Reporting and audit requirements for SMEs, whether regulatory or simply required by banks as a consideration for accessing markets, sometimes act as a barrier to SME finance and to SME growth. External audits can be costly and difficult to justify, as SME accounting is usually straightforward, relying on historical cost-based, rather than fair value, measurement. They may also act as an incentive to stay disengaged from the formal sector and full regulatory compliance. For example, the Central Bank of Egypt requires banks to have three years of audited statements for their enterprise clients. In West Bank and Gaza, all companies with limited liability, including SMEs, are required to undergo an annual independent audit, which can act as an indirect barrier to SME finance. This can also act as an incentive to enterprises operating informally and therefore less transparently.

Such requirements particularly affect smaller enterprises, which may not keep standardized financial statements in line with bank or auditor expectations. In some cases, enterprise owners may even keep more than one version of financial records for instance, if they do not present all relevant information to tax authorities. SMEs are also constrained by financial or management skills and by a lack of access to information about markets, product standards, and buyer trends. Excessive bureaucratic requirements for, enterprise registration, and payment of fees and taxes can also act as a disincentive to enterprises operating in the formal sector, which would further exclude enterprises from many market opportunities. SME owners may lack the range of skills needed to successfully run a business as it grows and becomes more complex, and tend to place insufficient importance on financial management and accounting.

# **VI. DETERMINANTS OF JOB CREATION IN SELECTED ARAB COUNTRIES - AN EMPIRICAL INVESTIGATION**

It is important to identify the determinants of firms’ growth in the Arab countries. While little work has been done in this respect we bring new empirical evidence on the significance of location, innovation, access to bank finance costs and performance of enterprises in terms of the economic and regulatory framework as determinants for firms’ growth. The proxy for high growth is to achieve employment growth above 10%.

We use data from the World Bank’s enterprise survey considering responses from 4,211 SMEs in nine Arab countries. Several models were applied, in part to accommodate the different variables available from different countries. Model specifications were applied with many sub samples to ensure robustness of results, controlling for firms sizes, to view the relationship of job growth to explanatory factors across the full sample of formal enterprises surveyed in each country.

The data used for this exercise is comparable across countries since they are all sourced from the World Bank database focuses mainly on formally registered firms. We identify SMEs using comparable employment size definitions, looking across sectors as well as specifically at the manufacturing sector (see Annex I for details on the specification of logistic regression models adopted). Nevertheless, the findings of this analysis are subject to a number of caveats.

Most importantly, enterprise surveys cover only the formal sector, excluding the informal firms<sup>23</sup> , and typically exclude microenterprises as well as most rural enterprises. Hence our results do not speak to informal enterprises and focus primarily on the urban economy. While this database is the best available source, we recognize these limitations.

We adopt a logistic regression empirical motivation that is adopted to predict the outcome of a categorical dependent variable (i.e., a firm with high (10% or more) growth in employment)

> 23The typical country in MENA produces about 27 percent of its GDP and employs 67 percent of its labor force informally (Loayza and Wada, 2010).

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