An analysis of how private sector companies in Saudi Arabia should alter their business strategies to attract foreign investment
For all the countries worldwide, Foreign Direct Investment or FDI is one of the most vital factors in their economic development. It not only brings capital to a country, but also facilitates transfer of skills, knowledge and technology, provides access to the global market and develops organizational and managerial practices. Thus, countries are striving to develop a favourable environment to attract foreign direct investment. This is their top priority and therefore they are liberalizing their foreign direct investment regimes to diminish precincts on the entry of foreign direct investment. The present work aims to develop strategies for attracting higher FDI in Saudi Arabia by private sector companies.
This work is based on interpretivism philosophy and is both quantitative and qualitative in nature. The researcher has adopted exploratory research design and the data collected through primary and secondary sources is analyzed through thematic analysis.
From this work it has been found that Saudi government is making some serious efforts of attracting foreign direct investment through the Saudi Arabian General Investment Authority (Sagia). However, Sagia is drifting away from its previous strategy and now is changing its direction. Now the authorities are focusing more on small and medium size businesses, investment on which will give rise to transfer of knowledge, training and technology and are less concerned about heavy industries. From the collected data it is found that although, the country is trying to switch government working from offline to online so as to cut application time and to control corruption, still many companies are finding it difficult to get visa and other formalities done for their staff. Further, the nation has the lack of qualified judges because of which its present court system is overburdened, and even Sagia regulations are very indistinct. Laws change quite frequently in the country. Lastly, it has been found that, the human capital of Saudi Arabia is not skilled enough and thus foreign companies face lots of difficulties in hiring talented human resource.
Chapter 1 - Introduction
In the present economic scenario Foreign Direct Investment, popularly known as FDI is increasingly recognised as one of the most vital factors in the economic development of the nations. It not only brings capital to a country, but also facilitates transfer of skills, knowledge and technology, provides access to the global market and develops organizational and managerial practices (Doytch and Uctum, 2011). Thus, countries are striving to develop a favourable environment to attract foreign direct investment. This is their top priority and therefore they are liberalizing their foreign direct investment regimes to diminish precincts on the entry of foreign direct investment (Doytch and Uctum, 2011). Countries have developed various incentives for attracting foreign direct investment, but the effectiveness of such incentives for determining the attractiveness of foreign direct investment is still questioned. For such kind of inward investment, government often offers tax incentives to the foreign parties so as to make an investment in their country (Doytch and Uctum, 2011).
The present work focuses on foreign direct investment in Saudi Arab. This nation is the greatest producer and exporter of natural gas and petroleum products. Many economies of the world depend on Saudi Arabia to meet their fuel requirement. This has provided an edge to the country, but now analysts regard this as one of the limitations of the country (Naguib, 2012). For years, officials of the country are in process to diversify their petroleum dependent economy and now the country is seriously working towards this. In recent time's oil and natural gas industry has seen slump because of which the overall economy of Saudi Arab was severely affected (Naguib, 2012). Diversifying the economy will help the nation in lowering the shocks from the oil slump and in addition to this it will also create jobs for the local people. In order to achieve this, the government is liberating its economy and the country is making some serious efforts of attracting foreign direct investment through the Saudi Arabian General Investment Authority (Sagia), which is the foreign investment licence provider (Naguib, 2012).
In May 2012, there were some changes in the Sagia's leadership and it has shifted its scope from the large projects. The promoters claimed that the six economic cities will contribute near about $150 billion into its GDP and would create around 1 million jobs (Allam, 2014). This will be achieved by attracting heavy industries. Attracting heavy industries in Saudi Arabia will not be a difficult task as those industries would benefit from Saudi Arab's subsidized energy. However, during the global financial crisis most of the projects in these cities were either called off or were derailed. High cost of local fuel consumption forced the government to shift its focus from heavy industries towards those industries which emphasizes more on technology (Smith, 2008).
As per Adulaziz al - Gasim, one of the senior Riyadh based lawyers, the foreign investment license provider Sagia is drifting away from its previous strategy and now is changing its direction. Now the authorities are focusing more on small and medium size businesses, investment on which will give rise to transfer of knowledge, training and technology and are less concerned about heavy industries. Saudi Arabia, the oil rich kingdom is the biggest economy of the Gulf region with the largest population. Among all the Gulf nations, 40 percent of the total foreign investment flows to Saudi Arab (Allam, 2014). Early this year, the volume of its foreign direct investment reached to the level of $199 billion. In 2011 when the Kingdom was uprising, the government announced to spend $130 billion on public to head off public discontent (Allam, 2014). In addition to this, the authorities also planned to invest $100 billion on the transported related projects which includes trains, subway lines, ports and public buses. In July 2011, in the bidding process, three construction companies from the west bided for Riyadh's metro lines and won contracts of worth $22.5 billion (Allam, 2014). However, the investors are very deeply concerned at the regulations by the Sagia which were focused on creating jobs in the country.
Regardless the size of the company; the investors were forced to meet the required hiring norms of the country under which they have to recruit certain percent of local talent. In addition to this, the companies were forced to transfer the technology and knowledge within the 18 months of their operations in the Kingdom (Smith, 2008). Most of the companies were not ready to follow this model as this model was not fit for them. The companies undertaking huge infrastructure projects in the construction line were not in favour of hiring local talent as according to them local talent avoids working in the construction business and are less interested to take a job with any construction company (Usa, 2009). In addition to this, high tech construction companies require limited numbers of skilled labours as the majority of the work is mechanized so they need small number of skilled talent. In this line with this, an investment licence of one of the construction contractors of Spain named Tecnicas Reunidas was cancelled as his company was not able to meet the criteria set by the Kingdom's government for the foreign investors (Usa, 2009).
Recently, one of the Sagai's officials stated that Sagia is trying to negotiate with the investors to extend their deadlines so that they can meet the requirement set by the government. There are various sectors such as health, transport, education, etc. in which the local government is spending a major part of its budget and thus it wants investment in those sectors from the foreign investors. Still the oil and natural gas industry of Saudi Arabia accounts for 90 per cent of its fiscal revenue (Allam, 2014). Although, the country is trying very hard to attract small and medium sized businesses, but still the government has not done much in its legal framework so as to attract foreign investment. Earlier the government of Saudi Arab were interested in inviting big foreign industries and corporate houses in the country, but later on it changed its policies and now they are more interested towards small and midsized industries. The country could have benefitted from the investment if it would have stuck to its earlier policy of attracting heavy industries as such kind of companies can mitigate the difficulties (Smith, 2008). However, on the other hand, it is very difficult for the small and midsized companies to cope up with the demands of the local government as they have financial constraint. Although investors do not need to have some kind of tie ups with the local partners, they can work independently in the Kingdom. However, having connections with the prominent or royal family is an added advantage and is always fruitful in the long run.
Every year World Bank rates every country on various parameters. These ratings are used by the investors and help them in deciding whether they must invest in the nation or not. In terms of accountability, Saudi Arabia is ranked last. The country has opaque regulations with large and slow bureaucracy (Glass and Saggi, 2002). The country is trying to switch government working from offline to online so as to cut application time and to control corruption, still many companies are finding it difficult to get visa and other formalities done for their staff. Another problem faced by the nation is the lack of qualified judges because of which its present court system is overburdened and there is a lot of pending cases to be heard. The government is working on the plans to bring specialized commercial courts and efforts are looking to be materializing slowly and steadily (Glass and Saggi, 2002).
In the views of Hazim - al - Madani, one of the prominent lawyers of the Kingdom, the Sagia regulations are very indistinct. Laws change quite frequently in the country, therefore, lawyers find it difficult to cope up with it as they themselves are not sure what to brief to their clients. Because of this, a foreign investor who was operating in the nation for the past ten years has to quit his business and closed the factory and moved to Northern Iraq (Smith, 2008). The main reason was, it has become quite frustrating to adjust to the ever changing regulations without notice. In addition to this, it has been found that there is a lack of coordination between the ministries and government bodies and in some cases there has been an intense rivalry among various government bodies (Usa, 2009). Analysts and economists feel that investors such as mobile phone assemble lines and tyre making industries must be invited to export the finished products to Middle East and African nations.
Present work focuses on the foreign investment rules and regulations in the Saudi Arab so as to develop strategies for the companies so that they can attract higher foreign direct investment. The work highlights the present trends in foreign direct investment around the world and in Saudi Arab. The work studies opportunities and limitations for foreign direct investment in Saudi Arab so as to propose strategies for the Saudi companies so that they can meet the challenges of stagnant foreign direct investment in Saudi Arab.
