Business and management environment in saudi arabia challenges and opportunities for multinational corporations

The signifi cant role that the Kingdom of Saudi Arabia plays in the global economy and in political affairs is evident in the worldwide concern over oil prices and political stability in

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48 Business and Management Environment in Saudi Arabia

Challenges and Opportunities for Multinational Corporations Abbas J Ali

Business and Management

Environment in Saudi Arabia

Challenges and Opportunities for

Multinational Corporations

Abbas J Ali

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Business and management environment in Saudi Arabia : challenges and

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p cm.—(Routledge studies in international business and the world economy ; 48) Includes bibliographical references and index.

1 International business enterprises—Saudi Arabia—Management 2 Saudi Arabia—Economic conditions 3 Corporate culture—Saudi Arabia.

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10 Decision-Making Styles and Attitudes toward Risk 162

The signifi cant role that the Kingdom of Saudi Arabia plays in the global economy and in political affairs is evident in the worldwide concern over oil prices and political stability in the Middle East The Kingdom is endowed with one-fi fth of the world’s proven oil reserves In terms of production costs, the Kingdom is considered one of the lowest producers of oil; and because of its aggressive investment in the energy sector, the Kingdom has strengthened its role in the world economy and has maintained a noticeable presence on the global economic stage Politically, since the early 1970s the Kingdom has used its oil revenue and its close connection to the United States to transform itself into a powerful restraining force in Middle East politics That is, economically and politically, many countries and the majority of the world’s population are affected by initiatives and actions taken by the Kingdom

In fact, the Kingdom has become the United State’s most trusted ally, after Israel, in the Middle East In this newly found capacity, the Kingdom performs three roles: defender and justifi er of U.S economic interests in the region, it enables forces to translate U.S Middle East foreign policy into

a reality and acts as a restraining factor in Middle East Politics In ing these three roles, the ruling al Saud family understands that its grip on power is characteristically linked to the approval of the powerful Wahhabi religious establishment and the support of the United States Therefore, the Kingdom’s ruling family has carefully sought to faithfully serve U.S interests in the region while closely consulting with the religious authority

play-on matters related to domestic and Islamic affairs Accordingly, the regime has engaged in four interrelated strategies Economically, it has adopted a system which optimally serves U.S interests while strengthening the role of the ruling family: Sheiko-Capitalism In terms of oil strategies, for exam-ple, the Kingdom has always sought to keep its oil production capacity in line with the interests of the industrial world and to use oil revenues to co-opt opposition In terms of foreign policy, the Kingdom faithfully performs the role of executor of U.S Middle East policy and, behind the scenes, uses all its energy to paralyze any move on the Arab street to confront such policy Third, domestically the regime effectively pursues economic policies

that offer its population a reasonable level of prosperity and simultaneously focuses its citizens’ concerns on ever-emerging crises, induced or spontane-ous, in other Arab countries and other Muslim states, thereby diverting their attention from domestic affairs Fourth, it utilizes its fi nancial power

to establish or take over the ownership, direct and indirect, of major Arab and international media outlets This has allowed the kingdom to promote its political vision and to effectively counter views that are in confl ict with the United State’s vision and interests in the Middle East

In the last few years, the Kingdom has revised its commercial, investment, and labor laws In October 2007, the King fi nally acted upon his promises to reform the judicial system by establishing specialized courts, including per-sonal status, commercial, and labor tribunals The new laws are expected to speed up the review process and signifi cantly reduce routine and bureaucratic procedures in judgments related to business, labor, and personal grievousness These laws, along with membership in the WTO, will enhance international investors’ confi dence in the Kingdom’s market and create an environment more conducive and friendly for MNC operations

Over the last forty years, the study of the process of management, its tegic importance, and its environment in the Kingdom has been neglected

stra-by scholars and managers and has usually been left to be covered stra-by nalists instead of undergoing rigorous and professional analysis The little that has been written about business and organization in the Kingdom has not taken into account the cultural assumptions and the nature of forces which shape business practices and organizational conduct In fact, there has been a great misunderstanding about the interplay of forces infl uencing business and management practices in the Kingdom, making it impossible for MNCs and their representatives to formulate a sound and practical

jour-view of the nature of business and work environment This book, Business

and Management Environment in Saudi Arabia, provides managers,

con-sultants, students of international business, and policymakers with a prehensive treatment of essential management and organizational issues, concepts, and techniques

com-Business and Management Environment in Saudi Arabia moves beyond

the question of how to do business in the Kingdom It is an innovative and authoritative source which provides accurate and signifi cant information, for MNCs and scholars, on how to capitalize on opportunities in the Kingdom, avoid minefi elds, understand the power structure and organizational conduct

of that country, develop sound approaches and strategies to compete tively, and familiarize expatriates and international managers with cultural assumptions and deeply held beliefs regarding business norms The book is written with the intention of bridging the gap between business and culture misunderstandings and providing sound theoretical reasoning for how and why certain management and organizational issues have evolved

effec-The book is organized into fourteen chapters effec-These chapters were written in an integrated way to give readers an accurate understanding of

the nature of business and management in the Kingdom The interplay of business, politics, religion, and culture is brought into focus in the most dynamic way The fi rst three chapters place considerable emphasis on the business and organizational environment in the Kingdom and the Middle East The next three chapters address cultural values, work orientations, and managerial roles within and outside the organization The rest of the chapters offer detailed practical and theoretical reasoning for and guide-lines on the nature of groups, effective communication, human resource challenges, decision-making styles, organizational change, and the place of the Kingdom in a globalized economy.

In preparing this book, I had to consult with and seek assistance from several individuals All have been very cooperative and supportive My deepest appreciation is to Robert C Camp, my dean at the Eberly College

of Business, Indiana University of Pennsylvania Bob has provided erable support for engaging in intellectual and scholarly activities Drs Abdulwahab S Al-Kahtani and Ahmed Al-Mughrabi from Saudi Arabia were instrumental in collecting data and in providing needed publications Erdener Kaynak, executive editor for international business at the Haworth Press, is a friend and scholar His natural cooperative tendency and intellec-tual instinct make him a valuable asset In addition, I am thankful to Laura

consid-D Stearns at Taylor and Francis Group and Ryan Kenney of IBT Global for their cooperation and assistance

