Business and Management Environment in Saudi Arabia

Challenges and Opportunities for Multinational Corporations

Abbas Ali

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781135695880
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

For the last 60 years, Saudi Arabia has assumed a vital economic role and has been situated on the center stage of the global economic and political scene. While the market was once dominated by American and British firms, and later Japanese corporations, Korean and Chinese companies have now aggressively entered the market and have posed serious challenges to entrenched multinational corporations. The Saudi market has newly become an arena for unbridled competition. As companies must adapt and embark on creative means to sustain their positions in dynamic markets, multinational corporations must also find a comprehensive approach to dealing with cultural and political developments. Having a competitive edge demands familiarity with market nuances and peculiarities in addition to providing quality product and service.

Business and Management Environment in Saudi Arabia is not primarily about how to conduct business in the region, but rather it provides insightful information to optimally guide western managers in conducting their operations in Saudi Arabia. The book offers essential information to engage effectively, manage business activities, resolve cultural understandings, and tackle appropriate issues of group dynamics, human resource management, managing change, and development and relations with the government and the general public. As such, it is required reading for both business leaders and academics alike.

1
Socio-Political Environment

GENERAL SETTING

Arabia, the center of a rich civilization, is surrounded by water on three sides (the Arabian and Oman gulfs from the east, Indian Ocean from the south, and the Red Sea from the west) and by sand on the fourth (Jordan and Iraq). Historically, Arabia was the center of the caravan trade. Before Islam, cities flourished on the edge of the huge desert. Commerce, art, and literature found fertile ground in these cities. Just after the birth of Islam in Mecca, Arabia came to play a vital political and religious role in the area. When the capital of the Arab/Islamic Empire was relocated to Damascus and then to Baghdad, Arabia maintained its strategic importance for Arabs and Muslims. This is because the holy cities of Mecca and Medina and the shrines of the Prophet Mohamed and other Islamic figures are in Arabia.

For centuries, two patterns of life have coexisted in Arabia: the Bedouin and the sedentary. The Bedouins are nomadic people who stress courage and pride and show independence and generosity. The traditional sedentary population stresses endurance, hardship, submission, and cunning. The first group produced poets and warriors, whereas the second produced merchants, scientists, and rulers. Both lived in harmony and were dependent on each other. However, the influence of the sedentary population declined after the eclipse of the Arab-Islamic State and the beginning of foreign hegemony (Ottoman and European). Consequently, Arabia witnessed a decline in its economic, political, and social influences. The Bedouins and their way of life were also shattered and the Bedouins’ Islamic-Arabic traditions gave way to sectarian and tribal conflicts. Rom Landou, a British scholar who in the early 1930s visited and lived in Arabia, noted that the West corrupted Arabia and taught the Arabs racism and intolerance. He stated (1938:387), “Racial or national antagonism is alien to the Muslim. It is we in the West who have made him conscious of race and nationalism. It is we who have taught him to suspect, to mistrust and, in the end, to dislike us.”

A majority of the population that used to roam the vast arid plains of Arabia and the Fertile Crescent just to earn a minimum income became prosperous in the few years following the discovery of oil in the twentieth century. Modern facilities were constructed, and consumption of luxury goods and services became the norm. The discovery of oil also contributed to the establishment of independent entities in Arabia: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates (UAE), and Yemen. Most of these states were created by fiat in order to institutionalize the political hegemony of the colonial power (e.g., Britain). Kuwait, Qatar, and the UAE were declared independent city-states by the British government during the 1960s and early 1970s. Later, as economic interests of the ruling elite matured, imaginary national boundaries were sanctioned and became a device for defining economic relationships between powerful business and tribal elites nurtured during the colonial era.

Arabia is characterized by extreme contrasts. Economic disparity, as reflected in per capita income, is very wide (per capita income in Yemen in 2005 was $600 vs. $11,770 and $23,770 in Saudi Arabia and the UAE, respectively). Bahrain, Kuwait, and Qatar, for example, are city-states, whereas Saudi Arabia is a huge desert with scattered but highly populated cities. While unemployment is high in Yemen—about 35 percent—the other states rely heavily on foreign workers that made up 60 to 90 percent of the total work force in 2005. A vivid example of heavy reliance on foreign workers is the UAE. The percentage of nationals in the UAE declined from 36 percent in 1975 to less than 10 percent in 2003. Defense expenditures per capita ranged from $810 in Saudi Arabia to $1,770 in Kuwait in 2005 (Ehsani, 2006). In terms of total defense expenditures, however, Saudi Arabia tops the list in the Middle East with its order of $50 billion in military hardware in 2006 (Al Jazeera, 2007). The region, in general, is considered strategically vital to the global economy because of oil reserves and its geographic location. About two-thirds of the proven oil reserves in the world are located in the Gulf region. The Gulf Crisis (August 1990–March 1991) and the subsequent invasion of Iraq in 2003 provided vivid evidence of the volatility and importance of the region for world stability and economic prosperity.