1.2: Structure of the report
For the successful completion of the study, the entire process was conducted in a systematic order. This has significantly helped the researcher in achieving the aim and objects of the study and the scholar was able to unearth the answers to all the research questions. Research is a systematic process, so the work is completed step wise step as all the chapters of the work are linked to its previous and next chapter. So the researcher has not skipped any of the chapters in between. Following chapters construct the structure of the report:
Chapter 1 - Introduction: Every work starts with a background which tells about the subject on which the work is carried out. The introduction chapter present aim, objects and research questions about the study. In addition to this, it throws light on the methodology used in the research study and focus and purpose of the work.
Chapter 2 - Literature Review: In order to gain deep insight on the subject under consideration, the researcher needs to accumulate knowledge on the topic and this can be best attained by reviewing the previous literature available on the similar topics. Although researcher cannot get exact information as no work is similar to any other work, but one can gather related information by referring to various past studies and articles from different authors and researchers. In the present case, the literature review focuses on the foreign investment scenario in the Kingdom. The section highlights local investment rules and regulations and moreover, the challenges faced by the companies in attracting foreign investment. It also discusses opportunities lying in the country for foreign investment.
Chapter 3 - Research Methodology: One of the most important chapters of the entire research report is research methodology. Without selecting appropriate research methodology, no researcher can achieve the aim and objects of the work effectively and efficiently. Methodology significantly helps the researcher in collecting appropriate and valid data that too by spending lesser resources. This chapter discusses what kind of research design has been practiced by the researcher and what all modes have been used by the scholar for the collection of data. This chapter concludes with the limitations faced by the researcher at various stages of the research process.
Chapter 4 - Data Analysis and Findings: This is the penultimate chapter of the research report and deals with the analysis of the data gathered by the researcher from different resources. Finally, all the analyzed data are presented in a suitable manner so that it can be understood by a common reader.
Chapter 5 - Conclusion and Recommendations: The ultimate chapter of research report deals with the conclusion. In this all the findings and knowledge gained are concluded and on the basis of that certain findings are proposed.
1.3: Focus and Purpose
The proposed work focuses on foreign direct investment and investment scenario in Saudi Arab. The kingdom of Saudi Arabia is an oil dependent nation as 90 per cent of the economy is dependent on the oil and natural gas sector. Because of this its economy keeps on fluctuate with the fluctuations in the prices of oil and natural gas. To overcome from this challenge, now the government is trying to attract foreign direct investment and is inviting foreign companies to invest in the nation so as to reduce its reliance on a single sector. In this regards government is making efforts to bring small and midsized industries in the country that will help it in the transfer of skills, knowledge, technology and investments. Thus, the work tries to find out how companies should devise their strategies so as to attract foreign direct investment.
The main aim of the proposed work is to develop strategies for attracting higher FDI in Saudi Arabia by private sector companies.
To meet the aim of the work, here are the objectives worked on during the research process:
To study FDI theories and present trends in FDI
To evaluate limitations and opportunities in FDI in Saudi Arabia
To formulate strategies for addressing limitations and opportunities in FDI in Saudi Arabia
While performing research on a subject, there are several questions in front of the researcher. It is essential for the researcher to find out answers to all such questions so that researcher can reach to some authentic and rigid findings. Here are the researcher questions which the researcher has tried to answer through this work:
What are the opportunities and challenges in FDI in Saudi Arabia?
Are the present strategies of private sector companies not effective for attracting FDI in Saudi Arab?
How companies can meet the challenges of stagnant FDI in Saudi Arabia?
The Saudi Arabian economy is going through a dull phase and after the financial crisis of 2008, the economy has not been able to recover and is still derailed. The main reason of poor performance of the economy is its over reliance on oil and natural gas sector. Secondly, government and local players are not able to attract foreign investors to invest in their Kingdom. Thus, the purpose of the work is to suggest strategies that will help the nation in increasing its foreign direct investment.
1.4: Framework Analysis
Following methodologies have been adopted by the researcher in the study:
Research Philosophy: In the present work, Interpretivism approach is appropriate as it allowed researcher to undertake more in-depth survey with managers of foreign private companies.
Research Type: The proposed work is both quantitative and qualitative in nature. The researcher collected both qualitative and quantitative data from primary and secondary resources.
Research Design: The present work is exploratory in nature as it explores the subject under consideration.
Data Collection: The researcher has collected data from primary as well as secondary sources. For primary data, a questionnaire was forwarded to the managers of foreign private companies consisting of both open and close ended questions.
Sampling Technique: A sample of 50 managers was selected through simple random sampling technique.
Data Analysis: Qualitative data analysis has been applied. Under qualitative analysis, thematic analysis has been performed to reach towards a conclusion.
1.5: Significance of the work
The present work has both practical and academic significance. In the present scenario, when every country is trying to diversify its economy, Saudi Arabia is still largely dependent on oil and natural gas sector. In the present scenario the oil industry has seen lots of fluctuations and because of this Saudi economy has suffered a lot. Government and industries are not able to attract foreign investors. Mainly because its foreign investment guidelines are very stiff and foreign players are not able to adopt a those policies as their business model does not suit it. Thus, the present work proposes some changes in the strategies of the private companies so that they can increase the value of foreign investment. This work helps the managers of Saudi private companies to devise better strategies so that they can resist to the frequent fluctuations in the economy because of changing oil prices. In addition to this, this work can be used by managers of other private companies also operating in other parts of the world. In case of academic significance, this work is useful for the professors, teachers, students and scholars who want to gain knowledge on foreign investment strategies. Further, scholars who what to conduct their researcher on similar kind of topic can refer this study as this will provide them a takeoff ground.
Chapter 2 - Literature Review
The literature review is an important chapter of a dissertation as it significantly helps the researcher in collecting appropriate information so that a researcher can gain deep insight about the subject under consideration. In the present chapter, researcher has studied various literatures on FDI and FDI in Saudi Arabia to understand how to increase inflow of FDI in the Kingdom.
2.2: Business Strategy
According to Rumelt and et al (1994), strategic management is the main driver which creates a difference in the performance among the competitors in the market. Various researchers have proposed various reasons which are directed towards strategy implementation such as the quality of strategy formation by Mintzberg (1990), effective designing of an organization by Galbraith and Kazanjian (1986) and possession of valuable and unique resources by Wernerfelt (1984). The main purpose behind formulating and applying business strategy is to gain competitive advantage in the market (Slater and Olson, 2001). In this regards there are two popular theoretical frameworks, one is proposed by Miles and Snow (1978) and another is proposed by Porter (1980).
The theoretical framework proposed by Miles and Snow (1978) is multi dimensional. According to it, any organization needs to define and approach their product market domains and later on needs to construct processes and structure to achieve top position in the sector. That is, Prospector companies keep on hunting for the new markets and invest in new products and services. Whereas, Defender companies try to maintain their market share and thus focus on manufacturing efficiency. However, the third category is of Analysers who have combined property of prospectors and defenders. They keep on searching for the new market and products, but simultaneously they also focus on maintaining the share of their established products and services in the market. Finally, there are Reactors who react to the market and thus are not responsive to product market domains (the entrepreneurial problem) and therefore find it very difficult to sustain in the market in the long run.
Porter's (1980) framework is an extended version of Miles and Snow's (1978) framework as it also deals with entrepreneurial problem. According to Porter (1980), companies must treat entrepreneurial problem as product that creates value such as offering unique products or offering products at competitive prices; and moreover, it must also define the taste of the customer in which the firm is operating.
2.3: Global Marketing Strategy
With globalisation, firms are expanding their business boundaries and becoming more and more global. Therefore, it has added a new subject of discussion for the researcher, that is, global marketing strategy. Various researchers have put forward their views on the effect of global marketing strategy on the overall performance of the business. Researchers such as Hamel and Prahalad, (1985); Birkinshaw and al., (1995); Zou and Cavusgil, (1996); Porter, (1986); feel that in determining the performance of a firm in overseas market, global marketing strategy acts as a crucial factor. There are three major perspectives on global marketing:
First is the standardization perspective according to which advances in transportation and communication is transforming the world market as a homogenized market (Jain, 1989; Levitt, 1983). Because of such homogeneous market, there is a similar kind of product preference and demand across the globe. In the views of Levitt (1983), in the global market, only those companies can gain competitive advantage that can provide quality products at lower prices. Thus, believers of this perspective feel that if the marketing program of a company across different nations is standards, it will add to its global marketing strategy. That is, companies need to standardize its prices, promotional mix, product offering and channel structure throughout its area of operations (Johansson 1997; Keegan, 2000). This will result in economies of scale in marketing and production (Levitt, 1983), consistency in responding and dealing with customers (Laroche and et al., 2001) and to develop aptitude to explore new ideas on a global level (Ohman, 1989).