Furthermore, I would like to thank Dr Helen Bailie for her careful editing and useful comments on the manuscript My assistants, Ashok Kumar Velayudampalayam Palaniswamy and Nicole Marie Carney, did

a fantastic job in helping me fi nish the book, and I am grateful to Helen, Nicole and Ashok for their exceptional enthusiasm in working with me In particular, my children Fadil, Aziz, and Yasmin, along with their mother, Huda, have been a source of enjoyment and challenge To each of them, I

am always grateful

1 Socio-Political Environment

GENERAL SETTING

Arabia, the center of a rich civilization, is surrounded by water on three sides (the Arabian and Oman gulfs from the east, Indian Ocean from the south, and the Red Sea from the west) and by sand on the fourth (Jordan and Iraq) Historically, Arabia was the center of the caravan trade Before Islam, cities fl ourished on the edge of the huge desert Commerce, art, and literature found fertile ground in these cities Just after the birth of Islam in Mecca, Arabia came to play a vital political and religious role in the area When the capital of the Arab/Islamic Empire was relocated to Damascus and then to Baghdad, Arabia maintained its strategic importance for Arabs and Muslims This is because the holy cities of Mecca and Medina and the shrines of the Prophet Mohamed and other Islamic fi gures are in Arabia.For centuries, two patterns of life have coexisted in Arabia: the Bedouin and the sedentary The Bedouins are nomadic people who stress courage and pride and show independence and generosity The traditional seden-tary population stresses endurance, hardship, submission, and cunning The

fi rst group produced poets and warriors, whereas the second produced chants, scientists, and rulers Both lived in harmony and were dependent

mer-on each other However, the infl uence of the sedentary populatimer-on declined after the eclipse of the Arab-Islamic State and the beginning of foreign hege-mony (Ottoman and European) Consequently, Arabia witnessed a decline

in its economic, political, and social infl uences The Bedouins and their way

of life were also shattered and the Bedouins’ Islamic-Arabic traditions gave way to sectarian and tribal confl icts Rom Landou, a British scholar who in the early 1930s visited and lived in Arabia, noted that the West corrupted Arabia and taught the Arabs racism and intolerance He stated (1938: 387),

“Racial or national antagonism is alien to the Muslim It is we in the West who have made him conscious of race and nationalism It is we who have taught him to suspect, to mistrust and, in the end, to dislike us.”

A majority of the population that used to roam the vast arid plains of Arabia and the Fertile Crescent just to earn a minimum income became prosperous in the few years following the discovery of oil in the twentieth

century Modern facilities were constructed, and consumption of luxury goods and services became the norm The discovery of oil also contributed

to the establishment of independent entities in Arabia: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates (UAE), and Yemen Most of these states were created by fi at in order to institutionalize the political hegemony of the colonial power (e.g., Britain) Kuwait, Qatar, and the UAE were declared independent city-states by the British government during the 1960s and early 1970s Later, as economic interests of the ruling elite matured, imaginary national boundaries were sanctioned and became

a device for defi ning economic relationships between powerful business and tribal elites nurtured during the colonial era

Arabia is characterized by extreme contrasts Economic disparity, as refl ected in per capita income, is very wide (per capita income in Yemen

in 2005 was $600 vs $11,770 and $23,770 in Saudi Arabia and the UAE, respectively) Bahrain, Kuwait, and Qatar, for example, are city-states, whereas Saudi Arabia is a huge desert with scattered but highly populated cities While unemployment is high in Yemen—about 35 percent—the other states rely heavily on foreign workers that made up 60 to 90 percent of the total work force in 2005 A vivid example of heavy reliance on foreign work-ers is the UAE The percentage of nationals in the UAE declined from 36 per-cent in 1975 to less than 10 percent in 2003 Defense expenditures per capita ranged from $810 in Saudi Arabia to $1,770 in Kuwait in 2005 (Ehsani, 2006) In terms of total defense expenditures, however, Saudi Arabia tops the list in the Middle East with its order of $50 billion in military hardware

in 2006 (Al Jazeera, 2007) The region, in general, is considered strategically vital to the global economy because of oil reserves and its geographic loca-tion About two-thirds of the proven oil reserves in the world are located in the Gulf region The Gulf Crisis (August 1990–March 1991) and the subse-quent invasion of Iraq in 2003 provided vivid evidence of the volatility and importance of the region for world stability and economic prosperity

A Western life style coexists with the traditional one in most of the Gulf states, but in Yemen the traditional way is still the norm Indigenous popu-lations in the Arab Peninsula share a similar cultural background Almost all of them are Muslim Arabs who display similar outlooks and orienta-tions With the exception of Yemen, the ruling elite in the Arab Penin-sula are sheiks and heads of tribes They have absolute authority and are accountable only to senior members of their respective clan Businesspeople across Arabia are related in one way or another (e.g., through kinship, tribal networks, marriage) Studying a particular segment thus gives a fair picture of the orientations and demands of the whole indigenous popu-lation across Arabia Saudi Arabia, in particular, because of its size and political and social dominance, represents the nature of the business and economic mode prevailing in the region In fact, despite the outstanding economic performance of the UAE, in recent years, Saudi Arabia’s role and prospect as the leading player in the region is not expected to diminish for

the coming decades The primary focus in this chapter is on Saudi Arabian business and social environments Implications and future recommenda-tions are applicable to Arabian executives in general and are useful for multinational corporations (MNCs) operating in the region.

ISLAMIC ENVIRONMENT

It is fair to suggest that many Arab management practices are rooted in Islamic and pre-Islamic practices During the fi rst six centuries of Islam (beginning with the sixth century), knowledge, trade, industry, agriculture, and construction of complex organizations fl ourished Work and creativity were honored in all their forms Quranic principles and prophetic prescrip-tions served as guidelines for Muslims in conducting their business and family affairs For Muslims, Islam is a way of life and is a source of spiritual power that sustains and enforces a high moral standard Izzeddin (1953) suggests that Islam signifi cantly contributed to organized work, indicating that industries and trades were organized in corporations and guilds before the collapse of the Arab-Islamic state around 1258 She argues that Islamic moral foundations encouraged businesspeople and artisans to have a sense

of duty toward their craft and toward one another Honesty and ety were characteristic qualities of Muslim craftsmen In the golden age of Islam, people sought perfection in their work, and in their search for truth they acknowledged that there is nothing of higher value than truth itself.Various Islamic schools of thought fl ourished during the Arab-Islamic Empire There were at least six Islamic schools (see Ali, 1990, 2005, for

sobri-more details) The fi rst was Jabria (predestination) It asserts that man is

not responsible for his/her actions and that tradition must take precedence over the power of choice It relies on clearly defi ned rules and complete obedience to authority Rational arguments are prohibited and individuals

must follow the leader’s instructions The second school is the Tafwiz

(del-egation) This school emphasizes free will and unqualifi ed discretion in the choice of wrong and right because rules and regulations constrain human and organizational life In organizational life, employees assume different tasks and duties and collective responsibility is preferred The third is the

Ikhtiar (choice) school, which shares the Tafwiz emphasis on free choice

but differs in the belief about man’s capacity to turn evil into good Unlike

the Tafwiz school, it stresses that man is at liberty to commit a good or bad

deed, infl ict pain or joy, and that he is solely responsible for his actions Man is believed to be a responsible social actor striving to work with the group and to achieve the group’s goals in a harmonious and cooperative

environment The Mutazilas (rationalistic) school believes that all

knowl-edge must be attained through reason This school holds that nothing is known to be wrong or right until reason has enlightened us to the distinc-tion and, further, that everything is liable to change or annihilation It

maintains that free will and democracy are prerequisites to action and the prosperity of society Denial of ability and free will stifl es creativity and destroys the soul.

