Following the advancement in globalization and technology, businesses are not confined to a single territory. All the major organizations have continuous global expansion as one of their prioritized business objectives. In such a scenario, entrepreneurs and multi-national enterprises seek avenues with promising economic outlook. One such avenue is Saudi Arabia as the country has showed tremendous economic growth in the recent past, mainly due to inflow of financial resources associated with the oil trade. A number of entrepreneurs are attempting to establish businesses in Saudi Arabia, however prior to such establishment, it is essential to know the state of entrepreneurship as it is prevailing in the country.
This report presents the current state of entrepreneurship in Saudi Arabia as it includes an evaluation of a number of factors that influence the business environment. The report includes a general overview of the country, the national culture using Hofstede’s national culture dimensions, an evaluation of the organizational environment, an evaluation of the ease of establishing business in the country, access to capital for new entrepreneurs, tax and regulatory environment, and human resources of the country. The report also includes a case study of three organizations operating in Saudi Arabia, which are: Lomar, IBS, and Rumman. The report highlights how these organizations have successfully established their places in their respective markets and how they continue to grow in the current state of entrepreneurship in Saudi Arabia.
Table of Contents
Introduction
Saudi Arabia Economy at Glance
Ease of Starting Business
Best practices of Starting business in Saudi Arabia
Tax and Regulations
Best practices of Tax and Regulations in Saudi Arabia
Access to Capital for Entrepreneurs
Best practices of Accessing Capital in Saudi Arabia
Education and Training
Best practices of Education and Training in Saudi Arabia
Saudi Fast 100 Growth
The Saudi Fast Growth finding:
SWOT Analysis of Saudi Arabia
Strengths
Favorable Taxation Regime
Business Friendly Regulatory Framework
Easy Availability of Venture Capital
Weaknesses
Lack of Bank Lending
Oil Business Overshadows Entrepreneurship
Abundance of Family Owned Businesses
Unemployment
Opportunities
Investment in Research-Oriented Education
Interest of International Venture Capital Firms
Increasing Government Support
Threats
Problematic Banking Sector
Difficulty in Achieving Culture Shift
Case Studies of Lomar, IBS, and Rumman
Lomar
IBS
Rumman Company
Conclusion
References
Introduction
Following the advancement in globalization and technology, businesses are not confined to a single territory. All the major organizations have continuous global expansion as one of their prioritized business objectives. In such a scenario, entrepreneurs and multi-national enterprises seek avenues with promising economic outlook. One such avenue is Saudi Arabia as the country has showed tremendous economic growth in the recent past, mainly due to inflow of financial resources associated with the oil trade. A number of entrepreneurs are attempting to establish businesses in Saudi Arabia, however prior to such establishment, it is essential to know the state of entrepreneurship as it is prevailing in the country. This report presents the current state of entrepreneurship in Saudi Arabia as it includes an evaluation of a number of factors that influence the business environment. The report includes a general overview of the country, the national culture using Hofstede’s national culture dimensions, an evaluation of the organizational environment, an evaluation of the ease of establishing business in the country, access to capital for new entrepreneurs, tax and regulatory environment, and human resources of the country. The report also includes a case study of three organizations operating in Saudi Arabia, which are: Lomar, IBS, and Rumman. The report highlights how these organizations have successfully established their places in their respective markets and how they continue to grow in the current state of entrepreneurship in Saudi Arabia.
Saudi Arabia Economy at Glance
Due to its historical significance, Saudi Arabia has a strong and distinctive culture. Saudi Arabia embarked on a journey of economic development and international recognition after the discovery of oil in 1938. Although Saudi Arabia acquired wealth as a rentier state, the kingdom has undergone significant changes to enhance its industry and increase its competitiveness in the international economy (Kayed & Hassan, 2011).
The importance of Saudi Arabia as a country can be seen from an economic perspective as a leading oil producer, with more than 20% of the world’s known oil reserves. In consequence, it plays a leading role in the Organization of Petroleum Exporting Countries (OPEC), with its oil sector accounting for 75% of budget revenues, 45% of GDP and 90% of export earnings (Kayed & Hassan, 2011).