A Western life style coexists with the traditional one in most of the Gulf states, but in Yemen the traditional way is still the norm. Indigenous populations in the Arab Peninsula share a similar cultural background. Almost all of them are Muslim Arabs who display similar outlooks and orientations. With the exception of Yemen, the ruling elite in the Arab Peninsula are sheiks and heads of tribes. They have absolute authority and are accountable only to senior members of their respective clan. Businesspeople across Arabia are related in one way or another (e.g., through kinship, tribal networks, marriage). Studying a particular segment thus gives a fair picture of the orientations and demands of the whole indigenous population across Arabia. Saudi Arabia, in particular, because of its size and political and social dominance, represents the nature of the business and economic mode prevailing in the region. In fact, despite the outstanding economic performance of the UAE, in recent years, Saudi Arabia’s role and prospect as the leading player in the region is not expected to diminish for the coming decades. The primary focus in this chapter is on Saudi Arabian business and social environments. Implications and future recommendations are applicable to Arabian executives in general and are useful for multinational corporations (MNCs) operating in the region.

ISLAMIC ENVIRONMENT

It is fair to suggest that many Arab management practices are rooted in Islamic and pre-Islamic practices. During the first six centuries of Islam (beginning with the sixth century), knowledge, trade, industry, agriculture, and construction of complex organizations flourished. Work and creativity were honored in all their forms. Quranic principles and prophetic prescriptions served as guidelines for Muslims in conducting their business and family affairs. For Muslims, Islam is a way of life and is a source of spiritual power that sustains and enforces a high moral standard. Izzeddin (1953) suggests that Islam significantly contributed to organized work, indicating that industries and trades were organized in corporations and guilds before the collapse of the Arab-Islamic state around 1258. She argues that Islamic moral foundations encouraged businesspeople and artisans to have a sense of duty toward their craft and toward one another. Honesty and sobriety were characteristic qualities of Muslim craftsmen. In the golden age of Islam, people sought perfection in their work, and in their search for truth they acknowledged that there is nothing of higher value than truth itself.

Various Islamic schools of thought flourished during the Arab-Islamic Empire. There were at least six Islamic schools (see Ali, 1990, 2005, for more details). The first was Jabria (predestination). It asserts that man is not responsible for his/her actions and that tradition must take precedence over the power of choice. It relies on clearly defined rules and complete obedience to authority. Rational arguments are prohibited and individuals must follow the leader’s instructions. The second school is the Tafwiz (delegation). This school emphasizes free will and unqualified discretion in the choice of wrong and right because rules and regulations constrain human and organizational life. In organizational life, employees assume different tasks and duties and collective responsibility is preferred. The third is the Ikhtiar (choice) school, which shares the Tafwiz emphasis on free choice but differs in the belief about man’s capacity to turn evil into good. Unlike the Tafwiz school, it stresses that man is at liberty to commit a good or bad deed, inflict pain or joy, and that he is solely responsible for his actions. Man is believed to be a responsible social actor striving to work with the group and to achieve the group’s goals in a harmonious and cooperative environment. The Mutazilas (rationalistic) school believes that all knowledge must be attained through reason. This school holds that nothing is known to be wrong or right until reason has enlightened us to the distinction and, further, that everything is liable to change or annihilation. It maintains that free will and democracy are prerequisites to action and the prosperity of society. Denial of ability and free will stifles creativity and destroys the soul.

The fifth school of thought, advocated by Ibn Rushd (or Averroes, c. 1126 AD), holds that actions depend partly on free will and partly on external environmental forces that serve to restrain and/or determine individual and collective action. The participative democratic process is thought to be the ideal organizational form and autocracy is believed to open the door to human misery. The sixth and final school, the Ikhwan-us-Safa (Brothers of Purity), arose in the tenth century in response to the oppressive practices of the Jabria School. During the tenth century, liberal-minded thinkers and philosophers were tortured and persecuted. Nevertheless, a small body of thinkers formed themselves into a brotherhood to hinder the downward course of Muslims toward ignorance and narrow-mindedness. They established secret organizations across the Islamic nation and wrote letters as a way to disseminate thought. The school advocated rationalism, self-disci-pline, and self-control. Ikhwan-us-Safa believed that faith without work and knowledge without practice were futile and that corruption and disorder were symptomatic of tyranny. They displayed a strong faith in man’s ability to make progress and to control the environment.