The fi fth school of thought, advocated by Ibn Rushd (or Averroes, c

1126 AD), holds that actions depend partly on free will and partly on nal environmental forces that serve to restrain and/or determine individual and collective action The participative democratic process is thought to be the ideal organizational form and autocracy is believed to open the door to

exter-human misery The sixth and fi nal school, the Ikhwan-us-Safa (Brothers

of Purity), arose in the tenth century in response to the oppressive practices

of the Jabria School During the tenth century, liberal-minded thinkers and

philosophers were tortured and persecuted Nevertheless, a small body of thinkers formed themselves into a brotherhood to hinder the downward course of Muslims toward ignorance and narrow-mindedness They estab-lished secret organizations across the Islamic nation and wrote letters as a way to disseminate thought The school advocated rationalism, self-disci-

pline, and self-control Ikhwan-us-Safa believed that faith without work

and knowledge without practice were futile and that corruption and der were symptomatic of tyranny They displayed a strong faith in man’s ability to make progress and to control the environment

disor-The previously mentioned schools had tremendous infl uence on the way

in which Arab and Islamic states were organized and on the way ness and personal transactions were conducted For example, the Otto-

busi-man Empire (1412–1918) subscribed to some aspects of the Jabria School

whereby centralization of government affairs and strict adherence to

speci-fi ed rules were the norm Since then, with the exception of the Jabria, these

schools of thought have become part of history In Arab states, independent thinking, concepts of liberty, and the power of a free mind were condemned,

and Jabria principles were sanctioned in every aspect of life This is visible in Saudi Arabia today, where the government ascribes to the Jabria School In

Arabia, the birthplace of Islam, it is not diffi cult to imagine the fl ourishing

of the Jabria School The conditions of Arabia after the collapse of the Arab

empire and the dramatic downward course of Arab civilization fostered the

growth of Jabria The harsh desert environment, the humiliation of Arabs

at the hands of foreign elements (Turks and Mongols), isolation from the rest of the world, and cultural discontinuity—centuries of living in an age of darkness or ignorance with no knowledge of Arab civilization and history—opened the door for disintegration, confl ict, and an authoritarian outlook

in Arabian society It was in the eighteenth century that Wahhabism, the offi cial sect of the Saud ruling family named after Mohammed Ibn Abdul Wahhab, 1703–1792, began The movement, originally, was a call to restore Islam to its purest aspects In practice, however, Wahhabism appears on many occasions to compromise on basic aspects of early Islamic thinking: tolerance and fl exibility Increasingly, in recent years, critics of the move-ment have argued that Wahhabism is more inclined to discount the role of

community “ijma” (consensus) and disregard the consultative (democratic) form of Islamic government as it is specifi ed in the Quran (e.g., Holy Quran,

3:159, 27:34, 42:38) and Islamic traditions of the Rashidun caliphs (rightly

guided successor of Prophet Mohamed) Nevertheless, the current King Abdullah, then prince, argued in 1962 that “if there is any truly democratic system in the world it is the one now existing in Saudi Arabia Our under-standing of democracy is that it permits direct contact between the people and the ruler Anyone can secure an audience with the King and argue with him about the sharia” (quoted in Powell, 1982: 366) Since then this view has been widely promoted in countering critics and opponents of the regime Indeed, Foreign Minister Saud al-Faisal, in his remarks to the U.S Council on Foreign Relations (2005), reiterated the same when he stated that the system in the Kingdom enables “any person in Saudi Arabia to take his or her grievance directly to any offi cial including the King.”

One of the most distinct aspects of Wahhabism is complete obedience

to rulers This particular orientation has been instrumental in sustaining and strengthening the Saudi regime and in easily aligning various tribal and community leaders behind the King and the decisions made by the senior members of the al Saud family, the ruling family Historically, the latter, under the leadership of its founder, Mohammed Ibn Saud, who was the tribal leader of the village of Diriyah around 1744, established a pact with Ibn Abdul Wahhab to provide him with protection as long as he showed allegiance and loyalty Since then, this pact has been strengthened through marriage and mutual interests Wahhabi religious leaders who control most mosques in today’s Saudi Arabia have played signifi cant roles in promoting religious and political edicts that serve the interest of the government The Saudi family, in turn, has been successful in integrating the Wahhabi lead-ers in daily functions of government (e.g., approving new laws, advising, and participating in offi cial ceremonies) Sanetan (2004) in his study of the elites in the Kingdom has concluded that religious leaders, in their quest to enhance their personal interests, have been successful in molding religious principles to be in line with the wishes of the ruling family Two examples shed light on the vital roles of the religious Wahhabis to the ruling Saud family First, at the onset of the Gulf Crisis (August 1990), the Wahhabi sheiks ignored the Quran’s instructions to Muslims not to rely on foreign protection (Holy Quran, 4:51 and 5:57) The head of the religious author-ity, Ibn Baz, in justifying the attack on Iraq, issued a fatwa calling Saddam Hussein of Iraq an infi del stating that “He is an infi del even if he says, there

is no God but God; prays and fasts This is the case of Saddam and those like him, who declares Islam hypocritically and who oppresses and harms Muslims and stands by his ungodly Baathist ideology.”

Second, when Islamic scholars and intellectual groups petitioned the King in late May 1991 to meet certain demands (e.g., the establishment

of an independent consultative council, the observation of Islamic ciples in government action and conduct, the establishment of a defense

prin-and information system that does not serve foreign interests, competent and qualifi ed personnel for embassies abroad, respect for individual dig-nity, and adherence to due conduct and procedures), the Wahhabi religious authority denounced the group The religious authority considered the peti-tion un-Islamic as it did not observe the edict that people must obey the ruler whether right or wrong They stated: “The manner in which the peti-tion was published and distributed does not serve the [general] interest,

neither does it help Muslims observe piety and virtue” (Arab News, June

1991) Most recently, the chairman of the Islamic scholars, Abdulaziz Al Al-Sheikh, issued a warning to youths in Arabia to obey the ruler, stating that by joining jihad abroad “the youths commit a number of violations

of Islamic orders and teachings including disobedience of our rulers and subject themselves to be attracted by deviated elements and misuse their enthusiasm to achieve political and military gains for suspicious quarters” (Saudi Press Agency, 2007)

SOCIAL ENVIRONMENT

Arabian society is a mosaic one Various groups, traditions, and patterns of life coexist Since the mid-1940s, the simple life that the majority of indige-nous citizens used to enjoy has given way to more complex and sophisticated patterns During the pre-oil boom era, most Arabians merely sustained life and were comfortable with a minimum standard of living Only a few tribal, political, and merchant elites lived in prosperity The discovery of oil and the sudden increase in oil revenues in late 1973 changed the Arabian social and economic structure Cities and towns fl ourished (e.g., Dammam, Jeddah, Jubail, Riyadh, Yunbi) and per capita income increased ($1,040 in

1972 vs $15,645 in 1985) Arabia has evolved in the last forty years into

an urbanized oil-based economy and has established manufacturing-based industries using the latest Western technology

Society in Arabia has always been highly personalized Friendship, ship, regionalism, and communal relationships have had a signifi cant infl u-ence on individual action and behavior Relationships evolve around the person-tribal network Despite the erosion, for historical reasons, of tribal organizations, individuals take great pride in keeping up their tribal tradi-tions, divisions, and Bedouin heritage Ghazi al-Qusabi (2006), a seasoned minister, noted that a high percentage of citizens in the Kingdom still con-sider themselves, in terms of tradition and tribal origin, from the desert Previously, Patai (1983: 76) stated:

kin-The preservation in many families of a tradition of or claim to tribal ancestry is another common form of nostalgia for Bedouin virtues Such traditions and claims are found among inhabitants of small towns and large cities alike, even in families who have been town dwellers for

many generations People of humble circumstances, such as artisans and workers, preserve the tradition of their Bedouin descent carefully and jealously, for it supplies them with the one and only claim they have to a semblance of status and social importance.

