Human Resource Development in Small and Medium Enterprises in Saudi Arabia - Case Study Example

Running Head: HUMAN RESOURCE DEVELOPMENT Human Resource Development (HRD) in Small and Medium Enterprises (SMEs) in Saudi Arabia (Name) (Course) (University) Date of presentation: Lecturer: 1. INTRODUCTION Small and medium enterprises are considered one of the most capable and efficient instruments for accelerating the rate of social and economic developments (Sharma, 2011). Besides being the origin of large scale enterprises, SMEs provide an ideal environment for training workers and developing their skills and help in facilitating turnover of small investments. On this perspective, governments allover the world have paid great attention to these businesses by enacting laws to provide the infrastructural framework that would contribute to their development. In Saudi Arabia, SME’s represent more than 90% of total enterprises and account for 25% of the Kingdom’s total employment. Nevertheless, the contribution of these businesses to the country’s GDP remains significantly low compared to the prevailing average in industrialized countries (Shalaby, 2004). In the European Union, about 23 million SMEs represent 99% of enterprises in the vast economic block and are a key driver for economic growth, employment, innovation ad social integration (Chin-Ju, 2010). One of the union’s polices is to promote successful entrepreneurship and business environment for SME and allow them to realize their potentials in the global economy. In North and South America, SMEs are a prominent feature of national economies and continue to ply a key role in bridging economic gaps between countries and reducing wealth inequalities in households (Heneman, Tansky & Camp, 2000). Despite their potentials to contribute to increased economic growth and development, SMES are facing many challenges across the globe. In Saudi Arabia for instance, SMES are faced with the challenge of obtaining enough funds to meet their expansion needs. Research Aims and Objectives In the past few decades the Human Resource has come into focus as an important function in the growth and development of SMEs. This research paper aims to investigate HRD practices in Small and Medium Enterprises in Saudi Arabia. Research Questions What is the current status of HRD practices in SMEs in Saudi Arabia? 2. LITERATURE REVIEW 2.1 Defining the Concept of SMES Forth, Bewley and Bryson (2006) have noted that there are many differences in the definition of SMEs at the international level such that it is difficult to reach a uniform level of definition. These differences arise from the fact that different authorities rely on different parameters to define SMEs. The other reason is that SMES occupy different positions in the economies of different countries. It is for this reason that some definitions of SMEs rely on the number of people employed by the firms while others rely on the value of assets owned by the firms (Forth, Bewley & Bryson, 2006). In the European Union for instance, a firm with an asset value of less than 10 million Euros is classified as a small-sized enterprise while the same firm can be regarded as a medium or a large sized enterprise in another country. Chin-Ju (2010) has underscored the basis of differences in the definition of SMEs by noting that the words ‘small’ and ‘medium’ are comparative and as such have relative concepts which vary from one country to another. Nevertheless, the general practice in every country depends on a range of criteria including total financial position, manpower numbers, volume of annual sales and capital employment. In the European Union, medium-sized enterprises are defined as those with 250 workers and an activity volume of more than 50 million Euros, while small enterprises are defined as those with annual volume of 10 million Euros and 50 workers. In the United States, the criterion for defining SMEs is based on industry category, revenue, ownership structure and number of employees. In Saudi Arabia, different organizations have different definitions for SMEs. For instance, the Small and Medium Enterprises Development centre defines small enterprises as those with fewer than 20 workers and medium enterprises as those with 20 to 100 workers. In contrast, the Saudi Arabian General Investment Authority defines small enterprises as those with less than 60 workers and medium enterprise as those with between 60 and 100 workers. The Industrial Development Bank classifies SMEs in terms of annual sales. In this classification, SMEs are those enterprises whose annual sales do not exceed SR 20 million (Shalaby, 2004). Despite the different classification systems adopted by different countries and companies, SMEs are characterised by many distinguishing features including simplicity of businesses because of low value of capital and low costs of establishment and administration (Forth, Bewley & Bryson, 2006). In addition, majority of SMEs across the world are independently managed by their owners who seek to maximize returns as much as possible. Other important features of SMEs include low marketing costs, low labor wages, highly efficient communication channels and usage of simple production and distribution systems. According to Heneman, Tansky and Camp (2000) SMEs have low market entry and can easily exit the market because of their modest ratio of liabilities to assets. 