Business in Saudi Arabia- Past and present

Introduction

Saudi Arabia is a premier business location in the Middle East. Arabs first inhabited the Arabian Peninsula centuries ago. The communities that settled at the place gave rise to the present counties that form he Middle East including Saudi Arabia. Recorded history indicates that Saudi Arabia at the time of its inhabitation was one of the largest trading centers in the world.

Historians say that the Saudi market attracted people from as far as Mesopotamia and Nile River for business. These people congregated in Saudi Arabia to sell commodities mainly agricultural products such as dates, plums, spices, as well as aromatic commodities like myrrh and frankincense (Shoult 45).

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The history of the country also covers the introduction Islam the main in the year 610 and the formation of the first Saudi state in the eighteenth century. A second state of the Saudi Arabia was set up in 1824 and the capital shifted to Riyadh. In 1932, King Abdulaziz set up the Kingdom of Saudi Arabia. The King recognized the importance of business to the development of the county. He immediately rolled out programs aimed at building the infrastructure that was crucial for the development of business and transforming the Kingdom to a modern state.

The trading center that Saudi Arabia was marked the beginning of business in the Kingdom that has been transformed over time. A long history is linked to doing business in Saudi Arabia. It is important to note that like in the past, most businesses in Saudi Arabia were and are still owned by families through companies that have been in existence for along time.

This paper will have a general look at the development of business in Saudi Arabia as well as the transformation of Saudi Arabia as an economic powerhouse in the Middle East. Over time, conducting business in the kingdom has become sophisticated especially with the vibrant oil industry as well as friendly government policies.

In 1926, the country set up its first commercial court. This was meant to help in the interpretation of business law and in solving of cases that involved business. However, the influence and use of the courts waned and it was abolished. However, the influence of modern trends and the increasingly complicated business world necessitated the formation of the court again.

After its formation 1932, the Saudi government pledged to work with foreign developers to build the infrastructure of the country in order to raise the living standards of the people.

The machinery that enabled the development was masterminded by complicated government structures that cautiously observed the ideals of Islamic Law. When comparing business then and now, the collaboration of Saudi government with partners especially foreign companies will come to the fore highlighting the concrete Saudi government an business relationships (Wynbrandt and Gerges 15).

One of the most outstanding characteristics of business in the past in Saudi Arabia is the engagement in Slavery. However, King Faisal abolished the slavery in the country in 1962. Despite the abolition, many people especially foreigners continue to live and work under severe conditions that qualify as slavery. Most of these people are found in the construction and domestic industries that still employ lot of migrant workers even in the present Saudi Arabia.

The year 1965 saw a change in the way business is done in the kingdom after the introduction of legislation of regulating various businesses in the country. The regulations that were issued by a royal decree have undergone numerous amendments to reflect the fast changing business environment.

It is important to note that business in Saudi Arabia is greatly influenced and dependent on the religious customs of the Islamic religion. Business people whether on private or official business trips to Saudi should bear in mind that prayer times are supreme to business meetings. Similarly, business people should reschedule their diaries according to the Saudi Arabia.

In the country, the starts on Saturday and ends on Wednesday. Hospitality is a hallmark of Saudis and it is often extended to business.

The business culture of the country value hierarch and it is not uncommon for high-ranking government officials to exercise authority over their subordinates in the course of doing business. Trust and cordial relations also characterize the business dealings in the country and it is common for a whole family to be involved in business dealings. (Mamarintha 32)

This paper will cover some brief history of the country but from a business perspective as described in the introduction. Other sections will deal with a brief look at the oil industry and its importance in doing business in Saudi Arabia.

There will also be an analysis on the business practices that have characterized business in the kingdom from the ancient times but that still have influence in the ways of doing business in Saudi Arabia. An overview of the current business climate will be carried out and brief explanations given on its comparison with the ancient way of doing business in the country.

Business and the oil industry

Oil is the main engine of the economy of Saudi Arabia. The industry is the mainstay of the people in the country and any business dealings have at least an oil related perspective. Since its set up, the Kingdom has had relationships with the West and the rest of the world that have defined business trends in the country.

The government sources most of its revenue from the sector. Before the discovery and exploitation of oil the old Saudi Economy depended on agriculture and fishing. It is safe to say therefore that business in the past in Saudi Arabia was based on primary commodities from agriculture and fishing. After the discovery, the two sectors experienced decline because the money got from oil was enough to meet the needs of the Kingdom.

The sectors in the past were arguably the biggest employers of the people of Saudi Arabia but economists today approximate the employment rate of slightly above 10% of the total workforce in the two sectors. Business in Saudi Arabia is therefore defined by oil, no matter what perspective it is observed from (Wynbrandt and Gerges 9).