Both in urban and rural centers, tribal identity and loyalty are tent and command respect with special privileges bestowed on those with recognized lineages Family, however, is still the basic social unit to which individual members are subordinate The transformation of Arabia into a semi-industrial and semiurban society, however, has given new meaning

persis-to the role of family In the old traditional secpersis-tors (Bedouin and rural), family relations reach beyond the extended family to include the entire kinship network Individuals not only identify with larger organizations (tribes), but their welfare and fate depend on the actions of that network as

a whole In cities and towns, however, the tribal network evolves primarily around extended family Individual concerns and loyalty are to parents, grandparents, and immediate relatives The tribe plays a reinforcing factor that sustains the continuity of the social fabric and revitalizes the role of the extended family It has increasingly become a source of reference or pride Furthermore, Bedouin tradition and values are still apparent in the behav-ior and orientation of the majority of the indigenous population Powell (1982) observes that one gets the distinct impression of the legacy the desert has left even in the heart of a major city He states (p 158): “The egali-tarianism of the Bedouin is ever present Hospitality is extended without regard to social or economic rank ” Urbanization and the accompany-ing fl ourishing of schools and business and government networks may give the appearance of modernity but are not yet effective in reducing the need for tribal organizations This, however, has not precluded the emergence

of new relations based on social class identifi cation, career interests, gious activities, and social and organizational interests among career ori-ented individuals and the rising middle class Though this development has not been widely accepted, it is more likely that this new trend constitutes the beginning of a new social foundation that Arabian society has never experienced before It is this new foundation that poses a challenge to old political thinking and patterns of relations In fact, with the rapid degree of urbanization, educational achievement, and economic affl uence, confl ict-ing loyalties may appear on the social and political stage The outcome of this divided loyalty remains to be seen

reli-The rising middle-class businesspeople display a high level of tication Their business judgments are increasingly based on facts and objective data more than on subjective inclinations or emotional consid-erations However, the latter may persist, as it was cultivated in the early days by social upbringing and lavish paternalistic attention to children Social forces, too, may shape emotional tendencies as these forces reinforce what is cherished and desirable and articulate the necessity of showing

sophis-passionate attachments to inner groups But ever-looming fear of regional political upheaval coupled with a possible sudden decline in oil prices, a shift in economic and social priorities (e.g., emphasis on private initiative and investment, class consciousness, privilege of social class relations), and familiarity with international nuances have strengthened the middle-class competitive spirit and entrepreneurship In the political realm, the middle classes are aware that their freedom is limited but they have managed to carve a fi ne balance between their business demands and the political real-ity of absolute monarchy Their fl exible ethics and long-term perspective enable them to control an unease, often unnoticed, with the lack of politi-cal freedom This may evolve, in the future, into a tension with the ruling family, thereby threatening the stability and prosperity of the rising middle class In an environment of little or no political openness and of supremacy

of personal relationships, neither government offi cials nor businesspeople would like to publicly lose face with the ruling family Members of the busi-ness community, in particular, know that when the ruling family withholds its approval or support for a business person, the immediate and inevitable result is a sudden decline of fortune and a business calamity While wealth and family name are often a prerequisite for economic and social advance-ment, the ruling family’s approval and support has been always the most pivotal factor

Though Saudi Arabia confronts several social problems, the most ing are those that are related to youth resentment, diminishing opportuni-ties, and women’s roles in the society These problems are not exclusive and taken collectively they could be a serious destabilizing political factor In

press-2004 the population reached 24 million people The percentage of youth

in the total population is relatively high The Eighth Development Plan (2004–2009) shows about 40.4 percent of the total Saudi population is below fi fteen years of age and the median age of the population is estimated

at 17.3 years This means that one-half of the population is at or below age 17.3 years Most of the youth population is concentrated in the relatively few urban centers This could make this group a potential bombshell and a source for social and political unrest This particular group, relative to other and previous generations, has access to satellite communications and vari-ous sources of media This factor, coupled with an extensive use of cellular phones and other media technologies, make the youth less inclined to show conformity to social and political order Their exposure to world politics and their interest in unbridled political and religious debates via Arab and foreign television satellites such as Al Jazeera, al-Arabia, al-Manar, BBC, and CNN reinforce such tendencies and most likely lead them to question political decisions and the ruling family Bradley (2004) suggests that the frustration among the youth in the Kingdom is akin to that which led to the French Revolution However, Bradley’s assertion that this frustration and resentment toward the privileged classes and the ruling family is certain to result in a popular revolution against the al Saud family seems unrealistic

given the nature of prevailing social forces, the depth and complexity of the Saud family network with tribes, infl uential families, Wahhabi religious authority, and the superpowers This, in addition to the ability of the ruling family to manage social and political crises, makes it impossible to have a full-scale uprising.

In an editorial in 2003, the New York Times argued that the rapid

growth in population, the decline in oil prices, and widespread corruption

in Saudi Arabia will eventually translate into diminishing opportunities and rising discontent In spite of these, the real challenge facing the King-dom, which will be addressed in the chapters that follow, is the ability to maintain equitable access to economic and political opportunities While the social fabric has been a factor in maintaining at least the appearance of social cohesion, economic changes at home, social mobility, regional insta-bility, and rapid integration in the world economy may erode or weaken the social foundation and traditional allegiances as the government fails to meet the rising demands of a youthful generation Since the early 1970s, the economy has been relying heavily on foreign manpower, and a large and growing segment of educated Arabian individuals has enjoyed access to government jobs and lavish government spending Oil revenues, however, are not expected to steadily increase and the government may have limited capacity to absorb the ever-increasing number of high school and college graduates Successive development plans have envisioned a role whereby the private sector offers opportunities for the new graduates to work and participate in economic activities The private sector, however, has not per-formed according to governmental expectations, making diminishing eco-nomic opportunities a potential reality

