Entrepreneurship in Saudi Arabia - What You Must and Must Not Do - Case Study Example

Entrepreneurship in Saudi Arabia what you must and must not do Table of Content Economic Aspects 3 Environmental aspects 4 Legal Aspects 5 a.)Registration and Licensing of an Enterprise 5 b.)Taxation 7 Social Aspects 9 Political Aspects 10 Conclusion 11 References 12 Executive Summary In 2009, Saudi Arabia was ranked by the World Bank as the 13th most favourable business environment in the world. Over the years, the Saudi Arabian government has implemented regulatory reforms that have drastically improved and boosted entrepreneurship in the region. Currently, Saudi Arabia presents endless opportunities for entrepreneurship ventures. Nevertheless, in order for any business venture to be effective and successful, entrepreneurs must acquaint themselves with Saudi Arabia’s social, economic, political, environmental and legal aspects. This report examines entrepreneurship in Saudi Arabia in relation to what entrepreneurs must and must not do. Some of the key aspects that this report examines with regards to entrepreneurship in Saudi Arabia include key legal, economic, social, political, environmental factors that may influence entrepreneurship in the country. Introduction The fast pace economic growth in Saudi Arabia presents endless opportunities for entrepreneurship ventures. However, in order for any business to realise its full potential, it is imperative for entrepreneurs to have a clear understanding on Saudi Arabia’s economy, political structure, environment, laws, culture and traditions. This report seeks to examine entrepreneurship in Saudi Arabia in relation to what entrepreneurs must and must not do. It will discuss key legal, economic, social, political, environmental factors that may influence entrepreneurship in the country. Economic Aspects In past years, Saudi Arabia’s economy was mainly oil-based with stringent government controls on most economic activities. These stringent rules made it difficult for both local and foreign entrepreneurs to effectively capitalise on the vast business opportunities available in the country. However, with time the Saudi Arabian government has implemented several policy reforms that have brought about significant changes in the country’s business environment. For instance, as a result of the policy reforms implemented by the government, Saudi Arabia’s economy has become more diversified and the private business sector has witnessed tremendous growth. Saudi Arabia has also made remarkable progress in entrepreneurship. In 2005, Saudi Arabia was ranked by the World Bank as the 67th most favourable country of doing business. In 2009, Saudi Arabia climbed the ranks to position 13 out of 178 in terms of its favourable business environment (World Bank 2010). This improvement can be attributed to regulatory reforms implemented by the Saudi government to boost entrepreneurship in the region (Kesting 2010). Due to regulatory reforms implemented by the government in areas such as taxation, operation regulations, registration procedures and access to funding among many other areas, the entrepreneurship environment in Saudi Arabia has improved drastically. In addition to this, factors such as culture, coordinated support, fast pace economic growth, education and training have significantly contributed to the improvement of Saudi Arabia’s entrepreneurship environment (Ernst & Young 2011). Therefore, there are numerous business opportunities in Saudi Arabia that entrepreneurs can take capitalise on. Environmental aspects Generally, Saudi Arabia has a desert climate thus the country’s the climatic condition is characterised by high temperatures during the day time and low temperatures during the night. Some of the key environmental issues that Saudi Arabia is currently facing include; desertification, pollution from oil spills, deforestation and depletion of underground water resources. In addition to this, the country lacks permanent water bodies and perennial rivers. This has in turn forced the government to develop extensive seawater desalination facilities (Index Mundi 2012). Due to the rapid economic transformation that Saudi Arabia has undergone in recent years and its fast growing population, environmentalists predict that environmental pressures are bound to increase within short-term and long-term terms period thus bringing potential risk to the health and well-being of the public (WSP 2012). In a bid to protect the environment the Saudi Arabian government has put in place environmental regulations with the aim of protecting and preserving the environment. This environmental laws and regulations convey a general obligation for entrepreneurs or business persons engaged in servicing, production and other activities to take precautions that would promote the well-being of the environment. Based on these environmental laws and regulations, entrepreneurs must prevent contamination of ground and water surfaces. The must also prevent and minimise the contamination of land and soil. Furthermore, when operating machinery in their business premises they must limit noise pollution. Moreover, these environmental laws and regulations dictate that entrepreneurs who engage in project development must employ the best technologies to protect the local environment. They must also use materials and machinery that cause the lowest levels of pollution. Additionally, entrepreneurs must take precaution for the safe transportation and storage of waste materials to avert emissions and leaks. They must also develop emergency plans to prevent adverse effects on the environment (Al Tamimi 2009). Based on the environmental laws and regulations in Saudi Arabia entrepreneurs must not introduce poisonous, radioactive and hazardous wastes into Saudi Arabia’s territory. If they fail to comply with the set environmental laws and regulations, they are bound to suffer consequences such as; imprisonment for up to 5years, fines up to SAR 500, 000 or the closure business facilities or operation premises (Al Tamimi 2009). Legal Aspects a.)Registration