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Business reforms

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US Entrepreneurs doing Business in Saudi Arabia Mohannad Almalki Notre Dame de Namur University 10/14/2018 Table of Contents Introduction 3 Background 3 Literature Review 6 US Entrepreneurs doing Business in Saudi Arabia The research will explore factors Entrepreneurs from the US should consider before starting a business in Saudi Arabia. It is the dream of every business person to expand the business into the global market. For multinationals in the US, doing business in Saudi Arabia can be highly profitable if the business people get to follow to the policy and culture differences. Expanding business to new market could provide a more favorable economic opportunities and even better business environment. A company that operates in different countries stands to benefit more because in cases of recession or even restrictive policy the business can still make profits from the other country. Different countries have different business environments across the world and countries differ regarding regulations governing how to do business.

The researchers seek to compare between doing business in Saudi Arabia and the in the US. It will examine the key factors that entrepreneurs from the US trying to do business in Saudi Arabia needs to consider. Attention will be given on the policies and regulation in Saudi Arabia that makes it attractive to the international corporates. Also, the research will explore the challenges that multinationals face when starting and running a business in Saudi Arabia Background Saudi Arabia is one of the rapidly emerging economies in the globe and is among the favorite destination for entrepreneurs. Saudi Arabia’s booming economy can be attributed to the oil exports which has played a significant role in its growth. The high growth rate of the country’s GDP which this year 2018 stand at a healthy 4.08 percent is, in particular, the basis why many multinomial companies want to set up business in Saudi Arabia. Saudi Arabia’s economy is described as one of the most stable economies in the entire Gulf due to its conservative economic and financial policies (‘Saudi Arabia and the Gulf Cooperation Council (GCC),’ n.d., p. 429). In 2017 Saudi Arabia was one of the top-ranked countries in promoting a friendly environment for businesses, the World Bank Ease of Doing Business Index positioned the kingdom at number 12 globally (Niblock, 2015, p. 42).

The availability of capital and business prospects makes the kingdom attractive to leaders of multinational corporations from the US who seek an opportunity to set-up business in the nation. The government of Saudi has played a significant role in this because it has injected an enormous amount into the country’s infrastructure in a bid to boost the economy and attract more investors. The massive spending by the government has seen a high economic growth which is 2013 doubled that of the US. During that year local and foreign entrepreneurs realized substantial profits for their companies and the situation attracted triggered more investors from want to share in the profits. In recent years the Kingdom made it easier for corporates and investors to start and run a business by making the process of registration easier and also reducing the time needed to conduct registration. The Saudi Arabian General Investment Agency introduced incentives for firms, eliminated layers of bureaucracy and removed impediments that delayed listing of businesses.

The reforms in business regulations contributed to lowering of the time required for a start-up. However, investors planning for expansion into Saudi Arabia need to clearly understand that the business environment and the operation differ from that in the US. In Saudi Arabia, corporate have to adhere to specific regulations governing the labor force which in many ways differ with the terms in the United States. Employment contracts in Saudi Arabia require side-by-side translation in Arabic. The government’s aims of enforcing such regulation are to ensure that the terms of the agreement get captured in both English and the native-language versions. The importance of the Arabic text is that if an issue arises, the contract laid out in the Arabic version override the English translation. For an investor seeking to run a business in Saudi Arabia, he or she should be ready to give the workers a paid holiday which includes Ramadan a holiday that lasts one month. During the month of Ramadan, employees work fewer hours to provide time for the observation of the holy month. Employers must give the workers the paid holidays or face penalties. Saudi Arabia being an Islamic nation, the religious influence everything from working life to its legal systems and entrepreneurs and multinationals corporates seeking to start a business in the country will need to consider these. Due to these numerous holidays, some investors find it difficult to cope with the situation as many want to maximize the profits by working more hours. Saudi Arabia celebrates many different holidays than the United States.

Many of these holidays should be paid according to the government regulations, and employers from other countries must abide by the law. Also, the working days in Saudi Arabia differ with that of US.in the US the working week runs from Monday to Friday, with a weekend on Saturday and Sunday. In Saudi Arabia, for example, Sundays is typically a working day and the weekends is Friday and Saturday. Salary Allocation Requirements in Saudi Arabia Saudi Arabia requires employers to provide transportation, housing, and supplementary health benefits to all of its workers. Employers are allowed to allocate a certain percentage of an employee’s gross salary to cover these areas instead of paying additional fees outside of their compensation. Literature Review Implications of VAT The perception by many business people from the US that Saudi Arabia is a tax-free kingdom changed in 2018. Following the introduction of 5% value-added tax that took effect on January 2018 in the entire UAE, the move requires that an investor planning to expand to Saudi Arabia be ready to adhere to the new tax policy.

The VAT tax applies to almost all goods and services except for essential food items, education, and healthcare. It is challenging for new businesses to register for VAT, and the process comes as an added cost to the starting capital. According to a report by the Association of Chartered Certified Accountants, poor cash flow management has led to close to 82% of the startups business to fail (López-Laborda & Peña, 2018, p. 171). Also getting funding for a new company in Saudi Arabia can be a difficult task because of the bank’s regulations. The primary requirement for any application for business loans is the provision of at least three years of audited balances with positive figures and growth indicators. Several authors have extensively covered the topic and made their findings on the business environment in Saudi Arabia. According to (Rice, 2003, p. 62) the Kingdom of Saudi Arabia stands among one of the largest economies in the Arabian Gulf. The kingdom offers foreign and domestic investors many opportunities in a wide variety of business sectors (‘Entrepreneurship in Saudi Arabia Today,’ 2016, p. 132). The desire to decrease its dependence on oil and the objective of providing more jobs, housing, and services to its civilian’s population are the key factors pushing economic policy in the region. The need to ease the business environment for foreign investment culminated in the implementation of a law in 2000 which significantly changed the regulations regarding the foreign policy on business allowing 100% ownership of projects by foreign multinationals.There are investment incentives and a streamlined foreign investment application process in Saudi Arab.

References

  1. Al-Hajjar, B., & Presley, J. R. (1996). Small Business in Saudi Arabia. Business and Economic Development in Saudi Arabia, 105-126. doi:10.1007/978-1-349-25096-7_8
  2. Entrepreneurship in Saudi Arabia Today. (2016). Business and Entrepreneurship in Saudi Arabia, 120-161. doi:10.1002/9781118949146.ch4
  3. López-Laborda, J., & Peña, G. (2018). A New Method for Applying VAT to Financial Services. National Tax Journal, 71(1), 155-182. doi:10.17310/ntj.2018.1.05 Niblock, T. (2015).
  4. State, Society and Economy in Saudi Arabia (RLE Saudi Arabia). doi:10.4324/9781315727455 Rice, G. (2003).
  5. Doing business in Saudi Arabia. Thunderbird International Business Review, 46(1), 59-84. doi:10.1002/tie.10106 Saudi Arabia and the Gulf Cooperation Council (GCC). (n.d.).
  6. The Saudi Arabian Economy, 417-452. doi:10.1007/0-387-24935-4_14
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