A challenging issue that faces the government in Saudi Arabia is the rate at which women are slowly being integrated in the workforce The government appears to be aware of this challenge and its economic and social consequences The participation of women in the workforce has been assertively protested by the Wahhabi religious authority In spite of this, the government has been gradually enabling women to participate in the mar-ketplace though the rate of participation is still considerably low, averaging about 10.3 percent in 2003 Women, however, are graduating from a large number of high schools and colleges The Eighth Plan shows that female students constituted 48.6 percent of the total number of students Enroll-ment in junior and senior high schools has reached 50.3 percent, female students in higher education have outnumbered male students, and the rate

of female graduates reached 56.5 percent of the total number of graduates

In addition to limited economic opportunities, women in Saudi Arabia face other problems such as the right to drive, to travel abroad without

an accompanying male relative, and participation in the political process, especially elections Comparatively, in recent years, women have achieved modest progress, and this progress is destined to lead to more opportuni-ties Western media, however, seems to be more obsessed with what women

wear outside their homes, as almost all women in the Kingdom have to

cover themselves in black cloaks or abaya, than women’s social and nomic progression For example, in his visit to Saudi Arabia, New York

eco-Times columnist Nicholas Kristof (2002) described women gathering in a

mall, stating, “I spotted a surreal scene: three giggly black ghosts, possibly young women enveloped in black cloaks called abayas, clustered around

a display in a shopping mall, enthusiastically fi ngering a blouse so sheer and low-cut that my wife would never be caught dead in it.” Many politi-cians and reformers in the Kingdom assert that women’s dresses are cul-tural issues and part of prevailing social norms and are not impediments to their integration into the labor market These reformers, along with a large segment of professional women, view economic opportunities, the right to drive and vote, and fairness in employment, rather than attire, as the most serious obstacles for women’s social and economic progression

POLITICAL ENVIRONMENT

Saudi Arabia’s political system is a monarchy It is ruled by a king and senior members of his family They have absolute authority and the fi nal say on how things must be managed These range from social and eco-nomic to political issues Arabian society is characterized by the presence

of a well-entrenched tribal system and close adherence to Wahhabi Islamic thought Since the establishment of the current monarchy system in 1932, the Saudi ruling family has based its legitimacy on two pillars: Wahhabism and tribal allegiance In fact, the strength of the ruling family has rested

on the ability to maintain and exploit both tribal and religious traditions The Saudi rulers’ skills in dealing with conservative Wahhabi elites enable them to maintain unquestionable acceptance of their authority Refusal to accept al Saud family authority is considered to be the most heinous moral crime an Arabian individual might commit Perhaps the fi rst serious reli-gious attempt to violate Wahhabis’ allegiance to the al Saud ruling family took place on November 20, 1979, when a political Wahhabi group seized the Kaaba in Mecca The siege of the holy place, Kaaba, continued for a few weeks until the government used force to end the siege and eventually arrested the group leader, Jehman al-Autabi

In 1932, Abdul Aziz Ibn Saud was successful in uniting various parts of Arabia after militarily defeating his rivals—tribal and religious leaders—

in fi erce battles He established a kingdom and named it after his clan, the Saudi Ibn Saud was shrewd and initially left the autonomous status

of many of the scattered tribes across Arabia intact This, at the time, enabled these tribes to exert infl uence on the ruling family but gave Ibn Saud the opportunity to cement alliances and build the foundation of his power Nevertheless, Ibn Saud, with the help of British advisors, initiated

a plan that gradually destroyed the socio-political autonomy of the tribes

Cole (1982) indicates that the al Saud ruling family took several steps to

implement this plan First, the urf or customary tribal law as practiced by

tribes was declared illegal and was replaced by the Sharia or Islamic law The law is administered by religious judges and other state representatives appointed by the ruling family It replaced the scattered tribal “arbitrators” and established a unifi ed centralized code The code was enforced and its religious justifi cations were communicated to tribal leaders Since the latter had little, if any, knowledge of Wahhabism, religious authority stepped in and assumed additional infl uence at the expense of tribal leaders The sec-

ond was the abolition of the hima system, the communal ownership of

cer-tain territories where grazing was restricted to particular tribes This led to reduced armed confl ict between tribes and to weakened tribal solidarity as

it contributed to the breakdown of the socio-political autonomy of tribes

Third was the creation of the Ikhwan al Muslimin, the Muslim

Brother-hood, to spread and enforce Wahhabi Islamic thought The Ikhwan assumed three initial responsibilities: to promote the sedentarization of tribesmen in agricultural settlements, to send preachers among the Bedouin to convert them to Wahhabism and to convince them that many of their actions were not Islamic, which could lead to severe consequences, and to put an end to Bedouin independence as tribal warriors by killing their horses (the basis of

independent tribal military action) Later on, the Ikhwan assumed a

secu-rity or law enforcement role, making them a formidable force in protecting the al Saud family and the Wahhabi religious establishment This was and

is still conducted by the Organization of Propagation of Virtue and nation of Vice And lastly, the Saudi family incorporated tribal leaders into

Elimi-a highly centrElimi-alized Elimi-and bureElimi-aucrElimi-atic system The titles of sheik Elimi-and Elimi-istrator were given to tribal leaders and access to lucrative businesses was secured for them The traditional fi nancial independence of the tribal lead-ers and the contribution of tribal members were weakened or eliminated

admin-By making social privileges and access to wealth contingent on the degree

of relations to the king’s palace, the al Saud ruling family has been effective not only in eventually diminishing the traditional tribes’ independence but also in creating a new type of loyalty that transcends the normal kinship basis and ensures the emergence of a salary-dependent population

For many years, the ruling family attributed the stability of the dom, the munifi cence of the king, and the validity of the monarchy system

King-to God’s blessing, thus making a strong argument that their hold on power was religiously ordained The Gulf Crisis (1990–1991) and its aftermath exposed the vulnerability of the regime The ruling family had to invite foreign troops to station themselves in the Kingdom to protect the regime from possible attack by Iraq and to force it out of Kuwait At least two developments are linked directly to the aftermath of the Gulf Crisis First, the public showed dissatisfaction with the presence of a large number of foreign troops on Arabian soil Some members of the Wahhabi religious authority publicly denounced the presence of American troops and were

jailed Several religious groups, notably the one which was led by Osama Ben Laden, broke rank with the ruling family and called for the replace-ment of the al Saud family Though the group politically does not pose a credible threat to the regime, its mere existence constituted a challenge that the ruling family takes seriously The second development is the increas-ing demand, both domestic and internationally, for political tolerance, self-expression, openness, and liberalization of the government system Just before the invasion of Iraq in 2003, several infl uential individuals, including reformed and conservative religious fi gures, signed a document (February

17, 2003), “The National Reform Document,” and submitted it to Crown Prince Abdullah The document, while reaffi rming allegiance to the ruling family, accentuated the necessity for establishing a constitutional govern-ment and the development of a “basic law system to strength the constitu-tional concepts the separation of the executive, judicial and legislative authorities, and ensuring of the citizen’s basic rights in justice, equality, and equal opportunity.” The document, too, called for direct elections, fairness

in wealth distribution, prevention of bribery and expropriation of public land, designing of sound economic plans, political inclusiveness, promotion

of human rights, and granting the rights for self -expression on matters of public affairs

The Saudi ruling family has with considerable ease dealt with the lem of containing discord and preventing major political crises Members

prob-of domestic groups who sought a greater voice in the political process and more openness have been virtually incorporated into the system or are allowed to voice their concerns through sanctioned channels Furthermore,

in 2005, the Kingdom for the fi rst time experienced municipal elections Several religious and tribal fi gures ran for offi ces The outcome was pre-dictable as religious fi gures or those who were promoted by the religious authority won a signifi cant number of seats While this development seems

to be a trivial one for the West, in Saudi Arabia the mere participation

in an election inaugurates a new era where people are given an nity to take part, though limited, in a political exercise This particular development may represent a profound change in the political atmosphere and could set the stage for further openness and inclusion in the politi-cal process While the ruling family and the religious authority have been careful to maintain a signifi cant degree of control on the municipal elec-tion process, there is no guarantee that those elected will show obedience and conformity to sanctioned political norms and order Political expecta-tions and confi dence may translate into a political capital that ultimately erodes the traditional political base Municipal elections and the necessity for political reform were forced upon the government after the 2003 inva-sion of Iraq Perhaps the fi rst Gulf Crisis (1990–1991) was instrumental in inciting nationalistic Arab and religious feelings, while the second crisis of

opportu-2003 radicalized the indigenous population

Though the government in Saudi Arabia supported the U.S invasion

of Iraq and thought that a Middle East without Saddam Hussein would

be a stable place, it failed to grasp the scope and the nature of its own people’s resentment to a foreign military presence and invasion The public,

in general, was vehemently against the invasion and foreign intervention

in Arab affairs In fact, the invasion contributed to further polarization of the population and enlarged the gap between the ruling family and ordi-nary citizens Several groups—tribal, religious, and secular—demanded political reform, tolerance, and openness in the political process and in decision making These groups, unlike the ones which issued the petition for reform in 1991, were led by mostly reformed and conservative reli-gious groups This unexpected mounting pressure induced senior members

of the ruling family to publicly tout the idea of possible reform At the time, Crown Prince Abdullah took the lead and initiated consultations with various groups on possible courses of action He started what he called a

“national dialogue” and proposed municipal elections Prince Bandar Ben Khalid, a rising member of the ruling family, called for accelerating politi-cal reform to maintain the stability of the regime, including a decentralized system where regions and groups would have more say in their affairs

He stated, “I think you will fi nd more people will have a bigger say in government I don’t think we have an option, we need to go in that direc-tion to ensure social stability” (quoted in MacFarquhar, 2003) The Saudi family, so far, appears to have been successful in containing discontent and preventing it from evolving into a national crisis that may threaten the existence of the regime After the 1991 petition, the senior members of al Saud announced on March 17, 1991, the establishment of a consultation council, Majils al-Shura In announcing the formation of the Majils, King Fahid made it clear that it was purely advisory He further articulated a message that open elections and prevailing norms of democracy were not suitable for the Kingdom, stating that “the democratic systems prevailing

in the world are systems which, in their structure, do not suit this region and our people The system of free elections is not part of Islamic theol-ogy” (quoted in Cordesman, 2001) Since the second public discontent in

2003, the regime has allowed limited municipal elections and carefully opted powerful individuals and groups In February 2007, a small group of self-described reformers called for direct and open general elections and to limit the authority of the ruling family Using the Internet, the group hopes

co-to broaden and widely promote its message The ruling family, however, seems to be concerned with those segments of society that pose a threat for its survival and the continuity of the traditional norms In the meantime, the Saudi ruling family has constantly reminded the public that obedience and conformity to existing order, rather than confrontation, brings stabil-ity and reward This confi dence and forcefulness in confi ning the threat of internal opposition enables the Saudi regime to project itself as the leading

force for stability in the region and to broaden its international role well beyond the Middle East.

Indeed, since the demise of Gamal Abdul Nasser’s nationalistic regime

in Egypt in 1970 and the sudden rise of oil prices in 1973, the Saudi family has gained considerable confi dence in projecting itself as the protector of Arab and Muslim causes The fi rst event put an end to a credible ideological and nationalistic threat to the Saudi regime The rise in oil revenues enabled the Saudi government to spend freely on political and economic projects deemed essential for the survival and the strength of the family Since then, Saudi Arabia has intensifi ed its active role in Arab and Middle Eastern affairs The imposing of UN-led economic sanctions on Iraq in 1990 and the dismantling of Iraqi military power after the U.S.-led attack in Janu-ary 1991 removed the last obstacle in the way of Saudi Arabia’s playing an unrivaled role in shaping Arab politics and events

Internationally, Saudi Arabia has become the second most trusted U.S friend after Israel in the Middle East Many Americans and global executives are familiar with the tremendous help that Saudi Arabia offered the United States in defeating the Soviet Union in Afghanistan and in Latin America during the Reagan era Saudi Arabia, moreover, has been instrumental in facilitating the implementation of U.S goals in the Middle East regarding the Israel-Palestinian confl ict, and events in Iraq, Lebanon, Somalia, Yemen, Libya, and Iran Furthermore, Saudi Arabia exercises its infl uence within OPEC to keep oil prices in line with U.S interests and in steering events in a way that maximizes U.S benefi ts around the world, especially in South Asia, Africa, and Muslim countries in East Asia Though Saudi Arabia often plays its global role diplomatically and avoids a blunt approach, it does not hesitate

in asserting itself when the U.S government gives it the signal to do so

IMPLICATIONS FOR MNCS

Since the 1940s, the number of foreign managers and MNCs operating in the Kingdom has increased steadily Some managers have lived in Saudi Arabia for many years Because of the nature of work, political, and social environments, the majority of managers live in housing areas that mostly serve expatriates Moreover, Western managers have utilized foreign work-ers and servants from South and East Asia who are readily and cheaply available to conduct most of their contact with local government and Saudi businesspeople This tendency has limited Western managers’ exposure

to local culture and politics and has consequently severely obstructed the development of essential local knowledge and productive relationships with the government and businesspeople

In the context of the preceding discussion, there are three issues that are important to keep in mind The fi rst revolves around the role of religion in life and in personal conversation While the fi rst part is covered in some detail

in the coming chapters, it is essential to note that Arabian individuals and governments believe that Islam is the foundation of their conduct This should not be a subject for debate and should be taken at face value In personal con-versation, therefore, it is advisable to avoid, if possible, any argument relative

to religion Comments about some practices may be taken negatively and open the door for suspicions In the case that an individual there raises a reli-gious issue, listening fi rst is prudent This gives an opportunity to understand what the host is aiming at and conveys the impression that the guests are willing to learn and take an interest in the subject Western executives should

be aware that Arabian managers and individuals, in general, take pride in showing that they are deeply familiar with religious teachings and beliefs and that they are guided in their affairs by religious precepts From an early age and until graduation from college, individuals are carefully indoctrinated in Wahhabism It is this indoctrination and the view of most religious matters strictly from a Wahhabi perspective that often enlarge the gulf of misunder-standing between Westerners and the indigenous people