Ease of Starting Business
Saudi Arabia is counted among those few countries where initiating a new businesses is relatively easier. There are a number of factors that make it easy for new entrepreneurs to start the business, and some of those factors include: easy regulatory requirements, availability of venture capital, easy minimum capital requirements, favorable tax laws, easy registration process, and widespread support from regulatory authorities (SAGIA, 2010). The establishment of business in Saudi Arabia became easier after the enhanced political commitment due to the government’s policy to strengthen the country’s business sector. Due to the political support, the business establishment process was reformed in the years following 2003 (Belayachi & Haidar, 2008). With changes in the tax and regulatory environment, Saudi Arabia soon became one of the most attractive avenues for new entrepreneurs.
Best practices of Starting business in Saudi Arabia
Saudi Arabia assisted its people to start a business in 2006 while simplifying processes cutting the usual registration time from 64 days to 39 days (World Bank, 2007). Saudi Arabian General Investment Authority decided to change the processes to make it easier. In 2007, the time for starting business decreased once more to 15 days (World Bank, 2008).. The Kingdom decided to eliminate red tape bureaucracy. Soon computerized procedures occurred allowing office to accommodate in two days (World Bank, 2008).
Tax and Regulations
With regard to the ease of establishing business, Saudi Arabia ranks commendably high in comparison to other economies. The regulatory environment and government policies are business-friendly and international investment is encouraged by the regulatory authorities (Porter, 2009). This is due to the fact that Saudi Arabia is attempting to enhance its entrepreneurial landscape to make the country highly competitive in the international markets.
With regard to tax and regulatory frameworks, Saudi Arabia is among the most attractive countries. The country has a streamlined tax regime which helps the government encourage the culture of entrepreneurship in the country. The business friendly taxation laws provide the entrepreneurs with a chance to acquire optimum profits and enhance the growth of their business through reinvestment. As Saudi Arabia attempts to reduce its dependence upon revenue generated from oil exports, the government has created a highly favorable environment for new entrepreneurs to start business. The country’s tax system places very light administrative burden on entrepreneurs as only three payments are made each year. In addition to the favorable tax system, the cost of setting up a business in Saudi Arabia is significantly lower as compared to other developed countries in the world. The employment regulations in the country are also favorable for new entrepreneurs as the country has a very low labor tax (Alarabiya, 2013).
Best practices of Tax and Regulations in Saudi Arabia
Saudi Arabia one of the top country for paying tax as it ranked 7th worldwide in the world bank report for the ease of paying taxes. The government wanted the people to earn more and save more. By 2009, Saudi Arabia cut fees. Only 50 % remained in tax in order for entrepreneur to pay nothing for registering of property (World Bank, 2010).
Access to Capital for Entrepreneurs
As mentioned earlier, the regulatory environment of Saudi Arabia is very welcoming for new entrepreneurs as the country attempts to make itself competitive in the international knowledge economy. Thus, in pursuance of this advancement, the country has a rising venture capital industry which helps new entrepreneurships establish in the industry. At the point of inception, entrepreneurs may be required to invest their own capital along with informal investors. However, debt financing may be available as venture capital depending upon the business plan and credibility of the owner of the business (Rice, 2004). Thus, it can be said that the overall business friendly environment of Saudi Arabia helps the entrepreneurs acquire access to the capital they need to ensure establishment and growth of their businesses.
Best practices of Accessing Capital in Saudi Arabia
Saudi Arabia ranked fair worldwide as stated in Doing Business report 2011. The Kingdom ranked 46th place compared to former years (World Bank, 2010). By 2004, public registry of Saudi Arabia reduce the minimum loan size for gathering data from 5 million Riyals to 500 thousand, which is, doubled the borrowers’ population. The bureau was supported by the Central Bank before the Saudi Arabia launched its own credit bureau in 2007. The bureau reports various businesses’ credit exposure with its financial statements and ownership details. Mobile telephone companies and retailers joined the bureau in 2008. The credit bureau allowed borrowers to review and dispute on their information (World Bank, 2008). There was a better enhancement on amending the Saudi’s commercial line law in the latest reform in 2010. This allowed accessing credit easier though the secured lending flexibility and letting out-of-court implementation in case of default. In the future, the Kingdom would implement an electronic collateral registry (World Bank, 2010).