2.2 Importance of SMEs SMEs are important to all economies in the world, more especially in the developing countries. Motwani, Levenburg and Schwarz (2006) have explained in his article that SMEs shall continue to be an important economic bulwark in developing countries with major income distribution and employment challenges. Owing to the ongoing ownership reforms and privatization, the numbers of SMEs in different countries has increased significantly over the last few decades and have been acknowledged for contributing to rapid employment and at higher rates than larger firms (Sharma, 2011). In the European Union for instance, 99% of all business enterprises are SMEs and are major contributors to national GDPs. Across the world, SMEs form the backbone of market economies and provide most of he employment in developing, transitioning and developed economies in the long term. Galvin and Haidar (2007) have explained that SMEs play an integral role in curbing the monopoly of large enterprises in addition to offering complementary services. They also absorb fluctuations of the economy. Through inter-enterprise cooperation, SMEs have helped raise the level of skills with their innovative and flexible business operations. Essentially, these businesses can generate important benefits by creating skilled industrial bases and developing well-prepared service sectors capable of making significant contributions to GDPs. According to Heneman, Tansky and Camp (2000) the increasing number of SMEs will for a long time bring more flexibility to the world’s economy and the society at large by facilitating technological innovations and providing significant opportunities for development of new skills and ideas. The current structural shifts in developing countries from state owned enterprises to private and smaller SMEs will increase the number of owners, a group which presents increased responsibility than centrally-planned economic systems (Motwani, Levenburg & Schwarz, 2006). In Saudi Arabia, which is a developing county, SMEs are a key generator of employment and income. These businesses have increased technological innovation in the Kingdom, which has helped reduce development gaps between Saudi Arabia and other countries in the region (Shalaby, 2004). Recognizing the importance of SMEs, the government of Saudi Arabia has pledged support for these businesses in the form of capital (easy access to loans), training and low tax regimes. According to Galvin and Haidar (2007) SMES with high adaptability and turnover play a significant role in removing regional as well as sectoral imbalances in an economy. This, in turn, becomes a key driver for rapid economic growth and development. Moreover, the easy market entry of SMEs makes economies more flexible and competitive at the international stage. In less developed countries, SMEs play a critical role in poverty reduction. This view is supported by Motwani, Levenburg & Schwarz (2006) who have argued that majority of SMEs tend to employ low income and poor workers and are the only source of income in rural areas and poor regions. Björkman and Xiucheng (2002) have noted that developments in SMEs trends are evident of the role played by these businesses. In response to globalization and modernization, business innovations have diffused from large cities to the tradition-bound peripheries of the national trade economies. This has been aided primarily by the business practices of SMEs as well as the influence of mass media and formal education. As a result, the employment profile of Saudi Arabia, which was at one time dominated by the government sector and capital intensive manufacturing industries, is full of independently-owned small enterprises (Sharma, 2011). According to Wilkinson (2005) SMEs have assumed the important role of galvanizing the self-help efforts of the vulnerable and marginalized groups such as the youth and the disabled in rural and urban areas to met basic needs. It is for this reason that most governments have generously supported this strategic economic sector. In both develop and developing countries, governments continue to appreciate the importance of SMEs in contributing to national development efforts by facilitating gaps in regional economic growth, social justice and sustainable development. Such a contribution is a bold step in countries whose people have to depend on formal sector employment and government support during natural crises such as severe droughts (Björkman & Xiucheng, 2002). 2.3 SMES Characteristics and Challenges SMEs are generally born out of individual skills and initiatives and are set up purely as a means of earning a livelihood. Because of their small scale of operations, SMEs have a greater operational flexibility than large enterprises. This is also because of the direct involvement of owners coupled with less number of employees and flat hierarchical structures (Wagar, 2002). For this reason, decision making with regard to price and product mix is faster and efficient. SMEs enjoy low production costs and high propensity to adopt new technologies (Wilkinson, 2005). They also have high capabilities to innovate their services. Moreover, they have high employment orientation and are usually the primary drivers of jobs. Majority of SMEs tend to be labor intensive and are fond of utilizing locally available human and capital resources (Galvin & Haidar, 2007). Although small and medium enterprises are fundamental to service innovation, employment creation and improvement of living standards, a number of challenges continue to confront these business ventures. One of these challenges is the unfavorable regulatory environment under which they operate. Björkman and Xiucheng (2002) have concluded from his research that in some countries, SMEs go through complicated regulatory and registration procedures, crippling corporate taxes, complex company laws and restrictive zoning. The unfavorable regulatory environment serves as an indicator of barriers to entry. Another equally important challenge facing SMEs is lack of marketing and management skills including inventory control, record keeping, tendering