The second perspective deals with organization and synchronization of a firm's value chain activity (Porter 1986; Craig and Douglas 2000; Roth and et al., 1991). Believers of this perspective feel that global marketing strategy helps in exploiting synergies across various geographical markets and thus companies gain competitive advantage associated with the respective nations it is operating in. It is essential for the companies to systematize its value chain activities and there must be synced between its efforts in different markets (Kogut 1989; Craig and Douglas 2000; Yip, 1995; Ghoshal 1987). Specialization enables an organization to enjoy location specific opportunities and advantages (Craig and Douglas 2000; Porter 1986; Roth, 1992) and cross national coordination helps in achieving synergies through learning, economies of scale and scope (Kogut, 1989; Roth, 1992). Another important aspect of this perspective is a configuration that deals with scale of deliberation of value chain activities that maximize the efficiency of the firm (Roth, Schweiger, and Morrison 1991; Porter 1986; Zou and Cavusgil 1996). This shows that companies must plant their manufacturing units in those nations where there is availability of plenty of good and cheap skilled human resource and engineering. This will enable the firm to benefit from competitive advantage delivered by respective nation.
Integration or integrated view is the third perspective of global marketing strategy. It means that, in order to gain success across the world, companies must participate in all the major markets of the world so as to achieve competitive leverage. Moreover, firms must integrate its competitive campaign in all the markets (Yip 1989, 1995; Birkinshaw, Morrison, and Hulland 1995; Zou and Cavusgil 1996).
Zou and Cavusgil (2002) feel that companies can simultaneously use these global marketing strategies, but before implementing these strategies they must thoroughly study the internal and external environment in which the firm is operating. According to Zou and Cavusgil (2002), global marketing strategy is an extent to which companies can globalise its marketing activities through integrating competitive advantages, directing and harmonizing of marketing activities and standardization of marketing mix in various nations.
2.4: Foreign Entry Strategy
There are mainly three strategies available to any company for entering into a foreign market; these are franchising, licensing and joint ventures. In case of licensing there is a written contract and on the basis of that, the owner of patents, know how, copyright, trademark, service mark or any other intellectual property, allows a license to sell, make or use copies of original products or services in return for royalties. The contract or license is generally granted for a limited period of time. By obtaining a license, the holder of the license gets the exclusive rights to use the know-how or the trademark in the market in which the owner is not able to operate. According to Rolf (1980), license is a good market entry option for those culturally and physically distinct markets in which the patent is based on simple technology and is owned by small or mid-size company. Thus, by granting licenses, the licensor can access a new market which otherwise it could not have been possible.
On the other hand, in the views of Caves and Murphy (1976), a franchise is a kind of contract that last for either definite or indefinite duration. Under such kind of contract, the owner of the product or service grants rights to another individual or company to operate under this trademark for the production and / or distribution of products and services. The main features of franchising are the operation of a decentralized production or distribution process and the rental of a brand which is an intangible asset. In the present scenario, franchising is getting popular. In this regards Hollensen (2011) argues that downfall of traditional manufacturing industry and their replacement by service sector with easier government policies and regulation of small and mid-size business has resulted in popularity if franchising.
Finally, joint venture can be defined as a partnership, corporation or enterprise formed between two or more companies, organizations or individuals in which at least one is the operating entity who comes into contract for the purpose of broaden its activities and to capture new profitable market for permanent duration. Thus, there is no absolute dominance of a single party and the ownership is enjoyed equally by all the parties (Young and Bradford, 1977). Joint ventures are most risky contract as in this the ownership is shared by both foreign and domestic partners, but are considered to be yielding very high returns (Anderson and Gatignon, 1986). In addition to this, there are several other advantages of joint ventures such as transfer of technology, access to resources, and improvement in competitive position of the firm and reduction in the political risk.
In the views of Ring and Van de Ven (1992), for reducing risk in any joint venture contract, there must be a high degree of trust, corporation and reciprocity among the parties involved. This will help them in cost sharing and better use of resources. Ning (2008) argues that cultural difference between the parties can cause difficulties and can increase transaction costs.
2.5: The FDI Theories
Before investing in any foreign market, which market to enter into is not only the single question among any firm, rather they have to plan how they are going to enter into that market. There are different schools of thoughts in this regard:
2.5.1: The Uppsala School
As per this school, expanding business in the foreign boundaries is comparatively riskier because of cultural and political differences. In addition to this, it is very difficult for a foreign player to quickly adapt to the domestic market system. Thus, Johanson and Vahlne, 1977, 1990; Root, 1987 feel that there should be gradual involvement of a firm in foreign market. According to this thought of school, internationalization of a company should be done progressively. Initially there are no export activities, gradually the firm must practice export through an independent representative and once it get established in the market, it can thought of manufacturing. Thus, there is an increasing commitment of resources in the foreign market (Yu, 1990). This internationalization can be categorized into two categories; first is the general international experience and second being experience specific to certain locations (Johanson and Vahlne, 1977). The company, which operates in various locations has ample of experience and can use this experience to explore new places. Contractor and Kundu, 1998; Randoy and Dibrell, 2002; in their work found that there exist positive correlation between the number of FDI a firm has and its echelon of investment assurance. The study by Contractor and Kundu, 1998; Randoy and Dibrell, 2002 had a limitation that they all were conducted on Scandinavian companies. This limitation was overcome by Sullivan and Bauerschmidt (1990) as they performed their work on other European companies. In their work Sullivan and Bauerschmidt (1990) found that process of internationalization is affected by factors such as competition in the domestic market and various government programs.
The Uppsala school was also criticized by Millington and Bayliss (1990). In their study, they found that the incremental development of the firm is less common in the process of internationalization, rather strategic planning plays a commanding role in it. According to Millington and Bayliss (1990) those firms which have a formal planning system and international experience can bypass incremental process of internationalization. Millington and Bayliss (1990) conducted research on 50 UK firms of the European Union and found that out of 50 firms, 10 firms do not have any experience of operating in international markets and 28 firms have directly jumped for manufacturing facilities. Thus, they concluded that initially companies rely on their experience of getting internationalization and later on give more emphasis on strategic planning.
2.5.2: Transaction Cost Approach
The second school of thought is based on transaction cost and is followed by Beamish and Banks, 1987; Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Caves, 1982. The approach is based on the fact that firms will perform all those activities which can be performed at low cost. On the other hand, those activities which involve higher cost will be outsourced. When the operations are subcontracted, it gives rise to transaction cost. As per the model of Anderson and Gatignon (1986), at the time of entry in the foreign market, the efficiency of the firm depends on the degree of control the firm holds on products and processes. Moreover, the degree of control is calculated on the basis of international activities in which the company is involved. For example, if a company is having manufacturing facilities in some foreign country, in that case the organization has greater control over its processes. Contrary to this, if it is operating through some agents or sales subsidiary, the degree of control is limited.
Anderson and Gatignon (1986), through their model established certain hypothesis relating to the control of the firm over its processes in various market situations. In case of highly specialized products, higher more control is required as the processes for such products will be highly complicated. Thus, firms need to have direct control over foreign units. In addition to this, in case of unstructured and poorly understood processes and process, higher level of control is necessary. On the other hand, if certain firm have limited international exposure, such firms do not require greater control of overseas processes. In cases where socio-cultural difference between the host and the home country is high, companies must have limited control and agents and subsidiaries should have more control as they have a better understanding of culture and thus will be more efficient.
2.5.3: The Product Life-Cycle Theory
A simplistic approach was adopted by Raymond Vernon (1966) to decide whether a company must invest in foreign markets or not. The theory of Raymond Vernon (1966) was based on the fact that the decision of investing abroad should be based on the stage of the product in the product life cycle rather than advantages in the host country. For invention of new products, in order to have centralized R&D and production, companies desire to have manufacturing in the home country only. Proximity to potential customer is another advantage of producing in the home country. Products which are new in the market or have some unique feature are often highly demanded by the customers. In such case, because of high inelasticity of demand, firms can charge higher prices for such products.