The previously mentioned schools had tremendous influence on the way in which Arab and Islamic states were organized and on the way business and personal transactions were conducted. For example, the Otto-man Empire (1412–1918) subscribed to some aspects of the Jabria School whereby centralization of government affairs and strict adherence to specified rules were the norm. Since then, with the exception of the Jabria, these schools of thought have become part of history. In Arab states, independent thinking, concepts of liberty, and the power of a free mind were condemned, and Jabria principles were sanctioned in every aspect of life. This is visible in Saudi Arabia today, where the government ascribes to the Jabria School. In Arabia, the birthplace of Islam, it is not difficult to imagine the flourishing of the Jabria School. The conditions of Arabia after the collapse of the Arab empire and the dramatic downward course of Arab civilization fostered the growth of Jabria. The harsh desert environment, the humiliation of Arabs at the hands of foreign elements (Turks and Mongols), isolation from the rest of the world, and cultural discontinuity—centuries of living in an age of darkness or ignorance with no knowledge of Arab civilization and history—opened the door for disintegration, conflict, and an authoritarian outlook in Arabian society. It was in the eighteenth century that Wahhabism, the official sect of the Saud ruling family named after Mohammed Ibn Abdul Wahhab, 1703–1792, began. The movement, originally, was a call to restore Islam to its purest aspects. In practice, however, Wahhabism appears on many occasions to compromise on basic aspects of early Islamic thinking: tolerance and flexibility. Increasingly, in recent years, critics of the movement have argued that Wahhabism is more inclined to discount the role of community “ijma” (consensus) and disregard the consultative (democratic) form of Islamic government as it is specified in the Quran (e.g., Holy Quran, 3:159, 27:34, 42:38) and Islamic traditions of the Rashidun caliphs (rightly guided successor of Prophet Mohamed). Nevertheless, the current King Abdullah, then prince, argued in 1962 that “if there is any truly democratic system in the world it is the one now existing in Saudi Arabia. Our understanding of democracy is that it permits direct contact between the people and the ruler…. Anyone can secure an audience with the King and argue with him about the sharia” (quoted in Powell, 1982:366). Since then this view has been widely promoted in countering critics and opponents of the regime. Indeed, Foreign Minister Saud al-Faisal, in his remarks to the U.S. Council on Foreign Relations (2005), reiterated the same when he stated that the system in the Kingdom enables “any person in Saudi Arabia to take his or her grievance directly to any official including the King.”

One of the most distinct aspects of Wahhabism is complete obedience to rulers. This particular orientation has been instrumental in sustaining and strengthening the Saudi regime and in easily aligning various tribal and community leaders behind the King and the decisions made by the senior members of the al Saud family, the ruling family. Historically, the latter, under the leadership of its founder, Mohammed Ibn Saud, who was the tribal leader of the village of Diriyah around 1744, established a pact with Ibn Abdul Wahhab to provide him with protection as long as he showed allegiance and loyalty. Since then, this pact has been strengthened through marriage and mutual interests. Wahhabi religious leaders who control most mosques in today’s Saudi Arabia have played significant roles in promoting religious and political edicts that serve the interest of the government. The Saudi family, in turn, has been successful in integrating the Wahhabi leaders in daily functions of government (e.g., approving new laws, advising, and participating in official ceremonies). Sanetan (2004) in his study of the elites in the Kingdom has concluded that religious leaders, in their quest to enhance their personal interests, have been successful in molding religious principles to be in line with the wishes of the ruling family. Two examples shed light on the vital roles of the religious Wahhabis to the ruling Saud family. First, at the onset of the Gulf Crisis (August 1990), the Wahhabi sheiks ignored the Quran’s instructions to Muslims not to rely on foreign protection (Holy Quran, 4:51 and 5:57). The head of the religious authority, Ibn Baz, in justifying the attack on Iraq, issued a fatwa calling Saddam Hussein of Iraq an infidel stating that “He is an infidel even if he says, there is no God but God; prays and fasts…. This is the case of Saddam and those like him, who declares Islam hypocritically and who oppresses and harms Muslims and stands by his ungodly Baathist ideology.”

