Multinational Firms in Saudi Arabia: Risk Perceptions

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Table of Contents

Risks and Business Environment in Saudi Arabia
Market Entry Modes
Risk Perception Defining Tools
Conclusion
References

Considering the fact that newer business strategies are developed and the level of competition has increased recently due to growing interest in entrepreneurship and international collaboration, it is necessary to assume that it has become more difficult for international companies to survive and achieve success because of growing business risks. Conducting the research on the topic of business risks and approaches utilized by multinational companies in order to mitigate them, it is necessary to pay an increased attention to the situation in the Middle East.

As for the Gulf countries such as KSA, it is known that, due to relatively high income level in the region and growing competition, international companies should put an increased focus on strategies used for foreign market entry. The given paper aims at describing the situation with international business risks in KSA and proposing the tool that could be used to define and analyze the perceptions of owners of multinational companies in Saudi Arabia.

Risks and Business Environment in Saudi Arabia

International business in Saudi Arabia remains a sphere that involves a great number of factors that can hardly be controlled and this is why they act as potential risks capable of undermining the authority of a certain company or decreasing its consolidated income. When it comes to Saudi Arabia, there are a few factors that need to be taken into consideration to better understand the methods used for risk mitigation and successful foreign market entry.

To begin with, there is a range of difficulties related to religious beliefs peculiar to nations living in different regions. Considering the enormous role of religion in everyday life and business activities of people in KSA, it is necessary to suggest that entering foreign markets (especially when it comes to European countries with religious diversity) can present certain difficulties due to a significant lack of coincidence in cultural values that may be extremely dangerous for companies in Saudi Arabia moving into new markets.

In fact, there are many people who are unlikely to pay attention to the values supported by business owners and managers; they make decision based on whether they like the product and whether collaboration with the new company will be profitable for them. Nevertheless, it is necessary to remember that, due to interfaith dialogue accompanied with various conflicts, this factor should be considered as well. In case with such situations, companies may invite new employees from other countries to ensure diversity as such measure will be likely to improve the level of trust

Nowadays, a few basic types of business risks can be distinguished, these risks remain important for countries in any region as they reflect the common facts of life of the modern society. To begin with, business owners should consider a range of strategic risks that occur when there is a possibility that particular practices chosen by the company appear to be ineffective due to changing circumstances (Sadgrove, 2016). Such risks occur due to rapid technological development and significant changes in prices of important materials. Speaking about these risks in connection with Saudi Arabian multinational companies, it needs to be said that the most notable companies in KSA are usually connected with the spheres of transportation, gas and oil market, and health; despite the fact that all of them involve changes in technology capable of changing companies’ profit levels, successful firms in the wealthiest countries usually manage to keep up with the times.

The next type of risks relates to practices that business owners utilize to align their activity with all the necessary regulations peculiar to the new market. The given type is especially important due to the fact that sometimes the decision to introduce new regulations is influenced by people of influence running their own businesses. Changing regulations and introducing new rules, interested groups may make it more difficult for foreign companies to achieve success and it increases their own chances to stay the most powerful in the market.

Speaking about additional problems that multinational companies in KSA may face, it is important to mention that regulations in European market are extremely different from ones used in KSA when it comes to such spheres as food and clothes production, and this is why companies may need to spend a lot of money to comply with new requirements.

Another type of risks that may significantly decrease performance level of a multinational company is related to money and unexpected pecunial losses. Such risks may depend upon numerous factors; for instance, companies working with a relatively small number of clients may face uncontemplated losses due to financial problems of those firms they collaborate with; apart from that, if business involves the necessity to offer credits to customers, financial risks become even more obvious.

Also, financial risks for multinational companies in KSA can be related to using production loans; considering that credit terms may always change for the worse, the use of such service involves significant risks for companies in the country. Apart from that, financial risks that need to be paid an increased attention to when it comes to global business activities are strictly interconnected with the rates of exchange (as in case with oil companies such as Saudi Aramco). As for the latter, they may vary and, therefore, have a negative influence on proceeds from sales. Due to that, companies in KSA and other countries should develop effective business strategies allowing to prevent extra spending in order to stay successful in condition of growing competition.

At the same time, the number of risks that need to be taken into consideration by business owners in KSA and other countries in the region are not limited to outside threats. Instead, there are significant risks that can be strictly interconnected with the activity of the company.

Importantly, this includes such areas as production activities; speaking about them, it is extremely important to take into account that production equipment cannot be perfect and, together with minor problems, there can be significant equipment occurrences that sometimes may disrupt the schedule defined. Importantly, such risks are peculiar to companies working in construction such as Xenel. When it comes to international companies having a few production facilities that are not located in neighbouring countries, it can be extremely difficult for managers to cope with the situation when production problems occur.

