42 economic subsectors, 23 or > 50% did substitute nationals for
expats over the period.
Second. Economic activities that realized negative substitution of non-Kuwaiti
for Kuwaitis: Three outcomes are observed: i) eight subsectors experienced an
expansion in total employment and hired more Kuwaitis but less proportionately,
thereby reducing the share of Kuwaitis in total employment (Outcome No. 2), ii) in
six ISIC categories, an increase in total employment is accompanied by a decrease
in the number of Kuwaiti employees as well as a decline in their ratio in total
employment (Outcome No. 3), and finally, iii) seven activities contracted their
operations, kept fewer workers, laid off Kuwaiti and non-Kuwaiti employees but

66
Owing to having zero Kuwaiti employees in certain 2-digit subsectors, only 42 subsectors
are included in the table instead of the routinely recorded 45 subsectors.
67
This subsector is dominated by privately owned overseas shipping firms (2,894 employees
in 2012) and the Kuwait Oil Transport Company (588 employees) which is owned and
operated by the State.
77
more proportionately from Kuwaitis than from non-Kuwaitis, therefore reducing the
K/E ratio (Outcome No. 4).

Table 29. Kuwaitization of Jobs in 2-Digit ISIC Activities, 2003-2012†

Direction of
Outcome

Change from 2003

to 2012 2-Digit ISIC Subsector
Ei Ki (K/E)i
11 Quarrying; 17 Textiles manufacture; 18 Manufactured
apparel products; 21 Manufactured paper products; 25
Rubber products; 26 Non-metallic minerals; 27 Basic
metals; 28 Fabricated metals; 31 Electric machinery; 35
(1) + + + Transport equipment; 37 Recycling; 45 Construction; 63
Travel agencies; 64 Telecommunication and post; 65
Finance; 66 Insurance; 67 Financial intermediaries;74
Other business activities; 80 Education; 90 Sewage &
sanitation.
15 Food products; 21 Paper manufacture; 24 Chemicals;
(2) + + ̶ 55 Restaurants; 60 Land and pipe transport; 70 Real
estate; 72 Computer & ICT; 85 Health services.
22 Printing and publishing; 33 Precision instruments; 50
(3) + ̶ ̶ Sales of motor vehicles; 51 Wholesale trade; 52 Retail
trade; 71 Leasing.
19 Leather products; 20 Manufactured wood products; 34
Motor vehicles; 62 Air transport; 91 Membership NES
(4) ̶ ̶ ̶
organizations; 92 recreational activities; 93 Other
services.
(5) ̶ ̶ + 61 Water transport
(6) ̶ + + 29 Machinery and equipment; 36 Furniture
Notes:1) Ei denotes total employment in subsector i; Ki the number of Kuwaitis
employed in sector i and (K/E)i the ratio of Kuwaitis in total employment in sector i.
(2) ISIC 73, Research and Development, is excluded as it had 29 workers in 2003
and zero employees in 2012.
† Non-oil business sector.

The Elasticity of Substitution of Kuwaiti for Non-Kuwaiti Workers

Besides judging the substitution of nationals for foreign workers by gauging

the direction (i.e., sign) of change, the second follow-up procedure is to measure the
extent of the substitution by estimating the elasticity of substituting Kuwaiti workers

78
for non-Kuwaitis in response to specific changes in total employment68. The
coefficient of the employment elasticity of demand for Kuwaiti workers is measured
as:
ηki = (dEki/Eki) / (dEi/Ei)
For subsector i, ηki denotes the employment elasticity coefficient of the demand for
Kuwaiti workers; Eki, the number of Kuwaiti employees, and Ei, total employment.
The value and sign of the coefficient could take any of the following six possibilities:
1. ηki = 0 if there is no change in the number of nationals when total
employment changes,
2. ηki = 1 Unitary Positive elasticity if the percentage change in Kuwaiti
employment matches the percentage change in total employment and both
move in the same direction,
3. ηki = ̶ 1 Unitary Negative elasticity if the percentages match in value but
move in opposite directions,
4. 0 < ηki > 1 Elastic demand under two conditions: i) if a rise in percentage
change in employment is coupled with a larger rise in the percentage change
in the employment of Kuwaiti workers or ii) if a drop in the percentage change
in total employment is associated with a larger percentage drop in the
employment of Kuwaitis,
5. 0 < ηki < 1 Inelastic demand under two conditions: i) if the percentage
increase in Kuwaiti employment is less than the percentage increase in total
employment or ii) if the percentage decrease in Kuwaiti employment is less
than the percentage decrease in total employment, and
6. ηki < 0 Negative substitution when the percentage change in the employment
of nationals moves in the opposite direction of the percentage change in total
employment, in which case the value could be less than or greater than 1.

Under ‘normal’ economic conditions, one would expect the coefficient to be

positive. Its value would depend on a host of predictors such as labor availability,

68
Besides the employment elasticity of substitution, the wage elasticity of substitution (σ ki) was carried out and
the results were not too dissimilar. The latter was computed as follows: σki = (dEki/Enki) / (dWki/Wnki) where Wkis
the average wage rate of Kuwaiti workers and Wnki is the average wage rate of non-Kuwaiti workers in activity
i.

79
wage ratio of Kuwaiti to non-Kuwaitis, skill requirements, education and work
experience, and government subsidies, among others. The results are given in Table
30. Overall, there appears to be a positive elastic demand for national workers in the
country in that the business sector elasticity coefficient is +1.3. This means that
during the period from 2003 and 2012, Kuwaiti employers increased (decreased) the
employment of Kuwaitis by 1.3% when their total labor force expanded (contracted)
by 1%. The fact that there exists a definite substitution of Kuwaiti for non-Kuwaiti
workers in the business sector, even if it is over a very limited magnitude, is indeed a
virtuous indicator that augurs well for the future of the problematic population mix in
Kuwait. That said, the aggregate 1.3 coefficient masks some less favorable
outcomes at the disaggregated level.
That MSMEs have increasingly relied on inexpensive foreign workers in labor-
intensive activities, as stated earlier, is affirmed by the negative MSMEs elasticity
coefficient. This says that there has been a negative substitution. The trend is
particularly strong in the largest number of business firms, micro enterprises, where
there is negative substitution at the rate of – 3.4. The same is true in medium
enterprises. The exception is the group of small firms, which, as observed earlier,
are declining in numbers and economic significance within MSMEs. Hence, their
positive 1.5 coefficient has little effect on MSMEs as a whole. Straddlers present the
bright spot with a coefficient of 11.0, which signifies their important positive influence
in the labor market dilemma because of their economic significance in the business
sector. LEs’ demand is inelastic: with a 10% rise in employment, Kuwaiti
employment rises by only 6%.

Table 30. Aggregate Sector-Size Elasticity of Substitution Coefficients†

Micro Small Medium MSMEs LEs Straddlers Overall
-3.4 1.5 -8.5 -38.0 0.6 11.0 1.3
Non-
Manufacturing Construction Trade Finance
finance
1.2 2.3 0.5 0.4 1.3
†Excluding the oil sector.

The results of the elasticity coefficients among economic sectors are all > 1.
Also, there is a much greater homogeneity between the two-wide-ranging trade and
non-finance sectors (ηki is 0.5 and 0.4, respectively) where their activities are heavily
reliant on unskilled or semi-skilled non-Kuwaiti workers. Likewise, finance and

80
manufacturing exhibit somewhat similar coefficients (ηki is 1.3 and 1.2, respectively)
where the demand for nationals is elastic. The results of measuring the elasticity
coefficients for the 2-digit subsectors (Table 29) are reported in an ascending order
in Table 31.
The elasticity results show that there are 32 out of 43 subsectors with
coefficients > 0, indicating a keen sense of positive Kuwaiti employment responses
on the part of employers to changes in total employment. Also, there are 24
subsectors with elasticity coefficients ≥ 1 and 8 subsectors with coefficients > 0 (ηki)
<1. In addition, there are 9 subsectors with negative coefficients (< 0). For
instance, in the furniture subsector, a 1% increase in total employment triggered a
2.5% decrease in the number of Kuwaitis. In publishing and printing, a 1% increase
in employment caused a 0.18% drop in the number of Kuwaitis. Inversely, when
employment increased by 1% in say, the manufacture of wood products, Kuwaiti
employment increased by 1.58%. The 7 subsectors with coefficients < 1 show a
restrained expansion (contraction) of Kuwaiti workers as employment increases
(decreases). These include a few manufacturing activities such as paper products,
food, and chemicals in addition to a few services such as restaurants and hotels, real
estate, health, and computer and ICT. The magnitude of their coefficients ranges
from 0.10 in computer and ICT to 0.89 in restaurants and hotels.

Table 31. Elasticity of Substitution Coefficients between Kuwaiti and non-

Kuwaiti Labor†
ISIC Elasticit ISIC Elasticit
Description Description
2 y 2 y
18 Manufacture of apparel 34.93 65 Finance 1.24
31 Manufacture of electric 28.60 91 Membership NES orgs 1.16
machinery
93 Other non-finance 25.55 61 Water transport 1.05
activates
62 Air transport 10.09 67 Financial Intermediate 1.06
64 Telecommunications post 7.69 55 Restaurants & hotels 0.89
92 Recreational activities 5.43 21 Manufacture of paper 0.88
66 Insurance 5.05 15 Manufacture of food 0.80
production
19 Manufacture of leather 3.05 85 Health 0.59
26 Non-metallic minerals 2.96 52 Real estate 0.27
90 Sewage & sanitation 2.58 60 Land & pipe transport 0.26
74 Other business activities 2.54 24 Chemicals 0.22
17 Textiles manufacture 2.25 72 Computer & ICT 0.10
45 Construction 2.17 73 R&D 0.00
28 Manufacture of fabricated 2.09 22 Publishing -0.18

81
 metals
11 Quarrying 1.80 52 Retail trade -0.31
20 Manufacture of wood 1.58 50 Sales of Motor Vehicles -0.73
34 Manufacture of motor 1.56 51 Wholesale trade -0.73
vehicles
25 Manufacture of rubber 1.53 33 Precision instruments -1.86
products
35 Manufacture of transport 1.41 36 Furniture -2.50
equip.
80 Education 1.30 71 Leasing -3.81
63 Travel agencies 1.30 29 Machinery & equip. -15.06
Note: Manufacturing activities include ISIC 11-39; construction 45; trade 50-52; non-
finance from 55-93 and finance 65-67.
† Excluding the oil sector.

Six of the eight cases with negative coefficients, which imply an inverse
relationship between total employment and Kuwaiti employment, are troublesome in
that they point to a tendency to lay off Kuwaiti workers even when they expand their
total employment. These include leasing, precision instruments, wholesale trade,
retail trade, sales of automobiles, and publishing and printing69. The exception to
this trend was captured in the previous directional analysis where the opposite took
place: as total employment decreased, Kuwaiti employment increased more
proportionately in the case of the manufacturing of furniture and machinery and
equipment.
Further research is required to identify the common factors that lead to
increases in K/E ratios, especially when E increases. More significant, perhaps, is
the importance of finding out the conditions under which employers increased the
employment of nationals when their total employment had declined70.

Tradables versus Non-Tradables: A Way to Enhance Job Kuwaitization

Private business firms in industrial economies have long outsourced their

production processes to low-wage countries while maintaining most of the other links

69
Even though K/E in publishing and printing tops other manufacturing activities’ ratios in
2012, the dynamic directional analysis of K/E as well as the elasticity results show that
over the period from 2003 to 2012, it has been substituting non-Kuwaitis for Kuwaiti
workers.
70
An attempt to determine K/E predictors using regression analysis is reported in Appendix
F.
82
in the production chain at home including R&D, product design, marketing, finance,
sales, and accounting. This model is suitable only for tradable goods and this
strategy, if applied in Kuwait, would soften the current imbalance in Kuwaiti/non-
Kuwaiti employment ratios in the (tradables) production sector and may even
eliminate thousands of unnecessary jobs held by non-Kuwaiti nationals71.
For the record, 19.4% of all employees are engaged in the production of
tradable goods, where tradables are defined roughly as consisting of manufacturing
activities. In 2012, there were 119,100 employees working in tradables, of whom
4,116 or 3.5% are Kuwaitis. Should the production of tradables be outsourced to low-
wage countries, a good percentage of the 119,100 jobs held by non-Kuwaitis could
be eliminated while keeping high value added jobs, which could generally be filled by
nationals, at home. As shown in Table 32, and depending on which sector is
selected (MSMEs, LEs, or straddlers), at least 94.5% of the workforce engaged in
the production of tradeable goods are made up of expatriates.

Table 32. Percent of Kuwaitis Employed in the Production of Tradeable Goods,

2012†
Total Kuwaitis Non-Kuwaitis
Employment Number % in total Number % in total
MSMEs 45,738 677 1.5 44,689 97.7
LEs 53,224 2,909 5.5 50,311 94.5
Straddlers 20,138 530 2.6 19,592 97.3
Total 119,100 4,116 3.5 114,591 96.2
† Excluding oil and gas extraction and oil refining.

Investment Trends from 2003 to 2012

A Change in a firm’s productive capacity is measured in terms of changes

made to its investment from year t to year t+1. The literature abounds with definitions
for ‘capital’. Here, it is expediently adopted CSB’s ‘paid-up capital’, defined as a
measure of the book value of the firm’s fixed assets at year’s end + working capital +
inventories + financial or real estate investments72. Taking this datum with its

71
Naturally, not all tradables would benefit from relocating to low wage countries because
some activities stand to gain more due to raw material proximity such as refined oil.
72
Data on “invested capital” are also available but for fewer firms. Moreover, invested
capital data do not reflect a firm’s productive capacity in that it is defined by CSB as
consisting of paid-up capital at market value + retained profits + reserves.
83
ordinary statistical drawbacks and examining its development over the 9-year period
should be interpreted with caution. Yet, if the data are consistently distorted year
after year, a temporal comparison is doable.
Total paid-up capital of MSMEs in 2012 was KD805.3 million, while non-oil LEs’
was KD11.97 billion. Straddlers’ capital assets were not far off LEs’ at KD 8.70
billion73. Focusing for the moment on MSMEs, the results of Table 33 point to the
following:
The finance sector had the lowest capital share at 0.3% in contrast to trade’s
overwhelming share of 55.3%. As observed before, the limited share of the
finance sector can be explained by its minute role in MSMEs compared to its
significant role in LEs and straddlers, where typically large-scale commercial
banking, insurance, and leasing firms exist. It is surprising, though, that the
manufacturing sector, which is more capital intensive than most of the
services sectors, ranks second to last,
By far the largest contributor in 2012 to total MSMEs investments is the trade
sector, bolstered most likely by its end of year inventories and its working
capital requirements, followed by non-finance, manufacturing, construction,
and finance, as shown on an annual basis in Fig. 17, and
This pattern is akin to their respective weights in output, value added, and
employment.
The results also show the presence of an unusual level of investment
stagnation in sectoral capital assets of MSMEs over the period 2003-2012 in that
three of the five sectors experienced varying degrees of disinvestment ranging from
– 0.001% in manufacturing to – 2.2% in finance (see Fig.18), only construction and
non-finance increased investment spending over the period.

Table 33. Investment Growth Rates of MSMEs, 2003-2012 (KD 000)

Manufacturing Construction Trade Non-finance Finance Total
2003 93,667 51,585 466,460 177,718 2,859 792,290
2007 90,180 56,246 437,897 207,917 2,680 794,919
2012 93,662 66,107 445,341 197,836 2,335 805,281
CAGR - 0.001% 2.8% - 0.5% 1.2% - 2.2% 0.18%

73
Capital/labor ratio in MSMEs in 2012 is 3.3 in contrast to 36.81 in LEs and 76.89 in
straddlers.
84
 Not only did MSMEs experience stagnant investment growth in absolute
terms, this was also true relative to the growth of investment in the rest of the
business sector. To wit, MSMEs’ assets made up 10.4% of LEs’ assets in 2003 and
2007 but had declined to 6.4% in 2012 (see Table 34). Also, as MSMEs’ investment
stagnated, LEs’ capital had increased substantially from KD7.56 billion in 2003 to
KD11.97 billion in 2012 and straddlers’ also had increased considerably from KD2.65
billion to KD8.76 billion.

900
800
700
600
KD Million

500
400
300
200
100
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Micro Small Medium Total

Fig. 18. Total capital assets from 2003 to 2012 for each size category.

The combination of anemic growth of capital (1.6%) with an equally anemic

growth in employment (0.5%) over the 9-year project a certain lack of growth in
MSMEs’ two principal factors of production: labor and capital. These two
developments had culminated in an equally lackluster cumulative annual real output
growth rate of 1.11%, as noted earlier.