and Licensing of an Enterprise An entrepreneur may do business in Saudi Arabia in a number of ways. The options available range from forming a company to formal contractual relationships. Conducting business in Saudi Arabia requires some form of license from relevant government authorities. The form of licensing required will depend on factors such as the nature of business transaction, the type of business and the duration of involvement (Al-Qahtany 2012). Registration of an enterprise or getting license to operate an enterprise is one of the measures that any prospective entrepreneur must take in order to legally and successfully conduct business in Saudi Arabia. The process of registering a business venture for entrepreneurs who are citizens in Saudi Arabia is simplified and easier than for foreign entrepreneurs. For entrepreneurs who are citizens of Saudi Arabia, registration of business takes approximately 15 days, procedures at the ministry of commerce have been sped up, publication requirements are merged and social security registration is automated. Moreover, the commercial registration fee was subsidized upto 80% thus making it easy for local entrepreneurs to get license to start-up their business ventures (World Bank 2010). On the other hand, foreign entrepreneurs wanting to form and operate their businesses in Saudi Arabia must obtain an Investment License from the Saudi Arabian General Investment Authority (SAGIA) under the Foreign Investment Regulations. For certain types of business ventures, foreign investors have to obtain approval from the Ministry of Commerce before obtaining their SAGIA license (SABB & PWC 2010). Furthermore, most foreign investments must be conducted through limited liability companies co-owned by a foreign investor and business partner who is a Saudi national. In addition to this, foreign investors are excluded from business ventures in oil exploration and mining, the manufacture of explosives, security and detective services, military catering services, real estate ventures in Medina and Mecca, retail and wholesale trade, real estate brokerage and satellite transmission services. Both local and foreign investors must not form or operate business ventures without following the due process of registration and licensing as this may result to outright prosecution (IBP 2009; O’Kane 2010). b.)Taxation There are two main types of taxes in Saudi Arabia, Zakat and Income tax. Zakat is based on Islamic concepts and is applicable to Saudi and GCC nationals. Zakat is often equal to 2.5% of an individual’s taxable capital. Therefore, any local entrepreneur in Saudi Arabia who is a GCC or a Saudi national must pay 2.5% of their taxable capital to the Department of Zakat and Income Tax (DZIT). On the other hand, income tax is applicable to foreign entrepreneurs or investors. The income tax rate for foreign entrepreneurs or investors in Saudi Arabia is usually 20 % nevertheless, the corporate income tax rates vary depending on the nature of business. When operating a business venture in Saudi Arabia entrepreneurs must make advance tax payments for a current tax year. Entrepreneurs must not fail to file their tax returns or else they are liable for 5% to 25% penalty of the unpaid tax. They must also not also delay payment of their taxes or else they are liable for a penalty of 1% of the unpaid tax for each 30 days of delay (SABB & PWC 2010; Rice 2003). c). Employment Laws and Relations Employment laws and policies in Saudi Arabia is one of the key legal requirements that any prospective entrepreneur must acquaint themselves and adhere to in order to effectively do business in Saudi Arabia. All labour related issues in Saudi Arabia are regulated and governed by the Labour Law which came into force in 2005 as a result of a Royal decree. The Labour Law stipulates a number of requirements that must met while engaging in any form of business or employment. According to the Labour Law, in the event that a business or company is hiring employees, employment contract agreements must always be prepared in duplicates with one copy being left with the employer and the other with the employee. The contract agreement should clearly state the place and kind of work to be done, name of the employer, location and address, name of the employee, nationality and ID number. However, if the employee is a foreigner, the employee’s contract agreement should clearly state the duration the contract will take. Moreover, according to the Labour Law, the employer will be liable to meet all expenses relating to work permit, immigration residence visa fees (iqama), departure tickets and any other closely related expenses (SABB & PWC 2010). In Saudi Arabia, employment contracts are subjected to special scrutiny. The terms of contract between and employer and an employee must adhere to the set Labour Law. Therefore, employers must carefully set contract terms and take precautions before terminating their contracts with employees since a wrongfully terminated contract may be presented before the Preliminary Committee for the Settlement of Labor Disputes (Al-Qahtany 2012). Employers must not infringe on the rights of employees by overworking them. The permissible working hours in Saudi Arabia is eight hours per day. During the month of Ramadan the maximum daily working hours is six, based on a weekly criterion the number of hours an employee should work is a maximum of 36 hours. Furthermore, prospective entrepreneurs in Saudi Arabia must not join any labour unions. Currently the activities of labour unions and collective bargaining are prohibited under the Labour Law (SABB & PWC 2010). Social Aspects The business culture in Saudi Arabia is intertwined with the Islamic tenets and therefore entrepreneurs wishing to do business in Saudi Arabia must conduct themselves in a manner that does not offend or tend to contradict with the Islamic religious system. Religion plays a central role in all aspects of professional and personal life style of the Saudi people (Chaney & Martin, 2007). Therefore it is important for any individual without prior knowledge