How is Saudization Negatively Impacting the Private Companies
For a long time, Saudi Arabia’s economy remained dependent on oil revenues to support its growth (Al-Darwish, et. al., 2015). However, the domestic economy needed to be insulated from the volatility of the global petrochemical industry. So, in an attempt to move away from its over-reliance on the oil market, the Saudi Arabian government decided to diversify its economy and improve its business climate by creating job opportunities for the Saudis with significant labour market reforms in 2011 (Taylor, 2014).
Another trigger for these reforms was the year-after-year unemployment of many Saudi nationals and the Saudi job market’s dependence on foreign labour (Ministry of Labor, 2011). According to one study, expatriates constituted about two-thirds of the entire Saudi job market (Pakkiasamy, 2004). Most of these were in the private sector, as reported the Saudi Arabian Monetary Agency (SAMA) in 2006. To resolve this problem, a nationalisation program called ‘Saudization’ was launched by the government of the Kingdom of Saudi Arabia or KSA (Koyame-Marsh, 2016), which demanded that both the public-sector and private-sector companies recruit Saudis instead of expats. Various quota targets and impose restrictions on expat hiring were implemented, securing certain jobs to the Saudis (Alanezi, 2010). This Saudization process started as long back as in the mid-1990s (Al-Jadaan, et. al., 2011), but saw limited success. Therefore, in 2011, the Ministry of Labor in KSA reinforced Saudization through a program called ‘Nitaqat’, meaning bands or zones (Koyame-Marsh, 2016). To increase job opportunities for the Saudi citizens in the private sector, it highlighted zones. The Nitaqat program was an initiative to establish Saudization in a stronger way than before. It imposed sanctions on companies that did not comply to the quota requirements and provided benefits and incentives to those who complied.
Research suggests that the Nitaqat or renewed Saudization negatively impacted the private companies in Saudi Arabia. Studies by Looney (2004), Ramady (2013) or Peck (2014) clearly suggest that it forced the companies to bear unnecessary additional costs. While it increased employment for Saudi nationals, it increased expenses for companies and lowered margins. The pressure increased more because the government restrained its investments in a period of lowered oil prices (Reuters, 2016). Many private firms had to shut down business within 16 months of Nitaqat (Peck, 2014). The current research aims to tap into this area and understand in how many ways did the private sector in KSA bear the brunt of Saudization or Nitaqat. The research also aims to explore, as a sub-topic, if squeezing the private sector through the Saudization and Nitaqat initiatives really helped the Saudi economy or not. Many questions and thoughts for further research is expected to surface through this study. The current research plans to adopt a mixed methodology approach, involving both quantitative and qualitative techniques.
Extensive literature will be reviewed to arrive at a better understanding of the Saudization and Nitaqat programs and their impacts on the private companies. These include online journals, eBooks, news articles, white papers, government reports, etc. Along with these qualitative findings, the current research also intends to conduct a quantitative study through a mini survey (in questionnaire format) of 15-20 participants, who belong to the private sector. The participants will include both employees and top management executives of certain private companies in KSA. The participants’ functional background would be HR, finance, retail, construction, etc. so that the study can gage the impact across industries. It may not be possible to include all industries, but the results from a chosen sample will suggest similar impacts on private firms from other industries as well. The names and companies of the participants will be kept confidential and only their responses will be analysed to understand the various types and levels of impact of Saudization on the Saudi Arabian private sector.
There are two fundamental hypotheses for this study:
- Saudization and Nitaqat are formed to boost Saudi Arabia’s economic growth and tackle the issue of unemployment.
- The impacts of Saudization and Nitaqat are primarily negative for the private firms.
Based on these two premises, the objective of this research would be to find out:
- In what ways is Saudization/Nitaqat hurting the private businesses in KSA?
- Which type of private firms are suffering the most?
- Did Saudization/Nitaqat solve the unemployment issue in KSA? If not, what are the reasons?