Table 34. The Decline of MSMEs’ Capital as % of Non-Oil LEs’ Assets from
2003 to 2012
Manufacturing Construction Trade Non-Finance Finance MSMEs MSMEs/LEs
2003 11.8% 6.5% 58.9% 22.4% 0.4% 100.0% 10.4%
2007 11.3% 7.1% 55.1% 26.2% 0.3% 100.0% 10.4%
2012 11.6% 8.2% 55.3% 24.6% 0.3% 100.0% 6.7%

That there is no noticeable progress in expanding MSMEs’ existing productive

capacities, either according to different class sizes or across sectors, can be readily

85
seen in Fig. 19. One notices that the annual additions to capital assets in
manufacturing, construction, and trade are negligible. Their pattern of growth looks
flat vis-à-vis the other sectors. In the case of finance and non-finance sectors, the
fluctuations are soft, pointing to investments as well as to disinvestments, and are
minor in magnitude: less than KD2.5 million for the whole finance sector in 2009.

2,500,000
2,000,000
1,500,000
1,000,000
KD

500,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012
-500,000
-1,000,000
-1,500,000

Manufacturing Construction Trade Non-Finance Finance

Fig. 19. MSMEs’ annual Incremental capital expenditures (investment)

classified by sector, 2003 to 2012.

Profit and Profitability

A Bird’s Eye View of Profits’ Patterns in 2012

Data on corporate profits in developing countries are ordinarily considered

less than reliable. In Kuwait, however, they may be a bit more reliable due to the
absence of any form of taxation. On the other hand, because there are many firms
that do not maintain audited accounting (especially among MSMEs, where the line
between owners’ salaries and the firm’s profits, notably among single
proprietorships, is blurred), this factor will affect the quality of the data on profits.
With that in mind, the data on profits in the business sector are shown in Table 35
and Fig. 20. The 2012 results are as follows:

86
 Of the 41,252 firms operating in the non-oil business sector, for which data on
profits are available, only 342 or 0.8% show losses. Of those, only 87 belong
to MSMEs (0.2%), signaling a seemingly well-off MSMEs sector,
The non-oil business sector realized a total amount of KD3.6 billion in profits,
of which LEs accounted for KD2.6 billion or 72.4%. When the oil sector was
included, LEs’ total profits jumped to KD6.94 billion or 87.5%,
MSMEs made KD597.7 million in profits, divided among micros, KD414.5
million (69.3%); small firms, KD82.1 million (13.7%); and medium firms,
KD101.0 million (16.9%),
MSMEs account for a small share in total profits in 2012,
Micro enterprises as a group realized four times the profits of medium
enterprises and 2.3 times the combined profits of small and medium
enterprises.
Except in the construction sector, micros are once again the dominant profit-
making subsector in manufacturing, trade, and non-finance,

Table 35. Total Profits Classified by Sector and by Size Category†, 2012 (KD
000)
Micro Small Medium MSMEs LEs Straddlers Total
Manufacturing 48,481 22,942 19,343 90,765 1,072,627 66,445 1,229,837
Construction 7,243 14,173 14,290 35,706 107,998 32,480 176,183
Trade 228,114 16,426 31,880 276,419 170,364 168,029 614,811
Non-finance 130,099 28,314 34,920 193,333 188,187 262,975 644,495
Finance 615 293 535 1,443 1,068,308 -135,675 934,075
MSMEs 414,551 82,147 100,968 597,667 2,607,483 394,252 3,599,402
% in MSMEs 69.36 13.74 16.89 100.00
% in Total 11.52 2.28 2.81 16.60 72.44 10.95 100.00
†) Excluding the oil sector.

In contrast with the KD597.7 million in profits made by the 39,193 MSMEs, the
1,734 straddlers accumulated KD394.3 million, which attests to the important
economic weight of this group in the business sector,
By far the most profits made were by LEs, excluding oil, where they outpaced
MSMEs and straddlers by more than 2.6 times,

87
 250

200
KD Million

150

100

50

0
Manufacturing Construction Trade Non-Finance

Micro Small Medium

Note: The finance sector is not shown due to its negligible size in MSMEs.
Fig. 20. Total profits, 2012.

Even though micro firms in the trade sector show the largest amount of profits
of all other subgroups, non-finance appears to do better among small,
medium, and straddlers’ enterprises. These are dominantly service oriented
activities that depend largely on consumer spending, and
Among LEs, manufacturing tops the other sectors, followed by finance.

Profits and Company Ownership

Next, the relationship between ownership and profitability is considered. Do
government-owned enterprises typically show high profits and are they all profitable?
The results of the analysis are as follows:
SOEs, including oil companies, accumulated KD4.82 billion in profits in
addition to KD27.1 million from joint government/private firms,
Of the 149 ISIC classifications at the 5-digit level covering LEs, there are 14
non-oil LEs, which are wholly owned by the government. Of those, nine are
profitable; the remaining four sustained losses, notably air transport (KD97.0
million), local buses and inland transport (KD8.6 million), and oil and oil
products’ transport (KD6.7 million),
Against the losing SOEs, the remaining non-oil SOEs contributed KD605.5
million to the treasury74, 95% of which originated in wholly owned SOEs,

74
Assuming SOEs’ profits are transferred to the government budget annually.
88
 The largest profits among SOEs were realized from the production of urea
(KD230.7 million), multilateral development aid banks (KD215.6 million), and
specialized banks (KD57.9 million),
In contrast with SOEs, joint private firms (private ownership > 50%) reported
KD706.1 million in profits,
Of the group of wholly or mostly owned (> 50%) LEs that belong to the private
sector, 18 ISIC classifications sustained losses during 2012, and
The largest underperforming LEs activities include freight transport by road;
financial leasing; manufacture of metal pipes; and advertising agencies. On
the other hand, the most profit-making subsectors include, to list a few,
commercial banking; sale of new or used motor vehicles; construction; and
restaurants.

Profits per Firm

By way of neutralizing the distorting influence of the number of firms on gross
profits, Table 36 and Fig. 21 summarize the profile of profits per firm in 2012. Here,
fairly conclude that:
MSMEs, on average, are realizing profits even though they are quite slim: the
average MSME gained only KD15.3K in 2012,
Without exceptions, profits per firm among micro enterprises fluctuate in a
very narrow range across sectors, from a low of KD9.6K in trade to a high of
KD17.6K in finance, revealing an absence of diversity to match the diversity of
their economic activities,
Profits of average LEs are multiple times those of MSMEs and straddlers;
they are particularly high in the financial sector, followed, at a distance, by the
manufacturing sector.
The least amount of profits per firm are noticed in construction and non-
finance firms, and
Size does matter in that the highest profits per firm are realized in larger firms
and they drop steadily as the size becomes smaller,
For the non-oil business sector, the finance sector stands out as the one with
the highest firm profitability at KD3.9 million compared to only KD25K in trade
and KD67K in non-finance. The latter, which consist mainly of retailers,
project a limited profitability profile, and
89
 As noted elsewhere, straddlers take up the middle point between MSMEs and
LEs.

Table 36. Average Profits per Firm 2012† (KD 000)

Micr Smal Mediu MSME Straddler Total
LEs
o l m s s
Manufacturin 15,773.9 235.0 233.7
11.4 41.5 189.6 18.5
g 2
Construction 15.2 32.9 138.7 35.3 1,542.8 232.2 144.2
Trade 9.6 34.9 315.6 11.4 3,154.9 291.2 24.7
Non-finance 16.1 41.5 253.1 21.7 1,710.8 472.6 67.2
Finance -7,62.2 3,859.
17.6 73.2 267.6 35.2 46,448.2
8
Total 11.3 38.3 226.4 15.3 8,023.0 227.4 87.3
† Excluding the oil sector.

0.35
0.3
0.25
0.2
KD Million

0.15
0.1
0.05
0
Manufacturing Construction Trade Non-Finance

Micro Small Medium

Note: The finance sector is not shown due to its eligible size in MSMEs.
Fig. 21. Profits per firm, 2012.

Evolution of Profits of MSMEs from 2003 to 2012

A general view of the developments that had taken place in the profitability of
different business entities over the period 2003 to 2012 points to the following
outcomes:
The MSMEs sector appears to be doing relatively well financially as can be
seen from the slim percentages of firms with losses – row 3 in Table 37,

90
 The obvious exception to the rule is medium firms in 2012 when there was a
sizable percentage (6.5%) of sustained losses,
In general, the average amount of realized profits per firm is quite stable
throughout the period with minor fluctuations, and
Micros steadily increased their gross profits throughout the period as a group,
whereas small firms’ profits declined steadily and profits among medium firms
fluctuated slightly,

Table 37. MSMEs Total and per Firm Profits & Losses in 2003, 2007 and 2012
Micro Small Medium
2003 2007 2012 2003 2007 2012 2003 2007 2012
1. Number of firms 34,180 35,835 36,604 2,509 2,419 2,142 489 451 446
2. Firms with losses 130 26 16 46 35 42 22 11 29
3. (2)/(1) % 0.38 0.07 0.04 1.82 1.46 1.96 4.50 2.44 6.50
4. Gross profits (Mn.) 352.0 377.9 414.9 106.2 93.9 84.7 102.7 108.9 107.4
5. Losses* 472 169 367 1,069 1,076 2,576 1,861 841 6,449
6. Net profits (Mn.)** 351.5 377.8 414.6 105.2 92,.9 82.2 100.8 108.0 101.0
7. Net profits per firm* 10.3 10.5 11.3 41.9 38.4 38.3 206.2 239.6 226.4
* KD 000,
** Net profits denote realized gross profits minus losses.

If one considers the trend since 2003, MSMEs’ profit performance appears to
deteriorate along the same lines noted in connection with the growth of employment,
output, wages, etc. In Table 38, the steady decline in the share of MSMEs from
2003 to 2012, with or without the oil sector, leaves little doubt that even after
eliminating the impact of the oil sector along with the positive impact of the oil price
increase, the share of MSMEs declined from 29.5% in 2003 to 18.6% in 2012.

Table 38. Profit Shares: MSMEs versus LEs, 2003, 2007, and 2012
2003 2007 2012
Including Oil
MSMEs 23.2% 7.4% 7.9%
LEs 76.8% 92.6% 92.1%
Excluding Oil
MSMEs 29.5% 14.0% 18.6%
LEs 70.5% 86.0% 81.4%

91
 While MSMEs show, in relative terms, a diminishing share in the overall level
of profits of the business sector, they have not done well in absolute terms either, as
shown in Table 39, whose main findings are:
Small enterprises have diminished in number, gross profits, and profits per
firm. Almost all their growth signs are negative including losses, which
increased by 141% from 2003 to 2012,
Medium firms have suffered a similar pattern of losses during 2003 and 2007,
and for the whole period, profits per firm increased by only 9.8% or by an
average of less than 1% per annum.
The exception to the rule has been micro enterprises, which increased in
number by 7.1% and, yet, profits per firm rose by 10.1% during 2003 to 2012.
Here again, the annual growth of average profits per firm has been lackluster,
at best, like that of medium enterprises,
It is worth noting that the finance sector in Kuwait suffered the most from the
2008 global financial crisis. While net profits of MSMEs’ small finance sector
fell slightly in 2012, LEs’ profits dropped from KD2.4 billion to KD263 million,
and straddlers’ tumbled from KD2.0 billion to a loss of KD135.7 million, and
When the loss per firm in the case of small enterprises (- 8.5 from 2003 to
2012) is coupled with the meager growth in profitability of the average micro
and medium firm (about 10% during the whole 9-year period), the profile that
emerges is, once again, one of stagnation in the firm profitability of MSMEs,
regardless of size.

Delving deeper into the movement of firm profitability among MSMEs during
the period 2003-2012, Table 39 compares inter-period developments in the number
of firms, total profits, and profits per firm.

Table 39. Growth Rates of Profits, Losses, and Profits per Firm, 2003, 2007 and
2012 (%)
Micro Enterprise Small Enterprises Medium Enterprises
03- 07- 03- 03- 07- 03- 03- 07- 03-
07 12 12 07 12 12 07 12 12
Number of firms 4.8 2.1 7.1 -3.6 -11.4 -14.6 -7.8 -1.1 -8.8
Firms with < 0 -80.0 -37.3 -87.5 -22.8 18.6 -8.4 -50.0 163.6 31.8
profits
Gross profits 7.4 9.8 17.9 -11.6 -9.8 -20.3 6.0 -1.3 4.6

92
Losses -64.1 116.8 -22.2 0.7 139.4 141.0 -54.8 667.0 246.6
Net profits 7.5 9.7 17.9 -11.7 -11.5 -21.9 7.1 -6.5 0.1
Net profits per firm 2.5 7.4 10.1 -8.4 -0.1 -8.5 16.2 -5.5 9.8
Notes: All values represent growth rates (%) over the period and for the variables
shown.
The following observations summarize the main results:
1. 2003 to 2007:
a. As the number of micro enterprises increased by 1,655 firms, the
number of small and medium enterprises fell,
b. Total MSMEs’ profits increased but at the expense of small firms,
c. Profits per firm in both micro and medium firms rose but not so in small
firms,
d. Small firms with 11–49 employees fared poorly in terms of their
numbers, net profits, and firms’ profitability during this period, and
e. The overall firm profitability of the MSMEs sector also decreased, albeit
slightly.
2. 2007-2012:
a. Micro enterprises continued to show expansion in terms of their
numbers, profits, and profitability,
b. Small firms continued to bleed in terms of their numbers, profits, and
profitability,
c. Medium-sized firms took a negative turn during these five years in
terms of their numbers, profits, and profitability, and
d. MSMEs realized solid gains primarily due to the performance of micro
enterprises.
3. 2003-2012:
a. The net change in all three variables (number of firms, profits and
profitability) show definite progress in micro enterprises, persistent
deterioration in small enterprises and mixed progress in medium
enterprises,
b. LEs, which seem to have been severely affected by the 2008 global
recession, recovered in 2012 after a precipitous drop in 2007. In
general, they finished the decade with a positive sign on all three
variables.

93
94
Table 40. Changes in Number of Firms, Profits, and Profits per Firm: 2003,
2007, and 2012

Micro Small Medium MSMEs LEs

2003-2007
No of firms 1,655 -91 -38 1,526 88
Profits 26,213 -12,316 7,209 21,105 2,174,268
Profits/Firm 0.26 -3.52 33.36 -0.05 5,821
2007-2012
No of firms 769 -276 -5 488 79
Profits 36,791 -10,716 -7,071 19,004 - 899,638
Profits/Firm 0.78 -0.05 -13.17 0.30 - 6,233.6
2003-2012
No of firms 2,424 -367 -43 2,014 167
Profits 63,004 -23,032 138 40,110 1,274,630
Profits/Firm 1.04 -3.57 20.19 0.25 412.8
Notes: Profits are expressed in KD million and per firm profits in KD 000.

All in all, the results thus far reveal a number of important features of the MSMEs
sector as follows:
While the bulk of MSMEs are profitable, the growth of profitability in the
average firm over the period from 2003 to 2012 has been lackluster,
Size-wise, micro enterprises appear to be expanding and prospering while
small enterprises are contracting, and some are exiting. Medium enterprises
increased their net profits and firms’ profitability, attributed in part to the
decline in their numbers, and
The overall picture that emerges reveals a sector that is struggling to stay
afloat financially, for the definition most used generally to measure the
financial success of a business concern is the realization of increased profits
from one year to the next. MSMEs in Kuwait during 2003-2012 have fallen
short of this yardstick: the average profit level per firm per annum among
MSMEs stagnated from KD15,000 in 2003 to KD14,950 in 2007 to KD15,250
in 2012.

Return on Equity (ROE) and its Evolution since 2003

In addition to its profitability in absolute terms, a firm’s financial health is
measured in terms of its rate of return on equity (ROE), defined as the returned net

95
income as a percentage of shareholders’ equity. Due to the lack of information on
shareholders’ equity and because most MSMEs in Kuwait are not incorporated, ROE
ratios are estimated as the percentage of profits in paid-up capital75.
The results, shown in Table 41, indicate that a) in general, the business sector
in Kuwait projects robust ROEs in 2012, especially in privately owned firms (28.2%)
in contrast to SOEs (8.1%) and b) the overall ROE rate of 21.8% is quite high,
pointing to an active business environment supported by one of the highest per
capita income worldwide. However, the growth record of ROEs shows a 50% drop in
the business sector’s overall profits in 2012 compared with 2007, most of which is
attributed to losses sustained by financial institutions, notably among LEs and
straddlers.
Thus, the robustness of ROEs in 2012 derives its strength from the base year
2003. Put it differently, MSMEs stay in business despite unusually tiny increases or
even small declines in profits year after year because their ROEs are fundamentally
strong. Clearly, one does not conflict with the other. Furthermore, even though the
rate of return on capital revolves around a healthy 20% level, the rate of growth of
profits has stagnated at about 1.1% per annum, which helps explain i) the large
increase in the number of micro enterprises each period due to their increased ROEs
and b) the contraction in the number of small and medium enterprises because of
their declining ROEs.