Once the products get into maturing stage in the product life cycle, it enables the organization to export those products because of their higher demand and greater popularity. Many a times this may result in a copy of the product by the competitors. Therefore, with the increase in the competition, firms which are innovative in their operations must seek for new market and FDI is their last resort. As soon as competitors enter into the market with similar kind of products or services, the products and services get standardized and company starts losing its monopoly over the product and eventually on the production process. If the companies need to reduce its cost, it should invest in developing company instead of developed countries (Nebende, 1999). In the views of Sanyal (2001), this theory is does not completely explain all the motives of foreign direct investment. Sanyal (2001) feels that this theory only explains the flow of investment from developed to developing countries, but fails to explain anything regarding the reverse scenario.
2.5.4: Oligopolistic Reaction
Some researchers feel that the phenomenon foreign direct investment is an oligopolistic reaction. In an oligopolistic market, there are few companies in the market and firms can easily recognize the impact of their actions on the competitors and on the overall market (Caves, 1982). Knickerbocker (1973) feels that as the firms are mutually independent, an action by one firm will result in appropriate reaction by another firm. Further, a behavioural approach was proposed by Knickerbocker (1973) for explaining foreign direct investment decisions. Ass per that behavioural approach, organizations operating in an oligopolistic market try to replicate foreign direct investment actions of other firms and it results in an oligopolistic reaction as a company's action by investing in some foreign country will motivate its peers to also invest in the same country (Head, Mayer and Ries, 2002). If that occurs, then the followers try to minimize the overall competitive advantage enjoyed by the initiators. The aim of firms operating in the oligopolistic market is to maximize profitability by capitalizing on emerging opportunities and to outplay their peers. As per Knickerbocker (1973), following motives motivates companies for foreign investments:
- Investment to gain resources
- Supply the native market
- Investment to gain a strategic export platform
However, Moosa (2002) feels that behavioural approach by Knickerbocker (1973) fails to explain the drivers behind the initial investment made by the first company. Thus, it can be assumed that it is not appropriate to use Knickerbocker (1973) approach to understand the reason behind investing in overseas market by the first firm instead of licensing or exporting.
2.5.5: The Electric Paradigm
Dunning (1980, 1988 and 2001) proposed an Electric Paradigm according to which firm will invest in foreign market if it possesses ownership specific advantages. This will enable the company to benefit ownership advantages in the overseas market and to exploit the opportunities available in that market. It cannot benefit from these advantages if it goes with licensing or franchising model. Apart from this, the ownership specific factors and the internationalization specific factors are also considered under this model.
2.5.6: Born Global
Born global firms are those firms which, despite of limited financial and human resources manage to expand its business boundaries within three or less years of its establishment in the home market. In the views of Autio et al., 2000; McDougall and Oviatt, 2000; it is the internal capabilities of an organization that enables it to get internationalization in such a short span of time. Knight and Cavusgil (2004) in their study found that it is the innovation capabilities and knowledge of born global organizations that drives these companies for high performance and internationalization in the global market. In their work Knight and Cavusgil (2004) found that organizational capability is a key for a company to achieve success in the international market. Some of the drivers for global firms for achieving internationalization are unique product development, global technological competence, leveraging foreign distributors and quality focus. Leveraging technology and quality excellence helps global born in developing niche market across the globe. Findings of Knight and Cavusgil (2004) are in line with the findings of Rennie (1993). In his study over Australian market, Rennie (1993) found that technological excellence and superior quality goods and services helps early exporter in capitalizing their business in overseas market.
The above section discusses the concept of foreign direct investment and its theories. The subsequent paragraphs of this literature review section focuses on Saudi Arab market and foreign direct investment in Saudi Arab. The section discusses various barriers and attractors for entering into the market of Saudi Arabia.
2.6: Foreign Direct Investment in Saudi Arabia
Till date various studies have been performed on foreign direct investment in Saudi Arabia, however, no research work has studied the area thoroughly. Ramady and Saee (2007) feel that foreign direct investment is one of the key drivers for the economic prosperity. This is the reason that in the present times most of the economies are trying to attract more and more foreign investment. For example, in 2003 the communist China surpassed the United States of America by formulating appropriate strategies for attracting FDI. Ramady and Saee (2007) in their work found that around 2007, the majority of the Saudi managers was welcoming FDI. However, Saudi managers were still not confident, whether attracting FDI is beneficial for the company or not. Roberts and Almahmood (2009) focused their study on the effects of origin nation traits on trends in FDI. In their study, Roberts and Almahmood (2009) studied actions of 33 countries from 1980 to 2005. The authors found that size of investment depends on a few factors, but the decision of investing in the nation depends on a wide range of factors.
According to Usa (2009), in 2000, the national FDI laws were revised in order to attract more and more investment opportunities. Smith (2008) stated that between 2005 and 2006 there was an increase of 51 per cent in FDI making FDI influx comparable to oil. According to the World Investment Report 2012, total FDI inflow in Saudi Arab in 2011 was $214 billion, making it FDI leader of the MENA region and 12th largest in the world. In its report "Ease of Doing Business 2011", the World Bank rated Saudi Arabia as the easiest place to do business with among all the MENA nations. Moreover, the Kingdom was ranked 11th in the entire world to invest money in. Analysts feel that Saudi Arabia is growing with a swift pace and it can be beneficial for a wide range of sectors across the nation. The pie chart below shows inward foreign direct investment stock between 2005 and 2012 in Saudi Arabia.
Figure 1: Inward Foreign Direct Investment Stock, 2005-2012
(Source: Alshareef, 2013)
Oxford Business Group (2012) in its report showed that although the international economy is not doing well, instead Saudi's FDI grew by 15.7 per cent in the third quarter of 2011. Doytch and Uctum (2011) reported that FDI facilitated by financial sector stimulate service and other sectors and results in growth. Contrary to this, FDI hasn't facilitated by financial service, results in a negative impact on the associated sectors and drain resources. Doytch and Uctum (2011) further reported that higher FDI in service sector helps the service industry to flourish, but it has a negative impact on the manufacturing sector. FDI in the financial sector stimulated growth in the Pacific and South East Asia by stimulating activities in both service sector and manufacturing sector.
2.7: Barriers and Attractors for entering into Saudi Market
Davidson (1980), Moore (1998) and Braunerhjelm and Svensson (1996) in their study report that demand and scale effects depend on the market of a country, Bajo-Rubio and Sosvilla- Rivero (1994) and Loree and Guisinger (1995) in their work stated that different types of FDI have different impact on the market. For example, export oriented FDI will have different as it will focus on export and market oriented FDI will have different impact as it is more concerned with the size of the market. In the empirical models measuring market size, two variables are frequently used, either together or separately, these are the GDP variable and its rate of growth. These variables are predetermined to have a positive relationship to FDI. The growth rate is a very important variable to be considered as if growth in the host country is much higher in comparison to home, than firms' tries to expand their businesses in the host country rather than home country and thus are more likely to enter into foreign markets (Abdel-Rahman, 2010).
Busse and Hefeker (2007) took a sample of eighty three countries and examine the investment flow for several years. At the end, in the cross sectional section they concluded that factors such as survival of religion, democracy and government are very important. In addition to this, other factors that also play huge role are bureaucratic values, internal and external conflicts and law and order (Clare and Gang, 2010).
The year 2005 saw various improvements in the investment scenario of Saudi Arab, such as:
- There was a special arrangement for establishment of new commercial courts, the development of the new law and order, an increment in the number of judges and speedy hearing of cases.
- Visa norms became less stringent and the Ministry of Foreign Affairs ensures to issue visas to the investors within 24 hours.
- The profit tax was reduced from 40 per cent to 20 per cent by the Ministry of Finance and allowed deportation of losses for an unspecified number of years.
- More loan facilities were available for Industrial development and expansion.
Contrary to the discussion in the above paragraph, Hafiz (2009) stated various constraints for attracting foreign direct investment in Saudi Arabia. These are; barriers of regulation and legislation, constrains in organizational and procedural sides, impediments of the cost of private investment, limitation of the information availability system and restriction of economic policies. Thus, some of the barriers in the inflow of FDI in the Kingdom are the time taken of issuance business licenses and approvals, lingering customs clearance procedures, complexities in visa procedures, ignorance of private sector by the government in foreigner investment and lack of sponsorship.
Alamri (2011) argues that between 2006 and 2010, near about 462 billion Riyals of foreign direct investment was entered in the Saudi Arabia, but the income generated by FDI was comparatively very less. Moreover, the Saudi Monetary Agency presented the figures of balance of payment that confirms that though there was rise in foreign investment, but not many activities were seen in national employment of manpower and there was a rise in the recruitment of foreign labour. Because of the increase in foreign labour, chunk of money was transferred out of the nation. This has aggravated economic leakage and it was increased from 9.5 per cent in 2006 to 14.1 per cent by the end of the first decade of the 21st century.