Education and Training
Achoui (2009) presents the current landscape of human resources in Saudi Arabia. The educational and training facilities in Saudi Arabia are still in their developmental phase therefore the local human resources may not be in accordance with the international standards. Saudi
Arabia spends relatively smaller amount on Research and Development activities in universities (EnY, 2013). However, the landscape is changing rapidly as educational institutes offering professional qualifications have started operating throughout the country. Apart from that, a large number of Saudi professionals acquire their academic qualifications from abroad therefore they are equipped with the skills and knowledge necessary to help in the growth of a business.
Currently, the businesses in Saudi Arabia place very high dependence on foreign labor and this dependence may continue for a period of time till the local human resources are equipped with the necessary skills and knowledge.
Best practices of Education and Training in Saudi Arabia
KAUST broaden its accessibility with US$10 billion. This became the world’s sixthlargest university. Its goal is to be an internationally renowned graduate research and entrepreneurial university (US-Arab Tradeline, 2010). Soon, the Alfaisal University started to be the leading industry-based research institutions. Alfaisal’s vision is to be a world-class research university. The Prince Mohammed bin Fahd Leaders Preparation Center also wanted to help the female citizens of Saudi Arabia to lead future (US-Arab Tradeline, 2010). Scholarships are provided to students and there are more than 148,000 student studying abroad.
Saudi Fast 100 Growth
During the last Global Competitiveness Forum in 2008, there was an awarding to the entrepreneurial companies in the Kingdom who was able to perform remarkably. This awards were SAGIA, AlWatan, and Next Economics. The SFG decided to create the Saudi Fast Growth 25. It was recorded as the fastest growing, private company in Saudi Arabia. The winners were chosen based from their revenue growth. Companies chosen have to undergo some qualification process. The list mentioned the generation of companies that have assisted the Kingdom on creating jobs and spurring innovation and growth within various industries. The SFG mentioned 95 companies.
The Saudi Fast Growth finding:
There was an average entrepreneurial age, which was placed within 32 years. Surprisingly, those who won were coming from a group of college graduates, with half of them having their master’s degrees. Surprisingly, they have an academic background often in engineering or business. SFG made sure that the participants should have a working experience of 3-5 years for a global firm before launching their startup. Surprisingly, more than half have founded more than one company. The most common industries enlisted were High Tech &
Telecom (23 %), Construction & Engineering (12 %), Health & Education (10 %) and Management Consulting (10 %).
SWOT Analysis of Saudi Arabia
The favorableness of Saudi Arabia for entrepreneurship or otherwise can be assessed using the SWOT analysis of the country in context of its suitability for new entrepreneurs. SWOT analysis is one of the most effective analytical models used to evaluate the internal and external environment of an entity. SWOT analysis considers; strengths and weaknesses of the entity, and in this context, a country which are also known as the internal factors, and opportunities and threats faced by the country which are also known as the external factors (Doyle & Stern, 2006). The following sub-sections highlight the strengths, weaknesses, opportunities, and threats in the Saudi Arabian environment for entrepreneurs.
Strengths
The strengths are the internal factors that enable an entity to sustain its position against the competitors and other threats to its long term survival in the industry. Following are the strengths in the Saudi Arabian business environment that will enable entrepreneurs to hold a viable position in the industry.
Favorable Taxation Regime
One of the biggest strengths of Saudi Arabian environment is the favorableness of taxation regime of the country for new businesses. The country is attempting to enhance its business landscape in order to reduce its overreliance upon the oil export business and in order to attract new investment and new entrepreneurs, the country has established a very favorable taxation system that allows the businesses to acquire greater proportions of the income so that they may be able invest in their own growth (Tax Rates, 2013).