Table 41. Development of ROEs from 2003 to 2012, Classified by Size

Categories (%)
2003 2007 2012
Micro 0.62 0.66 0.71
Small 0.78 0.69 0.72
Medium 1.16 1.22 0.96
MSMEs 0.71 0.73 0.74
Straddlers 0.41 0.38 0.05
LEs 0.18 0.46 0.22
Total 0.28 0.44 0.17

From a sectoral vintage point, both the manufacturing and trade sectors
exhibit about 50% ROE compared to 29% in construction, 14% in finance, and 7.4%

75
An ROE rate differs from the ratio of profits per firm as it reflects the rate of return on
investment.
96
in non-finance76. The latter was influenced by a negative ROE in government-owned
firms, which sustained substantial losses in 2012, particularly in firms operating in
land, sea, and air transport services77. When comparing MSMEs with LEs, it is
noticed stable ROE rates from 2003 to 2012, ranging from 71% to 74% compared to
LEs’ rates which increased from 18% in 2003 to 46% in 2007 and then fell to 22% in
201278.
As losing firms exit the market, the financial viability of the remaining firms
improves, other things being equal. This, as an example of the prevailing structural
changes that occurred during the 9-year period, explains in part the observed
changes in ROEs over time. Regarding the business sector, noted the following:
1. Over time, LEs did not fare well. The percentage of LEs with losses increased
through the period from 7 to 11 to 38 firms. This was accompanied by a
parallel increase in realized losses from KD6.7 million in 2003 to KD51.4
million in 2007 and to KD208.5 million in 2012. Yet, the LEs sector doubled its
gross profits from KD1.3 billion in 2003 to KD2.8 billion in 2012, after having
reached KD3.5 billion in 2007,
2. For MSMEs, the number of losing enterprises fell from 198 in 2003 to 87 in
2012, while total profits increased marginally, from KD561 million to KD607.1
million in 2012. At the same time, their total losses fell from a small amount of
KD3.4 million in 2003 to KD2.1 million in 2007 and then up to KD9.3 million in
2012,
3. The business sector steadily sustained a pattern of accumulating losses over
the period under study, from KD20.6 million in 2003 to KD81.2 million in 2007
to 754 million in 2012,

76
Owing to a host of influences, especially the absence of market competitive environment –
see Appendix C, business activities in the MENA region are described as some of the most
profitable globally. This notwithstanding, the observed rates of 50% or higher at the ISIC
2 level should be taken with a grain of salt.
77
One infers that this includes both KOTC and Kuwait Airways.
78
The unusual oscillations in LEs’ and straddlers’ ROE levels are likely to reflect
observational errors as well as changing economic conditions, especially the negative
impact of the global 2008 financial crisis. They may also conceal structural changes in the
composition of the sector.
97
 4. While some firms sustained losses, others managed to more than offset the
losses: total net profits for the business sector rose from KD2.97 billion in
2003 to KD3.6 billion in 2012, and
5. Among MSMEs, micro enterprises performed better than the most. In
contrast, small and medium enterprises were worse off in 2012 than in 2003.
In the absence of the data on the number and economic classification of
enterprises that exit the market, it is difficult to ascertain the average cohort shifts in
the financial viability of the operating firms. An appropriate way of making this
assessment is to measure the average profits per firm in each size and sectoral
category and to trace its development over time, which is analyzed in Table 40.
In conclusion, the findings posited in this section indicate that the business
sector consists of a few LEs, which dominate all other enterprises in terms of profits
and profit per firm. This is true even when the oil sector is excluded. On the other
hand, apart from being profitable, the profitability growth of MSMEs over 2003-2012
is modest, especially small enterprises, which have declined and failed to maintain
growth in numbers, total profits, or average profits per firm.
The business sector also exhibits a lopsided profile of profit making. A few
large enterprises are accumulating substantial incomes and wealth, whereas
thousands of MSMEs are languishing trying hard to maintain reasonable amounts of
profits.

Access to Finance

The lack of access to finance is often cited by MSMEs and practitioners in the
field as the most critical factor that hampers their growth. The severity of the financial
challenges facing MSMEs in the MENA region is best seen through the following
International Finance Corporation (IFC) prism (2014)79:
42% of SMEs consider access to finance as a major/severe barrier,
52% of SMEs do not have checking accounts,
93% of SMEs have no access to overdraft facility,
89% of SMEs have no access to credit,
59% of SMEs are unserved by financial institutions,

79
IFC, 2014,” Enterprise Finance Gap Database”.
98
 3% of SMEs are well served, and
MSMEs sources of funds consist of:
o Private commercial banks: 55%
o State banks and government agencies: 32%
o Non-bank financial institutions: 12%
According to a recent International Monetary Fund (IMF) study:
45% to 55% of SMEs need credit,
The finance gap of SMEs is estimated at $3.2 trillion to $3.9 trillion worldwide,
66% of which is in developing countries,
IFC estimates the finance gap in MENA at $359 billion,
Only 8% of commercial bank loans in the MENA region are given to SMEs80,
Lending to SMEs in GCC countries is less than that in non-GCC countries in
MENA (2% versus 8%), ranging from 0.5% in Qatar; 1% in Bahrain; 2% in
Saudi Arabia, Kuwait, and Oman; and 4% in the UAE, and
In terms of the percentage of firms that have access to loans and/or lines of
credit, the MENA region ranks far below other regions: 20% compared to 43%
in Latin America and the Caribbean, 41% in Eastern Europe and Central Asia,
37% in East Asia and the Pacific, and 30% in South Asia. Only Africa with its
limited financial resources matches the MENA region’s ranking of 20%81.
The preceding observations contend that finance is a serious barrier to SMEs
growth and that, in comparison with other countries and regions, GCC SMEs are
underserved by state and private conventional and Islamic commercial banks. The
situation in Kuwait is worse in that it is either feast or famine: SMEs that qualify for
IBK’s loans can obtain an average of 72% of their total investment costs in loans82

80
See IMF, 2014, “Growth and Diversification in Kuwait: The Role of SMEs in Economic
Development and Employment”.
81
See World Bank, 2011,” The Status of Bank Lending to SMEs in the MENA Region: The
Results of a Joint Survey of the Union of Arab Banks and the World Bank”, World Bank
Policy Research Working Paper 5607.
82
In an official correspondence between KISR and IBK, dated Nov 24. 2015, IBK reports
that since its startup operation in 1974 until 2015, it has supported 928 projects and
extended KD78.9 million in loans. IBK’s loans make up 72.3% of projects’ costs, on
average. Sectorally, medical care and social services account for 28.1% of the loans,
24.4% in manufacturing, 15.7% in hotels and restaurants and 11.2% in personal services,
all of which add up to the bulk of its loans (79.4%). The number of jobs created by IBK’s
projects are for 2,747 males and 965 females, adding up to 3,712 Kuwaitis.
99
while those that do not, stand a 2.3% chance to obtain either short- or long-term
loans from commercial banks and investment companies, based on the 2012
database.
Cognizant of the severity of this constraint and in part to stimulate the growth
of MSMEs to create new job opportunities for unemployed Kuwaitis and young
nationals and to instill the rewards of self-employment, innovation, and
entrepreneurship, the GoK has enacted the 2013 SMEs Law83. It offers financing of
up to 80% of the project’s cost with grace periods ranging from 1 to 3 years; makes
available techno-economic feasibility studies; provides land plots for commercial and
industrial use; guarantees government jobs for investors who decide to leave their
public sector jobs to start a new SME project;, permits the securitization of the
project’s fixed assets as collaterals; establishes incubators, cooperatives, and
industrial estates for MSMEs startups; imposes a specific percentage of government
procurements to MSMEs; exonerates MSMEs of customs duties and taxes; offers
export subsidies; and conducts training modules for MSMEs employees, among
other support schemes. To carry out these functions, GoK set aside KD2 billion to
enable the SMEs Fund meet its targets.
The situation in 2012 regarding MSMEs’ access to finance from 2003 to 2012
is summarized in Table 42, which is based on CSB’s enlarged, non-oil micro dataset.
The dataset differentiates between short- and long-term loans where, generally, the
former finances working capital requirements, while the latter finances capital
investment spending. The table provides data on the number of establishments,
number of employees, and number of Kuwaiti workers as reference points.
The results point to MSMEs having a severely limited access to finance in
Kuwait. Of the 37,197 MSMEs in 2003, only 134 firms or 0.36% had access to
finance their working capital requirements. In 2007 and 2012, the situation
deteriorated further as the percentage fell to 0.24 and to 0.26%. Financing long-term
investment expansion is not different in that the percentage of beneficiaries fell
steadily from only 0.28% to 0.18% to 0.17%, in 2003, 2007, and 2012, respectively.
In the Kuwaiti context, one cannot attribute this to capital scarcity; rather, it is likely
due to the commercial bank’s inability to handle loan applications from MSMEs and

83
As any nascent institution in a developing country, the SMEs Fund is experiencing teething
pains but it will soon overcome its difficulties and begin to fulfil its expectations and
deliver its long-term strategy.
100
to MSMEs’ failure to submit proper application documents or to produce the required
collaterals, among others. Suffice it to say that, based on available statistical
information, MSMEs in Kuwait have long encountered difficulties in obtaining
appropriate financial services that would enable them to finance working capital
and/or investment spending.
However, there is a ray of hope hidden in the results: despite the drop in the
number of firms with access to short- and/or long-term loans and the parallel decline
in the total value of long-term loans, both the average loan per firm and the money
value of total loans per Kuwaiti employee in the borrowing firms have increased from
2003 to 2012. The uptick in 2012 is significant and may obscure a recent tendency
in lending institutions to favor firms with Kuwaiti employment, holding other things
equal.

101
Table 42. MSMEs’ Access to Finance, Developments from 2003 to 2007, and to
2012
2003 2007 2012
Number of firms 37,197 38,718 39,198
Number of employees 242,552 248,535 243,799
Number of Kuwaiti employees 7,434 6,732 5,981
Short- term loan (KD 000) 27,746 19,278 57,909
Long- term loan (KD 000) 28,292 19,271 19,243
Total loans (KD 000) 56,038 38,549 77,152
Number of firms with short term loans 134 91 103
Number of firms with long term loans 103 70 65
Number of firms with short or long term loans 204 139 141
Average amount of loans per borrowing firm (KD 000) 274.7 277.3 547.2
Average loan value per firm (KD) 1,507 996 1,968
% firms with access to financing of working capital 0.36% 0.24% 0.26%
% firms with access to financing of investment
0.28% 0.18% 0.17%
expansion
Loans per Kuwaiti employees (KD 000) 7.54 5.73 12.90

The facts presented above show that, whether short- or long-term loans are
considered, the situation is worse than reported by the IMF and IFC because the
percentage is less than 0.5% and that it has declined from 2003 to 2012. If
implemented efficiently, the newly established SMEs Fund with its substantial
lending resources should be able to notably ameliorate the difficulties faced by
MSMEs in obtaining the necessary financing needed to run and/or expand their
operations.

Ownership

Public, Private, and Foreign Ownerships

Following the Commercial Law No. 15/1960, Kuwaiti nationals must own at
least 51% of the assets (shares or paid-up capital) of registered domestic
enterprises. This law was changed recently via Law No. 25/2012 and Law 97/2013
and subsequent Executive Regulation issued in October 2013, which enabled 100%

102
foreign ownership of Kuwait-based enterprises84. CSB’s original database delineates
six ownership categories:

1. Public (100% government),

2. Joint public (≥ 50 government),
3. Private (100% private),
4. Joint private (≤ 50% government),
5. Joint domestic/foreign (>50% domestic), and
6. Foreign (100% foreign).
An analysis of the relative weights of the different formats of ownership in
2012 yields the following results:
1. Two types dominate the non-oil business sector: wholly owned private and
wholly owned public sector enterprises. As shown in Table 43, there are
41,205 private versus 21 public enterprises representing 99.9% and 0.1%,
respectively. This profile does not change if joint private is combined with
wholly owned private firms and joint public is added to public enterprises: the
private sector overwhelmingly owns and manages the non-oil business sector,
2. In addition to owning the clear majority of firms, the private sector also
employs a sizeable proportion of the business sector’s workforce, accounting
for 95% of total employment versus 3.5% employed in SOEs,
3. The predominance of the private sector is downgraded, though, when
considering the employment of nationals. In 2012, privately owned firms
employed 78.8% of the total employment of nationals compared with 17.3%
for the public sector. When joint ownerships are added, the private sector’s
share rises appreciably to 81.6%,
4. Since 100% foreign ownership was allowed in 2012, a few firms took
advantage of the relaxed regulation. Of the 41,265 firms, there are 19 firms
owned by foreigners, and
5. The share of MSMEs in the total number of firms, total employment, and total
number of Kuwaitis employed in the non-oil business sector varies

84 Thematter of foreign business ownership in Kuwait is a complex issue with a long-drawn-

out history: see http://news.kuwaittimes.net/door-total-foreign-ownership-companies-
opened-kuwait/ for a summary of its developments since 1960.

103
considerably. On the first, they make up 95% of all firms but they represent
only 35.7% of total employment and 16.2% of all Kuwaitis.

104
Table 43. Ownership Structure of the Business Sector in 2012
JOINT
JOINT DOMESTIC/
PUBLIC PUBLI PRIVATE FOREIGN TOTAL
PRIVATE FOREIGN
C
NUMBER OF FIRMS
MSMES 0 1 0 39,188 2 7 39,198
LES† 21 6 9 2,017 2 12 2,067
Total 21 7 9 41,205 4 19 41,265
% MSMES 0.0 14.3 0.0 95.1 50.0 36.8 95.0
TOTAL EMPLOYMENT
MSMES 0 164 0 243,426 96 113 243,799
LES† 23,643 1,391 7,495 404,742 410 700 438,381
Total 23,643 1,555 7,495 648,168 506 813 682,180
% MSMES 0.0 10.5 0.0 37.6 19.0 13.9 35.7
NUMBER OF NATIONAL EMPLOYEES
MSMES 0 10 0 5,959 1 11 5,981
LES† 6,381 155 1,057 23,133 3 224 30,953
Total 6,381 165 1,057 29,092 4 235 36,934
% MSMES 0.0 6.1 0.0 20.5 25.0 4.7 16.2
† Including straddlers.

The relative weights of each type of ownership in terms of their contributions

to output, value added, capital, profits, employment and IT expenses are depicted in
Fig. 22. The impact of the public sector on the economics of the business sector is
clearly manifested by towering over the private sector in several economic
aggregates, notably output, value added, capital, and profits. It takes a secondary
role, though, in terms of the number of firms, total employment, Kuwaiti employment,
and IT expenses. The remaining four types of ownerships exhibit inconsequential
influence over the business sector’s economic aggregates.
Next, to assess the relative contribution of SOEs vis-à-vis privately-owned
enterprises, first the two primary factors of production, labor and capital, are
considered as the main gauges of the size and hence the level of economic capacity.
The team noticed that even though SOEs, including the oil sector, employ only 5.7%
of the workforce and invest less than half (29.7%) of the total paid-up capital in the
entire business sector, they more than proportionately dominate the economy as
they generate 75.3% of output, 80.2% of value added, and 61% of profits, and
employ a weighty 38% of all Kuwaitis employed.

105
 100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

Public Joint public Joint private Private Domestic/foreign Foreign

Fig. 22. Relative shares of ownership types in major non-oil economic

aggregates, 2012.

However, as Table 44 shows, this profile changes markedly when oil is

excluded from SOEs in that the important role played by privately owned enterprises
in the Kuwaiti economy becomes apparent as they generate 75.1% of output, 82.6%
of value added, 64% of profits, 95% of total employment, 78.8% of Kuwaiti
employees, and even 98.2% of IT expenses.
It should be noted that the profile described above runs counter to the
conventional wisdom that the government sector in Kuwait dominates the business
sector and that its share is about 70% in contrast to the private sector’s share of
30%85. This assertion is contingent on the inclusion of the two oil and gas extraction
companies and the oil refinery. When these three firms are excluded, privately
owned firms do dominate the economy, a conclusion strongly supported by the
knowledge that large establishments with substantial output, value added, and
employment are mostly privately owned.

Based on total value added, SOEs’ share is even more than 70%; it reached 84% in 2012
85

mostly due to high oil prices and increased crude oil production.
106
Table 44. Relative Economic Weights of Private versus Government
Enterprises, 2012
Public Ownership Private Ownership
Including Oil Excluding Including Oil Excluding
Oil Oil
Output 75.3 7.06 21.0 78.8
Value added 80.2 8.6 17.9 82.6
Paid-up capital 29.7 28.3 62.2 63.4
Profits 61.0 14.02 29.0 63.97
Employment 5.7 3.47 92.8 95.01
Kuwaiti 37.7 17.3 59.3 78.8
employment
IT expenses 1.8 1.8 98.2 98.2
Excluding oil, how significant is the role of MSMEs? Based on the results,
their role is modest in that they contribute 15.3% of the total output, 15.54% of the
value added, 3.75% of paid up capital, 16.6% of profits, 35.74% of employment,
16.2% of Kuwaiti employment, and 2.22 of IT expenses.