2.8: Entering in Saudi Arabia
For any Multi National Corporation (MNC) entry strategy plays a crucial role while entering into some new or foreign market. Companies need to formulate their entry strategies in such a manner that they can fully exploit their resources and capabilities. Due to different reasons, different MNC expands their business boundaries across the globe through different modes. The success of entry strategy devised by MNC largely depends on the external environment on which the management of the firm does not have any control. Thus, MNC needs to develop a flexible working system so that they can quickly adjust its system as per the requirements. It is highly recommended that firms entering into emerging market needs to have flexible system. However, such companies do not only have to plan for external environment, systematic and controlled internal environment also plays a significant role in the success of MNC in entering into the emerging markets of the world.
In recent times, strategies such as mergers and acquisitions (M&A), strategic alliance, joint ventures, etc. are highly practiced by the companies making their successful entry in the market. This helps them in improving their capabilities and to raise their market influence. Similarly it has been found that expenditure on R&D has risen by three times in comparison to the investments in fixed assets. This is the reason an individual firm cannot meet all the requirements to remain independently operating in foreign nations (Grosu, n.d).
Strategic alliance refers to a kind of partnership between two or more firms that they will work hand in hand to achieve their strategic objectives that will be beneficial for both the parties. After globalization the prospects of strategic alliance between the companies are very bright. In views of Brucellaria (1997), if companies effectively put this strategy into practice, there are higher chances that they will develop a corporation's operations and competitiveness.
Traditionally, most of the FDI in Kingdom was mostly of the three forms, Greenfield investment, joint ventures and invested related to Off-set programs. Before the implementation of New Investment Law, the most common form of FDI was joint ventures. At that time most of the foreign companies ventures jointly with KSA firms or KSA government institutions. The New Investment Law gave rise to a new form of foreign investment, that is, Greenfield investment in KSA production. Earlier the concept of mergers and acquisition (M&A) was almost unknown in KSA. Joint ventures were either Contractual Joint Ventures (CJV) or Equity Joint Ventures (EJV). Between these two also, Equity Joint Ventures (EJV) were a more popular form of FDI in KSA. In such type of investment, industrial property, equipments, funds and technology were generally contributed by the foreign partner, while land, plant and local component of the currency was contributed by the Saudi counterpart. Apart from this, most of the defence purchases were done through Off-set programs with foreign partners.
The next part of this chapter focuses on the external environment of KSA and various other parameters that have some kind of influence on the FDI in the country.
2.9: Political Factors
2.9.1: Terrorism and Saudi Arabia
Terrorism is the most serious issue among the world and presently many of the countries are facing various challenges to curb this threat. In the short term, there may be both negative and positive impacts of terrorism on the economy of a nation, but in the long term, the effects of terrorism are always negative on the economic strategies. Almeshal and Albahoth (2004) have categorized both positives and negatives of terrorism on KSA.
Negatives of Terrorism on KSA
- Increase in speculation of real state
- Low rate of economic growth
- Decline in actual value of external financial assets
- Interference in the internal affairs of the Saudi Economy
- Negative impact on the charitable sector
Positives of Terrorism on KSA
- Return many Capitals
- Recovery of financial market
- Resettlement of tourism
- Accelerate the development of many systems
- Contributed to create a more complex international situation
Yamami (2010) feel that there are many negative effects of terrorism on various aspects of people living in the country. Here are negative aspects of terrorism on the FDI of KSA:
- It has created a repellent environment in the country for the foreign investors
- Terrorism not only affected foreign expertise and competencies in industrial sectors, but has also affected other disciplines such as hospitals, scientific research centres, universities, etc.
- Due to terrorism, there was a decline in the investment activities as a result of which there were no job opportunities and there was low level of rehabilitation and training for the local talent.
- The community capabilities were depleted and most of the resources were wasted in fighting against terrorism is utilizing them for some productive work. Thus, instead of spending budget on infrastructure, hospitals and other important projects, money was wasted to curb terrorism.
- Tourism which offers huge opportunities in the economy was severely affected by terrorism
2.9.2: The influence of Iran relations on FDI in Saudi Arabia
It has been confirmed by the economic experts that international tension between Iran and the western countries will not have any influence on the FDI of KSA. Holdar (2007) “deputy director of Moody's Investors Services” feel that there are negligible chances that relationship with Iran will not change the conditions in the KSA. Further, Dr. Abu-Dahesh (2007) “expert and economics writer” argue that many western and international banks are eager to enter into the KSA. Moreover, development of nuclear weapon will also not affect the foreign investment in the nation. Furthermore, Dr Al Barrak (2007) confirms that because of greater financial, economic and political stability the KSA will not get affected by the tension between Iran and some western countries. According to Etel Solingen (2007), foreign players will forgo the development of nuclear weapon in KSA as they are more interested in strengthening their own regime.
2.9.3: The Positives and Negatives of raising the exchange rate of Saudi Riyals
The positive side is that it will increase the returns and the value of assets of the foreign companies operating in KSA. Moreover, it is also beneficial for the Saudi investors who have invested their savings in the KSA.
On the other hand, the negative side of this is that it may result in decline in the new foreign investment as the revaluation of Saudi riyal will raise the cost of FDI in Saudi Arabia. This impact will be more severe for those countries which are planning to enter into the Kingdom market for the first time. Apart from this, it will also discourage local investors to transfer their investment to the homeland from outside.
Thus, in the end it can be concluded that there are several ways available to a country for entering into a foreign market. Moreover, through the past literature, it was also found that KSA is a developed and stable nation, but the majority of the economy is dependent on the oil sector. Now the government is trying to attract FDI so as to mitigate its dependency on the oil sector. The literature shows that KSA is more interested in those foreign players which operates in small and medium sector as it will transfer of knowledge, skills and more advanced technology.
After reviewing the above literature, it can be concluded that till date, various scholars have studied the subject FDI. Most of the studies were aimed to either determine the determinants of FDI in some particular country or to evaluate the opportunities and limitations of a country in attracting FDI. None of the work has formulated and recommended strategies that local companies must follow in order to attract higher FDI. The present work is an attempt to study the market of Saudi Arabia and to determine the level of FDI activities in the country. On the basis of data collected through primary and secondary research, it recommends certain strategies that companies can adopt to attract higher FDI in the nation.
Chapter 3 - Research Methodology
There are various methodologies available for a researcher to select from in order to successfully complete his or her research work. In case, if none of the methodologies have been selected by the researcher, scholar will never be able to reach to any authentic conclusion and it will have an adverse impact on the overall process. In simple words it can be said that research methodology section provides a road map for successfully achieving the aim and objectives of the work. If no or wrong methodology is selected by researcher, then the final outcome of the work will lacks validity and reliability.
3.2: Aims, Objectives and Research Questions
Every work is conducted with some aim. The main aim of the present work is to develop strategies for attracting higher FDI in Saudi Arab by private sector companies.
To meet the aim of the work, here are the objectives worked on during the research process:
- To study FDI theories and present trends in FDI
- To evaluate limitations and opportunities in FDI in Saudi Arab
- To formulate strategies for addressing limitations and opportunities in FDI in Saudi Arab
While performing research on a subject, there are several questions in front of the researcher. It is essential for the researcher to find out answers to all such questions so that researcher can reach to some authentic and rigid findings. Here are the researcher questions which the researcher has tried to answer through this work:
- What are the opportunities and challenges in FDI in Saudi Arabia?
- Are the present strategies of private sector companies not effective for attracting FDI in Saudi Arab?
- How companies can meet the challenges of stagnant FDI in Saudi Arabia?
3.3: Research Philosophy
Different individuals have different outlook to similar kind of situation. Generally, these philosophies are categorized into two categories, positivism philosophy and interpretivism philosophy. People with positivism philosophy believe that there is only a single kind of solution to a given problem (Daff, 2011). In other words, a situation does not get affected by different environmental conditions and can be rectified through a single method only. Such philosophy is also termed as scientific philosophy. Contrary to this, in case of interpretivism philosophy, people feel that there can be different solutions to a given problem in different circumstances. Thus, the impact of this philosophy can be seen on the entire research process. The positivism tries to explain the models and theories, whereas, interpretivism tries to develop new theories and models. Finally, in case of positivism, only truth exists, while interprevism believes solution should be measured as per the experience and knowledge of subject matter (Creswell, 2009). The present work is interpretivism in nature as researcher believes that different countries can alter their FDI policies in a different manner, based on their macro environment, to attract higher foreign investment.