Business in the country is has also been affected by national regional as well as international politics. For instance, the recurrent conflicts that have dogged the region for many years have always had a negative impact on the production of oil that normally has a ripple effect on the economies including that of Saudi Arabia. Business in the past has been done in a kind of informal way where government officials have to receive kickbacks and commissions from people willing to do business in Saudi Arabia.

Modern Business, done the old way in Saudi Arabia

One of the distinct aspects of doing business in Saudi Arabia is the art of personal and business communication. This art is characteristic of past business practices as well as the present. These cultural traits have endured the test of time to define business etiquette in the past and the present.

in the past when Saudi Arabia was not an oil power, there was no distinction between personal and business interactions and relations. Musiak says that before the discovery of oil in the Kingdom, people were still traders and they entered to agreements.

Unlike the westerners who had thousands of years to develop and institutionalize business processes and interaction protocols, the Saudis understood the nature of buying and selling through the art of verbal communication. Because written words were non existent, business people were held to account through their word of mouth (Par: 5). He adds that, despite the modern way of doing business being in the country for slightly fifty years, its yet to dislodge the traditional dependence of the word of mouth.

The cultural practice is still observed today. The main idea of this practice is trust. Almost all business transactions in Saudi Arabia in the past and preset have been based on trust. Business deals and agreements are rarely depend on trust like is the case in western country and many other markets that observe free market principles.

Despite the use of business, technology and communication in the country as well as entering into modern contracts, business in Saudi Arabia greatly rely on word of mouth. Long periods of discussion and verbal agreements have been the norm in the country for long periods of time. They still are.

Business entertainment is another aspect of present business etiquette that has endured the test of time. According to Musiak, business entertainment is a necessary component in building trust in among business partners in Saudi Arabia (Par: 6). This can be done through many forms for instance talking over coffee or tea in an unofficial environment.

Occasionally the business dinner can be a welcome business entertainment event that helps partners to know each other. The practice has been observed by the business community of the country for a long time and its still persistent today.

Many business commentators have made an observation on the business language of the Saudis. Perhaps rooted in their culture, many consider saying “no” rude. Even in the climate of modern business where business executives are comfortable and in fact prefer to be told exactly the way it is, many Saudi business people find it difficult to face a prospective or existing business partner and say no to a suggestion or business deal. More often business people in the country cannot give one a straight answer.

It is important therefore when dealing with them for a person to clearly read body language since it hold many clues to what any given answer means.

Meetings are not held in secrecy in Saudi Arabia as they are in western countries. It is possible for a business meeting in Saudi Arabia to be interrupted several times to answer phone calls or any other event that a Saudi businessperson considers important.

It is just customary in the country. The practice is deeply rooted in the ancient practices of conducting business in Saudi Arabia that highly regarded and still does personal interactions in the course of business. It can also be used to explain the trusting nature and the verbal commitments that Saudi business people have.

Current business climate

Saudi Arabia is the premier business place in the Middle East, competing on the same footing as UAE and Kuwait. The country is highly modernized and has created a business environment that favors both government and private sector control of the economy. The oil and service sectors present the best business opportunities for business people in the country.

It is a huge departure from the way business has been conducted in the past. Past business had been conducted in a crude way and only involved the exchange of agricultural commodities. The changes and state of the current business climate aims at highlighting the changes that have been entrenched into the economy and how they are aiding doing business in a different way.

In the past agriculture, fishing and nomadism were the main business activities that supported the economy. Currently however, business in Saudi Arabia is defined by the oil industry. The country is the biggest exporter of oil and holds about 25% of the world’s proven oil reserves.

Besides accounting for roughly over 40% of revenue for the country, proceeds from oil also generate over 90% of the country’s earnings and contribute over 50% of the county’s GDP. The private sector also plays an important role in the business environment of Saudi Arabia. According to the existing statistic, over 40% of GDP is contributed by the private sector.

A large work force in the country comprises of foreign experts who have been hired by the Saudi government and consultants as well as other experts who have been seconded by their companies to work on their Saudi operations (Mamarintha 76).

Doing business in Saudi Arabia has become easier in the recent years. Traditionally, business in the Kingdom was tightly controlled by the authorities and only limited sectors were open to investiments from foreigners. However, since the country became a member of the World Trade Organization in 2005 the government has been willing to open its markets to foreign goods and services in line with WTO requirements and obligations.

Similarly, the government has sped up efforts to attract investors to do business in the Saudi Arabia through the establishment of the Saudi Arabian General Investment Authority that is charged with the responsibility of encouraging foreign direct investment in the country. Like in the past, the Saudi government still tightly controls some sectors of the economy that it has closed to foreign investors.

However, global trend and dynamics have forced the authorities to consider opening us some of the sectors like telecoms, insurance and power generation, and transmission. As a result, the country has been rated as the 13th most competitive countries in which to business in the world. Doing business in the current Saudi environment is easier because of the various reforms that have been carried out by the Saudi government (Shoult 32).