This type of risk can be regarded as very important for those companies in KSA doing business in Europe and the United States as well; combined with risks related to foreign regulations, operational problems may cause heavy disimbursement and sometimes its consequences lead to corporate bankruptcy. Apart from risks related to production equipment and its ability to function properly, business owners in KSA should understand that human factor can also pose a significant threat to company’s success.

Therefore, different employees are supposed to fulfil a range of duties and, according to the most common plan of activities, duties and tasks should be differentiated to achieve better results. Nevertheless, it often happens that there is a lack of specialists responsible for performance monitoring. In such case, a great number of mistakes made due to human factor (for instance, tiredness or lack of competence) can remain unnoticed and it may lead to significant financial losses as managing the problems can be quite costly.

In the end, another type of risk that can be important for business owners in KSA is related to shaping the appropriate image of a company. In case if clients have doubts concerning the quality of company’s services or professional behavior of its employees or managers, it will definitely result in slumping sales. Therefore, it may take a lot of time to restore reputation and prove that previous mistakes are considered and necessary conclusions are made.

Nevertheless, it often happens that companies applying inappropriate practices or ignoring their own values expressed in mission and vision statements cannot restore their reputation despite a great number of measures taken and the best specialists that are supposed to help them to become successful again. It happens because big corporate scandals usually become so famous that there is no way for business owners to make customers and prospective partners forget about them.

Continuing on the topic of such risks, it is necessary to say that the reputation of a multinational company in KSA can be destroyed in many different ways; for instance, companies may be involved in legal arguments, they can be found out in a lie concerning the quality of their products and production practices utilized. More than that, there can be scandals related to negative customer feedback. Discussing the reasons that may damage the reputation of a company, it is important to note that sometimes such feedback can be fabricated by leading competitor of a company; therefore, in order to mitigate such risks, multinational companies in KSA should have a legal backing and be extremely careful when it comes to quality control and professional integrity of its employees (Pearson, 2014).

Importantly, international risks are strictly interconnected with the practices companies utilize in order to enter new markets. Companies in KSA and all over the world use strategies that involve different control procedures.

Market Entry Modes

There are a number of practices that can be used by multinational companies in Saudi Arabia in order to enter new markets and manage to demonstrate an appropriate performance. To begin with, companies may apply three major strategies – exporting products, establishing shared ownership, and opening daughter companies (Laufs & Schwens, 2014). Each practice has its own strengths and weaknesses; for instance, speaking about the first one, it is important to mention that it involves a greater level of control and protection of owners’ rights. Nevertheless, it also entails significant organizational changes and increased costs.

The second type such as shared ownership is related to additional risks caused by possible disparities between business strategies applied by the owners. More than that, the third type such as the establishment of daughter companies involves extinguishing any debts that it has and it may be quite costly for parent undertaking. Nevertheless, the latter is able to control all the processes within daughter companies and it helps to decrease certain risks.

Risk Perception Defining Tools

There is no doubt that studies aimed at defining strategies and perceptions of business owners in Saudi Arabia need to be based on data reported by authoritative specialists from international companies. In order to better understand the methods that entrepreneurs in KSA apply to perform business expansion and the choice of methods based on the most significant risks, we suppose that it can be necessary to use the questionnaire to collect the data. The questions chosen relate to the information that can be provided only by specialists responsible for strategic management. The companies that are supposed to participate in the survey include Comap Systems, the Olayan Group, Rezayat Group, Xenel, Almarai, and Saudi Aramco.

The questions that representatives of the companies will be supposed to answer include the following:

Which risks do you believe to be the most important when it comes to your field of business?
Which risks have the least significant influence on your company?
What are the sources of financial risks for your company? Which measures need to be taken to mitigate them?
What are the sources of operational risks for your company? Which measures can reduce them?
What are the sources of reputational risks for your company? How can they be reduced?
What are the sources of strategic risks for your company? How can they be reduced? What are the differences between local requirements to your business and ones imposed in other regions where your company operates?
What foreign markets have you already entered?
Which strategies did you apply in each case?
Which factors influenced the choice?

Conclusion

In the end, the activity of multinational companies in KSA is inextricably bound up with risks related to extra losses, reputation, equipment, choice of strategy, and new regulations. It is supposed that these risks are strictly interconnected with the strategies that companies in KSA apply to enter foreign markets; in order to define the links between these factors, the questionnaire for strategic managers of a few companies in KSA is proposed.

References

Laufs, K., & Schwens, C. (2014). Foreign market entry mode choice of small and medium-sized enterprises: A systematic review and future research agenda. International Business Review, 23(6), 1109-1126.

Pearson, N. (2014). A larger problem: financial and reputational risks. Computer Fraud & Security, 2014(4), 11-13.

Sadgrove, K. (2016). The complete guide to business risk management. New York, NY: Routledge.

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