Managers of MNCs should also be sensitive to the fact that expressing political thought freely may not be wise While knowing the personal politi-cal opinions of the Arabian counterparts is an advantage, Arabians, in gen-eral, have to live within their own political constraints and thus tend not to express their feelings freely This stems from the fact that in Saudi Arabia, the government maintains a close lid on free political expression and that people in the Kingdom view the deepening problems in the Middle East as a result of Western interference in the region Whether the latter is a reality or mere perception is not an issue The issue is that people in Saudi Arabia take these views seriously and expect their Western counterparts to have sympa-thy It is only after personal relationships with Arabians are strengthened and trust is established that MNC managers and representatives can address certain political issues without necessarily offending their counterparts.One of the most important aspects in dealing with Arabian counterparts

or working in Saudi Arabia is the personal attributes of Arabian individuals

On a personal level, these individuals exhibit exceptional warmth, ship, hospitality, and a readiness to help These attributes ease business dealings and communication and, more importantly, minimize diffi culties associated with religious and political subjects Indeed, having a network and building effective personal relationships might seem to be a cumber-some task in other cultures, but in Saudi Arabia it is constructive and desir-able Generally, early upbringing and Islamic tradition sanction close social relations, friendly personal attributes, and a removal of any obstacles which may inhibit personal and professional relationships That is, individuals in the kingdom, by nature, are disposed to friendly relations and are anxious

friend-to show their hospitality, concern, and service friend-to other people This, ever, should not be taken for granted, as the same personal attributes if trust

how-is not gained could be a serious obstacle for future dealings

2 The State and Prospect

of the Economy

THE NATURE OF THE ECONOMY

Saudi Arabia adopts a form of free enterprise system In the last four decades, the Kingdom has established strong trade relationships with various coun-tries, chief among them Japan and the United States In recent years, both China and South Korea have steadily become important trade partners In terms of openness to the outside world, membership in the WTO (World Trade Organization) and liberalization of trade policies have encouraged foreign direct investment (FDI) In fact, as is documented in other chapters, foreign capital investment has increased and joint ventures have fl ourished in the Kingdom Most foreign participation is motivated by Saudi government support and by the opportunity to establish a niche in a highly competitive market A large number of foreign direct investments, especially joint ven-tures (JVs), were created after 1973—the year when the government’s rev-enue increased sharply In early 1987, there were 1,585 licensed JVs (Al-Aali and Ali, 1991) In 2006, total licensed projects since 2000 reached 3,608, amounting to $78 billion (Sagia, 2006) FDI in the Kingdom is expected to increase from $1.4 billion in 2006 to $1.8 billion in 2009 (Sagia, 2006).The growth in FDI in the Kingdom and the dramatic changes in the Saudi economic structure refl ects a change in the orientations and emphasis of various development plans Although Saudi Arabia is essen-tially a one-commodity (oil) developing nation, the goals of the devel-opment plans have been to reduce dependence on oil and to diversify sources of income The fi rst plan (1970–1975) was a modest one Nev-ertheless, as oil prices increased in 1973–74 a large amount of petro-leum revenues was directed to economic development The second

fi ve-year plan (1975–80) was oriented toward building oil refi neries, rochemical aluminum and steel plants, light industries, and natural gas processing plants In subsequent development plans additional empha-sis was placed on infrastructure (e.g., highways, ports, and communi-cation facilities) A case in point is the creation of economic cities in the Kingdom The development of the additional new cities is expected

pet-to cost about $283 billion over the next three years The Knowledge

Economic City, to be fully completed by 2020, in Medina alone, is jected to cost $7 billon and aims to attract and develop talent from around the world (Sagia, 2007).

pro-The third fi ve-year plan (1980–1985) witnessed a shift in sis from infrastructure projects to the production sector, agriculture, manpower training, and reducing reliance on foreign workers Major emphasis, however, was placed on defense spending This trend contin-ued throughout the fourth fi ve-year plan (1985–1990) This plan was more realistic than the previous two plans, since it was not infl uenced

empha-by the boom era (the era of considerable oil revenue, 1974–1982) ian sectors, nonoil revenue-generating activities, and the role of private initiatives in economic growth were given a relatively proper place in the development process This trend, however, did not continue in the

Civil-fi fth Civil-fi ve-year plan (1990–1995) because strengthening national defense took priority after the end of the Iraq-Iran War The plan was developed before the Gulf Crisis, as the events, during and after the crisis, suggested that defense spending would increase more than ever The plan, never-theless, included other priorities: achieving effi ciency in the government sector, promoting private-sector initiatives, balancing regional develop-ment in the Kingdom, increasing the share of employment in the public sector, and reducing reliance on foreign workers Like previous plans, the seventh and eighth development plans (see Table 2.1) place signifi cant emphasis on human development and diversifying the economic base and reducing dependence on oil The two plans signify the intention among the leading ruling family of cultivating the image of Saudi Arabia in the Muslim world, for example, providing better service to pilgrimages, protecting the environment, and conserving water and natural resources,

in addition to having a national economy that is able to meet the global challenge and global changes

Because of the constant fl uctuation in oil prices and the Kingdom’s dependence on oil exports for its economic growth, a realistic economic assessment of the Kingdom has to be considered For example, Looney (1990) indicates that despite vast amounts of public-sector expenditure since 1973–1974, the Kingdom’s fortunes remain inextricably linked with the world oil market Since then, this reality has not changed and no dra-matic transformations seem possible in the short term Furthermore, the boom period undermined the nascent work ethic that was beginning to develop with expanded education and training (Shaw and Long, 1982) and the Islamic ethic with its emphasis on hard work and persistence (Ali, 1986; Ali, Al-Shakhis, & Nataraj, 1991) Only modest growth has taken place in productive sectors: manufacturing and agriculture Table 2.2 shows that the contribution of the manufacturing sector to gross domestic product (GDP) increased from 10.4 percent in 1999 to 11.1 percent in 2004, while that of agriculture and forestry slightly declined from 5.7 percent in 1999

to 5.3 percent in 2004

develop human capital with better education and replace foreign

develop human capital with bet- ter education

maintain the religious and

to safeguard the Islamic values,

Islamic identity of the Kingdom.

raise the stan- dard of living

develop physical infrastructure

creating aware- ness of the Kingdom’

stimulating the potential of all the regions of the Kingdom

stimulating the potential of all the regions of the Kingdom

improving the administra- tion by better effi ciency

-formance, and responsibility

preserve the national fi

limiting the level of expenditure to SR783 billion

to achieve economic and social integration between the Arab Gulf cooperation countries

to achieve economic and social integration between the Arab Gulf cooperation countries and support economic cooperation with Arab, Islamic and other

to promote sci- entifi

improve the services provided to Hajj and Umrah performers to expand the basic services offered to the common man to prepare the national economy to be more fl

Table 2.2 GDP by type of activity, seventh development plan, constant 1999 prices.