The programs that have enabled the growth of the country and its economy include the adoption of the entrepreneurial approach that was almost non-existent before.

This approach supports establishment of small and medium enterprises as opposed to the large family owned corporations that have characterized business in the country for years. Additionally, the Saudi Stock Exchange has been opened up and numerous companies including Saudi, European, and American multinational have been listed.

The Tawadul together with its financial markets are governed by the Capital Markets Authority of Saudi Arabia. The total market capitalization of all the companies that are traded in the Tawadul is slightly over 640 billion dolls according to 2005 estimates by the World Bank.

One of the most striking and drastically different ways of doing business in the past and present Saudi Arabia is the adoption of information communication technology.

In the Middle East, Saudi Arabia is the leading country in the uptake and consumption of ICT related technologies and products. The boom that characterizes the computer industry in the country shows not sign of receding and that has made it an attractive business destination for the world’s leading computer makers. In the year 2005, personal computer per capita rose to an unprecedented 43% compared to 13% in 2002.

Similarly, the country presents attractive opportunities in the electronic market that was estimated to be worth around 3.5 billion dollars in 2004. Interestingly, the e commerce market synonymous with Europe and the US showed strong growth in the country with a total estimated worth of one billion dollars.

ICT has revolutionalized the way business is done all over the world. However, in Saudi Arabia it has marketed the complete departure from the traditional way of doing business to the 21st century way of doing business.

Summary

There are many comparisons that can be drawn from the literature that has been presented on doing business in Saudi Arabia. Concisely, the comparisons can be summed as follows

In the past, business relied on the word of mouth and there was little or not formal contracts between business partners. Nowadays however, the business is warming up to the contracts albeit in a very slow way. Business in Saudi Arabia is in a big way still conducted through word of mouth.

There is increased freedom and application of free market principles. In the past, especially after the discovery of oil, the government held tight control on the industry. However, that has changed with global business dynamics. The government is now opening up various sectors of the economy and encouraging foreign direct investments to encourage private sector growth and reduce over reliance on oil revenues.

One of the most striking features that business in Saudi Arabia has is the level of collaboration with foreign expatriates and governments especially the US. The trend was non-existent in the past. However, after the establishment of the Kingdom, the authorities initiated the practice and it has come to be the trademark in doing business in Saudi Arabia

The economy and business of the country have in the past, been dependent on non-oil sectors for their growth. However, the discovery of oil over seventy years ago transformed the economy to an oil economy. As a result, Saudi Arabia is the leading exporter of oil and holder of some of the biggest oil reserves in the world. The oil economy in the country has an effect on almost every business that is conducted in the country (Shoult 54).

Despite the changes however, its can be noted that some practices have not changed even with time. Business practices in Saudi Arabia are still heavily influenced by culture. It is safe therefore to conclude that cultural traits of Saudi business people have undergone little change in the past and present. Also, it’s safe to conclude that the business culture that is existent in Saudi Arabia is a blend of both traditional and modern or western culture.

Another comparison that has been exhaustively dealt with is the application of technology in doing business in Saudi Arabia. In the past, little technology was applied in business, if any. Conducting business anywhere in the world including Saudi Arabia was a logistical nightmare. Communication breakdowns and slow speeds led to inefficiency and massive losses for business people. However, business in the modern Saudi Arabia is fully automated enabling easier communication for a smooth conduction of business.

Conclusion

The comparisons presented in the paper hardly cover the scope of business changes in Saudi Arabia in the past and present. Comparison is relative and can be looked at from different perspectives. The past here was looked at from the time Saudi Arabia came to being to the current modern state.

However, one point comes out of the compassions, that doing business in the country is drastically different from the way it was carried out in the past. Technology and discovery of oil have played the biggest role in the transformation.

It is not farfetched to assume that more changes will be realized in the business environment in Saudi Arabia. The government is likely to de-regularize the business environment while more non-oil industry sectors are likely to come up.

The cultural aspect of conducting business in Saudi Arabia is however likely to experience little change given the deeply rooted Islamic religion values and the importance that the people attach to them.

There is also the likelihood of the introduction of new rules and regulations governing business in the country. Given the fast changing nature of doing business in the modern world, more changes can be expected to take place.

Works Cited

Mamarintha, Mababaya. International Business Success in a Strange Cultural Environment. New York: Universal Publishers, 2003. Print.

Musiak, David. Doing Business in Saudi Arabia- The art of personal & business communication. N.d. Available at http://www.expatarrivals.com/article/modern-business-the-ancient-way [Accessed 19th June 2011]

Shoult, Anthony. Doing business with Saudi Arabia. New York: GMB Publishing, 2006. Print.

Wynbrandt, James and Gerges, Fawaz. A Brief History of Saudi Arabia. London: Infobase Publishing, 2010. Print.