01 Dec 1997


Making Real Progress in the Middle East: The Bottom-Up, Economic Solution

by Michael Porter, Yagil Weinberg, and Noreena Hertz

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Below the surface of the roller coaster political negotiations in the Middle East, a new process is quietly being played out. It is a process in which economics, not politics, is the focus, in which companies, not governments, are the driving force.

Companies were beginning to build relationships and strike deals long before the Hebron agreement was signed, and this continues even in the wake of the Har Homa settlement at Jabal Abu Ghneim. Today, business-to-business cooperation and alliances across borders are being pursued aggressively by some of the region's foremost industrialists. More than 35 Israeli-Jordanian and Israeli- Egyptian joint ventures are already up and running.

Why are top Middle Eastern business leaders now seeking out strategic alliances with their neighbors? What benefits can regional cooperation at the company level bring about? In simple terms, the motivation for these ventures is competitive advantage and profit. For Israeli companies, cooperation can open up new markets, provide cost-effective outsourcing opportunities, and significantly lower the costs of production, which is especially important for what will otherwise be dying local businesses, rendered uneconomic by high Israeli costs.

At the same time, Israeli firms in industries that have been local, such as most services, can use alliances to begin trade and foreign investment. Any loss of lower-wage job opportunities for Israeli citizens should be more than offset by the need for managerial, technical, and skilled employees to support growing international business.

For Jordanian, Egyptian, and Palestinian companies, cooperation with Israeli firms, and with each other, is even more strategically attractive. Companies can acquire know-how, Òleap frogÓ technologically, improve access to regional and global markets, and, most important, enhance their productivity.

All this can be done far more efficiently in the region than with far-off partners. Whole new industries can grow up in these countries, and existing industries should become more competitive. Israel, then, can act as a catalyst for growth in the neighboring countries, in much the same role as Japan played in Asia.

Such collaborative activity across borders is common in other regions, but until recently has been all but absent in the Middle East. Even now, less than 8 percent of Middle East exports are destined for the region, compared with about 20 percent in Mercosur, the South American trade group. Not only have politics stood in the way of gains from collaboration between Israeli and Arab firms, but cooperation even among Arab companies has been rare. As a result, Middle Eastern countries, including Israel, have been left without one of the most powerful tools to boost trade and enhance productivity.

Consider Century Wear, a knitted garment joint venture between Israel's Dov Lautman (Delta Galil) and Jordan's Omar Salah (Century Investment Group). Century Wear was set up at modest cost in March 1996 and has been operational now for just over a year. The Israeli side is contributing expertise, access to export markets, and design capabilities; the Jordanian side provides production management and manufacturing prowess.

The venture created more than 850 new jobs in Jordan (where the unemployment rate is 16 percent) and is paying its employees 30 percent to 40 percent above the average Jordanian wage rate in similar fields.

Furthermore, the venture has the potential to open up markets to both sides that have hitherto been unreachable - the Arab market to the Israelis and Europe and the United States to the Jordanians. Proof of the venture's strategic benefits are apparent in sales that top $10-million in the first year of operation and are expected to exceed $25-million in the second.

Collaborative ventures such as Century Wear make sense whatever the overall political and economic situation; indeed, they can help to shape it. Up until several months ago, for example, there was no door-to-door transport agreement between Jordan and Israel. This meant that a company wanting to transport goods by truck between the two countries had to load the goods into a Jordanian truck in Jordan, unload them at the border, and reload the goods into an Israeli truck for delivery in Israel.

This convoluted process severely complicated logistics, not to mention its role in driving up transportation costs. It was only when Mr. Lautman and Mr. Salah combined forces and lobbied their respective governments that a door-to-door transportation agreement between the two countries was signed.

Such "bottom-up" policy changes, initiated by the business people and encouraged for economic rather than political considerations, are very much what is needed in the region. There is great potential in the Middle East today to capitalize on decades of missed economic and business opportunities. In how many other regions of the world can a company establish a manufacturing base only 150 km from its head office and significantly reduce production costs? Century Wear is just over an hour's drive from the Delta Galil head office.

In how many other regions of the world can a company, by forming a joint venture with a neighbor, gain access to significant new nearby markets that were hitherto inaccessible? In how many other developing regions of the world can a company find a sophisticated business partner only hours away that can transform its competitive position?

In order for such opportunities to be realized, however, the business community of the Middle East must begin to assume more responsibility for the economic future of the region. Companies must take on a much more active role in instigating cross-border opportunities and not wait for government to lead the way. They must recognize the value of the nearby regional markets rather than become mesmerized by the lure of the U.S. and European markets.

Government mindsets also need to change. Middle Eastern governments need to redefine their roles as facilitators and supporters rather than drivers and decision makers. Thinking about regional economic strategy needs to evolve from expensive and politically complicated infrastructure-type projects into lots of smaller steps in the right direction.

From the bottom up, and at the company level, a strong foundation for regional cooperation and trade can be built in the Middle East. It promises to result in real progress towards a better political as well as economic future for the region.

This article originally appeared in the September 16, 1997 Financial Times. Co-author Michael Porter, C. Roland Christensen Professor of Business Administration, recently received the Adam Smith Award from the National Association of Business Economists.

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