The Gender Factor86

The classification of ownership in CSB’s database is expressed as: i) single
male Kuwaitis, ii) single female Kuwaitis, iii) a few Kuwaiti males and/or females, and
iv) ‘unidentified’ with no further breakdown of the latter is known 87. An analysis of the
gender issue is given below for 2012 followed by a review of changes that have
transpired since 2003.
Note at the outset that Kuwaiti female participation in the labor force in
general, and in the GCC as well, is quite low by international standards. According to
2013 CSB data females represent 10.4% of the total (private and public) labor force
in the country. When non-Kuwaiti females are added to Kuwaiti females, the sum of
their shares in total employment rises to 17.1%, indicating a severely limited scope
of female participation in the work place. Yet, one must inquire if the ownership and

86
The reliability of the female ownerships of MSMEs in Kuwait is often questioned because
Kuwaiti government male employees, who are not legally permitted to own another
business concern while holding a government job, go around the restriction by registering
their private businesses under their wives’ names.
87
CSB dataset enumerates the number of owners from 1-7. By far the largest proportion
belongs to single owners (95%). The unidentified ownerships of MSMEs total 35,971
which are likely to come under public and private common shareholding companies,
family businesses, more than 7 owners plus an unknown number of unidentified firms.
These firms are not included in the analysis of this section.
107
management of businesses, especially of micro and small enterprises, exhibit a
similar profile?
The structure of MSMEs owned by single and multiple (2 to 5) Kuwaiti
nationals is depicted in Table 45. One notices the dominance of the trade sector
(54.3%) and of micro enterprises where more than half of all single and multiple
ownerships (1,794 entities out of 3,341 or 53.7%) are in micro trading firms. When
non-finance micros are combined with micro trading firms, they constitute 2/3 rd of all
single and multiple Kuwaiti owned firms.

Table 45. Number of MSMEs Owned by Single and Multiple (1-5) Kuwaitis,
2012†
Sector Micro Small Medium MSMEs LEs Straddlers Total
Manufacturing 274 54 3 331 2 9 342
Construction 197 313 67 576 28 67 671
Trade 1,794 81 6 1881 3 54 1,938
Non-finance 469 68 13 550 5 56 611
Finance 3 0 0 3 0 1 4
Total 2,737 515 89 3,341 38 187 3,566
% in MSMEs 81.9 15.4 2.7 100.0
% in Total 76.7 14.4 2.5 93.7 1.07 5.25 100.00
† Excludes 35,971 unidentified, private & public shareholding companies.

Turning to females versus males in MSMEs, the situation in 2012 is shown in

Table 46, which gives the number of firms owned by single Kuwaitis classified by
size and by sector in 2012. The salient features of the male/female ownership
pattern show that:
1. Only 8.9% of the 3,175 firms are owned by Kuwaiti females. The rest are
owned by males (91.1%). This confirms the considerable role played by
Kuwaiti males in owning and running MSMEs,
2. A clear majority of firms (92.7%) owned by females is centered in micro
enterprises,
3. There are no single female-owned enterprises at all in the finance sector,
except for three micros,
4. The strongest presence of female-owned enterprises is in the manufacturing
sector (62.2%) followed by trade (20%), both of which add up to more than
80% of firms owned by single females,

108
 5. For males, their highest concentration is in trade (61.1%) followed by
construction (18.3), both of which represent about 80%,
6. Of all MSMEs owned by Kuwaiti males, 82.1% are micros. For females, they
too are highly concentrated in micro enterprises,
7. Only 66 medium-sized firms are owned by single Kuwaitis, of which only three
are owned by females, confirming the limited ownership profile of females in
relatively larger firms than micro enterprises,
8. Male-owned enterprises make up the majority among micros (trade, 71.4%),
small (construction, 62.4%), and medium (construction, 77.8%) enterprises. In
fact, their top ranking belongs to 61.1% overall in trade,
9. The lowest shares in MSMEs ownerships belong to females in construction
(0.4%), and males in manufacturing (excluding finance), and
10. 82.1% of all male-owned enterprises are micros compared to 92.6% for
females; i.e., a sizable proportion of single Kuwaiti owners (83%) are
operating micro enterprises, while only 17% own and operate small and
medium enterprises.

Table 46. Single Kuwaiti Owners of MSMEs Classified by Gender, 2012

Micro Small Medium MSMEs
Male Female Male female Male Female Male Female
Manufacturing 100 174 45 2 2 146 176
Construction 197 284 11 49 2 530 13
Trade 1,695 57 69 1 2 1,766 58
Non-finance 380 30 57 4 10 1 447 35
Finance 3 0 0 0 0 0 3 0
Total 2,374 262 455 18 63 3 2,892 283
% in MSMEs 82.1 92.6 15.7 6.2 2.2 1.1 100.0 100.0

Considering the frequency of having multiple Kuwaiti owners (females and/or

males) sharing in the management of an enterprise, regardless of its size, ushering
in a different business model of joint responsibilities, available data show that there
are 166 such firms whose joint owners range from 2 to 5 individuals. Out of the total
number of all MSMEs (3,343), this class of firms represents only 5%, with most of
these involved in non-finance (67), trade (57), and construction (34). Only eight are
in manufacturing.

109
 As to the specific economic activities in which single female-owners of
MSMEs are involved, a detailed examination of the data at the 5-digit ISIC
classification yields the following out of 285 such firms:
1. 174 (61.1%) are concentrated in the manufacture of female wearing apparel,
2. 54 (18.8%) are in the retail sale of readymade apparel,
3. 13 (4.7%) are in law firms and other legal services, and
4. 11 (3.9%) are in medical and dental practice activities.
Finally, it is important to point at the glaring disparity of the gender factor
within the total employment profile in the private business (MSMEs and LEs) versus
the government sector in Kuwait. In the former, there are 283 females employed in
2012 against 2,892 males. That is, for every 100 jobs, the private business sector
employs 8.9 females. In the government sector, for every 100 jobs, 39.5 jobs are
held by Kuwaiti females88. Such a gender gap between the two sectors is
remarkable as it points to the considerable dichotomy between them in regard to job
qualifications, required skills, fringe benefits, job security, as well as the large wage
disparity between the private and governmental sectors, as shown earlier.
Internal Managerial Capabilities

It has been mentioned often in the MSMEs literature that singling out ‘access
to finance’ as the most critical obstacle to growth is misleading in that MSMEs’
limited internal managerial capabilities may perhaps be the true growth inhibitors. It
is further argued that even with access to finance, inadequate internal managerial
capacity is sufficient to retard growth. In other words, the ‘capability gap’ of MSMEs
is more serious than the ‘finance gap’.
The CSB’s Annual Establishment Survey collects information on managerial
skills by focusing on six attributes: manpower training, audited accounting and
bookkeeping, conducting market research, use of computer applications measured
by annual expenses, use of the Internet, and innovations (patents). Each of these
attributes is analyzed individually first followed by a tally of firms that carry out more

88
According to CSB’s 2014 Statistical Review, of the 331,333 individuals employed in the
government sector in 2012, 130,844 are Kuwaiti females (39.5%). When non-Kuwaiti
females (36,566) are added to Kuwaiti females, the share of females in total government
employees rises to 167,410 or 50.5%.
110
than one of the six attributes simultaneously. The results pertain to MSMEs’ status in
2012; start with training.
Training
The total number of operating MSMEs firms in 2012 is 39,198 firms. Of that,
only 150 firms provide training opportunities. This amounts to less than one half of
one percent, as shown in Table 47. The ratio of total MSMEs’ investments in training
programs as a percent in total profits is 0.00068, i.e., only 0.68 fils are invested in
training for every KD1 in realized profits. The total training budget represents only
0.67% of the wage bill. In contrast, the American Society of Training and
Development reports that US firms in 2002 invested between 5% to 20% of
corporate profits and 1% to 3% of their payroll on training89.
This seemingly dismal training record in MSMEs, however, must be tempered
in light of local business circumstances. In Kuwait, the motivation to invest in training
is weakened by several unique factors:
1. A clear majority of the labor force is made up of transitory foreign workers,
2. Employers do tend to seek specific skills and import workers who are already
so trained,
3. There is a high risk in training foreign workers who may jump ship or return to
their homelands, and
4. Training is an expensive proposition. It is a long-term business investment
that is ill suited for short-term foreign employees. Thus, local employers
generally skimp on training opportunities.

Table 47. Number of MSMEs with Training Programs Classified by Sector

and Size, 2012
Sector Micro Small Medium MSMEs
Manufacturing 0 1 1 2
Construction 2 1 2 5
Trade 60 1 5 66
Non-finance 29 18 28 75
Finance 1 1 0 2
Total 92 22 36 150
% in all firms 0.3% 1.0% 8.0% 0.4%
% in MSMEs 61% 15% 24% 100%
Training expenses (KD 000) 201.9 68.8 673.8 944.5

89
See http://www.citehr.com/2075-how-much-money-should-we-budget-training.html.
111
% in total training expenditure 21.4% 7.3% 71.3% 100%
Average cost per firm (KD) 2,193 3,088 18,717 6,282

Another probable disturbing explanation may be traced to an overriding

business ethos in which nationals start an MSMEs business enterprise seeking
short-term gains and utilizing open, simple textbook production processes that rely
mostly on low skill, low wage foreign workers. Success in such endeavors requires
able doers rather than trained employees with an eye on process improvements,
technical innovations, and product enhancements. As shall be reported later, the
pace of innovations in MSMEs in Kuwait is practically nonexistent.

Audited Accounts
An internal and/or external audit of the company’s finances yields many
benefits to the company’s top management, investors, and shareholders. Without
such audits, a company forgoes the opportunity to identify weaknesses in the
accounting system, checks on the accuracy of other information received on the
running of the business, assesses risks, institutes best financial practices, uncovers
fraudulent activities, and assures creditors, investors and top management of the
financial health of the company. In Kuwait, only listed companies are legally bound
to carry out external audited accounts90. All other firms, as per the Commercial Law,
are only obliged to maintain ‘adequate accounting systems’.
Due to the absence of income and sales taxes, firms in Kuwait do not need to
set up a computerized accounting system nor do they need to seek the services of
external audits. This applies especially to micro enterprises. As Table 48 shows,
only 389 micros maintain audited accounts, which represent only 1.1% of all micro
enterprises in 2012. Even out of small enterprises, which employ up to 49 workers,
only 14.4% commission externally audited accounts. The case of medium
companies with 50-249 employees is much better in that two thirds conduct audited
accounts. All in all, the dearth of leveraging external auditing to strengthen the
managerial functions of Kuwaiti business concerns is an additional indication,
besides the dearth of training, of what seems to be prevalent internal management
weaknesses in MSMEs.

90
Audited accounts are identified in CSB’s dataset as an external expense defined as
‘compensations for accounting services’.
112
 Sectorally, finance exhibits the highest use of audited accounts at 35.7% (15
firms out of 42) followed by construction, 12.8%, while the remaining sectors’
percentages fluctuate between a low of only 1.7% in trade and 3.2% in non-finance,
revealing a symmetry of managerial practices among these sectors.
Size-wise, the overall MSMEs rate is 2.5%, broken down into 67% in medium
sized firms, 14.4% in small, and 1.1% in micros. Micros operate virtually without
certified accounts and are likely to maintain substandard bookkeeping records while
two thirds of all medium enterprises conduct audited accounts and are also likely to
maintain reasonable computerized accounting systems91. It is worth noting here that
the annual cost of auditing accounts per firm does not appear to be excessive as it
amounts to about KD1000 for both micro and small firms. Even for medium firms, it
is less than KD3,000 annually. One infers, thus, that the cost is not the deterrent
factor.

Table 48. Number of MSMEs with Audited Accounts Classified by Sector

and Size, 2012
Sector Micro Small Medium MSMEs
Manufacturing 7 68 72 147
Construction 15 56 59 130
Trade 247 91 78 416
Non-finance 111 89 90 290
Finance 9 4 2 15
Total 389 308 301 998
% in MSMEs 39% 31% 30% 100%
% in all firms 1.1% 14.4% 67.0% 2.5%
Audit expenses (KD
395.0 314.2 822.5 1531.7
000)
% in total expenditure 25.8% 20.5% 53.7% 100.0%
Avg. cost per firm
1,015.3 1,020.1 2,732.6 1,534.7
(KD)

Over the years from 2003 to 2012, there appears to be a noticeable drop in
the number of micros with audited accounts; from 631 in 2003 to 535 in 2007 and to
389 firms in 2012. This is accompanied by a parallel decline among small firms (411
to 535 to 308, respectively) and a virtual standstill in the number of medium firms
(308 to 298 to 305). LEs show a different pattern of progress as their numbers

91
This deficiency makes it difficult for MSMEs to negotiate and obtain financing from
conventional banks.
113
increased from 149 to 238 to 298, respectively. In all, commissioning the external
audits of financial accounts shows an overall negative trend within MSMEs during
the 9-year period.

Marketing Research
It is natural not to expect all firms to commission market research reviews
every year. However, when only 0.16% of all MSMEs in Kuwait in 2012 do so, it
implies a lack of managerial campaigns to elevate the current market shares and/or
penetrate new markets. In fact, it reaffirms that conventional wisdom that MSMEs in
Kuwait lack a spirit of dynamism, the urge of creativity, and a keen desire to expand.
To illustrate the point, of the 449 medium-sized enterprises, 33 commissioned
market studies, spent KD529K, or about KD16K, per firm (see Table 49). For all
MSMEs, only 80 firms sought to assess possibilities of expanding into new markets.
This is especially alarming considering the semi-free cross-border flow of commerce
within the GCC countries (due to their current customs union) and the several free
trade agreements enacted with other Arab countries92.

Table 49. Characteristics of MSMEs Conducting Market Research, 2012

Sector Micro Small Medium MSMEs
Manufacturing 4 13 16 33
Construction 0 4 4 8
Trade 0 4 8 12
Non-finance 8 13 5 26
Finance 0 1 0 1
Total 12 35 33 80
% in MSMEs 14.4% 44.2% 41.4% 100.0%
% in all firms 0.03% 1.65% 7.35% 0.20%
Market research expenses
(KD000) 26.62 545.83 529.68 1102.13
% in total expenditure 2.42% 49.52% 48.06% 100.00%
Average cost per firm (KD) 2,314.8 15,467.8 16,051.0 13,813.2

In contrast to MSMEs, a sizeable percentage of LEs invest in market

research: 99 of the 330 LEs or 30%, which renders the notion of assessing market

92
While trade is supposed to move freely among GCC country borders, there are non-tariff
barriers and other inconveniences that hinder the true free flow of merchandise across
borders.
114
potential a familiar business practice in Kuwait 93. That MSMEs are inattentive to
exploring ways of expanding their market share, whether locally or abroad, can only
support the general image that is emerging concerning their inadequate eco-
managerial skills in general.
Of the 12 micro enterprises that conduct market research, four are in the
manufacture of printing and media publications in addition to seven miscellaneous
business activities. Besides media publications, fabricated metals in both the small
and medium categories (8) appear to be relatively active in searching for new
markets for their manufactured products in Kuwait as well as foodstuff industries (5)
and retail and wholesale trade (12), especially medium sized retail firms (5). All in all,
80 MSMEs and 99 LEs invested in marketing research; for the business sector, there
are manufacturing (117), non-finance (68), trade (55), construction (25), and finance
(68).

Computer Usage
To standardize inter-firm comparisons and to the extent that several aspects
of computer-related expenses are collected in CSB’s questionnaires, the “book value
of computer programs and information systems” item was selected as the least
ambiguous and the most comparable indicator of a firm’s usage of computer
programs and applications, especially as it is a cumulative datum rather than a one
year off expense.
Available results shown in Table 50 reinforce the preceding conclusions: there
are only 84 MSMEs, which show computer-related book value and constitute a mere
0.21% of all MSMEs. Regarding medium enterprises, their record is only slightly
better as the percentage of users increases to 2.9%, still substantially below
expectations. Among the firms that have installed computer programs and MIS, the
average values per firm in micros, small, and medium enterprises are not far from
each other; they range between KD2,700 and KD4,500. Clearly, several variables
influence this statistic but the variance of only about KD1,800 between micro and
medium enterprises is informative94.

93
This is particularly true in Kuwait given its small population size and extensive social
networks.
94
Indeed, it would be useful to research this issue further given its serious implications to the overall
productivity levels in MSMEs.

115
Table 50. MSMEs with Computer Applications Use, 2012
Sector Micro Small Medium MSMEs
Manufacturing 0 1 4 5
Construction 0 0 1 1
Trade 8 2 1 11
Non-finance 50 10 7 67
Finance 0 0 0 0
Total 58 13 13 84
% in MSMEs 69.0% 15.5% 15.5% 100.0%
% in all firms 0.2% 0.6% 2.9% 0.21%
Computer Book value (KD000) 188.5 35.4 56.1 280.0
% in total expenditure 67.3% 12.6% 20.0% 100.0%
Average cost per firm (KD) 3,250.0 2,723.1 4,315.4 3,333.3

Internet Usage
K.A. Francis describes the common use of the Internet recently as follows:
“Twenty years ago, a business opened a storefront, put ads in the local paper, joined
a local networking organization and hoped the local customers needed what they
had to offer. All that changed with the inception of the Internet. A business is no
longer dependent on its local customer base for its survival; it now has a worldwide
audience for its goods and services. The Internet has changed not only a business'
customer base, but how a business communicates with its employees, finds and
manages the competition95.” The reliance on the Internet has become widespread in
business, schools, finance, health, education, utilities, and, indeed, in every aspect
of life. In business, it significantly improved marketing; advertising; communications
with customers, suppliers and employees; and interconnecting nationally and
globally with potential customers. With its cost declining each year, its use has
become ubiquitous.
The situation among MSMEs in Kuwait is different, the results reported in
Table 51 give a bird’s eye view of the use of the Internet: MSMEs suffer from serious
managerial inadequacies in that only 6.2% of all establishments used the Internet.
Even the relatively high percentage of medium firms with employment ranging from
50 to 250 workers and paid-up capital up to KD500,000 is, at best, poor at 47.4%.
Of the many yardsticks employed in this section to gauge the internal managerial

95
K. A. Francis, 2016, “How has the Internet Impacted Business”,
http://smallbusiness.chron.com/Internet-impacted-businesses-321.html
116
capabilities of MSMEs, this criterion is more telling when one considers its
substantial benefits versus its minimal cost.