Business Friendly Regulatory Framework
The regulatory framework of the country is highly favorable for businesses. New entrepreneurs can set up new businesses in a significantly easier manner as compared to other developed countries. Saudi Arabia has maintained a business friendly regulatory framework in order to accelerate the growth of its business sector. Therefore, the regulatory framework is one of the major strengths of the Saudi Arabian business environment that can help new entrepreneurs acquire a stable position in a relatively shorter period of time.
Easy Availability of Venture Capital
For businesses that present innovative ideas with a potential for prospective growth, there is easy availability of venture capital in Saudi Arabia. There are a number of venture capital firms in the country that are ready to provide the entrepreneurs with venture capital if the entrepreneurs present a plausible business plan that is innovative and that shows the potential of high returns on investment (Schwab, 2012).
Weaknesses
Despite the strengths, there are certain factors that may weaken the position of new entrepreneurs in the industry. Following are some of the weaknesses in the Saudi Arabian business environment.
Lack of Bank Lending
The banking system in Saudi Arabia is significantly different as compared to the banking system in other countries. The banking system of the country follows Islamic principles and the policies for extending loans are strict. It is difficult to acquire loans unless viable securities are kept with the bank. Therefore, for new entrepreneurs, bank debt financing may not be a suitable option for raising capital.
Oil Business Overshadows Entrepreneurship
Due to abundance of oil reserves in the country, a significant proportion of the economy is dependent on the oil export business. This overdependence has eclipsed the process of development of technology and innovation in other business sectors in the country. For decades, oil business has been the main focus of the government and the major investors in the country; and in this process, all the other sectors of business have remained ignored. Therefore, it can be said that due to oil business, other businesses have not completely thrived and they are still in their developmental phase. The lack of innovation and overreliance on oil business is among the major weaknesses of the Saudi business environment which may lead the new entrepreneurs towards certain difficulties. The difficulties may include: lack of necessary infrastructure, lack of organizational structures, and lack of associations and networks. Due to lack of technology and infrastructure, the execution of businesses may be highly difficult for the new entrepreneurs.
Abundance of Family Owned Businesses
Upon screening of the Saudi business environment, it may be observed that there is abundance of family owned businesses in the Saudi business environment. There is lack of professional entrepreneurships therefore the business environment lacks the formal organizational structures, hierarchies, and other standards of business that are observed in other developed economies. This is a weakness for the new entrepreneurs as they may find it difficult to create associations and dealings with other businesses. The family owned businesses have an informal structure and they do not follow a rigid line of authority as it is observed in formal organizational structures. This may create a number of complexities for new entrepreneurs.
Unemployment
Since a significant proportion of country’s revenue is generated from oil business, there is lack of other industries and this has resulted in increase in unemployment. The economy has been struggling with creation of employment opportunities however there is high level of unemployment in the country. This is among the major weaknesses of the Saudi business environment.
Opportunities
With internal factors that help the businesses strengthen their position, there are certain external factors that present the businesses with opportunities to acquire strength and business growth. Following are some of the opportunities prevailing in the Saudi business environment.
Investment in Research-Oriented Education
The government has increased its investment in research-oriented education and this will result in the development of domestically educated and trained workforce that has a positive attitude towards innovation. Such an investment will result in advancement of technology and innovation in the country, which is a significant opportunity for the entrepreneurs. The entrepreneurs will have a previously established infrastructure of technology and innovation, and they will find it easier for establish their businesses in the industry.
Interest of International Venture Capital Firms
In addition to the local venture capital firms, there are a number of foreign firms that are interested in extending capital for potential entrepreneurs in Saudi Arabia. This recent increase in interest of venture capital firms is due to the strengthening economy of the country and the shifting landscape for business (Al Rajhi et al., 2012). Other factors are the business friendly regulatory framework. Therefore, this is an opportunity for entrepreneurs to acquire capital for establishing a business.