procedures and poor customer relationship management (Kerr & McDougall, 2009). In many countries, SMES are characterised by weak backward and forward linkages (Wilkinson, 2005). Moreover, there is an overall need for these businesses to develop a strong culture of entrepreneurship. It perhaps seems that SMEs face more challenges in developing countries than in developed countries. In Saudi Arabia for instance, SMEs lack access to necessary finances to support their expansion programs. Commercial banks in the country have been reluctant to lend funds to these businesses for fear of bad debts. Lack of sufficient finances implies that it is not possible for these businesses to upgrade their Human Resources. As a result, SMEs are characterised by inefficient human resource management practices. In addition, poor business planning and lack of innovation are major issues hindering the capability of SMEs to realize their potentials (Kerr & McDougall, 2009). In both developed and developing countries, rapid specialization and diversification of SMEs is hindered by lack of technological, marketing and managerial information. Therefore, knowledge management is not used in SMEs as it is used in large enterprises. For many SMEs, logistics integration is the most important challenge. Majority of these enterprises are under constant pressure from well-established and large manufacturing enterprises to shift from the traditional management styles, both organizationally and operationally and replace them with integrated systems so as to increase the fluidity and speed of physical as well as information flow (Barrett & Mayson, 2006). Globalization continues to be the greatest threat to the development of a stable SMEs sector (Shalaby, 2004). This is because the SMEs sector’s role in direct exporting is proportionally less to its size. Needless to say, single business activity with economies of scale based on brand loyalties and oligopoly positions is important for effective participation in international business. However, globalization can strengthen the SME sector because it provides subcontracting services to SMEs. This is particularly important where transportation costs are high. In the modern business world which is globalizing at a very fast rate, it is important that as many firms as possible have the capacity to participate in the global markets. Therefore, the importance of collaboration between large firms and SMEs should be emphasized (Björkman & Xiucheng, 2002). 2.4 Human Resource Management in SMEs Effective management of human resources is critical to the success of SMEs (Priem & Butler, 2001). Accordingly, numerous empirical researches have been conducted to determine the various HRM practices employed in different SMEs across countries. Current researches on the role of HRM in SMEs have shown that HRM in their businesses lack strategic focus, are less formal and less sophisticated. Moreover, they are rarely based on any systematic considerations. SMEs are often perceived as critical to economic growth and development of many countries. This recognition has provoked debate about the role of HRM as a means of enhancing organizational effectiveness in SMEs (Arrowsmith, Gilman, Edwards & Ram, 2003). According to Barrett and Mayson (2006), HRM practices in SMES are characterized by informal relationships. This is in contrast to HRM practices in larger firms which are characterised by highly formal and bureaucratic relationships. Most SMEs have not formalized their HRM practices and instead rely on emergent approaches that lack professionally structured HRM. An obvious explanation for this scenario is lack of enough resources for implementing formal HRM programs. However, the aspect of informality does not imply particular views of work relationships; there have actually been observed situations where management policies are unpredictable and indifferent to the HRM needs of SMEs. HRM practices in SMES are characterised by lack of personality tests in recruitment of new staff. Moreover, most SMEs, unlike large firms, place lower priority on off-the job training. Undoubtedly, the challenges of inefficient human resources can be more pronounced in the case of SMEs than larger firms due to lack of resources and specialized HR professionals. Union membership and employee participation are less common in SMEs (Priem & Butler, 2001). In a greater majority of these businesses, union membership has been identified to be positively related to firm size. Because of their informal HRM policies, SMEs are not likely to recognize the importance of unions. Moreover, they view SMEs as potential threat to employee loyalty and job satisfaction (Forth, Bewley & Bryson, 2006). As such, most SMEs are not faced with the threat of collective bargaining. Lack of collective bargaining is attributable to low wages and poor payment regimes common across SMEs. Sharma (2011) has explained that in Saudi Arabia, only les than 10% of employees in SMEs have their wages determined by collective bargaining. Research studies have shown that variations in HRM practices between SMEs and other business enterprises, particularly large firms can be explained by interplay of several factors arising from the firms’ internal and external environment (Chin-Ju, 2010; Bacon & Hoque, 2005; Edwards, Ram, Sengupta &Tsai, 2006). Internal factors include size of the firm, resources, technology, ownership and workforce skills. A number of studies have explored the relationship between the size (in financial terms) of the firm and the ability to adopt modern HRM practices. Barrett & Mayson (2006) for instance found that that there is positive association between firm size and ability to adopt formal training programs. Similarly, Cardon & Stevens (2004) found