Saudi Arabia’s Economic Environment

Saudi Arabia’s Economic Environment

Section 1

Legal Environment

Saudi Arabia’s legal system is based on Shari’a law and Islamic jurisprudence. Basic law was introduced in the country in 1992. It asserts that the government derives its authority from the Sunnah of prophet Mohamed and Qur’an. There is an affirmation that the two sources are responsible for all administrative duties. Several secular codes have been introduced in the country including companies’ regulation, foreign investment regulation, capital market law and tax regulations among others. The country allows 100% ownership of companies by foreigners. However, there are three caveats to this rule. The first one is that the banking industry is under SAMA’s regulation (Ramady, 2012). This organization has imposed restrictions and rules on foreign bank’s licensing. Foreign investment I also not allowed on areas that are included on the negative list. Professional service sectors are also regulated by respective licensing bodies. Foreign investment regulations apply to both corporations and foreign individuals.


In Saudi Arabia, imports have prompted to increase in recent years. In the second quarter of 2012, the imports were believed to have increased to 125838 million SAR. These were reports derived from the government figures. This was much higher compared to the first quarter that averaged at 117295 million SAR. Reports of these figures are usually released by the Monetary Agency of the country. Historically, since 1968, the country’s imports have always averaged around 85289.8 million SAR. The highest import average was realized in 2005 and went up to 222985 million SAR. Main imports in the country include foodstuffs, machinery and equipment, motor vehicles, chemicals and textiles. Main partners are United States, Japan, China, South Korea and European countries like UK, Germany and Italy (Ramady, 2012).

Local Manufacture

Most people might regard Saudi Arabia as an economy that relies solely on oil exportation. Having a closer look will show that the notion is not true. There has been various aspect of manufacturing in the country over the years. The last twenty years have seen a rise in manufacturing aspects of around 125.5% increase (Ramady, 2012). Among the sectors that have been involved manufacturing of export products include automotive, metal processing, home appliances, plastics and packing and solar energy. Anchor projects in the metal industry include aluminum casting, steel flat rolling mill, aluminum flat rolling mill and steel casting and forging among others. The automobile industry is concerned with truck assembly trucks, power train plants, tire plants and car assembly plants. On the other hand, anchor projects in home appliances include compressors, air conditioning expansions and appliances motors.


Residents of Saudi Arabia are not subject of income tax. People that are liable to personal income tax are the non-residents. Non-residents are taxed on the same basis as companies. The tax rate has been reduced over the years and now stands at 20% of the income earned. Residents that are involved with businesses are subject to Islamic taxes called “Zakat”. This form of tax comes with a flat rate of 2.5%. Foreign investors might face tax reduction if they incur certain costs towards Saudi’s employees. Among them is 50% of the cost incurred in training employees. There is also a 50% of salaries paid employee of Saudi Arabia origin. Conditions for qualifying for capital incentives include have a license from SAGIA and the paid capital must be more than 1 million SAR in kind or in cash (Ramady, 2012).

Section 2

Economic Climate for Foreign Business

The economic environment of Saudi Arabia is somewhat favorable for foreign investors. This is because the economy is open and government intervention is not in every sector. The main determinants of success for foreign businesses are market entry strategy that they use. This is based on the costs that are likely to be incurred. Going with importation might be costly to the relevant organization since there are extra costs to be incurred (Ramady, 2012). The costs come along in terms of import duties and levies that are usually charged. For foreign investors, these charges are relatively high. Formation of joint ventures with other local firms is considered to be the most cost effective in this economy. However, on general terms the economy has a huge market and a good supply of labor.

Political Environment

The government is involved with foreign businesses in ensuring that the stipulated regulations and rules are upheld. The political environment will affect a business depending on how its operations are conducted. Businesses that are not intending to abide with the relevant regulations fully might find it rough while operating in this environment. However, things are much better for businesses that abide with the low. The government is always in support of those ventures that are likely to create massive employment opportunities for its citizens. Ability to create employment is supported significantly since it is a way of reducing poverty hence bringing about economic growth and development. Enhancing favorable employment opportunities lead to reduction in corporate taxes and other legal levies. This acts as a form of motivation to these businesses.



Ramady, M. A. (2012). The Saudi Arabian economy. New York: Springer.

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