Increasing Government Support
The government’s strategy to strengthen the business sector in the country includes increase in support for new entrepreneurs. Thus, the government has provided lenient regulatory requirements and easy tax laws to encourage entrepreneurs to initiate new business ventures.
Threats
Although there are opportunities in the business environment of Saudi Arabia, the country is not independent of threats for the new entrepreneurs. Following are some of the threats that the new entrepreneurs may face.
Problematic Banking Sector
The banking sector in the country is different from other contemporary banking sectors in developed countries. Therefore, this may cause difficulties in international transactions for new entrepreneurs. The failure of banking sector can have detrimental impacts on new businesses.
Difficulty in Achieving Culture Shift
National culture plays a significant part in the communication and business prevailing in a country (Hofstede, 1980). Saudi Arabian culture is resistant to change, and introduction of a strong business environment may require a shift in the culture which has prevailed in the country for centuries. Moving from dependence on oil reserves and family owned businesses towards a more decentralized business environment with diversification of industries may be a significantly challenging task for the regulatory authorities. Therefore, the resistance of culture is a threat for the success of new entrepreneurs in the country.
Case Studies of Lomar, IBS, and Rumman
The state of entrepreneurship in Saudi Arabia can be best understood with the examples of real organizations that have established and successfully enhanced their businesses in Saudi Arabia. There are a large number of entrepreneurs that have found unforeseen success while operating in the country. For the purpose of this report, case studies of three organizations have been highlighted in the subsequent sections.
Lomar
Lomar is among the most successful fashion brands operating in Saudi Arabia. The founder of the organization, Loai Naseem, failed to establish more than 15 business then decided to go to the United States to complete his studies majoring in Arts. Naseem returned to Saudi Arabia after graduation and worked as a designer in the advertising agency. Naseem felt bored of wearing the traditional Saudi thobe (a variation of robes), formerly come up with new design.
Then he started the business of designing thobes after receiving positive feedback on the thobes he designed for himself. While working at an advertising agency, Naseem started selling thobes from home with annually, sales that year reached 19,900 USD. Due to increasing popularity of his thobes, he co-founded Lomar with his wife. Lomar is now among the highly successful brands in Saudi Arabia and the business has four stores; two in Jeddah, one in Riyadh, and one in Al Khobar. Lomar’s revenue in 2009 was $4.78 million, representing the astounding success of the entrepreneurship, which started entirely unplanned (NUSACC, 2010).
The success story of Lomar highlights that Saudi Arabian business environment is highly favorable for small businesses and entrepreneurships. New entrepreneurs can start their own businesses while targeting the right market segments, and depending upon the demand prevailing in the market and popularity of their products or service; they may reach the heights as reached by Lomar.
IBS
Innovative Business Solutions (IBS) is another entrepreneurship that found its way to success in a very short period of time. The owner of the business, Osama Bakur Natto, held a position at Procter & Gamble prior to starting his own business. According to Natto, the rules and regulations in the organizational environment of his workplace did not allow him to work innovatively therefore he was not satisfied with his job. He started a one man company in Jeddah in 2005 as a business consultancy. Within a few years, the popularity of IBS increased and the company was regarded as the most appreciated business consultancy in the region. Thus, the company embarked on a journey of success and growth (NUSACC, 2010). IBS is another example of the favorable environment of Saudi Arabia for new entrepreneurships. It can be said that the success of the business depends upon the demand for the product or service offered, the quality of the product or service, and the subsequent popularity of the business among customers.
Rumman Company
Rumman Company is a Media Publishing House founded by three women in 2007. The entrepreneurship started in the living rooms of the co-founders and found its way to a successful organization that has 21 employees and annual revenues ranging from $266,000 to $1.3 million.
The secret to the company’s success was careful identification and targeting of its market segment which is Saudi youth. The company reaches out to its target market through a youth website and a monthly English-language guide regarding exploring Jeddah. Thus, for any events, the company has access to the right demographic among Saudi youth and this is what makes the company among the most successful Media Publishing companies (NUSACC, 2010). Rumman Company is another example of the potential in Saudi Arabian business environment for young entrepreneurs.