Table 51. Number of Internet Users among MSMEs, 2012

Sector Micro Small Medium MSMEs
Manufacturing 29 27 29 85
Construction 36 73 56 165
Trade 828 84 48 959
Non-Fin. 954 162 79 1,194
Finance 17 4 1 22
Total 1,863 350 213 2,426
% in MSMEs 76.80% 14.42% 8.78% 100.00%
% in all firms 5.1% 16.3% 47.4% 6.2%
Internet expenses (KD 000) 534.4 160.8 212.1 907.3
% in total expenditure 58.9% 17.7% 23.4% 100.0%
Average cost per firm (KD) 286.8 459.7 996.0 374.0

Another peculiarity that the results reveal is the vast disproportionality to the
extent in which the Internet is used between medium and micro enterprises, where
the former spends, on average, KD996 compared with only KD286.8 in the latter. It
is not clear what the KD286.8 can provide in a year, a question that gives rise to the
need to explore not only whether a firm is using the Internet but also how it is using
it. Furthermore, one inference that emerges from medium firms’ data is that the
Internet usage is binary: a firm either uses it extensively by committing such a large
sum of investment or does not use at all. This dichotomy draws attention to the
possible existence of dual business models: some that are quite successful side by
side with some that are not96.

Innovations
The CSB’s questionnaires do not solicit information on R&D expenses.
Instead, they collect information on the number of patents. The number of patents in
MSMEs in 2012 in Kuwait is 2: one by a small construction company and the other
by a medium non-finance company. This outcome, though it corroborates previous

96
These issues require further research at the micro level to ascertain their validities and
hence design appropriate policy measures to accelerate the growth of the gazelles and help
modernize stagnant businesses.
117
results, should be tempered by the general negative perception about the complex
patent process in Kuwait.

A Composite Indicator of the Combinations of Several Management

Capabilities
The six preceding attributes revolved around an issue that has long
preoccupied MSMEs practitioners; namely, which is mostly responsible for the lack
of growth and economic vitality of MSMEs: is it weak internal managerial capabilities
or the lack of access to finance? While one would expect the reality to lie in
between, especially when the two causes are not mutually exclusive, the results thus
far reiterate the proposition that MSMEs in Kuwait in 2012 confront systemic internal
managerial weaknesses as well as shortages of basic managerial skills. A scarcity of
financial resources could dampen a firm’s plans to expand its plant and equipment or
install a new production capacity in a new location, whereas it could not prevent the
firm from training its employees, connecting to and utilizing the Internet, adopting
cost-saving use of computers, expanding into new markets, and/or investing in
externally audited financial accounts. This is particularly true when the cost of many
of these attributes is not excessive.
By merging the results of the preceding six indicators, MSMEs’ problems
become clearer at once. A summary of the previous six managerial attributes is
given in Table 52 classified by size category:
Access to the Internet is the most employed managerial tool, followed by
audited accounts. Given the immense benefits of the Internet compared to its
negligible cost, it is unusual to find that 36,772 firms out of 39,198 MSMEs, or
a whopping 93.8%, chose not to exploit the numerous and varied benefits of
the Internet,
More than one half of medium enterprises do not use the Internet. These are
firms that employ at least 50 and up to 250 workers,
Training, marketing studies, and computer usage come a distant second, and
The association between size and the application of managerial tools is
reaffirmed once again. The bigger the size of the firm, the more managerial
tools and skills are applied and vice versa.

118
 Table 52. Status of MSMEs’ Internal Managerial Capabilities by Size Category
in 2012
Number of firms Micro Small Medium MSMEs
Total 36,605 2,143 449 39,198
1. Audited accounts 389 308 301 998
2. Training programs 92 22 36 150
3. Marketing studies 12 35 33 80
4. Computer applications 58 13 13 84
5. Access to the Internet 1,863 350 213 2,426
6. Patents 0 1 1 2

Next, all six managerial practices are combined cumulatively to answer the
following inquiry: how many MSMEs employ all six practices as shown in Table 52.
To present the most favorable profile of the business sector, the sequencing of the
elements starts off from the widest use of any elements (Internet connectivity) to the
narrower tally (patents). Table 52 gives the number of companies that possess
multiple combinations of managerial capabilities. LEs are added to compare the
managerial strength of MSMEs with that of LEs.

Table 53. Number of MSMEs & LEs with Multiple Internal Managerial
Attributes, 2012
LEs
Micro Small Medium MSMEs Straddlers Excl.
Inc. Oil
Oil
1.Internet (1) 1,863 350 213 2,426 821 215 212
2. (1) + Audited 146 122 162 430 585 199 196
accounts
3. (2) plus + Training 13 13 21 47 109 82 79
4. (3) + Computer 0 1 2 3 11 6 6
5. (4) Marketing 0 0 0 0 5 3 3
studies
6. (5) + Patents 0 0 0 0 0 0 0

Concerning micro enterprises, only 0.04% or 13 out of 36,605 have access to

the Internet, externally audit their accounts, and offer training programs compared to
0.6% of small and 4.7% of medium firms. When computer usage is added to the
three categories, the list dwindles rapidly, reaching zero as additional categories are
included (i.e., marketing studies and patents). Once again, one observes a strong
relationship between size and managerial agility: the smaller the size, the more
flaccid the firm and vice versa.

119
 In sum, the empirical results reveal a somewhat bleak picture of the status of
managerial skills and practices in MSMEs. There is strong evidence that only a few
have sought to expand their customer base, reach out to customers in other GCC
countries (let alone, go beyond the GCC market), innovate, differentiate products
and services, invest in cost-reducing know-how, enhance workers’ productivity
through training, or seek external auditors to monitor the financial health of the firm.
These are the basic elements of must-do managerial practices that could vitalize the
MSMEs sector in Kuwait.
Over time, as the number of MSMEs increased from 2003 to 2012 (from
37,197 to 39,198), so did the number of firms with different managerial combinations
of skills and practices. Over the period, the number of firms with Internet connection
more than doubled from 1,144 to 2,426. In the combination of Internet and audited
accounts, there were 277 MSMEs in 2003 compared with 430 in 2012. When training
was added, the numbers dropped appreciably to 30 in 2003 and to 47 in 2012. In
other words, the pattern observed in 2003 is quite like that found in 2012, a
phenomenon that implies a lack of discernable upgrading of managerial practices in
general during the decade in question.
Finally, and more generally, the results are consistent with those found by
Wennekers et. al.97 who investigated the relation between the level of economic
development and the rate of nascent entrepreneurship, and concluded that “… low-
income nations, given their stage of development, should not consider the promotion
of new business start-ups as a top priority on their policy agenda. Instead, they may
be better off investing in the management qualities of their population and fostering
the exploitation of scale economies through foreign direct investment and the growth
of young businesses. To that purpose, governments of these countries must
establish confidence in property rights, promote education, guarantee access to
capital markets, safeguard stable macroeconomic conditions and make sure that the
necessary physical infrastructure is in place”. One may supplement their
recommendations by adding special initiatives in the Kuwaiti context: to build
specialized institutions designed to address particular weaknesses in domestic

97
S. Wennekers, A. Van Wennekers, R. Thurik, P. Reynods, 2005,” Nascent
Entrepreneurship and the Level of Economic Development, Small Business Economics,
Vol. 24, p. 306.
120
MSMEs and to encourage management- enhancing skills through grants, expert
advice, and personal networking.
Conclusion
The Kuwaiti economy is endowed with a very large number of small and
medium- sized enterprises, totaling more than 39,000 firms. In addition, there are
1,740 straddling enterprises that share the employment ‘smallness’ characteristic of
MSMEs though they surpass their capital boundaries and appear to mimic LEs
behavior patterns. Side by side with the numerical noteworthiness of MSMEs, there
are only 327 large non-oil firms. The review of the economic, financial, and
managerial characteristics of the two subgroups shows unmistakably a distinct
dichotomy between them. Not only do their attributes differ drastically at any given
point in time but also is their evolution over time dramatically different. The team’s
results conclude that while LEs and straddlers are expanding and prospering,
MSMEs are stagnating and struggling to stay afloat.
This outcome is unexpected for several reasons. First, Kuwait is a small
country geographically and demographically: the total number of business-oriented
male Kuwaiti adults (ages 30 to 59 years) in mid-2011 was around 150,000
individuals. In such a closely-knit society, evidenced by its extensive intermarriages
among local families, the popularity of Diwanyyas where adult nationals gather
weekly to exchange ideas, discuss current topics, and disseminate various news in
addition to the widespread publications of several daily newspapers, one would
expect a good measure of congruencies of economic, managerial, and cultural
practices in large and small enterprises. Indeed, the pervasiveness of such common
business environments should unleash a strong ‘demonstration effect’ through which
success stories of business practices in LEs are transferred to MSMEs. However,
the results do not corroborate this outcome.
Second, the Kuwaiti economy has experienced a remarkable financial windfall
because of the substantial increases in oil prices and oil production from 2008
through 2012. The World Bank databank shows that Kuwait’s GDP increased from
about $58 billion in 2003 to $174 billion in 2012 or by 200%, government spending
increased more than threefold during the same period and the Gross National
Income (GNI) per capita increased from $23.3K in 2003 to $49.6K in 2012 or by
113%. These developments should engender energized MSMEs through the spin

121
off effects of such an economic buoyancy on family disposable incomes and, hence,
consumption habits. However, the results do not corroborate this outcome.
Third, available evidence from industrial economies reaffirms MSMEs’
business agility when compared with LEs: they are typically characterized by having
more patents per employee, maintaining higher levels of productivity, adopting
modern business practices faster, realizing higher export growth rates, employing
more workers, and contributing more to GDP growth than LEs. In Kuwait, the results
point to MSMEs accomplishing none of the above. As shown below, LEs appear to
have realized these successes while MSMEs seem to be struggling to maintain the
status quo.
Fourth, historically, businesses, small and large, climb naturally along the
learning curve over time, honing their business practices, finding ways of cutting cost
while inching up labor productivity, expanding their markets, differentiating their
product or introducing new products/services and, most commonly, growing their
capacities and business operations. While there are a few such examples in the
database, the overriding conclusion for the MSMEs sector as a whole trends the
other way, particularly, towards restricted progress.
The results also point to another disquieting trend: the number of micros, LEs,
and straddlers has increased from 2003 to 2012, but the number of small and
medium sized enterprises has shrunk. Such a burrowing of the middle section of the
business sector has the effect, eventually, of creating an unhealthy economy made
up of micro and large enterprises.
There is another predicament dealing with the reality that while MSMEs are
good for growth, they are bad for creating jobs for nationals. The results over time
point to the fact that while both LEs and straddlers are job creators for nationals,
their MSMEs counterparts are job destroyers for nationals. Given the national
strategic importance attached to this issue and despite the government’s instituted
policy to subsidize salaries of nationals employed in the private sector, the results
exhibit a declining rate of participation of Kuwaitis in total employment in MSMEs.
These dilemmas and dichotomies require further research to provide
adequate explanations and propose pragmatic recommendations. Since this report is
focused on addressing the “what” question to fill in the current information gap on
MSMEs, future research is likely to focus on providing answers to the “why”
question.
122
 For now, the following analysis expounds on the anomaly of the tale of two
cities. First, all previous, relevant data on MSMEs and their evolution are pulled
together and are shown in Table 54. Previous results linked to LEs and straddlers,
as one subgroup, are presented in Table 55.
Regarding MSMEs, the following developments that had taken place all at the
same time, expressed in terms of compound annual rates of growth are:
The average wage paid to nationals increased by about 5.45% annually,
registering the largest annual growth of all variables,
Annual wages of non-Kuwaitis increased by 2.55% p.a. or by about half of the
growth in Kuwaitis’ wages,
Employment hardly moved up since it expanded by only 0.06% p.a.,
Employment of non-Kuwaiti workers inched gingerly up by 0.23%,
Employment of Kuwaitis declined by about 2.15%,
Output and total wages increased by 3.3% and 2.64% annually, respectively,
Value added lagged behind at only 1.6%,
Profits increased marginally by 0.77%,
Capital expansion grew by only 0.16%, and
The number of firms without Kuwaiti employees increased by 1.19%.
The slow growth of MSMEs’ two primary factors of production – labor (0.06%)
and capital (0.18%) – had precipitated similar patterns of slow growth in other
economic aggregates; namely, output, value added, and profits. More important,
perhaps, is the attendant trend to lay off national workers and replace them by non-
Kuwaitis. This is evidenced from the increase in total employment associated with a
simultaneous decline in the number of Kuwaitis, which has led to an increase in the
number and the relative economic weight of firms without Kuwaiti nationals.

In addition to the preceding outcomes, a selected number of important ratios

that shed more light upon the profile of MSMEs, are reported showing cumulative
annual growth rates:
Except for the relatively large increase in the overall average salary paid to
nationals, which reached 5.45%, other indicators show modest to sluggish
growth:
o Output per firm increased by 2.7%,
o Output/labor ratio increased by 3.24%,
123
 o Labor productivity increased by 1.75%,
o Per firm profits grew by 0.19%,
o Capital labor ratio moved by 0.03%,
o Dependency on supply chain for intermediate goods rose by 7.2%, and
o Average non-Kuwaiti wage rate increased by 2.31%,

Table 54. Developments of Major Economic Aggregates of MSMEs from 2003

to 2012
2003-2012
2003 2012
CAGR (%)†
Number of firms 37,197 39,198 0.58%
Number of firms without Kuwaiti workers 31,657 35,223 1.19%
Labor: total employment 242,552 243,799 0.06%
Number of Kuwaiti employees 7,434 5,981 -2.39%
Number of Non-Kuwaiti employees 229,473 234,261 0.23%
Output* 1,939,401 2,598,102 3.30%
Value added* 1,133,834 1,330,734 1.80%
Capital: paid up capital* 792,290 805,281 0.18%
Profits* 557,557 597,667 0.77%
Wages* 470,483 594,989 2.64%
Wages of Kuwaiti labor* 13,622 21,970 5.45%
Wages of non-Kuwaiti labor* 456,862 573,019 2.55%

Selected economic indicators

% Change
2003 2012
2003-2012
% of firms without Kuwaiti workers 85.1% 89.9% 4.8%
Average number of Kuwaiti workers per firm 0.20 0.153 - 0.047
Kuwaiti labor/total employment 3.1% 2.5% - 0.6%
% of intermediates in output 41.5% 48.8% 7.24%
% of wages of Kuwaiti workers in total wages 2.9% 3.7% 0.8%
Capital/labor ratio 3.27 3.30 0.03%
CAGR (%)†
Output/firm* 52.1 66.0 2.7%
Output/labor** 7,996 10,657 3.24%

124
Value added/labor* 4.67 5.46 1.75%
Profits per firm** 14,989 15,248 0.19%
Paid up capital per firm** 21,300 20,544 - 0.40%
Average annual wages of nationals** 1,832 3,673 8.04%
Average annual wages of non-Kuwaitis** 1,991 2,446 2.31%
Notes: * KD000. ** KD. † Compound annual growth rate.

Clearly negative trends in the evolution of MSMEs are observed through the
following set of indicators:
o Percentage of wages paid to nationals in total wages increased by
0.8%,
o Paid up capital per firm declined by 0.40%,
o Share of nationals in total employment declined by 0.6%,
o Average number of Kuwaiti workers per firm declined by 0.05%, and
o Percentage of firms without Kuwaiti employees increased by 4.8%.
In spite of the significant increase in oil revenues and its distributional impact
on the business environment, the appreciable increase in per capita disposable
income and, hence, increased consumer spending even with the government’s
generous subsidy program to increase the employment of nationals in the private
sector, the performance depicted above does not reflect a dynamic or an energetic
MSMEs sector. Instead, it projects the profile of a struggling business sector with
anemic growth of labor, capital, output, and profits - over a decade.
That the unexpected sluggish growth of MSMEs is only an isolated
phenomenon in an economy, which has experienced robust growth records, is best
corroborated by analyzing the performance of the non-MSMEs sector and comparing
their records with MSMEs’. Table 55 combines non-oil LEs and straddlers together
and focuses on their total growth as one unit representing the rest of the business
sector. Even though straddler firms belong to neither MSMEs nor LEs, the
comparison here seeks to distinguish between the MSMEs sector, on the one hand,
and the rest of the business sector, on the other. That said, the table provides
separate LEs and straddlers results to facilitate further comparisons.
The findings reported in the table indicate the following developments over the
decade:
None of the growth rates of the 12 economic indicators shown in the last
column turned out negative. All economic indicators exhibit positive growth,

125
 As in the case of MSMEs, the highest growth is observed in the rate at which
wages of Kuwaiti workers have increased; it grew by an impressive 13.4%
annually,
Even though total employment increased by only 5.3%, total wages increased
by 11.6%. The same occurred in wages paid to non-Kuwaitis, which increased
by 11%,
Impressive growth also occurred in production levels when output growth
recorded a 11.5% increase annually, as did value added at 10.2%,
Medium growth rates in the range of 5% to 7% are noted in the number of
Kuwaiti employees (5.6%), paid up capital (8%), and non-Kuwaiti employees
(5.3%), and
Excepting profits, which increased by only 2.4%, the slowest growth rates are
associated with the number of firms and firms without Kuwaiti workers (4.1%
and 3.2%, respectively).
By way of visually presenting the dichotomous growth performance of MSMEs
versus that of both LEs and straddlers combined, Fig. 23 shows their respective
growth rates over the period 2003 to 2012 in relation to the 12 previously selected
economic aggregates. The figure shows the latter group of firms surpassing the
former in every aspect, and often by substantial margins.