3.4: Research Approach
Research approach plays a significant role in the entire research process. For this purpose a researcher can opt from two approaches; inductive approach and deductive approach. Both the approaches are completely different from each other. A deductive approach follows the top bottom approach in which on the basis of certain theories researcher moves towards more specific field. That is, from the general environment to some specific situation (Bsait, 2010). On the other hand, inductive approach is the bottom top approach. In this the researcher studies a specific situation or problem and gradually moves upwards and formulates new theory. In case of inductive approach, the outcomes depend on the observation power of the researcher, so that new theories can be proposed. Whereas, in case of deductive approach, the researcher tries to explore the situation as nothing much have been done on the topic till date (Bell, 2010). The present work is deductive in nature as initially the researcher will understand the relationship between the macro environment of a country and FDI and then will propose certain strategies for SA companies to implement in order to attract higher FDI.
3.5: Research Design
As the name suggests, research design helps in designing the structure of the research process and provides a framework that assist researcher in collecting relevant data. Research design is of three kinds; exploratory, causal and descriptive. The exploratory research design is used in those researches in which not much has been done in the past and the researcher needs to explore the field in order to collect relevant information (Golding, 2005). This design helps in accumulating data in detail about any topic. Generally, this approach is apt for the researches in which deductive approach has been adopted by the researcher. On the other hand, descriptive research design provides a complete description of the subject matter. This research design is suitable in case of inductive research design as in this, researcher focuses on specific situation with specific assumptions and provides information regarding specific sample group. Finally, in case of causal research design, the researcher is interested in determining the cause and effect relationship. In causal research design, researcher tries to find out the effect of change of one variable on other variable (Hjorland, 2005). In the present case, since the deductive approach is adopted by the researcher and there is much scope to explore the topic, the researcher has opted for exploratory research design. It has enabled the researcher to explore the existing FDI policies in SA so that better policies can be recommended.
3.6: Research Type
We can categorize research methods into three types; quantitative research, qualitative research and case study method. In qualitative research the researcher tries to refine and strengthen the existing level of comprehension with respect to the behavioural feature of research (Miles and Huberman, 1994). Further, qualitative method can also be categorized into discussion, focused group interviews, survey to accomplish the qualitative study. On the other hand, in quantitative research there is a lot of data in the form of number and the researcher needs to apply various statistical tools and other quantitative techniques in order to extract relevant information from the gathered data. Generally, quantitative research method is adopted for the researches which are descriptive in nature as in such work questionnaire is designed by the researcher to accumulate data. Among all the methods of data accumulation, survey method is the most appropriate method as it is well organized and in a detailed manner and provide an opportunity to all the respondents to easily understand what have been asked for so that they can provide more relevant data (Haimes, 2002). Survey method can be implemented in both qualitative and quantitative research as it provides extravagant vision in the defined area of research. Finally, a case study approach is used for those researches in which vital details related to actual time are required or in the contingency situation (O’Connor and et. al., 2003). The present work is qualitative in nature as the research is explorative in design and researcher has accumulated data as per the available literature and through questionnaire.
3.7: Data Collection
To conduct research successfully, it is essential for the scholar to have sufficient amount of information. The secular can collect relevant information from either primary sources or secondary sources. Data collected through primary sources is known as the primary data while data collected through secondary sources is known as secondary data (Gill and Johnson, 2002). Primary data are that data which is collected by the researcher only for the first time and is used for the first time. It is not available before. The researcher has to accumulate data as per conveyance. On the other hand, data which is already available, that is, the data which is collected by some other agency and is used by the researcher for his purpose is known as secondary data (Gill and Johnson, 2002). In the present work both primary and secondary data are used by the researcher. For primary data, a questionnaire was circulated to the 50 managers of foreign private companies consisting both open and close ended questions and accordingly the responses provided by the respondents are recorded. On the other hand, the secondary data is collected by the researcher from various journals, books, newspapers, online articles, etc.
In the process of research study, the method of sampling holds its significance. This method tells about the selection of the most suitable sample for the study of the total population. Sampling is done in order to effortlessly accumulate the data from various primary sources. In research methodology, there are various sampling techniques available for the researcher to choose from. The researcher can choose any sampling techniques as per the convenience (Golafshani, 2003). Basically sampling is of two types, probabilistic sampling and non probabilistic sampling. In probabilistic sampling, every sample has equal chances of getting surveyed and thus it eliminates the problem of biasness. On the contrary, in non probabilistic sampling, samples are selected as per the convenience of the researcher and thus there can be degree of biasness. Probability sampling in further divided into cluster, stratified, simple random sampling and multi-stage sampling, while the types of non probability sampling are judgment, convenience, snowball and quota sampling (Golafshani, 2003). In the present work the researcher has adopted simple random sampling, which comes under probabilistic sampling technique. The researcher has selected 50 managers of foreign private companies. Through these respondents, the researcher was able to collect most appropriate data.
3.9: Data Analysis
Only collecting ample of data is not going to solve the purpose for the researcher. The data collected by the researcher through both primary and secondary sources are raw data and nothing can be inferred from that data. In order to convert that data into meaningful information it is essential for the researcher to analyse the accumulated data properly. There are various tools and techniques available to analyse the gathered data, but it is the researcher who needs to select an appropriate technique so that entire data can be converted into meaningful information. Basically, there are two major methods of data analysis, firstly, qualitative tool and secondly quantitative tools (Babbie, 2010). If the accumulate data are in numeric form, in that case the researcher needs to adopt quantitative methods of data analysis. In that case the researcher needs to determine various statistical characteristics of the data and thus needs to use tools like Ms-Excel, SPPS and other bar diagrams and pie-charts. By using these tools, researcher can determine accurate results and perfect outcomes. On the other hand, if the data are of a qualitative nature, in that case the researcher needs to adopt qualitative tools for analyzing data (Babbie, 2010). In the present case qualitative tool is used for analyzing the accumulated data. The researcher has employed thematic analysis to plot different themes. On the basis of these themes the researcher will reach to certain outcomes.
3.10: Research Limitations
Conducting a research work is not an easy task as there are many obstacles and barriers in the entire research process. Every researcher has to deal with such limitations and has to prepare himself or herself at the very first stage of the research process. The limitation can be that of time, data or money. In the present work, collection of relevant data was the greatest challenge for the researcher. The research is based on devising strategies to attract more and more FDI in the Kingdom. For this purpose, the researcher collected both primary and secondary data. Collecting secondary data and information was not that difficult for the researcher as collecting primary data. For understanding the existing strategies of the companies and government for attracting FDI, it was necessary to conduct surveys of the employees of the strategy department of various companies. Collecting data from 50 managers is not an easy task. Firstly, the researcher has to convince them. Secondly collecting data in such a short span of time was difficult as because of their busy schedule it is not possible for the employees to attain the survey session at the given date and time. Although the researcher has conducted a debriefing session before starting the survey, yet it is possible that many of the managers may not have revealed correct information. Thus, validity and the collection of data was the greatest limitation of the work.
3.11: Reliability and Validity
The main purpose of any research work is to find out valid and authentic solution to a real life situation. Thus, for this purpose, it is essential for the researcher to accumulate reliable, valid and authentic data from both primary and secondary sources. In this work the researcher has tried to maintain the reliability in collecting data. The majority of the secondary data has been collected from trusted source. Moreover, primary data were also collected from the managers of the some of the most reputed companies of the world. Further, to eliminate any kind of biasness, the researcher adopted the simple random sampling technique for selection of 50 managers. Finally, the researcher has applied correct tools and techniques for successfully completing the research process.
3.12: Ethical Consideration
Another important parameter that judges the quality of any research work is the ethical behaviour of the researcher. In this regards, this work is completely doubt free. The researcher has fully acknowledged the work of previous researchers which the researcher has used in the study. Further, the researcher has not copied the report from anywhere; rather it is the efforts of the researcher only. Another ethical consideration, followed by the researcher was in data collection. Before collecting primary data from the respondents, researcher has conducted a debriefing session for the participants to make them aware of the aim, objectives and purpose of the work. The researcher has not forced any participants to give their views, rather proper consent was taken from the respondents before conducting the survey session. Participants were free to leave the process in between if they were not interested to be the part of this work. Finally, the researcher has not revealed the personal information and identity of any of the respondents.