Conclusion
Following the rising wave of globalization, entrepreneurs are not confined to single regions; they seek new regions to establish their businesses. Due to the economic growth, Saudi Arabia has become one of the most sought after locations for establishment of entrepreneurships. There are a number of factors prevailing in the Saudi business environment that make it highly favorable for new entrepreneurs. One of the factors is the highly friendly regulatory environment which encourages establishment of new businesses. The Saudi government is attempting to enhance the business environment in the country to reduce over reliance on the oil export business. In pursuance of this goal, the government provides a very friendly tax and regulatory environment. The start-up costs are very low, the taxes are very low and easy to process, and there is availability of venture capital. These factors make Saudi Arabia an optimum destination for establishment of entrepreneurship. The report also highlighted that human capital of the region is still in its developmental phase however the educational and training facilities have started providing professional education to Saudi students. The report also presented case studies of three entrepreneurships that successfully made their mark in the Saudi Arabian market in a very short period of time, highlighting the favorable nature of Saudi Arabian business environment towards new entrepreneurs.
References
Achoui, M. M. (2009). Human resource development in Gulf countries: an analysis of the trends and challenges facing Saudi Arabia. Human Resource Development International, 12 (1), 35-46.
Alarabiya. (2013) Saudi Arabia's tax & regulatory framework strongest in G20. Retrieved on November 12, 2013, from http://english.alarabiya.net/en/business/economy/2013/09/30/Saudi-Arabia-s-taxhttp://english.alarabiya.net/en/business/economy/2013/09/30/Saudi-Arabia-s-tax-regulatory-framework-strongest-in-G20.htmlregulatory-framework-strongest-in-G20.html
Al Rajhi, A., Al Salamah, A., Malik, M., & Wilson, R. (2012). Economic Development in Saudi
Arabia. New York: Routledge.
Belayachi, K. O., & Haidar, J. I. (2008). Competitiveness from innovation, not inheritance. Celebrating Reform.
Doyle, P., & Stern, (2006). Marketing Management & Strategy, 4th ed. Harlow; Prentice Hall.
EnY. (2013) The power of three.
Hofstede, G. (1980) Culture’s consequences: international differences in work-related values.
London: Sage.
Kayed, R. N., & Hassan, M. K. (2011). Saudi Arabia's economic development: entrepreneurship as a strategy. International Journal of Islamic and Middle Eastern Finance and
Management, 4 (1), 52-73.
NUSACC. (2010). 27 Success Stories. US-Arab Tradeline, Spring, 18 - 36.
US-Arab Tradeline (2010) ,Incubating the Future: Entrepreneurship in Saudi Arabia, National
U.S.-Arab Chamber of Commerce, Washington,pp 4,8 DC
Porter, M. E. (2009). Competitiveness and the State of Entrepreneurship in Saudi Arabia.
Harvard Business School.
Tax Rates (2013). Saudi Arabia Tax Rates, taxrates.cc, accessed 15 oct 2013
Rice, G. (2004). Doing business in Saudi Arabia. Thunderbird International Business Review,
46 (1), 59-84.
World Bank. (2007). Doing Business 2008, Washington D.C. World Bank Group
World Bank. (2008). Doing Business 2009, Washington D.C. World Bank Group
World Bank. (2010). Doing Business 2011 Making a Difference for Entrepreneurs, Washington
D.C. World Bank Group
Doing Business 2011 Schwab, k. (2012). The Global Competitiveness Report, World Economic
Forum, 2012.
SAGIA. (2010). The Competitiveness Review: An Update on Saudi Arabia’s 10x10 Program. Retrieved on 22 November 2013 from http://www.sagia.gov.sa/Documents/Download%20center/SAGIA%20Publications/Com petitiveness_Review2010.pdf
- Quote paper
- Abdullah Almushaigeh (Author), 2013, The State of Entrepreneurship in Saudi Arabia. Best Practices, SWOT analysis and case studies, Munich, GRIN Verlag, https://www.grin.com/document/280335
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