16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%

MSMEs LEs & Straddlers

Fig. 23. A comparative analysis of growth rates of major economic metrics:

MSMEs versus. LEs and Straddlers, 2003 to 2012.

126
Table 55. Developments of Major Economic Aggregates of MSMEs, LEs, and Straddlers from 2003 to 2012
Cumulative Annual Growth Rate
MSMEs LEs Straddlers
2003 - 2012
straddler LEs &
2003 2012 2003 2012 2003 2012 MSMEs LEs s Strad.
Number of firms 37,197 39,198 161 327 1,279 1,740 0.58% 8.2% 3.5% 4.1%
No. of firms without
31,657 35,223 25 26 717 962 1.19% 0.4% 3.3% 3.2%
Kuwaitis
Employment 242,552 243,799 169,726 325,235 104,982 113,146 0.06% 7.5% 0.8% 5.3%
Kuwaiti employees 7,434 5,981 14,984 23,663 3,924 7,290 -2.39% 5.2% 7.1% 5.6%
Non-Kuwaiti
229,473 234,261 154,697 301,436 100,741 105,633 0.23% 7.7% 0.5% 5.3%
employees
1,939,40 3,706,22 1,696,27
Output* 2,598,102 4
11,224,763
8
3,177,964 3.30% 13.1% 7.2% 11.5%
1
1,133,83 2,127,04 1,122,74
Value added* 1,330,734 7
5,903,276
3
1,915,264 1.80% 12.0% 6.1% 10.2%
4
7,650,97 2,653,93
Paid up capital* 792,290 805,281 11,971,509 8,700,180 0.18% 5.1% 14.1% 8.0%
3 3
1,332,85 1,083,22
Profits* 557,557 597,667 2,607,483 394,252 0.77% 7.7% -10.6% 2.4%
3 4
Wages* 470,483 594,989 581,608 1,783,092 282,123 535,754 2.64% 13.3% 7.4% 11.6%
Wages of Kuwaiti
13,622 21,970 174,323 556,261 40,576 109,146 5.45% 13.8% 11.6% 13.4%
labor*
Wages of non-
456,862 573,019 407,286 1,226,831 241,547 426,607 2.55% 13.0% 6.5% 11.0%
Kuwaiti labor*
* KD000.

127
Table 55. (Cont’d) Selected Economic Indicators
Compound Annual Growth Rate
2003 2012
2003 - 2012
Straddler
LEs Straddlers Total LEs Straddlers Total LEs Total
s
% of firms without national
15.5% 56.1% 51.5% 8.0% 55.3% 47.8% -7.2% -0.2% -0.8%
employees
Average No. of nationals per firm 93.07 3.07 13.13 72.36 4.19 14.97 -2.8% 3.5% 1.5%
National labor/total employment 8.8% 3.7% 6.9% 7.3% 6.4% 7.1% -2.1% 6.2% 0.3%
Output/firm* 23,020 1,326 3,752.9 34,326 1,826 6,968 4.5% 3.6% 7.1%
Output/labor** 21,837 16,158 19,666 34,513 28,087 32,854 5.2% 6.3% 5.9%
Value added/labor** 12,532 10,695 11,830 18,151 16,927 17,835 4.2% 5.2% 4.7%
Profits per firm** 8,278.6 847.2 1,678.4 7,974.0 226.6 1,452.2 -0.4% -13.6% -1.6%
Capital/labor ratio 45.1 25.3 37.5 36.8 76.9 47.2 -2.2% 13.2% 2.6%
Paid up capital per firm** 47,522 2,076 7,159 36,610 5,000 10,001 -2.9% 10.3% 3.8%
% of intermediates in output 42.6% 33.8% 39.8% 47.4% 39.7% 45.7% 1.2% 1.8% 1.5%
Average annual wage of nationals 11,634 10,340 11,366 23,508 14,972 21,497 8.1% 4.2% 7.3%
Average annual wage of expats 2,633 2,398 2,540 4,070 4,039 4,062 5.0% 6.0% 5.4%
Nationals’ wages/total wages 30.0% 14.4% 24.9% 31.2% 20.4% 28.7% 0.4% 3.5% 1.4%

* KD Million ** KD000

128
 References
K. A. Francis. 2016. How has the Internet Impacted Business. Available at
http://smallbusiness.chron.com/Internet-impacted-businesses-321.html.
American Society of Training and Development. 2002, Annual report on training in
the US in the business sector. Available at http://www.citehr.com/2075-how-
much-money-should-we-budget-training.html.
André van Stel, Nardo de Vries and Jan de Kok, 2014,” The Effect of SME
Productivity Increases on Large Firm Productivity in the EU-27.
CSB. Annual Statistical Yearbook. Different issues. Central Statistical Bureau,
Ministry of Planning, Kuwait.
CSB. Statistical Review. Different issues. Central Statistical Bureau. Ministry of
Planning, Kuwait.
CMT, 1998. Long Term Development Strategy for Kuwait. Kuwait Institute for
Scientific Research, Kuwait.
Edinburgh Group. 2014. Growing the Global Economy through SMEs.
Eurostat. 2015. 2012 Statistics on Small and Medium-Sized Enterprises.
Gulf Eye Network. 2016. Available athttp://www.gulfeyes.net/kt/108246.html.
IFC. 2014. Enterprise Finance Gap Database. International Finance Corporation.
IMF. 2014. Growth and Diversification in Kuwait: The Role of SMEs in Economic
Development and Employment. International Monetary Fund.
Khrystyna Kushnir. 2011. How do Economies define Micro, Small, and Medium
Enterprises (MSMEs)? International Finance Corporation.
Ernest Kock. 2011. Challenges to SME Development in Kuwait. UNDP/ Kuwait.
Kuwait Times, 2014, Foreign Business Ownership history, Available at
http://news.kuwaittimes.net/door-total-foreign-ownership-companies-opened-
kuwait/,
Maurice Girgis (ed.). 2014, Towards Invigorating SMEs in the Arab World,
Proceedings of the Second Arab Development Symposium, World Bank and
the Arab Fund.
Maurice Girgis and Shaikha Al-Fulaij. 2016. SMEs Definitions in Kuwait: Revisited,
Technical report-I, TE051C. Volume 1. KISR Report in press.
OECD. 2004. Promoting Entrepreneurship and Innovative SMEs in the Global
Economy. Available at http://www.oecd.org/cfe/smes/31919278.pdf, P.11.
S. Wennekers, A. Van Wennekers, R. Thurik, P. Reynods. 2005. Nascent
Entrepreneurship and the Level of Economic Development, Small Business
Economics, Vol. 24.
Sung-Sup Kim. 2006. Korea’s Policies for SMEs. APEC SME Innovation Leadership
Workshop.
The World Bank. 2011. The Status of Bank Lending to SMEs in the MENA Region:
The Results of a Joint Survey of the Union of Arab Banks and the World
Bank. World Bank Policy Research Working Paper No. 5607.

129
Today’s Kuwait News, Friday March 25, 2016.
SBA. 2012. Multinational SMEs Companies. US Small Business Administration.
Available at https://www.usitc.gov/publications/332/US_SME_ Multinational
_Companies.pdf.
SBA. 2016. Small Business Facts Data, US Small Business Administration, USA.
World Economic Forum. 2016/2017 Global Competitiveness Index.

130
 Appendix A
Limitations of the Newly Issued SMEs Definitions

A long list of conceptual, statistical and policy-oriented objections to the

definitions of SMEs stated in the 98/2013 SMEs law was articulated earlier Technical
Report I. In this appendix, further justifications are presented to support the need to
seek new definitions. The statistical information is obtained from the governmental
CSO’s database for 2012. As shown in Table A1, the following facts emerge:

According to the 98/2013 Law (SMEs law), there were only about four
thousand SMEs when in fact there were about 39,000,
The SMEs law represents a miniscule 10.2% of the actual population of
SMEs,
If SMEs law definitions were followed, SMEs in Kuwait would make up 12.4%
of all firms while the comparable estimate globally is 98% to 99%,
The proposed definitions, on the other hand, bring the percentage of SMEs to
a level comparable with the international standard in that it is about 94.99%,
By severely limiting the scope of SMEs in the law, the impact of SMEs in the
domestic economy is unfairly diminished, if not distorted. To illustrate, the
following figures reflect the size of the sector according to the SMEs law in
comparison with that emanating from the proposed new definitions:
o Employment in SMEs law firms is 12.43% only of the business sector’s
total employment in contrast to 35.74% for the firms of the new MSMEs
definitions,
o The value added generated in SMEs law firms is only 38.1% of value
added in new definition firms. Moreover, their value added represents
only 5.5% of the non-oil business sector’s value added compared with
14.54% for firms of new definitions,
o Paid up capital of SMEs law firms is 20.9% of that of new definition
firms. In terms of the business sector’s total paid capital, the SMEs law
firms make up 2.1% compared with the new definition’s 13.11%,
o Gross profits of SMEs law firms are 20.9% of the profits earned in new
definition firms. In terms of non-oil business sector profits, SMEs law
firms constitute 4.9% compared to 16.6% for MSMEs as defined in this
report,
o Output and value added of SMEs law firms are only 5.69% and 5.54%
of the business sector’s total output and value added, respectively,

131
 while output and value added of the new definition firms are 15.28%
and 14.54%, respectively.
In sum, following the definitions promulgated in the 2013 SMEs law would
considerably undermine the extent to which the MSMEs sector does contribute to the
Kuwaiti economy. It would also stand as uniquely odd when compared with the
performances of MSMEs sectors in both developed and developing countries as it
conveys the image of an exceptionally abnormal performance in comparison with its
counterparts in the rest of the world. It is for this compelling reason that an
alternative definition must be sought to bring the SMEs sector in Kuwait in line with
its counterparts in the rest of the world.
It is noteworthy, however, to bring attention to the newly observed dichotomy
between the group of firms that employ Kuwaitis and those in the business sector as
a whole. Based on the results shown in the table below, it appears that the former
subsector is distinctly better managed than the latter. Based on data related to
management practices obtained from CSO’s database, firms which employ Kuwaitis
carry out must-do management practices more often than firms in the MSMEs sector
at large, as shown below.

Table A1. A Comparative Analysis of the Impact of Law 98/2013 SMEs versus
the New Definition of MSMEs 2012

Law 98/2013
Proposed Definitions
Definitions
Characteristic
Mediu Mediu MSME
Small SMEs Micro Small
m m s
Number of firms 3,826 191 4,017 36,605 2,143 449 39,198
Employment 46,132 38,687 84,819 154,688 43,388 45,724 243,799
Kuwaiti Employee 4,481 2,465 6,946 3,314 1,023 1,644 5,981
237,85 213,29 1,330,73
268,748 506,604 810,920 306,520
Value added (000 KD) 7 4 4
Paid-up capital (000 123,10 114,29
45,085 168,186 585,421 105,568 805,281
KD) 1 3
Profit (000 KD) 94,812 81,407 176,219 414,551 82,147 100,968 597,667
Profits per Firm 25 426.2 43.9 11.3 38.3 224.9 15.2
Number of Firms
Audited accounts 253 137 390 390 309 301 1,000
Training programs 28 24 52 92 22 36 150
Marketing surveys 28 19 47 12 35 33 80
Computer usage 30 9 39 58 13 13 84
Internet Connection 796 115 911 1,863 350 213 2,426
No of Firms with
41 20 61 34 41 67 141
Loans
% of Firms

132
Audited accounts 6.60 71.73 9.70 1.07 14.41 67.04 2.55
Training programs 0.74 12.57 1.30 0.25 1.04 8.02 0.38
Marketing surveys 0.73 9.95 1.17 0.03 1.65 7.35 0.20
Computer usage 0.78 4.71 0.97 0.16 0.60 2.90 0.21
Internet Connection 20.79 60.21 22.67 5.09 16.32 47.44 6.19
% of Firms with Loans 1.06 10.47 1.51 0.09 1.90 14.92 0.36

133
 Appendix B

Market Concentration Ratios, 2012

As a partial indicator of the performance of MSMEs and the market environments in

which they operate, the Herfindahl-Hirscman Index (HHI) is employed to estimate the
degree of market competitiveness in Kuwait. The HHI index is the standard measure
of market concentration ratios designed to gauge the extent to which companies
operate in a competitive or monopolistic market environment. The standard formula
used is:
2
HHI = ∑𝑁
𝑖=1 𝑠𝑖

where si = market share of firm I; N = number of firms

This metric takes values ranging from 1/N to 1. If all firms in an industry have
equal market shares, HHI = 1/N; and if there is only one firm in the industry, HHI = 1.
In general, market competitiveness is classified into five categories:

1. HHI < 0.01: highly competitive,

2. > 0.01 HHI < 0.15; unconcentrated market,
3. > 0.15 HHI < 0.25; moderately competitive,
4. < 0.25 HHI ≥ 0.25; highly concentrated, and
5. HHI = 1; pure monopoly.

While the index has an advantage of squaring the share of each firm
competing in a market, thereby emphasizing the size factor, it has the disadvantage
of being influenced by the selected boundaries of a ‘market’. The broader the
definition, the more competitive it would seem to be and vice versa. This index is
important for the purpose of this study because, intuitively, as markets become more
concentrated, competition is weakened, and, consequently, production efficiencies
are compromised. This would quite likely lead to stagnation resulting from the lack of
motivation to train employees, innovate, expand, differentiate a product mix or
introduce new products to stay ahead of competitors. Since this report has
concluded that this profile fits in MSMEs in Kuwait, it will be instructive to find out if
market conditions have contributed to this outcome.
Table B1 presents the estimated market concentration ratios for 2003 and
2012, covering both the business sector and MSMEs to facilitate comparisons

134
across competitiveness categories and over time. The results would also help
ascertain the structure of market competitiveness in 2012 and trace changes that
transpired over the 9-year period. The reference point in the analysis is the 5-digit
ISIC groupings. The selection of the 5-digit industrial classification instead of
aggregated levels enables a more realistic examination of the true conditions of
market competitiveness, for the narrower and the more individualized the activity, the
closer the HHI index is to the single product/service level, which is the appropriate
reference point from both the consumer’s and producer’s viewpoints. The gambit of
product groups in which the business sector in Kuwait is engaged yields more 5-digit
ISIC subsectors than is found in the MSMEs sector, be it 2003 or 2012. The
discrepancy is due to subsectors that belong entirely to either LEs or straddlers.
By way of interpreting the results in Table B1, consider, for instance, the
highly-concentrated category (HHI ≥ 0.25 – 0.99) in 2012. Each value represents the
percentage of economic subsectors from amongst the population of subsectors that
fall under one of the five HHI categories. Here there are 493 possible 5-digit ISIC
subsectors in the business sector, of which 193 (39.1%) are characterized as
operating in a ‘highly concentrated’ or monopolistic markets. Translating this result
into the number of enterprises in these 193 economic ISIC subsectors, the data
show that there are 2,148 firms or 5.2% of the 41,268 firms that benefit from
operating within such monopolistic market conditions. For MSMEs in the same
competitiveness category and for the same year, 143 of 391 subsectors or 36.5%
are defined as ‘highly concentrated, which is less than that of the business sector.
Those 143 subsectors encompass 1,028 firms operating out of a possible 39,198
enterprises or only 2.6%, which indicates that MSMEs do operate in slightly more
competitive market conditions.

Table B1. Market Concentration Index, 2003†

Business sector MSMEs
HHI classifications
2003 2012 2003 2012
1. < 0.01(Highly competitive) 0.0 0.0 0.0 0.0
2. ≥ 0.01 to 0.15 (Unconcentrated) 17.1 20.5 27.2 29.3
3. 0.15 – 0.25 (Moderate) 17.5 12.8 12.7 9.9
4. ≥ 0.25 – 0.99 (Highly
37.4 39.1 32.3 36.5
concentrated)
5. 1 (Pure monopoly) 28.1 27.6 27.6 24.2
No. of existing ISIC groups 503 493 434 391

135
Note: Values represent the percentage of firms that fall in each of the HHI
categories.
† Using the enlarged 5-digit ISIC dataset including the oil sector.