that a firm’s financial stability, when mediated with other factors such as people, time and resources influence HR policies in such important areas such wages and befits, performance appraisal and HR decisions. Arrowsmith, Gilman, Edwards and Ram (2003) have suggested that as firms grow in size, they tend to adopt formal HRM practices such as written policies for recruitment and performance appraisal, structured training programs and systematic management of a large number of employees. On the other hand, external influences encompass such aspect as labor market, network linkages, trade unions and competitors. Literatures indicate that the external environment within which SMEs operate has a direct impact on the way in which they manage their employees. Chin-Ju (2010) has concluded from his research study that management of human resources in majority of SMEs is influenced by specific customer requirements. While some SMEs have in the last few years shown interest in adopting innovative technologies in their HRM practices, they have not been as effective as large enterprise. For instance, use of internet and information technology to manage human resources is becoming a key trend in SMEs but on the other hand not many SMEs have the capacity to use the internet in recruitment process. Accordingly, most of the strategic HRM activities carried out by SMEs are meant to achieve limited objectives. Bacon & Hoque, (2005) have indicated that HR strategies in SMEs focus how these enterprises can capitalize on their human resource to enter existing industries that are dominated by established and large competitors. 2.5 Human Resource Development in SMEs The last two decades have witnessed profound shifts in the way SMEs perceive the roles that people play in organizational success. A widely acknowledged view is that effective human resource development is an important organizational capability and should be integrated with the strategic aims of the business (Cardon & Stevens, 2004). For this reason, a growing number of SMEs have moved a long the evolution path from the old style of people management that was characterised by command and control to a people centered approach that prioritizes progressive development of human resources. The growing concern with development of human resources in SMEs has arisen primarily because some of the traditional sources of competitive advantages that businesses relied on such as economies of scale, patents, market protection and access to finances have all been eroded and lost significance in today’s globalised economy (Heneman, Tansky & Camp, 2000). Increasingly, companies have relied on developing their human resources- the competencies, knowledge and capabilities of their workforces- as a key drive for competitive advantages. Thus, in today’s world of business, people and the way in which they are managed have become a key source of competitiveness regardless of the size and nature of the business. Oakland and Oakland (2001) has defined HRD as organized learning activities and programs in an organization that supports performance improvement. These programs include training and career development. In small and medium sized enterprises which persistently suffer from lack of capital and efficient equipment, skills held by people play an important role in adapting the companies to environmental changes. O’Dwyer and Ryan (2000) have noted that human resource development in SMEs contribute to career development for majority of workers in this sector. However, HRD programs in many SMEs tend to be inadequate because of time and resource limitations. Heneman, Tansky and Camp (2000) have argued that HRD is well articulated in the European and American SMES than in other parts of the world. Through HRD, SMES in the European Union and the United States have developed efficient and highly-skilled workforces capable of competing with the human resources in large enterprises. This has largely been as a result of the influence of education system and policies as well as training by public institutions to serve business needs better. The impact of HRD on organizational performance in SMEs is an important theme in research studies. Currently, there exits a substantial and rapidly growing body of empirical evidence that points to the strong connections between how firms manage and develop their human resources and the financial and strategic benefits gained. A substantial body of empirical evidence shows strong correlation between how firms develop their human resources and the financial and strategic benefits gained (Nadler & Nadler, 2005); Cardon & Stevens, 2004). The importance of HRD is particularly important when discussing its role in SMEs. By their nature, SMEs are labor intensive and depend on technical and social skills of their personnel, their hard work and ingenuity for competitive advantages. In a survey of current HRD practices in small and medium enterprises, Matlay (2000) found that owners and mangers of these businesses were very positive about staff training and development but did not regard it as an essential element in business strategy. Matlay further found that small and medium enterprise owners frequently claimed to be pressurized by government agencies as well as private trainers to implement HRD programs as part of organizational strategies. In most cases, decisions relating to HRD were taken by the owners. Marlow (2000) has found from his research that only less than 10% of small and medium enterprises employ professional human resource managers but even in those organizations with a HR manager, the final decision lies with the owners. Looking at SMEs, Heneman, Tansky and Camp (2000) conclude that owners continue to be heavily involved in HRD matters despite