Dmitrii Kucher, Founder at P2H.
The Kingdom of Saudi Arabia (KSA) is currently experiencing a boom among foreign companies looking to tap into its market. This surge is largely due to the Kingdom’s ambitious Vision 2030 reform plan, aimed at diversifying the economy away from oil and opening up new sectors for investment. Another driver is the reforms of 2016 that allowed 100% foreign business ownership.
However, the local market remains unknown to many entrepreneurs who wish to capitalize on its growth.
Why should entrepreneurs consider operating in Saudi Arabia?
Vision 2030, first announced by the KSA government in April 2016, is the country’s blueprint for future development. It aims to diversify the country’s economy away from oil. For instance, the country plans to elevate non-oil exports to SAR 580 billion by the year 2030.
The cornerstone of this transformation is digitalization, meaning the integration of advanced technologies into government services and the private sector. This creates opportunities for technological companies. They can develop and present numerous technologies for various sectors such as health, education, etc. Moreover, these developers can gain a significant advantage here compared to some other markets: In Saudi Arabia, they may receive strong government support and potentially substantial contracts.
Some of the most promising niches for foreign businesses in Saudi Arabia today are public-private partnerships (PPPs) and government technology (GovTech) initiatives. The emphasis on digital government, smart cities and the overall digital transformation of the economy creates significant opportunities to contribute to these national projects. This can be achieved by leveraging expertise in digital portals, IT operations, custom software development and cybersecurity services.
According to a 2017 JLL report, “Saudi Arabia is the most active PPP market in the Middle East and North Africa (MENA) region, with a total of 18 projects announced to date with a combined value of USD 42.9 billion.” They note PPPs are a key component of the transformation program, which aims to increase the percentage of private sector investment from 40% of GDP in 2016 to 65% by 2030.
What are the key factors for success?
While Saudi Arabia may seem like a promising market, establishing a business here can be hard and time-consuming. However, I’ve found there are ways to streamline it.
1. Hire local talent.
Operating a 100% foreign-owned company predisposes specific conditions, such as a minimum cash capital of SAR 30 million, operations in at least three markets, and a commitment to invest SAR 200 million over the first five years.
There are also Saudization requirements and training mandates for Saudi employees to consider. Saudization, also known as the Nitaqat program, is a national policy aimed at increasing local integration, typically requiring the hiring of three Saudi Arabian citizens for every foreign employee.
Incorporating a council of local experts into your strategy is also vital. These specialists, with their market knowledge and networks, can offer critical insights and guidance.
2. Establish headquarters in the country.
The KSA stimulates global corporations to establish their regional headquarters in the kingdom by offering a tax incentive program. The so-called Regional Headquarters (RHQ) program includes a zero percent rate for corporate income tax and withholding tax related to the approved RHQ activities for 30 years.
Furthermore, starting from January 1, 2024, the Saudi Arabian government and public institutions have ceased signing contracts with foreign companies that locate their regional headquarters in any other country within the MENA region. Therefore, a physical presence within the country is not just beneficial—it’s essential.
There are specific rules that companies must follow when creating regional headquarters in the country. An organization must have at least 15 full-time employees, including a minimum of three C-suite executives. The firm should hire these employees within a year after obtaining an RHQ license from the Ministry of Investment for Saudi Arabia (MISA).
Additionally, there is a nuance that not everyone knows before establishing headquarters: RHQ does not engage in revenue-generating activities. Instead, it serves as the center of administrative control for the firm in the MENA region.
3. Take part in building an innovative ecosystem.
With the establishment of innovation hubs and accelerators like King Abdullah Financial District (KAFD) and other initiatives, there’s a burgeoning startup ecosystem. This environment is conducive to nurturing tech talent and encouraging innovation.
Focus on offering innovative ideas and solutions that address specific needs within the GovTech space. By staying ahead of technological trends and proposing forward-thinking solutions, businesses can position themselves as a valuable partner to government entities looking to transform their digital services.
4. Participate in socially responsible projects.
In Saudi Arabia, there’s traditionally significant demand for nonprofit organizations (NPOs) assisting those in need, including people with disabilities. Estimations showed that in 2018, there was one NPO per 10,000 people in Saudi Arabia, compared to around 50 per 10,000 in Canada and the United States. Moreover, the later study confirmed the leading position of the kingdom in the corporate social responsibility (CSR) field.
Vision 2030 further encourages businesses to focus on impact rather than solely on generating profits. It promotes social entrepreneurship that addresses national challenges, especially in critical sectors such as healthcare, education, housing, and cultural and social programs. This sector is regulated by the National Center for the Development of the Non-Profit Sector (NCNP), established in 2021.
Companies looking to participate in these projects can start by researching local nonprofit organizations and initiatives that align with their values and mission. Engaging with local communities and stakeholders can provide insights into pressing societal issues and potential areas where the company’s expertise and resources can make a meaningful impact.
In summary, Saudi government initiatives are integral to business development strategies in the KSA. By aligning with them, actively contributing to the Kingdom’s digital transformation and engaging in collaborative projects, a business can establish itself as a strong and leading player in the market.
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