The results also indicate that the structure of commercial activities in Kuwait is
mostly monopolistic, for if we combine the ‘pure monopoly’ with the ‘highly
concentrated’ categories, whether for MSMEs or the business sector and for both the
base and terminal years, the sum ranges from a low of 59.9% (MSMEs in 2003) to
66.7% (business sector in 2012). This result represents a sizable segment of the
product markets in the country that do not enjoy the benefits of a highly competitive
market condition. Even when one notices that MSMEs do operate in a slightly more
competitive market conditions, the fact remains that commerce in general in Kuwait
is not sufficiently competitive. The limited ISIC competition signals another corollary:
that firms, too, engaged in these markets enjoy monopolistic market environments.
This conclusion is reinforced by the absence of ‘highly competitive’ (< 0.01) ISIC
markets in both years and in both MSMEs and the business sector. In between,
about one third of the 493 ISIC subsectors in 2012 faced some limited degree of
competition.
At the other end, there are 132 product subgroups, which are served by single
producers, constituting 27.6% of all product subgroups in the country in 2012. When
one considers that this number of monopolized markets is controlled by only 0.3% of
all firms, it becomes clear that there are a few producers in Kuwait who corner a
sizable segment of the market. Interestingly, pure monopolies are also prevalent
among MSMEs. Of a total of 136 MSMEs monopolies, 74 operate micro, small, or
medium enterprises whose market size probably does not support multiple
producers. Examples include the production and preservation of vegetable pickles
(ISIC 15135); manufacture of ice cream (ISIC 15205); manufacture of cork (ISIC
20296); manufacture of ink (ISIC 24228); veterinarian services (ISIC 8500), and
news agencies (ISIC 92200). Some of LEs’ monopolies include manufacture of
yogurt (ISIC 15204); grain milling (ISIC 15311); manufacture of beverages (ISIC
15549); manufacture of urea (ISIC 24122); ship repair (ISIC 35113), and stock
market (ISIC 67112).
Considering the changes that have occurred to market competitiveness in the
business sector in general and MSMEs over the 9-year period from 2003 to 2012,

136
the results for the former indicate an increase in the number of firms from 38,639 to
41,198 along with a slight decline in the number of ISIC product availabilities from
503 to 493 ISIC codes. The same trends occurred in the MSMEs: 38,639 to 39,198
and 434 to 391, respectively. As to market competitiveness in the business sector, a
moderate shift is observed in which product markets have become less competitive
(i.e., ‘highly concentrated’ index increased from 37.4% to 39.1%), while in MSMEs,
the percentage of ‘moderate’ dropped from 12.7% to 9.9% and the percentage in the
‘highly concentrated’ rose from 32% to 36.5%, all of which signal less competitive
markets. Thus, not only do market structures and the flow of commerce appear to be
monopolistic in 2012 but also is the shift from 2003 to 2012 towards less competition.
Changes in competitiveness in the business sector during the 9-year period
envelops different shifts and movements including the mortality of old firms and the
birth of new ones along with dynamic changes in the product mix and attempts
towards product differentiations carried out by firms. These forces combined point to
a slight temporal deterioration to the extent in which product markets have become
more competitive. In other words, there is a higher percentage of firms operating in
less competitive markets in 2012 compared with 2003.

137
 Appendix C

Outsourcing and Production Interrelatedness, 2012

138
By way of judging the extent to which firms depend on other economic activities –
i.e., outsourcing their intermediate inputs – an economic interrelatedness test is run
by measuring the ratio of intermediate inputs to total output. The volume of the
supply chain is measured as the difference between output and value added on the
premise that all raw materials and intermediate goods used in generating the output
are purchased from external sources. As to whether intermediate goods are
imported or produced locally, the data do not make such a distinction.

80

70

60

50

40

30

20

10

0
Manufacturing Construction Trade Non-finance Finance MSMEs

Micro Small Medium MSMEs Large Non-oil large

Fig. C1. The percentage of intermediate goods in total output.

The results shown in Fig. B1 indicate that, overall, MSMEs outsource about
half (49%) of the value of their final output. Both manufacturing and construction,
which are typically raw-material-intensive, exhibit the highest level of
interdependence on other sectors; their ratio revolves around 70%. On the other
hand, activities with high value added (mostly wages and profits) would ordinarily
show low ratios as shown in the case of large oil manufacturing, trade, and financial
services. For example, large non-oil establishments outsource one third (33%) of
their output; however, this dependence rises sharply to 47% when the oil sector is
included. The latter is ascribed to the significant profits realized in the sale of oil and
gas products, which enter as a part of the value added98. In general, it is instructive

98
CSB follows the UN system in estimating value added as net output after adding all outputs
and subtracting intermediate inputs. Economists refer to it as ‘gross’ value added when one
139
to emphasize the fact that, if strengthening backward linkages and overall production
interrelatedness are deemed necessary for future economic growth, manufacturing
and construction ought to be given priority.

does not deduct capital depreciation or depletion and degradation of natural resources. The
interrelatedness index shown above is estimated as equal to (value added -1) x100.
140
 Appendix D

A Preliminary Evaluation of the Kuwaitization of Jobs through the Labor

Restructuring Program

To raise the low rates of Kuwaiti participation in the work force in the private
sector and reduce the high rate of unemployment among nationals, the GoK
instituted in 2001 a new program through which salaries of Kuwaitis employed in the
private sector are subsidized. The rationale rests on three grounds: 1) that Kuwaitis
in the private sector ought to be given the same social allowances their cohorts
receive in the public sector, 2) the disparity in wage rates between nationals (i.e.,
reservation wage) and foreign workers can be reduced considerably through
subsidizing nationals’ wages and hence making it financially attractive for private
employers to hire Kuwaitis, and 3) all past legal and persuasive efforts to push the
private sector to employ nationals have not been effective with a few exceptions
(namely SOEs, and banking and insurance sectors), which are reaching a saturation
point.
The program, known as the “The Labor and Executive Branch Restructuring
Program (LEBR)”, stipulates that Kuwaiti nationals employed in the private sector will
receive a subsidy, depending on their education level, a monthly stipend covering
social and child allowances, as shown in the table below. The program’s design
implies that if Kuwaiti wages are double those of foreign workers, the program then
would eliminate the wage differentials between them and, hence, eliminate the
relatively high labor cost of Kuwaitis as a reason for not employing more of them.
Potentially, one can postulate several subsidy outcomes, delineated in the
following:
The maximum subsidy one can receive is KD2,298 or USD8,043 per month if
the individual is married, has seven children, and is a university graduate
specialized in medicine, engineering, or pharmacy,
The lowest applies to a single person with elementary or no education in
which case the subsidy is KD456 or about USD1,570 per month,
A Kuwaiti medical doctor, pharmacist, or engineer with an average family size
of six, including four children would earn KD1,098 or about USD3,850
monthly,

141
A married Kuwaiti employee with 4 children and a High School (HS) diploma
would earn KD838 or about USD2,930 monthly,

142
Table D1. Monthly Subsidies to Kuwaitis Employed in the Private Sector, 2015
Total
Social
Social Cost Educatio allowances
Child allowance
allowance of n Excluding
Qualification allowance differential
livin allowanc child
†
Singl Marrie g e Singl Marrie Singl Marrie
e d e d e d
University
190 278 220 50 330 50 70 790 898
graduate1
University
190 278 220 50 280 50 70 740 848
graduate2
University
190 278 220 50 230 50 70 690 798
graduate3
High school4 169 250 220 50 190 50 63 629 723
High school5 161 242 220 50 140 50 61 571 663
High school 147 222 220 50 140 50 56 557 638
Intermediate
6 147 222 220 50 100 50 56 517 598
Intermediate 141 216 220 50 100 50 54 511 590
<
136 211 220 50 50 50 53 456 534
Intermediate
Notes: 1Graduates of colleges of medicine, engineering and pharmacy, 2Graduates
of law, accounting, statistics, management information systems, economics, finance,
financial management, financing financial institutions, insurance, foreign trade,
banking, coordination, education & nursing, 3Graduates in other university fields, 4HS
or diploma plus two-year training, 5HS or Diploma plus one-year training or
intermediate with 3-yrs training. 6Intermediate plus a year of training. †Child
allowance is KD 50 per month, up to seven children.

The actual overall average payment in 2015 was KD511.2 or about USD1,789
per month, and
Measured against the 2013 GDP per capita of KD12,812, the maximum, the
minimum, and the actual subsidies are 2.2, 0.4, and 0.5 times the per capita
income level.

According to the program, a Kuwaiti employee receives a monthly salary

consisting of the government subsidy plus the salary paid by private employers.
Based on reports published by the LEBR program, government subsidies constitute
56% of the total wage bill of the private sector. If so, the resultant salary payments
structure is extrapolated for 2015 and shown in Table (D2) below99.
As Table D3 and Fig. D1 show, the cumulative cost of the program as of 2015
reached KD2.94 billion, reflecting the GoK’s labor policy towards encouraging private

99
This is based on the 56% assumption and the subsidy structure shown above.
143
employers to increase the number of employed Kuwaitis. The program’s cost has
risen from KD571K in 2001 to KD451.3 million in 2015, or by about 50% annually.
Table D2. Hypothetical Wage Packages of Kuwaitis under the LEBR Program in
2016
Government Private Sector
Total
Subsidy Salary
KD USD KD USD KD USD
Maximum 2,298 8,043 1,806 6,320 4,104 14,363
Minimum 456 1,596 358 1,254 814 2,850
Actual 511 1,789 402 1,406 913 3,195

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Kuwaiti Males Kuwaiti Females Kuwaiti Total

Fig. D1. Number of Kuwaiti males and females receiving employment

Subsidies in the private sector

The number of enrollees rose from 1,662 to 67,992 during the same period.
When the program started, males were 5.5 times the number of females, and over
the 15-year period since its inception, the ratio was reversed to where females
exceeded males by 25%. That is, male enrollees increased by 20.4% over the period
2001 to 2015, while females increased by 147.4%. This phenomenon runs
counterintuitive since conventional wisdom has always maintained that Kuwaiti
females strongly favor working for the government over the private sector. Yet, it
may be that there has been a bent-up demand in the private sector for Kuwaiti
females or that females seek employment more urgently than in the past or that, as
some contend in the media, many of them may be phantom employees.

144
 As in other government handouts the world over, it is claimed that some have
enrolled and received job subsidies even though they were full time students and/or
stay-home housewives who were employed by real or bogus companies100.

Table D3. Number of Male and Female Kuwaiti Enrollees in the Labor Restructuring
Programs, 2001 to 2015
Kuwaiti workers
Year
Males Females Total
2001 1,407 255 1,662
2002 2,742 685 3,427
2003 6,506 2,658 9,164
2004 8,827 5,392 14,219
2005 11,836 7,834 19,670
2006 16,280 12,500 28,780
2007 19,093 17,116 36,209
2008 20,223 20,364 40,587
2009 25,197 26,838 52,035
2010 27,102 30,418 57,520
2011 29,240 32,334 61,574
2012 32,077 33,732 65,809
2013 36,737 35,799 72,536
2014 35,733 38,341 74,074
2015 30,149 37,843 67,992

In a report, the program’s manager (July 2016) stated that even though the
program is designed to contribute to wages paid to nationals in the private sector,
monthly salaries paid to nationals in the private sector is KD28 million compared to
KD36 million paid out by the program. In contrast, though, the data show a
discrepancy with the subsidy program’s data. Based on the team’s dataset, the total
number of nationals employed in 2003, 2007, and 2012 in firms that are owned
100% by the private sector are 14,175, 17,226, and 22,155, respectively. To
eliminate the excluded number of Kuwaiti employees in straddler private firms (100%
private + < 50% joint public), added them for 2003, 2007 and 2012. The results show
that the total number of eligible nationals increased to 17,856, 24,477, and 28,985,

100
A local newspaper reports that there are ‘more than 6,000 citizens (males and females)
who illegally received subsidies totaling more than KD322 million’, Today’s Kuwait
News, Friday March 25, 2016, quoting a member of the Parliament. Similar reports are
often published in local newspapers, which prompted a 2016 modification of Decision
No. 316/2001 to close existing loopholes.
145
respectively. In contrast, the subsidy program’s data show the employment of
Kuwaitis numbering 9,164, 36,209, and 65,809, respectively101.

600,000.0

500,000.0

400,000.0

300,000.0

200,000.0

100,000.0

0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Fig. D2. Total cost of the employment subsidy program.

While it is reasonable to suspect that not all Kuwaiti employees in the private
sector enrolled in the program by 2003, and hence there are 17,856 employees but
only 9,164 enrollees, the same cannot be true in 2012 where enrollees exceeded the
number of Kuwaiti employees in the private sector (65,809 versus 28,985). And even
if one adopts the CSB’s count of 38,069 Kuwaitis in the private sector in 2011
census, which includes other activities not covered by the Establishment Surveys,
the disparity remains. Further research is required to explain these discrepancies.
Against the cost of the LEBR program, which totaled KD21.5 million, KD97.5
million and KD348.5 million in wages in 2003, 2007, and 2012, respectively, the
government official statistics obtained from CSB show that wages paid to nationals in
companies owned 100% by the private sector and firms with >50% joint
public/private firms, including straddlers, are KD49.3 million, KD120 million and
KD119 million in 2003, 2007, and 2012, respectively (see Table D4). Should one

101
There are three possible explanations for the discrepancy: 1) observational errors, 2)
excluded Kuwaiti employees in privately owned straddler firms and/or 3) sizable
fraudulent enrolments of unqualified or phantom national workers. Regarding the latter,
more than 200 individuals have been prosecuted for embezzling government funds and,
according to a member of the Parliament, the Restructuring program has uncovered about
6,000 cases of unqualified enrollees who were full-time students and are being sued for
the return of KD322 million. See http://www.gulfeyes.net/kt/108246.html.
146
modify the disparity in wages between CSB’s dataset and LEBR program data along
the same way the disparity in the number of Kuwaiti employees is modified above,
the gulf between the program’s wages and CSB’s dataset remains?

Table D4. Discrepancies between CSB’s and Subsidy Program’s Data

2003 2007 2012
CSO LEBR CSO LEBR CSO LEBR
No. of Kuwaitis employed 14,175 9,164 17,226 36,209 22,155 65,809
Subsidized labor as % of
64.6% 210.2% 297.0%
total
Kuwaiti wages (KD million) 49.3 21.5 120.0 97.5 119.0 348.5
Subsidized wages as % of
43.6% 81.2% 293.1%
total

In brief, this program, whose total cost in 2015 topped one half billion KD,
appears to be at odds with government’s official data on the number of employed
Kuwaiti nationals. This is true in terms of the number of subsidized Kuwaitis as well
as the amount of subsidized wages as shown above as evidenced by the variance
between CSO’s and LEBR’s estimates in 20027 and 2012. The table also indicates
a steadily widening gap between them since 2003.
To effectively evaluate the program, however, one must examine the natural
progression of job Kuwaitization before the program and then compare the results
with the progress made during the implementation of the program. To do so, more
information is required about the enrollees’ age composition, marital status,
education levels, the economic activities in which they enrolled, and attrition rates,
among others. A deterministic model based on data on demand function for Kuwaiti
labor by sector prior to the implementation of the LEBR program should yield
projections of Kuwaiti/employment ratios in the private sector against which actual
values of the same after the LEBR can be compared. Thus, the effectiveness of the
program can be gauged quantitatively.