of Islam to familiarize themselves with its tenets so as to avoid ugly incidents that may jeopardize their business relations. During business meetings or negotiations, it is important for prospective entrepreneurs in Saudi Arabia to understand greeting protocols. A handshake is the most common form of greetings; however, one will need to begin by greeting the most senior members of the delegation and trickle down to the juniors. It is important to note that handshakes are only preferred between men since any physical contact with women especially in public places is abhorred. When engaged in a conversation, it is important to establish and maintain eye contact since one’s sincerity is judged upon their ability to sustain their gaze (Chaney & Martin, 2007). Maintaining an attitude of patience is another important virtue which prospective entrepreneurs must develop when doing business in Saudi Arabia. Saudi Arabia’s cultures emphasises on a strong sense of loyalty. Most Saudi’s prefer to enter into business transaction with people they know and trust. Hence, developing trusting business relationship is very crucial for one’s success in business. Prior to enacting any business deal, most Saudi’s expect to establish strong bonds with their business counterparts. Moreover, business negotiations only take place after one has become very comfortable with you. This is often a slow process and may take some time. Therefore one has to exercise a lot of patience (Katz 2005). In addition to this, the exchanging of business cards is not a pre requisite but it can contribute to building trust between both parties. However, the business card should be written in Arabic on the rear side since it is the main language used in Saudi Arabia (Chaney & Martin 2007; Shoult 2006). Dressing standards is also a very important business etiquette that foreign entrepreneurs must strictly adhere to in order to effectively do business in the country. In Saudi Arabia, the dressing code in business circles is strictly smart, formal and conservative. Anything other than that can be regarded as an indecent exposure that could result to arrest by religious police “Mutaween”, who are charged with the responsibility of enforcing modest dressing styles that do not contravene Islamic tenets (Shoult 2006). Political Aspects Saudi Arabia has an absolute hereditary monarchy government system ruled by the Al Saud family. The Quran, the holy book of Islam, is considered as the country's constitution since it is the primary source of the “sharia”- law. Moreover, Saudi Arabia has Sharia court system where legal disputes are solved. This court system comprises of judges, lawyers and religious leaders who preside over cases with the guidance of the principles and laws set out in the Quran. Therefore, in order for entrepreneurs to effectively conduct business in Saudi Arabia, they must adhere to every dictates of the ‘sharia’. Since failure to adhere to the dictates of the sharia may lead to outright prosecution. In Saudi Arabia, national elections are not carried out and political parties are prohibited. Therefore, entrepreneurs must not or be part or take part in any political party or organisation (Vogel 2000). Conclusion This report has examined entrepreneurship in Saudi Arabia in relation to what you must and must not do. Some of the key aspects examined with regards to entrepreneurship in Saudi Arabia include; key legal, economic, social, political, environmental aspects that may influence entrepreneurship in the country. The findings of this report show that Saudi Arabia presents numerous business opportunities for entrepreneurs within and without the country. Nevertheless, in order for any entrepreneur to be effective and successful they must acquaint themselves with the Saudi Arabia’s local market, laws, culture and traditions. Before one establishes a business in Saudi Arabia, they must develop a basic understanding of the laws that govern aspects such as licensing, taxation and employment relations. Moreover, in order for one to be successful in business, they must learn basic social etiquette that will enable them to relate and effectively negotiate with the Saudi people (Al-Qahtany 2012; SABB & PWC 2010; Shoult 2006). References Al Tamimi, 2009, Environmental Law in the Kingdom of Saudi Arabia, viewed on October 26 2012 from Al-Qahtany, M. 2012, “Doing Business in Saudi Arabia: Implication for International Investors”, Journal of Transnational Management Development , vol 8, no,1-2, pp. 3-16. Ernst & Young, 2011, Nice Côte d'Azur 2011 Entrepreneurship Barometer, G20 Young Entrepreneurs Summit, October 2011, viewed on October 20 2012 Chaney, L. & Martin, J. (2007). The Essential Guide to Business Etiquette, Praeger, Westport. Katz, L. 2005, Negotiating International Business: The Negotiator’s Reference Guide to 50 Countries around the World, Booksurge, California. Kesting, P. 2010, “Incubating the Future: Entrepreneurship in Saudi Arabia”, US-Arab Tradeline, vol 18, no. 1, pp. 3-39. Index Mundi, 2012, Saudi Arabia Environment: Current Issues, viewed on October 26 2012 from International Business Publication (IBP), 2009, Saudi Arabia Investment and Business Guide: Strategic and Practical Information, International Business Publication, Washington. O’Kane, M. 2010, Doing Business in Saudi Arabia, Al-Andalus Publishing, Sharjah, UAE. Rice, G. 2003, “Doing Business in Saudi Arabia”, Thunderbird International Business Review, vol 46, issue 1, pp. 59-84. Saudi British Bank (SABB) & Pricewaterhouse Coopers (PWC), 2010, Doing Business in Saudi Arabia, viewed on October 20 2012, Shoult, A., 2006, Doing Business with Saudi Arabia, GMB Publishing, London. Vincent, P. 2008, Saudi Arabia: An Environmental Overview, Routledge, London. Vogel, F. 2000, Islamic Law and Legal System: Studies of Saudi Arabia, BRILL, Leiden, Netherlands. World Bank, 2010, Doing Business 2010: Reforming through difficult times, viewed on October 20 2012 WSP, 2012, Environmental Regulations & Standards for the Kingdom of Saudi Arabia, Jeddah, Kingdom of Saudi Arabia , viewed on October 26 2012 Read More