the growing level of formality and complexity in those organizations. From his research study, Marlow (2000) found that managers of these businesses show strong links between their firm’s training and development needs and sustainable competitive advantages. Nevertheless, despite being positive about training, most managers and owners of SMEs did not appear to consider training as being crucial to the overall business strategy. Rather, they took a tactical approach of relating to perceived HRD needs of their staffs. Forth, Bewley and Bryson (2006) have discussed that HRD training in family owned SMEs s more proactive as part of the long term succession strategies. Various research studies have expressed considerable dissatisfaction with the range of HRD resources available in most SMEs. For instance, Kotey and Folker (2007) have reported that some SMEs are faced with significant shortage of skills because they have limited resources to invest in development of present and future needs of their businesses. Where HRD program are available, business owners are often unwilling to proceed due to high costs involved in implementing the programs and the absence of support. As a consequence, most SMEs are likely to adopt ‘off-the-shelf’ training and devilment packages that have a more reasonable cost and guaranteed support (Patton, Marlow & Hannon, 2000). Nguyen and Bryant (2004) have used a number of empirical studies to explain the nature of HRD in SMEs and their relationships with national economic policies. They have confirmed a general tendency for short-term and spontaneous HRD in a wide range of SMEs businesses across industries. Training is reactive, informal and aimed at resolving current or immediate workplace problems rather than contributing to long-term development of staff. Similarly, Heneman, Tansky and Camp (2000) found a tendency to justify lack of HRD programs instead of active promotion of development strategies. Mentoring and coaching in most SMEs are largely informal. As a result, middle level or senior managers may voluntarily help in coaching less experienced employees by giving them career advice to help them stay committed and loyal (Nguyen & Bryant, 2004). Other informal means of coaching and mentoring in SMEs include capitalizing on the increasing opportunity for networking and interaction among various employees. As an example, an SME employer may develop relations with potential coachers and develop training to help coach and mentor employees to better understand their roles and responsibilities. Despite the numerous researches and literature on the topic of HRD in SMEs, there is need for more researches on the topic to address apparent gaps regarding the specific resources other than financial that SMEs may need so as to implement sound HRD policies. Forth, Bewley and Bryson (2006) have noted that there are gaps in current literature about how HRD can be used to boost development of SMEs in developing countries. 2.6The context of SMEs in Saudi Arabia The last two decades have witnessed fundamental growth in the small business sector in Saudi Arabia (Motwani, Levenburg & Schwarz, 2006). This is partly attributed to the economic liberalization policies adopted by the Saudi government as a requirement to gain membership into the World Trade Organization. Accordingly, the entrepreneurial importance of small and medium enterprises is well established and contributes a significant portion to the country’s GDP. Currently, SMEs make about 95% of businesses in Saudi Arabia and are the main source of new jobs and private sector investment. These businesses have helped foster technological development and innovation in the country in addition to alleviating poverty and encouraging entrepreneurial culture (SAMA 2010). Despite their positive contribution to the country’s economic and entrepreneurial development, Saudi Arabian SMEs face a lot of challenges which threaten to hinder their transition into large enterprises as is the case in other countries. Burke and Jarratt (2004) have for example noted that Saudi SMEs lack certain basic factors to help them monitor their businesses. These factors include access to loans, which has largely been as a result of the unwillingness by banks to lend money to SMEs. Moreover, Saudi SMEs are faced with the persistent problem of inability to implement superior planning and management strategies. This is one of the reasons why most of these SMEs collapse within the first few years of operation (Sharma, 2011). Another equally important challenge that Saudi SMEs have to contend with is lack of skilled workforce. This is particularly more pronounced in such sensitive areas as marketing, accounting and technology (Achoui, 2009). However, the last few years have witnessed the government making attempts to boost literacy rates within the country. The government has also set up preferential employment quotas for individuals who attain certain education credentials. Despite this, the rate of education and skill attainment is not as rapid as businesses looking for skilled workers would desire (Shalaby, 2004). An obvious feature of Saudi SMEs is that most of them are owned and managed by family members. One reason for this is that foreign competition faces many challenges when entering Saudi markets. There is also the discouraging requirement for foreigners to enter the market through a local sponsor (Sharma, 2011). Realizing the important contribution of SMEs to the country’s economy, the Saudi government has initiated various support programs to aid the viability of these businesses (Achoui, 2009). One of these initiatives was to eliminate bureaucracies associated with establishing small and medium enterprises. 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