147
 Appendix E

The Structure and Role of Straddlers

148
 Official SMEs definitions normally determine the size and the role of MSMEs
in an economy. Globally, definitions are expressed in terms of either a single
criterion or two, even though some countries stipulate more than two although these
are rare. When a definition is based on a single criterion such as employment, which
is often the one commonly selected to measure a firm’s size, every firm in the
country would fall under one of the size categories selected by lawmakers. In other
words, no firm will be left out.
When a country selects two criteria, as most do, typically consisting of
employment and either capital or turnover, some MSMEs will inevitably be excluded
since they do not meet both objectives at the same time. If they meet one but not the
other, they drop off the list of MSMEs. Since employment is the principal index by
which a firm’s size is measured, firms are usually excluded because they surpass
the limits set for capital or turnover; hence, the name “straddlers” as they straddle
the capital thresholds set for the different size categories (e.g., micro, small- or
medium). Straddlers are discounted and will not appear in MSMEs statistics, and
more importantly, they are ineligible to access government support initiatives – even
if they employ a handful of workers.
Many countries avoid such an outcome and its unfavorable consequences by
specifying unique definitions for them to suit their special business conditions. Since
the nature of their businesses requires large sums in the form of either fixed or
working capital rather than on labor, they easily exceed capital thresholds. Examples
of straddlers include financial brokers, investment and financing houses, financial
intermediation, real estate, construction firms, wholesale trade, retail, electric and
mechanical repair and installation and, in Kuwait, cooperatives, all of which would
not exist with the much smaller capital limits set in MSMEs definitions.
Should straddlers be more suited to achieve the targets set by the state, their
exclusion would represent lost opportunities. For this reason, it is important to shed
light on their numbers, composition, and performance to consider their inclusion
among qualified firms to access governmental support programs by, perhaps,
suggesting a different set of conditions for them.
Examples of efforts to accommodate straddlers elsewhere abound. For
example, the EU created a special support program for firms that do not qualify
under SMEs but do ‘further the interest of the EU’ or ‘contribute to the

149
implementation of EU policies’ or are ‘transnational with high value to the EU102.
Under the title “EU Funding Programmes”, the EU issues grants to such firms;
additionally, the EU may also solicit interest in specific objectives to which these
firms can apply and once qualified, would benefit from the Funding Programmes.
Outside the EU, are other similar instances, a few of which are outlined briefly
below103:
The US Small Business Administration stipulates that while small firms are
generally defined as employing < 500 workers, exceptions are made for
general building and heavy construction firms, computer planning, system
design and wholesale trading companies, among others, where their
qualification is based on “annual receipts”, set at USD7 million,
Bahrain sets aside real estate as an exception to the rule: micros, as an
example, are defined as having employment ≤ 10 and capital ≤ BD100K, but
for real estate firms, employment is the same at ≤ 10 but capital is raised 200-
fold to ≤ BD20 million; this also applies to small and medium firms,
Egypt has a separate definition for trading companies;
Japan excludes wholesale, service firms and retail from the general SMEs
definitions by setting higher capital limits for them, and
China designs a special definition for each economic sector; hence, there are
separate definitions for manufacturing activities, construction, wholesale, retail
transport, and hotels.
Hence, the principle of tailoring special qualifying condition(s) for sets of
economic activities based on their different and unique business operations is
practiced worldwide. It is suggested that Kuwait follow suit by singling out such
activities and attaching separate definitions for them, thereby including them into the
MSMEs sector. The same should apply to qualifications for accessing governmental
support programs. This suggestion would provide a level playing field for such
corporations, and it is also supported by their validated capacity to do more than
MSMEs towards achieving the targets set by the government for the MSMEs sector,
as shown subsequently.

102
See http://europa.eu/youreurope/business/funding-grants/eu-programmes/index_en.htm.
103
For more details, see Maurice Girgis and Shaikha Al-Fulaij, op cit. Also, Khrystyna
Kushnir, 2011, ‘How do Economies define Micro, Small, and Medium Enterprises
(MSMEs)?, IFC.
150
 In Kuwait, straddlers totaled 1,278 firms in 2003 and increased to 1,740 in
2012 (see Table E1. As a percentage of the enlarged dataset of firms, they made up
3.3% of the business sector in 2003 and 4.2% in 2012. The small increase is not
uniform among sectors or among firm sizes, for it ranges from 0.4% to 36.3% where
the largest occurred among medium straddlers as they represented 49.2% in 2003
and increased to 85.5% in 2012. When one compares the evolution of straddlers
from 2003 to 2012, the results show that there has been a strong growth from 2003
to 2007 compared with the period 2007 to 2012.
Their structure in 2012 indicates that even though there are more of them
among micros (620) compared with small (327), medium (244), and large (86), their
relative shares in micros is 2.2% compared to 22.1%, 85.5% and 25.4%,
respectively. In between sectors, there is a remarkable similarity in straddlers’
shares over the period where they stayed practically at the same relative shares -
showing the largest shares among trade (60%) and non-finance (24%). Noted also
that:
Straddlers in trade and non-finance are about equal in size: 580 and 556,
respectively,
The largest increase in 2012 emanated from straddlers, which could be
classified as medium-sized firms in that they increased by 143 firms from a
total of 286 for the business sector,
The lowest importance indicating a relative scarcity is observed in the
construction sector where they numbered only 80 firms in 2003 (6.2% of all)
and 140 (13.1%) in 2012,
Finance is by far the fastest growing among straddlers in that it grew from 83
(6.5% of all) in 2003 to 198 (12.6%) in 2007 and to 178 (20.6%) in 2012, and
Manufacturing maintained a middle status as it increased from 177 (13.8%) in
2003 to 286 (16.4%) in 2012.
Table E1. Number of Straddler Firms by Sector and by Size: 2003 versus
2012†
Sector Year Micro Small Medium MSMEs LEs Total
2003 11 78 83 172 5 177
Manufacturing
2012 54 98 133 285 1 286
2003 18 21 23 63 17 80
Construction
2012 47 36 39 122 18 140
Trade 2003 335 117 66 519 31 550

151
 2012 336 118 85 539 41 580
2003 241 77 39 357 33 390
Non-finance
2012 337 124 73 533 23 556
2003 15 34 33 82 0 82
Finance
2012 26 98 54 178 0 178
2003 620 327 244 1,192 86 1,278
Total
2012 799 474 384 1,657 83 1,740
† The oil sector is excluded.

All in all, straddlers in the business sector appear to be concentrated in 2012

in the trade and non-finance sectors. Among subsectors, their largest 2012 presence
is seen in micro trade (336) and micro non-finance (337), both of which add up to
673 firms or 45.8% of the total number of straddlers. That is, nearly half of the 2012
straddlers emploedy 10 or fewer workers.
An analysis of the specific economic activities that characterize straddler firms
in general in 2012 was carried out at the firm level, relying on firms that were
surveyed in full for these are actual data. Aggregated results show that the number
of surveyed straddlers is 1,034: 435 small, 384 medium, 132 micros, and 83 LEs.
Starting with micro straddlers, most belong to one of the following economic
activities: making of jewelry; advertising agencies; money exchanges; travel
agencies; car rentals; real estate: land sale brokerage and rentals; and trade of
ready-made garments. Of the 132 firms, 46 or a little above 1/3 rd show capital
ranging from KD1 million to KD100 million; 21 firms with a capital ranging from
KD500K to KD1 million; and the remaining 65 or about ½ had capital ≥ KD250K but
less than KD500K. Note that the capital condition for MSMEs’ micros is set at less
than KD150K.
Straddlers that fit in small enterprises with labor employment ranging from 11
to 49 workers are 435, of which the most prominent activities, in addition to those
mentioned above under micros, are public building, additions or modifications;
commercial banks; financial holding companies; household appliances; insurance
companies; and trading entities in computers, electric devices and lavatories. Of the
435 straddlers, 188 have capital between KD1 million and KD250 million; 107 firms:
KD ≥ KD 500K to KD1 million; and 140, ≥ KD250K, with the latter being the threshold
for small firms. The most prominent activities belong to holding financial companies;
renting and building and sales of real estates; banks and insurance.

152
 There are 384 straddlers within the medium-sized category whose major
activities are focused on public construction; commercial and specialized banks;
consulting firms; hotels and restaurants; private hospitals; private intermediate and
secondary education; sales of furniture; insurance; investment in real estate and
financial papers; and several miscellaneous manufacturing activities. These
straddlers, which employ up to 249 workers, have capital assets that are much larger
than the threshold set for this size class (< KD500K). There are (1) 60 straddlers with
capital ranging from KD10 million to KD588 million, (2) 253 with capital from KD1
million to KD10 million, and (3) 79 straddlers with capital > KD500K.
In contrast to straddlers that come under MSMEs, LEs straddlers number 83
with employment above 250 workers and capital less than KD500K. Those that
showed the smallest capital at < KD250K are 40 firms followed by 20 with capital
from KD250K – KD500K, and 23 firms with paid up capital set at KD500K. A few of
these firms show large total employment levels of up to 2000 workers. Their activities
are varied but can be highlighted in public construction firms for residential and
commercial buildings; cooperatives; installation and repair of elevators and
escalators; security; intermediate and secondary education; installation and repair of
pipes of different functions; restaurants’ and HVAC instruments.
How significant are straddlers in the scheme of things? The figures shown in
Table E2 leave little doubt that they do represent a significant portion of the business
sector. In fact, they outweigh the group of MSMEs in several economic aggregates.
The relatively large volumes of the economic aggregates shown in the table are self-
explanatory.
Straddlers also distinguish themselves as better than MSMEs in respect to
managerial skills and practices. For instance, in 2012 only 6.2% of MSMEs had
access to the Internet compared with 47.2% of straddlers. Likewise, 33.6% of
straddlers had access to the Internet and had commissioned external audits of their
financial accounts in contrast to only 1.1% of MSMEs. If one adds training to the two
previous attributes, the corresponding percentages are 6.3% versus 0.12% in favor
of straddlers. And if one adds the use of computers and conducting marketing
studies, the percentages are 0.29% to 0.003%, respectively. More importantly,
perhaps, they employ more nationals as evidenced by their high ratio of Kuwaitis in
total employment, which is greater than twice the ratio of MSMEs.

153
 In sum, straddlers are a key player in the business sector in Kuwait. Due to
their unique business conditions, they require vast amounts of capital, a requirement
that disqualifies them from being considered among MSMEs even though they are
quite small as measured by the size of their workforce.

154
Table E2. Major Economic Characteristics of the Group of Straddlers, 2003 to
2012†
2003 2007 2012
Employment 104,982 123,826 113,146
Kuwaiti employees 3,924 7,479 7,290
Non-Kuwaiti employees 100,741 116,045 105,633
Kuwaiti employees/total employment (%) 3.73 6.04 6.44
Value added* 1.123 3.359 1.915
Paid up capital* 2.653 7.741 8.700
Output* 1.696 4.552 3.178
Sales* 2.120 2.568 2.961
Profits* 1.083 2.953 7.933
Wages* 0.282 0.506 0.536
Value added/firm** 878 2144 1,101
Output/firm** 1,327 2,906 1,826
Paid capital/firm** 2,076 4,942 5,000
Sales/firm** 1,658 1,639 1,702
Value added/employment ** 10.7 2,701 16.9
Kuwaiti annual wage rate** 10.3 15.1 14.5
Non-Kuwaiti annual wage** 2.4 3.39 4.0
Kuwaiti wages/total wages (%) 14.4 22.3 20.4
Non-Kuwaiti wages/wages (%) 85.6 77.7 79.6
* KD billion; ** KD000, † Based on enlarged dataset.

By way of making a recommendation to bring most of them under the MSMEs

umbrella, it is suggested that the capital criterion be raised substantially for the
activities that will be selected from amongst those mentioned above, especially those
in ICT, R&D, financial intermediation, construction firms, real estate, specialized
banking, private hospitals, and private education institutions. Suggested estimates
of the capital thresholds for those selected would run as follows:
1. Micro: Employment of ≤ 10 workers and a capital or turnover of ≤ KD10
million;
2. Small: Employment of 11–49 workers and a capital or turnover of ≤ KD25
million; and
3. Medium: Employment 50–249 workers and a capital or turnover of ≤ KD50
million.
The choice of the economic activities should be firmed up through in-the-field
surveys of the suggested list, which should be submitted to the board of directors of
the SMEs Fund for final approval, keeping in mind the necessity of maintaining an
agile and flexible posture towards altering the list as business complexities grow,
new realities set in and new activities are introduced over time.

155
156
 Appendix F

Linear Regression Models Results

157
 Two examinations were carried out in an attempt to identify and quantify the
factors responsible for MSMEs’ hiring decisions of Kuwaitis in their workforce and for
their economic growth from 2003 to 2012. The data cover 4,165 enterprises, which
include micro, small, and medium firms. The OLS regression models are run using
an SPSS package and tested at a .05 level of significance. By selecting the use of
the ‘forward’ method, explanatory variables are entered stepwise when coefficients
are significant at ≤ 5% level.

Model 1: The job Kuwaitization model. It is expressed as follows:

(K/E)2012 = a + b1 (NWk/NW nk)2012 – b2 (Wk/Wnk)2011 + b3 P2008-2012 + E^2003-21012

+ɛ
where:
(K/E)2012 = The share of Kuwaiti nationals in total employment in 2012,
(NW k/NW nk)2012 = The ratio of the average non-wage payments per Kuwaiti employee
to the average non-wage payments per non-Kuwaiti employee in 2012,
(W k/W nk)2011 = The average wage ratio of Kuwaitis to non-Kuwaitis in 2011,
P2008-2012 = The overall average profitability rate over the period 2008-2012 derived
as total profits divided by total cost over the same period,
E^2003-21012 = The cumulative annual growth of employment from 2003 to 2012,
ɛ = Error term
Based on the available firm-specific information in our dataset, it is
hypothesized that the higher K/E ratio is caused/associated with higher profitability
levels and higher rates of employment expansion but negatively related to wage rate
ratios and non-wage payments of Kuwaiti workers versus non-Kuwaiti workers. Non-
wage payments include social insurance, insurance against work-related accidents,
health care premiums, residency renewal fees, and end of service gratuity. The
rationale of the postulated functional relationships states that firms that are profitable
and have experienced fast growth in hiring additional workers from 2003 to 2012 are
likely to hire more Kuwaitis than those that experienced the opposite. It further
assumes that the higher the cost of Kuwaiti labor than. non-Kuwaiti labor, the lower
the ratio of Kuwaitis in the labor force, where the cost of labor is measured in terms
of money wage rates and non-wage expenses. The results are reported in Table F1.
Due to the diversity of the unit of measurements of the independent variables,
158
standardized coefficients are reported, which measure the impact on the dependent
variable in terms of standard deviations.

Table F1. Determinants of Job Kuwaitization

Predictor Standardized beta
t-statistic Significance
coefficient
A (constant) 0.014 7.024 0.000
(NW k/NW nk)2012 0.744 5.182 0.000
(W k/W nk)2011 - 0.479 3.335 0.000
P2008-2012 0.035 2.302 0.021

Adjusted R2 = 0.072
F- 105.5 (sig at 0.000)
N = 4,069

The results show that while the independent variables are significant, they
explain only a small fraction of the variation in the K/E ratios. This implies that there
are more important predictors than those selected such as the high wage rate allure
in LEs and straddlers firms, government subsidy program, skill differences, social
taboos against manual jobs, and the appeal of jobs in the government sector, among
others. This notwithstanding, profitability and labor cost are factors that influence
corporate hiring decisions in MSMEs in regard to the division of Kuwaiti versus non-
Kuwaiti workers104. It is interesting to note that the growth of employment over the
long period from 2003 to 2012 did not add statistical significance to the model and
hence was excluded. This may reflect deeply rooted convictions on the part of
employers regarding the choice between Kuwaiti and non-Kuwaiti workers, for even
MSMEs that experienced faster employment growth did not raise the ratio of
Kuwaitis in their labor force.

Model 2: Economic expansion model. It is expressed as follows:

E^ = a + b1 Q^ + b2 F + b3 K^ + b4 HI + b5 T + ɛ
where
E^ = Compound annual growth rate of total employment (2003-2012),

104
While the wage ratio has the right sign, the non-wage ratio does not. This may be
explained by the limited significance of non-wage payments to Kuwaiti workers
compared with non-Kuwaitis.
159
a = constant,
Q^ = Compound annual growth rate of output (2003-2012),
F = 2012 firm size (1= micro, 2= small, 3= medium)
K^ = Compound annual growth rate of paid up capital (2003-2012),
HI = 2012 Herfindhal index,
T = 2012 Training expenses,
ɛ = Error term.
This model is intended to identify the role of several variables that
cause/influence the growth of firms measured by the rate of growth of employment.
It is postulated that growth is positively correlated with the growth of production as
well as the growth of capital. It is further assumed that it is correlated with the size of
the firms (larger firms tend to expand faster), Internet usage measured by expenses
on access, training expenses, and market competitiveness condition measured by
the Herfindhal-Hirschman index (the higher the market concentration rate, the
greater the ability of the firm to expand). The results are reported in Table F2.
The most influential factor on employment growth is the growth of production
followed by the size of the firm. Other explanatory variables include the growth in
capital assets since 2003 and the level of market competitiveness – the less
competitive the market, the greater the probability of the firm to expand faster than
those that operate in highly competitive markets. Although one would assume that
training and access to the Internet would contribute positively to the firm’s growth,
the results show extremely weak and negative correlation with the firm’s growth,
which cast doubt on the relevance and effectiveness of training programs in general.

Table F2. Determinants of Firm Growth, 2003 to 2012

Standardized beta
Predictor t-statistic Significance
coefficient
A (constant) - 0.043 15.827 0.000
Q^ (Output) 0.587 44.298 0.000
Firm size 0.134 11.165 0.000
^
K (Paid up
0.066 5.098 0.000
capital)
H index 0.037 3.151 0.002
Training - 0.033 - 2.861 0.004

Adjusted R2 = 0.44
F = 658.8 (sig at 0.000)

160
N= 4,164

This growth model excluded loans and computer-related expenses as

insignificant statistically, which is revealing as it implies that access to finance does
not seem to affect firm growth as measured by employment expansion.
In an attempt to explain output growth by regressing it on several potential
explanatory variables, the results show a positive and strong correlation between it
and employment growth, capital assets growth, Internet usage, and loans (long and
short term); with adjusted R2 = 0.498, F = 1034, and N = 4,164. The model
automatically excluded several variables: the firm size, training, market
competitiveness, and computer expenses as statistically insignificant. All beta
coefficients are significant at the .000 level. In this model, loans do positively predict
output growth, albeit weakly since its coefficient is quite small (0.053), unlike in the
previous growth model.

161