- Do the negative impacts on private firms indirectly hurt the country’s economy? In other words, is Saudization/Nitaqat missing the real problems in KSA?
Some of the impacts of the Saudization/Nitaqat program on private companies are found to include:
- Cost pressures / increased expenses
- Downsizing to fit different quota requirement
- General lack of skilled resources
- Recruitment of Saudis in low-skill positions
- Employee turnovers
- Increased competition to sustain
- ‘Delusive Saudization’ or a false impression of hiring Saudi nationals and meeting quota
- Business closure or shutdowns
- General performance slumps as companies are forced to focus on numbers, more than skills.
In spite its stringent labour regulations and monitoring, the Saudization/Nitaqat program has not been completely successful in curbing the unemployment issue in the country. Although it created several job opportunities for the Saudi citizens, especially in the private sector, there are still many Saudis who remain unemployed. It is also understood from prior studies that Saudization/Nitaqat had many side-effects on the Saudi economy that jeopardised the country’s overall image in the world market. The reasons behind unemployment are elsewhere and not in the number of foreign workers. Evidently, there exists a gap between the actual problem and perceived problem in Saudi Arabia related to its unemployment issue. This research, therefore, will try to identify where the possible gaps are, while researching the negative impacts of Saudization/Nitaqat on the private companies.
Alanezi, A. (2010). The Impact of Employment Localization Policy on the Human Resources Practices in the Saudi Financial Industry. Paper presented at the Brunel Business School – Doctoral Symposium 2010.
Al-Darwish, A., Alghaith, N., Behar, A., Callen, T., Deb, P., Hegazy, A., Khandelwal, P., Pant, M. and Qu, H. (2015). Saudi Arabia : Tackling emerging economic challenges to sustain strong growth. International Monetary Fund, Middle East and Central Asia Department. ISBN: 978-1-49832-307-9
Al-Jadaan & Partners Law Firm & Clifford Chance (2011). Saudization Update 2011. Retrieved 23 August 2017 from: http://www.aljadaan.com/files/file/Saudization%202011-Client%20Briefing.pdf
Koyame-Marsh, R. O. (2016). Saudization and the Nitaqat Programs: Overview and Performance. Journal of Accounting, Finance and Economics, 6(2): 36–48.
Looney, R. (2004). Saudization and sound economic reforms: Are the two compatible?. Strategic Insights, 3(2): 1–9.
Ministry of Labor Saudi Arabia (2011). Nitaqat Program, Kingdom of Saudi Arabia. Retrieved 23 August 2017 from: http://www.emol.gov.sa/nitaqat/
Pakkiasamy, D. (2004). Saudi Arabia’s Plan for Changing Its Workforce, Migration Policy Institute. www.migrationinformation.org/Feature/display.cfm?id=264
Peck, J. (2014). Can Hiring Contract Work? The Effect of the Nitaqat Program on the Saudi Private Sector, Massachusetts Institute of Technology Working Paper. Retrieved 23 August 2017 from: http://economics.mit.edu/files/9417
Ramady, M. (2013). Gulf unemployment and government policies: prospects for the Saudi labour quota or Nitaqat system. International Journal Economics and Business Research, Inderscience Enterprise Ltd, 5(4): 476-498.
Reuters (2016). Saudi Arabia plans new labour scheme to cut unemployment, Arabian Business. Retrieved 24 August 2017 from: http://www.arabianbusiness.com/saudi-arabia-plans-new-labour-scheme-cut-unemployment-630554.html
Saudi Arabian Monetary Agency (SAMA) (2006). Saudi Arabian Monetary Agency. Forty- Second Annual Report. Research and Statistics Department. Saudi Arabia: SAMA.
Taylor, S. (2014). Does Saudization help or hurt startups? Retrieved 24 August 2017 from: https://www.wamda.com/2014/02/saudization-saudi-workforce-tech-industry