Category of Activity SR Million

Average annual growth rate (%) Share in GDP (%)

According to Saudi Economy’s Golden Era: Phase Two (Jadwa

Invest-ment, 2007), manufacturing, transportation and communication, and

fi nance will experience an average growth (2007–2010) rate of 9.4, 9.3, and 8.1, respectively That of agriculture and oil and natural gas over the same period will have an average of only 1.5 and 0.7, respectively The report suggests a very optimistic picture of the economic trends in the Kingdom where the nonoil private sector rather than oil will be the engine for growth The forecast is based on four factors:

1 Mega Projects: It is estimated that about $300 billion will be spent

on defense, oil, gas, petrochemicals, infrastructure and real estate, agriculture, etc

2 Liberalization: This, in particular, is more evident in fi nancial service

and telecom sectors Companies and consumers have shown, in recent years, increasing interest in using these services and thus intensifying competition and improving quality standards

3 WTO Membership: This is expected to be a factor in opening up the

economy and encouraging more MNCs to enter the market and thus fuel investment and competition

4 Economic Reforms: New companies and labor laws along with

improving commercial law and enforcement of copy and property rights enhance corporate governance and trust and confi dence of investors in market institutions and institutional arrangements.According to government forecasts for 2005–2024 (Table 2.3), pub-lic consumption growth rate for this period is 4.3 percent while that of the private sector is 6 percent and investment rates by the private sector increase at an average of 10.3 percent Investment growth rate for the same period in industry and services is expected to grow at 9.4 and 11.4 percent, respectively The growth rate of export is 6 percent while that

of import is 5.3 percent In both government and independent agencies’ predictions, there is a consensus that the private sector will be the major economic player in the years ahead This may manifest a confi dence in the private sector and that business enterprises in the Kingdom will reach maturity levels to expand and navigate new business terrains independent

of government assistance

NATIONAL PRIVATE CORPORATIONS’ ROLE IN THE ECONOMY

The industrial sector is still relatively weak In the early 1990s, among the

100 largest companies in the Kingdom, there were seventy-fi ve fi rms in the service sector and the rest were industrial The situation has changed, however In 2006, there were thirty-fi ve industrial companies including ten petrochemicals in addition to four companies which were classifi ed as diversifi ed The number of companies in services or service-related sectors

was thirty-four (See Arab News, 2006) These 100 top companies in 2005

had more than 331,000 employees

The eighth development plan shows that there were about 700,000 vate fi rms in the Kingdom Wholesale and retail trade constitutes 48 per-cent while manufacturing industries amount to 13 percent

pri-The industrial sector output as a percentage of total GDP in 1987 was 8.3 percent and reached only 11.1 percent in 2004 For the same period, the contribution of the service sector was 48.6 and 29.6 percent, respec-tively Despite the fact that the private sector share of national investment increased from 52.4 percent in 1999 to 54.6 percent in 2004, the private sector is generally weak (see Table 2.5) Only a few well-established mer-chant families (e.g., Alirezas, al-Rajah, Juffahs, al-Zamil, Kamel, Algo-saibi, Olayanis, etc.), along with members of the ruling family, are active and economically and fi nancially solid The rest of the private sector inves-tors and entrepreneurs are either small or rely heavily on the connection and support of members of the ruling family

Table 2.3 Gross domestic product by expenditure items—constant prices of 1999.

Average annual growth rate (%)

Source: based on eighth development plan.

Table 2.4 50 top Saudi corporations in 2006.

Co.

(Tasnee)

Est.

GOVERNMENT ROLE IN THE ECONOMY

According to the Eight Development Plan, government consumption will increase from SR200.04 billion in 2004 to SR466.41 billion in 2024; an increase by 100.33 percent On the other hand, government investment will increase, for the same period, from SR21.18 billion to SR46.31 billion,

an increase by 100.19 percent Jadwa Investment (2007), however, expects

Jubail & Yanbu (Marafi q)

Saudi Arabia

Coop-erative Insurance

Commerce & Ind.

Co Ltd.

Marketing Group

Based on Top 100 Firms in Saudi Arabia: http://www.arabnews.com/supplements/Top100/ top100_2006NEW.html.

double-digit growth in government expenditure between 2005 and 2010, from SR346 billion to SR613 billion, respectively Most government spend-ing will be in defense, education, and health care In the defense area, the government has signed lucrative contracts with Britain and France and in August 2007, the United States announced $20 billion in military sales to Saudi Arabia The signifi cant role that the government plays in the econ-omy stem from four facts:

1 Oil Revenues: The government has complete control over oil revenues

Though there are some who suggest that oil prices are certain to fall, there are those who predict that $160 per barrel is not an impossibil-ity Oil revenues in the Kingdom are and will remain the primary source of revenues and the backbone of economic growth

2 Control and Subsidies: The government not only provides subsidies

for consumer goods and help to private investors, but also prices for essential commodities and public service are controlled by the govern-ment (e.g., consumer staples, water, electricity, foodstuffs, etc.)

3 Ownership of Foreign and Domestic Assets: Various enterprises are

either wholly or partially owned by the government Furthermore, foreign assets reached about $273 billion in 2006 and are expected to

Table 2.5 The private sector’s role in the national economy: major indicators.

Actual Annual Average Growth Rate During the Seventh Plan (%)

8 Share of Private

Sec-tor Employment of Total

Employment (%)

9 Share of Saudi

Employ-ment of Total Private Sector

Employment (%)

Source: Ministry of Planning: The eighth development plan.

reach $420 billion in 2010 (Jadwa Investment, 2007) In recent years, the Kingdom has accumulated about $1 trillion sovereign wealth funds making it a major global investor

4 Friendly Business Environment: Sustaining a friendly business

envi-ronment for both domestic and foreign investors is the primary aim

of the government In its search to diversify the economy, the ment considers private investors a strategic ally in achieving this goal and eventual political stability

govern-Despite trade liberalization, the governmental role in the economy is not expected to decline and, in fact, might appear in different forms These forms are manifested in the active role the government plays in forming JVs and in the participation of increasing numbers of the ruling family in the business world These members, though they might pursue their own private business interests, make certain that these activities serve the interest of the regime and that they strengthen its political and economic foundations In addition, the private sector in the Kingdom has always sought the assistance and direction of the government In fact, the latter, along with the expec-tations of customers that the government is supposed to provide a helping hand in economic matters, will strengthen the role of the government and give it the legitimacy to maintain its strong presence in the economy

ECONOMIC OUTLOOK

In a survey of 111 managers in the Kingdom (see Table 2.6) conducted in

2007, 90 percent indicated that the economic future of the Kingdom for the next ten years is either bright or good Furthermore, 94 percent believed that in the future the business environment will be highly or moderately competitive and that membership in the WTO will lead to a better national business environment (about 60 percent) This optimistic attitude is not without foundation In the last few years there has been an economic boom

in the Kingdom and the number of foreign and national fi rms operating has increased dramatically The liberalization of the economy and the enact-ment of friendly business laws, especially in terms of fi rm, labor, and liti-gations, have improved the economic environment and sustained the trust and confi dence of investors, making the Kingdom one of the most business friendly marketplaces in the Middle East Jadwa Investment (2007), in its assessment of the Kingdom’s economic outlook, reported that the Kingdom

is poised to enjoy a new high-growth era where the private sector is going

to play a vital role The assessment is based on fi ve indicators:

1 Private Sector Growth: Manufacturing, communication, fi nance, and

construction sectors have witnessed an increasing demand coupled with huge investment In general, a nonoil private sector is expected

to experience an average of 8 percent