Chapter 4 - Data Analysis and Findings
Data analysis is the penultimate chapter of the research and holds lots of significance. After accumulating data from various secondary and primary sources, the researcher needs to analyse the collected data as the data is in raw form and it is impossible for a reader to interpret the data. Thus, the researcher needs to present the data in such a way that a reader can understand the findings of the work. In other words, the researcher needs to extract information from the raw data. In the present work, the researcher has applied qualitative data analysis technique to analyse the gathered data. In this the researcher has used thematic analysis. In a thematic analysis various themes are formed as per the collected data and on the basis of those themes certain interpretations are made.
Theme 1: Foreign companies are not satisfied with the quality of local human resources
One of the major issues the Kingdom is facing in this highly competitive environment is lack of professionally qualified human resource. There is a dearth of people who can be employed at important places in a company. The majority of the working youth is not fit for the job. The condition is worsened in the case of multinational organizations. MNCs do not find quality local workers who can be placed at important position in their company. To overcome from this situation, MNCs need to employ any foreign employee who are not aware of local customs and culture. Thus, companies find it difficult to compete with the local players as they do not understand the needs and wants of local people. Government and local authorities are also aware of this problem and thus now have started various programs to train the local talent so that they can compete in the global environment. The chart below shows the views of respondents for their satisfaction level of the local people against various parameters.
From the graph above, it is clear that the majority of the managers of different foreign companies of the world are highly dissatisfied with the local human resource of the Kingdom. Most of the managers feel that local workers are not at par with the industry standards. Further, they believe that the majority of the local workforce do not match the standards for any of the parameters. Among all the respondents, 42 feel that language is the biggest problem in Saudi Arabia. Local people are not good in English which is the most commonly used corporate and professional language. Moreover, 35 managers said that Saudi Arabia workers lack in technical knowledge. They are not compatible to hold prime post in technical departments. Managers believe that, even technical basics are not clear among the local people of the Kingdom. Finally, 39 managers agreed that there is a lack of team spirit among the local workers. Teamwork is the first, and the foremost requirement in the corporate world to succeed. However, most of the managers believe that local people lack in this skill. Thus, it is clear that due to lack of quality human capital in the Kingdom, foreign companies hesitate to invest in this Gulf nation and this could be a major reason for the decline in FDI in Saudi Arabia in the coming years.
Theme 2: Multinational Companies have to face many problems and challenges in their operations because of local Human Capital of Saudi Arabia
Whenever a company enters into a foreign market, the biggest challenge it has to face is that of human capital. Human resources are the biggest assets of the firm and every company wants to have employees who are well aware of the local business environment, it gives them an edge in their operations. However, in the case of Saudi Arabia, the biggest problem, the foreign companies face is related to skilled manpower. A company can operate successfully in a foreign country if either of the following two situations meet; firstly, there is enough local talent in the market, or company can easily import foreign labour in the country. However, in the case of Saudi Arabia, companies find difficult to meet any of the above stated conditions. Firstly, because the local people are not talented enough and secondly importing of foreign labour is very difficult because of strict visa rules. The graph below shows the major reasons that affect the smooth operations of the foreign companies.
From the chart above, it can be concluded that there are various problems related to human capital in Saudi Arabia. Firstly, the visa rules of the country are so strict that foreign companies find it difficult to import labour from their country or from other parts of the world. Since local workers are not so talented, MNCs need to import workers from other nations to keep operating smoothly, but they need to send them back as the local government of Saudi Arabia does not give long work visas. Apart from visa issues, another problem that companies have to face is that of law that specify the number of local employees. Although, this is not a serious issue, yet it affects the operations of the companies because there is a lack of skilled labour. Out of all the respondents, 12 respondents said that the most serious issue for MNCs in Saudi Arabia is, regarding importing foreign labour. 9 participants said that they are not happy with the law that specify the number of local employment. Remaining 29 participants feel that scarcity of skilled employees in the local market is the most serious issue that affects their operations.
Theme 3: Foreign companies highly depend on local natural resources for the production process
Saudi Arabia is very rich in natural resources, specifically, crude oil and natural gas. Thus, most of the MNCs that have invested in this country operate in oil and natural gas sector. In the survey process it was found that most of the manager admitted that their company is heavily dependent on the natural resources of the company for raw material. They said, since the we are operating in an industry which depends on the natural resources available in the country, the operations of our company depends on the availability of raw material in the country. Thus, in case if the government of the Kingdom of local authorities brings any law that is related to use of natural resources, it may heavily impact the business of the company in Saudi Arabia and it will affect the overall profitability of the firm. This is the reason; companies need assurance from the government and local authorities before putting their money in the country. This is also one of the major determinants of FDI in Saudi Arabia.
Theme 4: Supply and prices of local natural resources are a big problem for foreign companies
In the survey process, all the managers admitted that the operations of their company are highly dependent on the natural resources of the company. They further said that many times they face problems related to supply of natural resources as raw material and the prices of raw material. It is the fact that companies which depend on natural resources, their operations are highly fluctuated due to fluctuation in the prices or supply or raw materials. Thus, such companies need to plan, otherwise in case of shortage of raw material, their operations may come to halt or it may raise its operational cost, which ultimately either decrease their profit margin or increase the final price of the product. In addition to this, such companies also need to have good liasoning with the government department as for purchasing natural resources as raw material, companies need to take permission for the government offices. Thus, availability of local natural resources is also a problem for the MNCs operating in Saudi Arabia. The chart below further shows the difficulties or problems faced by foreign companies in relation to natural resources in Saudi Arabia.
From the bar diagram plotted above, it is clear that foreign companies face some or other kinds of difficulties and problems in relation to the purchase of natural resources as raw materials for their operations. Although, the majority of the managers did not complain about the quality of raw material which means, the quality of natural resources for their raw material is not a big issue. Their main concern is regarding availability of natural resources and their prices. It's an economic fact that price and supply are inversely related. In case of high supply, the price of the commodity falls, whereas, in case of low supply, the price of the same commodity shoots up. Same is the case in the Kingdom. In order to make huge profits, government and local authorities generally keeps the supply low, as a result of which the prices of the natural resources go high and companies have to pay more. 21 of the respondents' marked limited supply as a major concern while 20 of the participants said high prices is a problem for them as it impacts their operations and costs.
Theme 5: MNCs are satisfied with the infrastructure services of the Kingdom
Infrastructure is one of the basic requirements for the industries. If the country has well developed infrastructure, industries operating in that country will definitely flourish. Contrary to this, if a country does not have a well developed infrastructure, companies find it difficult to operate in such environment. Moreover, foreign companies also like to invest in those countries which are well developed and have well developed infrastructure. In addition to this, FDI is high even those developing countries which have highly developed infrastructure. This, in genera words, it can be said that a well developed infrastructure of a country attracts FDI in the case of Saudi Arabia, the Kingdom itself is well developed. It offers great infrastructure facilities to the local and foreign companies. Transportation, telecommunication, banking, electricity, sewerage, etc., all the fundamental infrastructure requirements in the nations are at par with any of the developed country. Thus, highly developed infrastructure services make Saudi Arabia as a good option to invest in.
The above chart is plotted on the basis of a survey conducted and it clearly shows that managers of the foreign companies are almost satisfied with most of the infrastructure services of the Kingdom. In fact, for telecom, postal and transport related infrastructure services, cent per cent participants reported that they are satisfied. Only in the case of banking services, few of the managers looked not sure as they are not sure regarding the Islamic banking which is quite a new concept for some of the Non Islamic countries. Apart from banking, managers of all the foreign companies that participated in the survey were satisfied with the infrastructure services provided to them in the Saudi Arabia.
Theme 6: MNCs are not satisfied with the social and political variables of Saudi Arabia
For successful operations of a company in a foreign land, it is essential that social and political variables of the host nation are favourable. Social and political variables include institution stability, political stability and stability of rules, crime rate, entry and exit visas, etc. In the case of Saudi Arabia, the country has an unstable political system. Further, the entry and exit visa rules are not investor friendly, even if you have all your credentials ready. Finally, the crime rate in the country is also higher because of the dearth of judges and poor law and order in the country. Thus, MNCs that want to operate in Saudi Arabia and wants to put their money on the Kingdom, it is not a safe place to invest in terms of social and political stability. Managers of the foreign companies also felt the same at the time of the survey. The bar graph plotted below marks the responses of each of the participants.
