Economic Research Forum (ERF)

Digitalisation: what’s needed in business responses to Covid-19 in MENA

756
The pandemic caused severe disruptions to the global business environment. This column reports evidence on how different sectors in the Middle East and North Africa have been responding. The focus is particularly on firms’ adoption of digital technologies, as well as policies that might encourage greater digitalisation as an essential business strategy to mitigate the consequences of Covid-19 for the economy.

In a nutshell

To facilitate the adoption of digital technologies in MENA countries, policy-makers need to facilitate internet access to all businesses at competitive prices.

Businesses should be encouraged to move towards full digital transformation by granting subsidies and tax breaks; these concessions should be granted to the firms that invest extensively in localising and diffusing digital technologies.

Serious initiatives must be taken to reform education in the region, notably changing the curriculum in what that bridges the existing digital divide among the population.

The outbreak of Covid-19 was a global health crisis that led to severe disruptions to the business environment worldwide. Indeed, the containment measures adopted to control the pandemic’s spread – such as closing businesses, implementing social distancing and restricting mobility – resulted in destructive consequences for the business sector.

Among all the precautionary strategies aimed at absorbing the business shock induced by the pandemic – including changing business models and developing new products – digital solutions, such as using smartphone applications and telephone marketing, have emerged as one of the most frequently implemented strategies (Seetharaman, 2020; Donthu and Gustafsson, 2020; Dwivedi et al, 2020; Priyono et al, 2020).

During the pandemic, use of digital technologies increased remarkably in the Middle East and North Africa (MENA) by individuals, governments and businesses (World Bank, 2020). But the process of digital transformation in the business sector is expected to confront many challenges due to comparatively weak access to digital technologies (Göll and Zwiers, 2019; UNDP, 2016; ESCWA, 2015).

Recent statistics show that most firms in the region have been slow in adopting digital technologies, remain highly uncertain about the economic recovery and are exposed to a great drop in demand (World Bank, 2020). In addition, the dominance of the digital divide would have serious consequences for the region’s economy, especially with the successive waves of the pandemic.

Therefore, understanding whether the business sector in MENA benefited from digitalisation during the pandemic would support efforts to maximise the responsiveness of the business sector to the pandemic-induced troubles.

Based on micro data collected from 5,480 firms surveyed by the ILO/ERF COVID-19 MENA Monitor Enterprise Survey (CMMENT) in Egypt, Jordan, Morocco and Tunisia, our empirical study shows that about half (49%) of the firms covered by the survey have adopted digital technologies to cope with the troubles caused by the pandemic (Ali and Ebaidalla, 2022).

The results also show that a third of the firms have invested in digital technologies. This outcome implies that digitalisation acts as a crucial business strategy to mitigate the pandemic-induced effects. This may also indicate that the pandemic pushed a considerable portion of the firms in the region to adopt and invest in digitalisation as a survival business strategy during the lockdown period to keep businesses open and avoid permanent shutdown.

Moreover, the results reveal that most of the firms that were investing in digitalisation were operating in the services and retail sectors. Manufacturing firms rank second in adopting and investing in digital technologies (Ali and Ebaidalla, 2022).

These results imply that the wave of digital transformation was intensified in services and retail, both of which were the most affected sectors by the troubled business environment created by the pandemic. This confirms the global statistics, as service activities such as accommodation and tourism were the most hit sectors during the first wave of the pandemic (UNWTO, 2020).

Undoubtedly, the MENA region was not an exception, as tourist arrivals in the Middle East, for example, dropped by 69% between January and August 2020 (Gössling et al, 2020). The results also indicate that firms adopting digitalisation confront business difficulties due to the pandemic such as mobility restrictions, low demand and sales reductions.

This implies that difficulties induced by the pandemic were a key driver for adoption of digital technologies to keep businesses open. Specifically, more than 70% of the firms adopting digital solutions in the surveyed countries have arranged workplaces so that staff can maintain a safe distance (Ali and Ebaidalla, 2022).

Furthermore, a considerable segment of the digitalised firms adopted product modification in response to the pandemic. Overall, the unfavourable business conditions induced by Covid-19 acted as a crucial factor in pushing firms to adopt digital solutions.

Finally, our study reveals that characteristics of firms, including size and foreign ownership, accelerate digital transformation in the business sector. Furthermore, firms encountering challenges in complying with pandemic containment measures but receiving government support are more likely to invest in digital technologies (Ali and Ebaidalla, 2022).

Based on our findings, we propose several policy recommendations to facilitate the adoption of digital technologies in MENA countries. First, policy-makers in the region need to facilitate internet access to all businesses at competitive prices.

Second, businesses should be encouraged to move towards full digital transformation by granting subsidies, a preferential tax cut and tax breaks. These concessions should be granted to the firms that invest extensively in localising and diffusing digital technologies. Taking such a step is likely to enhance digital adoption and build an effective precaution for future pandemics.

Third, governments in MENA countries should reduce the digital gap by encouraging foreign direct investment in the digital sector. The presence of such investments would generate huge benefits. For example, local investors will copy the digital practices brought in by foreign investors and then implement them in their own firms. Moreover, the competitive environment created by the presence of foreign companies motivates local enterprises to keep pace with new developments, especially in the field of digital technologies.

