Encouraging entrepreneurship in Saudi Arabia

06 February 2012

Riyadh is looking to increase its global competitiveness ranking by encouraging the growth of start-ups and innovation, but significant hurdles remain

Key fact

The kingdom’s Labour Ministry plans to create 3 million jobs in the private sector by 2015

Source: MEED

In late January, hundreds of regional and international business leaders descended on Riyadh to attend the Global Competitiveness Forum, hosted by the Saudi Arabian General Investment Authority (Sagia). The annual event offers the opportunity to reflect on the kingdom’s efforts to become one of the most attractive places in the world to do business.

There are many underserved sectors in the economy, which can offer a good starting base for entrepreneurs

Michael Porter, Harvard Business School

In 2011, Saudi Arabia fulfilled its aim of attaining a top 10 ranking in the World Bank’s Doing Business report, but it came one year later than planned. Since then, the kingdom has slipped two places and currently sits in 12th position.

The Doing Business report tracks 183 economies and assesses the ease with which entrepreneurs can establish and run small-to-medium-sized enterprises (SMEs). It considers the processes for starting a business, obtaining construction permits and electricity connections, registering property and getting credit, as well as tax regimes and the ability to trade across borders, enforce contracts and resolve insolvency.

Saudi Arabia: A business leader

Despite losing some ground last year, Saudi Arabia is still the easiest place to do business in the region, according to the World Bank. The second-highest ranked regional economy is the UAE, in 33rd position.

Ease of doing business index, 2012
Hong Kong, China2
New Zealand3
South Korea8
Saudi Arabia12
Source: World Bank

The Saudi government has now set itself a new target of becoming one of the five best places to do business by 2015. The ‘5x15’ initiative is being spearheaded by Sagia and overseen by the National Competitiveness Centre.

Sagia has also established the ‘15x15’ initiative, which aims for Saudi Arabia to reach a top 15 ranking in the World Economic Forum’s (WEF) Global Competitiveness Report. The kingdom moved up four places to reach 17th position in 2011.

According to the WEF report, there have been major improvements in the kingdom’s institutional frameworks in recent years. Saudi Arabia was ranked 28th in 2009, climbing to 21st in 2010.

The WEF judges an economy’s competitiveness according to three factors. The first involves the basic requirements such as state institutions, infrastructure, the macroeconomic environment, provision of health services and primary education. The second factor relates to efficiency enhancers and includes higher education and training, goods market and labour market efficiency, financial market development, technological readiness and market size. Lastly, the WEF assess the levels of innovation and business sophistication.

When it comes to competitiveness, however, Saudi Arabia is not the regional leader. The country lags behind Qatar, which is currently ranked 14th and the path to competitiveness will not be a seamless one for the kingdom.

This year’s Global Competitiveness Forum focused on entrepreneurship as a means to help the kingdom reach its 2015 targets. Riyadh hopes that by improving the environment for start-ups and entrepreneurs in the country, it can regain its top 10 ease of doing business ranking.

“There has been a lot of progress, with many reforms in areas such as infrastructure, market openness, improving legal regulation and the push in education, but the issue of job creation remains,” says Michael Porter, a professor at Harvard Business School in the US.

“SMEs create the most jobs. They are spread across the economy and can create the jobs that this country needs.”

The opportunities for entrepreneurs are there. Saudi Arabia has a stable economy and rising energy prices are returning huge budget surpluses. Massive investment is being directed to improving infrastructure, and special economic cities are planned to act as hubs for international and local businesses.

Underserved sectors in Saudi Arabia

According to Porter, there are many underserved sectors in the economy and with the absence of income tax, these offer a good starting base for entrepreneurs. There is also an emerging venture capital industry, which is conducive to innovation, together with sustained government investment in the economy and increasing foreign interest in investing in the Middle East. 

Global competitiveness index
Hong Kong 11110
Taiwan, China13130
Saudi Arabia17214
South Korea2422-2
New Zealand2523-2
Source: World Economic Forum 

Sagia has also launched the ‘entrepreneurship village’, which seeks to create an e-government portal integrating different government services to enable entrepreneurs to start and grow businesses more easily.

The Labour Ministry aims to create 3 million new jobs by 2015 and 6 million by 2030 in the private sector. It hopes to encourage more Saudi citizens into the private sector, but this will be a huge challenge. The ministry has launched the Nitaqat initiative, which aims to increase the number of nationals working in the private sector. Instead of a 30 per cent blanket quota of Saudi employees, firms will now be ranked based on their peers and the size of their markets to determine a suitable quota.

But the country’s culture is holding back the growth of the SME sector. Nationals still attach prestige to more traditional professions and 90 per cent of the working population is employed by the government.

Reinventing entrepreneurship in Saudi Arabia

“Entrepreneurial spirit is the driver of competitiveness,” the former Saudi ambassador to the US Prince Turki al-Faisal, who is now chairman of the King Faisal Centre for Research and Islamic Studies, told the forum.

“Saudi Arabia needs to reinvent its entrepreneurial spirit. We have some 75 per cent [of the population] under 30 and about 60 per cent under 21. The challenge is absorbing them into the economy and training them to be competitive among the 8 million foreigners.”

The government is pumping 25 per cent of this year’s budget into improving the standard of the education sector

Other areas of weakness, according to the WEF, are that the kingdom’s health and education standards do not match those of countries with similar income levels. Saudi Arabia’s healthcare and primary education provision are currently ranked 61st, with higher education and training in 36th place. The government is pumping 25 per cent of this year’s budget – about $45bn – into the education sector. A large proportion of this will be spent on improving the standard of kindergartens in the kingdom and building new schools and universities.

“Boosting these areas, in addition to fostering a more efficient labour market [which is currently ranked 50th], are of great significance to Saudi Arabia, given the growing numbers of young people who will enter the labour market over the next years,” says the WEF report.

Limiting factors to doing business

The biggest hurdles to doing business in Saudi Arabia according to the WEF are restrictive labour regulations, limited access to financing and an inadequately educated workforce.

Government bureaucracy and underdeveloped infrastructure are also identified as barriers to competitiveness, along with the strict social codes and sidelining of women in society in the kingdom.

“We still have many years, if not generations, to go,” a female member of the Saudi royal family tells MEED. “Women are still encouraged to get married and stay at home, even the well-educated ones.”

Cultural limitations aside, Saudi Arabia is on the right path. It has made improvements to its institutional frameworks and is slowly opening up its economy. The stock exchange is soon expected to allow direct foreign ownership of shares.

Such measures will reflect across the economy and help improve the kingdom’s rankings. But unless these translate into job creation and a broader private sector, then the positions will be merely symbolic.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications