Saudi Arabia - PESTEL Analysis - Case Study Example

Saudi Arabia - PESTEL Analysis Introduction The kingdom of Saudi Arabia is the world’s largest oil exporter in the world. It is a political monopoly governed by the royal family. Founded by Abdul-Aziz bin Saud in 1932, Saudi Arabia has become one of the major powers in the Middle East. Irrespective of being a regime government it has been able to maintain political stability and has grown tremendously in the last few decades. This paper is a PESTEL analysis of the macro-environment of the country. The target audience of the paper are businesses which are looking at entering the Saudi Arabian market. This paper is completely based on secondary research. Secondary research is one that is dependent on the work of other researchers and institutions. Sources of secondary data are books, journals, government archives, websites, news articles, etc. Tools such as Google, Google Books, Google Scholar have been used and the best sources have been selected to complete this paper. Following key words were used: Saudi Arabia, political analysis, PESTEL analysis, political stability, economic growth, business cycle stage, GDP 2011, climate, etc. Political Factors After the recent uprisings in the Middle East, regime stability in the region is in serious threat. Even though there are no serious threats in the near future, Saudi Arabia’s long term stability has been questioned. Country is facing a dual problem of responding to the pressures of a reform and also having to counter extremist violence in the region. Saudi Arabia has developed a strong Islamic self identity. Numerous Islamist groups have known to have made the country their home and also they are being funded by affluent Saudis (BBC, 2012). Since recent extremist attacks, political reform has garnered great support. Even though there were elections held in 2005, democracy was not exercised at the fullest as political parties were banned and women were not allowed to vote. Protesters opposing in public call for the risk of arrests and it is from outside the country that the opposition functions. If there would be any uprising similar to the ones in the region, then that would mean disaster for political stability (BBC, 2012). In the near future, political stability is not threatened and the government has taken various steps to ensure citizens are happy. Government spending and wages have increased greatly in the last couple of years. Also Saudi Arabia being the largest oil exporter in the world, its internal stability is of prime importance to international powers and hence international is expected to take all measures to ensure stability in the country (Zand, 2011). As mentioned, many reforms have been announced on all fronts by the government with a vision to strike balance between modernisation and Islamic wisdom (Shaheen, 2010). Freedom of speech has come of age in the recent years, even though there are constraints. The Kingdom’s policies encourage foreign investment and active participation of foreign companies. There are no restrictions on movement of capital in and out of the country. Foreign investments enjoy the same benefits (such as tax exemptions, custom duties, etc) as that of national capital as long as they are in accordance with the Foreign Capital Investment Code. A drawback here is that investment should be economic development projects and should accompany technical knowledge (Saudia-Online, 2010). Overall, the country is politically stable and is attractive in business terms but businesses must closely keep an eye on the movements that can influence long term political stability. Economic Factors The current business cycle stage of Saudi Arabia is that of a retrenchment and restructuring cycle similar to the one witnessed in between 1996 to 2002. In the earlier phase major restructuring and reforms took place. The major focus of the government was to ensure that key driver of growth was the private sector. The government tried to attract foreign capital and involvement by making progress in various fields such as capital market reforms, liberalization and privatization (Ramady, 2010). The same is expected out of the current retrenchment and restructuring cycle. There has already been many reforms taken by the government (will be discussed in late sections) to attract and promote foreign investment in the country. Government is trying to diversify the economy as majority of the growth is accounted by the petroleum sector. As a result of this, other industries such as natural gas, telecommunication, and power generation are getting a boost from the government (Index Mundi, 2012). There have been investments made in building new economic cities in the country. Saudi Arabia is estimated to have achieved a GDP of 7.5% in 2011 which is an exceptional increase from 3.7% in 2010. Inflation is at 6% and unemployment rate is at 28.2% (Global Finance, 2011). The currency of Saudi Arabia is overhauled with high purchase price potential and low investment flow potential. On a whole, Saudi Arabia has had promising economic growth in the last couple of years. Government is working on bring the employment rate down and hence is encouraging foreign investment in the country. But considering the various factors Saudi Arabia’s economy is more promising and attractive for short term investment rather than long term investment. Social Factors Religion is the most important factor in Saudi Arabia and it affects all aspects of life. 90% of the population consists of Sunni Muslims and the country is governed by conservative Islamic interpretations. It’s the religious police, mutawa, who are responsible for ensuring that citizens (including foreigners) strictly adhere to the codes of conduct. The mutawa hold the right to detain offenders indefinitely and subject them to harassment and physical punishment. It is very rare that cases are presented to the court. In most areas of the society, women face discrimination and are treated as second-class citizens. As the society is patriarchal, women enjoy very few rights as compared to men (SIGI, n.d.). Opportunities and rights for women even in economic spheres are very limited. For any foreign company that is planning on expanding to Saudi Arabia must consider the above factors as understanding of local customs and culture is very important. Saudi Arabia is among one of the fastest growing nations in the world with respect to growth of the population. The population has grown nearly threefold since the 1975 and current population growth rate is at 2.3% p.a. (approx) (Ramady, 2010). The population as of 2010 is believed to be 26,534,504 but there isn’t an exact figure as there is no official census conducted by the government. The population’s age composition is such that it has greater young and working class population (0-14 years: 29.4%, 15-64 years: 67.6%, 65 years and over: 3%) (CIA, 2012).This means the government is under the pressure to create more jobs. There have been a number of demographic transformations that have taken place in society structure and as a result of this many improvements have been seen in social, health and living conditions. Health care has received great attention from the government and there have been many health institutions and hospitals set up. Also employment trends have been such that foreign nationals occupy majority of the jobs and Saudi citizens have remained unemployed. Government is trying to change this pattern by having more employment opportunities nationals by a process called Saudization (Hertog, 2010). Technological Factors Technological developments in Saudi Arabia have not been country specific but industry and firm specific (Wilson, 2004). For example, oil industry which is the backbone of the country has seen tremendous technological development but other sectors still lack the technical knowhow that is being used in other countries. The education system has also been such that the emphasis has not been on technology but this trend is changing and the government is placing strong emphasis on development of science and technology. The poor technical knowledge of the locals is one of the main reasons why there is more foreign nationals working in the country than locals. Also government is supporting many scientists working in the country by awarding millions in the form of grants (Janin & Besheer, 2003) and is encouraging multinationals which can contribute to technological development in the country. Environmental Factors Saudi Arabia’s geographical location is strategically ideal as it allows firms to establish base in the region. Extensive coastlines give great shipping leverage. The climate in the country is harsh with temperatures fluctuating between extremes. Terrain is dry sandy desert and is mostly uninhabited. It is rich in natural resources such as natural gas, petroleum, copper, gold, iron ore, etc (Goodwin, 2000). It is prone to regular dust and sand storms. There are various environmental issues that the country faces such as coastal pollution from oil spills, lack or permanent or perennial rivers, endangered species, marine dumping, depletion of underground water resources, etc (CIA, 2009). Legal Factors The law in Saudi Arabia is based on the Islamic legal code known as the “Sharia”. It is with this framework that all legislations must be compatible with and referred to. Hence, businesses entering the Saudi Arabian market must be aware of the cultural/religious reasoning behind the laws in the country. The laws and any possible violations by businesses are consistently monitored to the extent that the advertising behaviour of the firms is also critical (Mueller, 2011). Contracts have not been used in Saudi till very recently. It was recently that Arbitration Law and Regulations were enacted in the country (IPR, 1999). The government has approved a new foreign investment law that has facilitated foreign investment in the country (Saudia-Online, 2010). This has made the country more attractive and there are reforms being made to improve the situation. Conclusion Saudi Arabia’s political stability in the short term has no threats but to maintain stability in the long term will be a challenge for the royal family. If the recent uprisings in the region are anything to go by and demand for political reforms in the country, evidences point towards a similar uprising in the country. Government has taken various measures to ensure that political stability is not disturbed in the near future. With the current business cycle being a a retrenchment and restructuring cycle, it can be expected from the government to support and facilitate foreign investment and participation in the country. Also the GDP growth has been positive and is expected to improve. The overall economic conditions are favourable for businesses in the near future. An understanding of the social conditions and custom would be vital for any business. The analyses of the social conditions show that some improvements have been made but on a whole it is still a conservative society. Technological development in the country has been firm and industry specific until very recently, but now government is encouraging and investing heavily in advancement of science and technology. Firms that can add technological value have are being encouraged and policies have been formed to facilitate their operations. Environmental factors play a role depending on the industry and specific issues need to be addressed. Therefore, on whole Saudi Arabia is a very attractive market in the short run and in long run companies needs to give attention to specific details before making an investment. References BBC (2012). Saudi Arabia profile. [Online]. Available at: http://www.bbc.co.uk/news/world-middle-east-14702705. Accessed on 14 Mar 2012. CIA (2009). The CIA World Factbook 2010, Book 2010. NY: Skyhorse Publishing Inc. CIA (2012). The World Factbook, Middle East: Saudi Arabia. [Online]. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html. Accessed on 14 Mar 2012. Goodwin, W. (2000). Saudi Arabia. MI: Lucent Books. Global Finance (2011). Saudi Arabia. [Online] Available at: http://www.gfmag.com/gdp-data-country-reports/186-saudi-arabia-gdp-country-report.html#axzz1p6fhJDOL. Accessed on 12 Mar 2012. Hertog, S. (2010). Princes, brokers, and bureaucrats: oil and the state in Saudi Arabia. NY: Cornell University Press. Index Mundi (2012). Saudi Arabia Economy Profile 2012. Available at: http://www.indexmundi.com/saudi_arabia/economy_profile.html. Accessed on 12 Mar 2012. IPR (1999). Saudi Arabia Legal Review. [Online]. Available at: http://www.infoprod.co.il/country/saudia2a.htm. Accessed on 14 Mar 2012. Janin, H. & Besheer, M. (2003). Saudi Arabia. NY: Marshall Cavendish. Mueller, B. (2011). Dynamics of International Advertising: Theoretical and Practical Perspectives. NY: Peter Lang Publishing Inc. Ramady, M.A. (2010). The Saudi Arabian Economy: Policies, Achievements, and Challenges. NY: Springer. Saudia-Online (2010). Foreign Investment Policy. [Online]. Available at: http://www.saudia-online.com/foreign_investment.htm. Accessed on 14 Mar 2012. SIGI (n.d.). Gender Equality and Social Institutions in Saudi Arabia. Available at: http://genderindex.org/country/saudi-arabia. Accessed on 14 Mar 2012. Shaheen, A.N. (2010). Saudi Arabia a paragon of political stability. [Online]. Available at: http://gulfnews.com/news/gulf/saudi-arabia/saudi-arabia-a-paragon-of-political-stability-1.686064. Accessed on 14 Mar 2012. Wilson, R. (2004). Economic development in Saudi Arabia. NY: Routledge. Zand, B. (2011). Can Oil Money Buy Political Stability?. [Online]. Available at: http://www.spiegel.de/international/world/0,1518,748089,00.html. Accessed on 12 Mar 2012. Read More