Finally, serious initiatives must be taken to reform education in the region. Specifically, the educational curriculum must be reformed in a manner that bridges the existing digital divide among the population.

 

Further reading

Ali, M, and EM Ebaidalla (2022) ‘Does COVID-19 pandemic spur digital business transformation in the MENA region? Evidence from firm level data’, ILO/ERF Working Paper No. SWP 2022_2.

Donthu, N, and A Gustafsson (2020) ‘Effects of COVID-19 on business and research’, Journal of Business Research 117: 284.

Dwivedi, YK, DL Hughes, C Coombs, I Constantiou, Y Duan, JS Edwards and R Raman (2020) ‘Impact of COVID-19 pandemic on information management research and practice: Transforming education, work and life’, International Journal of Information Management 55: 102211.

ESCWA – Economic and Social Commission for Western Asia (2015) ‘Role of Technology in Sustainable Development in the Arab Region: Expert report for the Arab Sustainable Development Report’.

Göll, E, and J Zwiers (2019) ‘Technological Trends in the MENA Region: The Cases of Digitalization and Information and Communications Technology (ICT)’, MENARA 206.

Gössling, S, D Scott and CM Hall (2020) ‘Pandemics, tourism and global change: a rapid assessment of COVID-19’, Journal of Sustainable Tourism 29(1): 1-20.

Priyono, A, A Moin and VNAO Putri (2020) ‘Identifying digital transformation paths in the business model of SMEs during the COVID-19 pandemic’, Journal of Open Innovation: Technology, Market, and Complexity 6(4): 104.

Seetharaman, P (2020) ‘Business models shifts: Impact of Covid-19’, International Journal of Information Management, 54: 102173.

UNDP (2016) ‘Arab Human Development Report 2016: Youth and the Prospects for Human Development in a Changing Reality’.

World Bank (2020) ‘Digital transformation in the time of COVID-19: The case of MENA’.

Tags: , , , ,

Most read

Making trade agreements more environmentally friendly in the MENA region

Trade policy can play a significant role in efforts to decarbonise the global economy. But as this column explains, there need to be more environmental provisions in trade agreements in which developing countries participate – and stronger legal enforcement of those provisions at the international level. The MENA region would benefit substantially from such changes.

Iran’s globalisation and Saudi Arabia’s defence budget

How might Saudi Arabia react to Iran's renewed participation in global trade and investment? This column explores whether the expanding economic globalisation of Iran, following the lifting of nuclear sanctions, could yield a peace dividend for Saudi Arabia, consequently dampening the Middle East arms competition. These issues have attracted increased attention in recent times, notably after a pivotal agreement between the two countries in March 2023, marking the resumption of their political ties after a seven-year conflict.

Labour market effects of robots: evidence from Turkey

Evidence from developed countries on the impact of automation on labour markets suggests that there can be negative effects on manufacturing jobs, but also mechanisms for workers to move into the services sector. But this narrative may not apply in developing economies. This column reports new evidence from Turkey on the effects of robots on labour displacement and job reallocation.

Global value chains and domestic innovation: evidence from MENA firms

Global interlinkages play a significant role in enhancing innovation by firms in developing countries. In particular, as this column explains, participation in global value chains fosters a variety of innovation activities. Since some countries in the Middle East and North Africa display a downward trend on measures of global innovation, facilitating the GVC participation of firms in the region is a prospective channel for stimulating underperforming innovation.

Food insecurity in Tunisia during and after the Covid-19 pandemic

Labour market instability, rising unemployment rates and soaring food prices due to Covid-19 are among the reasons for severe food insecurity across the world. This grim picture is evident in Tunisia, where the government continues to provide financial and food aid to vulnerable households after the pandemic. But as this column explains, the inadequacy of some public policies is another important factors causing food insecurity.

Sustaining entrepreneurship: lessons from Iran

Does entrepreneurial activity naturally return to long-term average levels after big economic disturbances? This column presents new evidence from Iran on trends in entrepreneurship among various categories of firm size, sector and location – and suggests policies that could be effective in promoting entrepreneurial activities.

Manufacturing firms in Egypt: trade participation and outcomes for workers

International trade can play a large and positive role in boosting economic growth, reducing poverty and making progress towards gender equality. These effects result in part from the extent to which trade is associated with favourable labour market outcomes. This column presents evidence of the effects of Egyptian manufacturing firms’ participation in exporting and importing on their workers’ productivity and average wages, and on women’s employment share.

Intimate partner violence: the impact on women’s empowerment in Egypt

Although intimate partner violence is a well-documented and widely recognised problem, empirical research on its prevalence and impact is scarce in developing countries, including those in the Middle East and North Africa. This column reports evidence from a study of intra-household disparities in Egypt, taking account of attitudes toward gender roles, women’s ownership of assets, and the domestic violence that wives may experience from their husbands.

Do capital inflows cause industrialisation or de-industrialisation?

There is a clear appeal for emerging and developing economies, including those in MENA, to finance investment in manufacturing industry at home with capital inflows from overseas. But as the evidence reported in this column indicates, this is a potentially risky strategy: rather than promoting industrialisation, capital flows can actually lead to lower manufacturing value added and/or a reallocation of resources towards industries with lower technology intensity.

Financial constraints on small firms’ growth: pandemic lessons from Iran

How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.