The chart above shows that managers of the foreign companies are dissatisfied with the social and political variables existing in the country. 42 managers agreed that there is institutional instability in the country. 43 managers said that the local rules of Saudi Arabia are unstable and it is because of an unstable political environment of the country, 40 of the respondents marked that the country has a high crime rate which is one of the crucial factors for its declining FDI. Finally, 43 of the participants said that the entry and exit visa rules are illusive and are not favourable to the individual or firm even if they have documented all their credentials properly.
Theme 7: Companies are not satisfied with the economic and financial issues of Saudi Arabia
Another factor that attracts FDI in any nation is economic and financial condition of the hosting country. In the case of Saudi Arabia, the country has strong economic condition. Although, the economy is oil dependent, still it is at par with the economies of some of the developed nations of the world. However, companies find many issues with the accounting procedures. Further, the auditing system is also not transparent and there are chances of occurrence of scams. Finally, management of the foreign companies is not even satisfied with the importing and exporting rules and procedures of the Kingdom as they changes frequently. The chart below further cements the fact.
The chart above is plotted on the basis of the responses of the respondents during the survey process. The chart clearly shows that managers of the foreign companies are not satisfied with the economic and financial issues of the Kingdom. 45 respondents said that they are not satisfied with the importing rules and regulations. 42 participants were not satisfied with the exporting laws. Moreover, 38 of the managers marked that they are dissatisfied with the accounting system practiced in the country. Finally, 41 managers do have problems with the auditing system practiced in the nation.
Theme 8: Registering and getting approvals is a lengthy process
Before entering into any foreign nation, companies need to register themselves in the host country as per their rules and regulations. In this regards, registration process in Saudi Arabia time consuming. Unlike other developing nations, crime rate is very low in Saudi Arabia, but the corruption rate is very high. Because of this, sometimes companies find it much difficult to get approvals in the Kingdom. Nations with high corruption rate are generally not liked by any foreign companies as they have to offer bribe to various departments for getting approvals. Same is the case with the Kingdom. In Saudi Arabia also foreign companies need to pay bribes to various departments for getting things done on time and as they like. This is one of the reasons that companies do not get a timely registration certificate or approvals. In the survey also it was found that managers were not satisfied with the registration and approval process. The majority of the respondents agreed that at some point of time, they had bribed some or the other government department for getting approvals.
Theme 9: Foreign investors are satisfied with the legal guarantees given to them in Saudi Arabia
When any businesses enter into foreign markets, it need to fulfil various legal formalities of that market. In the case of Saudi Arabia, the legal guarantees are easily given to those corporate houses that have documented all their papers as per the norms. The same trend was seen during the survey, respondents agreed that they are satisfied with the legal guaranteesgiven to them in Saudi Arabia. The chart below shows views of respondents towards legal guarantee. The only thing that worries them is frequent changes in law.
Theme 10: Bureaucracy is the biggest business obstacle in Saudi Arabia
Finally, in regard to the question, the biggest business obstacle in Saudi Arabia; majority of the respondents agreed that bureaucracy is the biggest business obstacle for them in Saudi Arabia. Participants said that they are dissatisfied with most of the of the economic, social, political, financial and political variables of the country, and moreover, their business is highly impacted by bureaucracy. Most of the time they do not get approvals on time. It delays their entire operations and they are not able to reap full advantage of the market. Further, in many cases, they need to bribe the departments.Moreover, respondents feel that there is a lack or coordination among various departments of the government.
Chapter 5 - Conclusion and Recommendations
For all the countries worldwide, Foreign Direct Investment or FDI is one of the most vital factors in their economic development. It not only brings capital to a country, but also facilitates transfer of skills, knowledge and technology, provides access to the global market and develops organizational and managerial practices. Thus, countries are striving to develop a favourable environment to attract foreign direct investment. This is their top priority and therefore they are liberalizing their foreign direct investment regimes to diminish precincts on the entry of foreign direct investment. From the present work, it has been found that oil dependent economy of Saudi Arabia has now become one of the major limitations for the country. Officials of the country are in process to diversify their petroleum dependent economy and now the country is seriously working towards this. Diversifying the economy will help the nation in lowering the shocks from the oil slump and in addition to this it will also create jobs for the local people. In order to achieve this, the government is liberating its economy and the country is making some serious efforts of attracting foreign direct investment through the Saudi Arabian General Investment Authority (Sagia), which is the foreign investment licence provider. However, after going through literature review, it can be concluded that Sagia is drifting away from its previous strategy and now is changing its direction. Now the authorities are focusing more on small and medium size businesses, investment on which, will give rise to transfer of knowledge, training and technology and are less concerned about heavy industries. Moreover, the investors are very deeply concerned at the regulations by the Sagia which were focused on creating jobs in the country. The investors were forced to meet the required hiring norms of the country under which they have to recruit certain percent of local talent. In addition to this, the companies were forced to transfer the technology and knowledge within the 18 months of their operations in the Kingdom. This is one of the reasons that FDI has been declining in this part of the world as most of the companies are not ready to follow this model as this model is not fit for them. Thus, it can be said that if the country would have stuck to its previous strategy of attracting heavy industries in the country, the country would have greatly benefitted as such kind of companies can mitigate the difficulties. Moreover, it is very difficult for the small and midsized companies to cope up with the demands of the local government as they have financial constraint. From the collected data it can be concluded that although, the country is trying to switch government working from offline to online so as to cut application time and to control corruption, still many companies are finding it difficult to get visa and other formalities done for their staff. Further, the nation has the lack of qualified judges because of which its present court system is overburdened, and there are lots of pending cases to be heard. Further, the Sagia regulations are very indistinct. Laws change quite frequently in the country, therefore, lawyers find it difficult to cope up with it as they themselves are not sure what to brief to their clients. Because of this, a foreign investor who was operating in the nation for the past ten years has to quit his business and closed the factory and moved to Northern Iraq. Final, but the most important conclusion of this study is that, the human capital of Saudi Arabia is not skilled enough and thus foreign companies face lots of difficulties in hiring talented human resource.
According to the findings of the work, following are the recommendations that can help Saudi Arabia private sector companies in attracting higher FDI:
- E-governance and information technology are vital for the development of an economy and for attracting higher FDI. The companies should bring advancement in its technological and communications to benefit from the information revolution. This will improve the general performance of the economy and will bring institutional stability. Moreover, they should request the government and local authorities to switch from the centralisation of power and hierarchical authority to a digital model of government based on information.
- The companies should facilitate a highly developed control system for the movement of capital into and out of the nation so that it can minimize organized crime like money laundering, etc. Further, they should guarantee investors and assure them against seizure, dispossession, risk of nationalisation, reservations, etc.
- The companies of Saudi Arabia should focus on the expansion of private sectors, both foreign and local so as to create more jobs and to diversify income. These should be the part of its development strategy. They should motivate government to motivate private sectors by assuring guarantee against freezing of assets, reservation, seizure, risk of nationalisation, dispossession, etc.
- In order to overcome from the potential bureaucratic obstacles, local companies should unite themselves establish an agency that will protect investors. Further, this agency should establish coordination between companies and national and international development centres so that it can enhance technical capabilities of local companies.
- They must introduce OSS (one stop solutions) which will act as mediator between various government departments and the investor. This will help to mitigate procedural delays and foreign investors will get quick registration and approvals.
- In order to have a better workforce, companies should deliver frequent training and development programs to its employees, so that they can work on the advance technology of the foreign companies. In addition to this, companies must provide industrial trainings to the university students in order to make them compatible with business environment. This will help the foreign companies in getting skilled labour and adhering to the employment law of the country.
- Companies need to improve their accounting system. In this regards, to have practice a more transparent accounting system, they must practice GAAP. This will attract more foreign investors as they can study the financial of the companies in which they want to invest.
5.3: Suggestions for Further Research
The present work takes into account all the sectors of the Saudi Arabia's economy. Thus, in the future, an intense work is required to be conducted to determine the attitude of the foreign investors to invest in some of the specific sectors of Saudi Arabia's economy such as oil and gas, agriculture, communication, real estate, food industry, construction material and tourism. Secondly, there is a lot of scope for the future scholars to conduct a study on determinants of foreign direct investment in Saudi Arabia. Such kind of study will further help the local players and government and local bodies to focus on those determinants that play a significant role in attracting huge foreign direct investment in the country. Finally, the dynamics of general economic variables such as exchange rate, interest rate, unemployment, inflation and economic growth change very frequently. Thus, an investigation must be undertaken in every two years so as to study the flow of foreign direct investment in Saudi Arabia.
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