Second, when Islamic scholars and intellectual groups petitioned the King in late May 1991 to meet certain demands (e.g., the establishment of an independent consultative council, the observation of Islamic principles in government action and conduct, the establishment of a defense and information system that does not serve foreign interests, competent and qualified personnel for embassies abroad, respect for individual dignity, and adherence to due conduct and procedures), the Wahhabi religious authority denounced the group. The religious authority considered the petition un-Islamic as it did not observe the edict that people must obey the ruler whether right or wrong. They stated: “The manner in which the petition was published and distributed does not serve the [general] interest, neither does it help Muslims observe piety and virtue” (Arab News, June 1991). Most recently, the chairman of the Islamic scholars, Abdulaziz Al Al-Sheikh, issued a warning to youths in Arabia to obey the ruler, stating that by joining jihad abroad “the youths commit a number of violations of Islamic orders and teachings including disobedience of our rulers and subject themselves to be attracted by deviated elements and misuse their enthusiasm to achieve political and military gains for suspicious quarters” (Saudi Press Agency, 2007).

SOCIAL ENVIRONMENT

Arabian society is a mosaic one. Various groups, traditions, and patterns of life coexist. Since the mid-1940s, the simple life that the majority of indigenous citizens used to enjoy has given way to more complex and sophisticated patterns. During the pre-oil boom era, most Arabians merely sustained life and were comfortable with a minimum standard of living. Only a few tribal, political, and merchant elites lived in prosperity. The discovery of oil and the sudden increase in oil revenues in late 1973 changed the Arabian social and economic structure. Cities and towns flourished (e.g., Dammam, Jeddah, Jubail, Riyadh, Yunbi) and per capita income increased ($1,040 in 1972 vs. $15,645 in 1985). Arabia has evolved in the last forty years into an urbanized oil-based economy and has established manufacturing-based industries using the latest Western technology.

Society in Arabia has always been highly personalized. Friendship, kinship, regionalism, and communal relationships have had a significant influence on individual action and behavior. Relationships evolve around the person-tribal network. Despite the erosion, for historical reasons, of tribal organizations, individuals take great pride in keeping up their tribal traditions, divisions, and Bedouin heritage. Ghazi al-Qusabi (2006), a seasoned minister, noted that a high percentage of citizens in the Kingdom still consider themselves, in terms of tradition and tribal origin, from the desert. Previously, Patai (1983:76) stated:

The preservation in many families of a tradition of or claim to tribal ancestry is another common form of nostalgia for Bedouin virtues. Such traditions and claims are found among inhabitants of small towns and large cities alike, even in families who have been town dwellers for many generations. People of humble circumstances, such as artisans and workers, preserve the tradition of their Bedouin descent carefully and jealously, for it supplies them with the one and only claim they have to a semblance of status and social importance.

Both in urban and rural centers, tribal identity and loyalty are persistent and command respect with special privileges bestowed on those with recognized lineages. Family, however, is still the basic social unit to which individual members are subordinate. The transformation of Arabia into a semi-industrial and semiurban society, however, has given new meaning to the role of family. In the old traditional sectors (Bedouin and rural), family relations reach beyond the extended family to include the entire kinship network. Individuals not only identify with larger organizations (tribes), but their welfare and fate depend on the actions of that network as a whole. In cities and towns, however, the tribal network evolves primarily around extended family. Individual concerns and loyalty are to parents, grandparents, and immediate relatives. The tribe plays a reinforcing factor that sustains the continuity of the social fabric and revitalizes the role of the extended family. It has increasingly become a source of reference or pride. Furthermore, Bedouin tradition and values are still apparent in the behavior and orientation of the majority of the indigenous population. Powell (1982) observes that one gets the distinct impression of the legacy t...

Table of contents

• Routledge Studies in International Business and the World Economy
• Contents
• Preface
• 1 Socio-Political Environment
• 2 The State and Prospect of the Economy
• 3 Regional Markets and Business Environment
• 4 The Manager Role
• 5 Managerial Work Values and Beliefs
• 6 The Meaning and Centrality of Work
• 7 Group Dynamics and Work Relations
• 8 Communications and Negotiations
• 9 Human Resource Management and the Labor Market
• 10 Decision-Making Styles and Attitudes toward Risk
• 11 Organizational Change and Development
• 12 Organizational Form and Design
• 13 MNCs and Development
• 14 Globalization and Business Prospects
• References
• Index