Foreign Direct Investment in Saudi Arabia Paper Example

Introduction

Restaurant dealership is one of the most well-known social activities, and restaurants are very active throughout Saudi Arabia. Restaurants are the most popular destinations for people to socialize, celebrate, enjoy and meet with friends, family and business partners. Today, the country boasts as the fastest growing economy in the Middle East and is witnessing many changes, especially in the economic and social spheres (Taylor & Albasri, 2014). Saudi society tends to be more open to the standards of social integration, especially in the social and entertainment fields. Its young population provides a ready market with minimal risks and costs which means that investors are able to get a return for the investment.

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The success of the hotel and restaurant business is attributed to the popular Saudi Arabian culture where people enjoy shopping and eating fast foods. The high amount of disposable income gives the Saudi people the purchasing power to regularly shop and eat in the various stores and restaurant chains in the country. Although the country's size is only a fifth of the United States, its population is increasing at a high rate. Technological developments such as the advent of social media have exposed the Saudi community to the western culture where marketing approaches including franchising have gained a lot of popularity. According to Saudi Arabia - Franchising (2018), the country leads the Arabian Gulf in the retail market. About 83% of the country's population lives in urban areas where most franchises are set up.

The success of the franchise market in the country over the last decade has attracted a lot of foreigners including American and European franchises who have set up more retail stores. Both American and European franchises account for about 76% of the outlets in Saudi Arabia and continue to be a promising investment opportunity for investors. Food and beverage joints including restaurants make up for over 40% of the franchise sector followed closely by the fashion industry for readymade clothes in the last decade (Alharbi, 2014). The franchising market is estimated to be worth billions of dollars from royalties and yearly fees and is projected to continue growing at an annual rate of 10%. MacDonald's, Smoothie Factory, and Swiss Choco are some of the major brands that have established a strong market share in the country. Experts in the franchising business recommend the business model as a viable option for small and medium-sized enterprises (SMEs) seeking to increase market share in the food and beverage business.

Characteristics of American Franchises in Saudi Arabia

The major US franchises focus on foods, beverages, technology, fashion, health, and retail sectors. These businesses are particularly very popular among the young generation which accounts for the largest population in the country. Saudi Arabia has been spending over $14 billion on food and drink every which means that the franchise industry has a lot of potential in bridging the huge market gap. In the technological era, youth's consumer practices are associated with stylish gadgets such as smartphones and iPads, flashy clothes, meals in classy restaurants among others. With a high purchasing power, they will always want to purchase new gadgets and clothing to keep up with the current trends. The power of social media also plays a critical role in increasing the buying behavior of the population. This means that there exists a huge market potential that franchises can target to achieve significant returns.

As more and more franchises set up shop in Saudi Arabia, the current major market brands continue to lower their market share. MacDonald's is the largest fast-food franchise and accounts for a 30% market share. Herfy and Al Baik follow with a respective of 12% and 5.7%.

The Saudi Arabia market is slowly being dominated by middle-level franchises such as internet providers serving the populations technological demands. The Internet Success Coach, for instance, with an initial startup capital of about 4000 sterling pounds is one of the franchises helping young entrepreneurs in developing websites for their small firms in the country. The franchise utilizes a turnkey concept vital in fulfilling internet marketing needs. Be Harmony is another example of a franchise network that provides health services, particularly helping tobacco smokers quit smoking, manage stress and weight control. With over 19 offices spread out in the country, it is expected to expand further. Small-scale and mid-level technological companies are also being set up by the younger population who collaborate with the international investor to offer technological value such as internet needs.

Causes of Franchise Success in Saudi Arabia

In an effort to limit the Saudi Kingdom from heavy dependence of oil, the country joined the World Trade Organization (WTO). As a consequence of the collaboration, the kingdom has seen huge private marked based economic activities decentralized from the oil sector. As a member of the WTO, the kingdom has experienced increased international investments which have contributed to economic growth.

The other success factor for franchises is the large youth population in the country. According to Salam, Elsegaey, Khraif, and Al-Mutairi (2014), this population below 25 years account for 57 percent of the total population. The characteristic of this population is a huge desire and interests in food, fashion, and technology. Also, as the youths become older and capitalize on franchise business opportunities by opening up restaurants among other startups, more investment opportunities are opened up. As Salam et al. (2014) assert, there is a huge market demand for food among youths. This population is, therefore, less likely to offer much competition to large franchise brands such as Gucci, Nike, Louis Voulton, or Adidas. Therefore, the opportunities for such brands in the country are significant.

Another reason for the franchise business success is government support. Saudi Arabia has been encouraging contractual strategies through the signing of agreements. As Omran and Dandan (2016) posts, the huge infrastructural development in the country can be attributed to trade agreements such as Building, Operating, and Transfer (BOT) contracts in transportation modes; ports, airports, joint bridges and highways among others. The development of infrastructure means that transport and movement of people and goods are guaranteed and as a consequence encourages trade and economic growth.

Cultural integration and exposure have also contributed to the franchise business success in Saudi Arabia. Through exposure to technology and the consolidation of a virtual global world, the Saudi's have been exposed to international cultures thus influencing their way of life. Exposure to the Western world creates the demand for western products such as mobile phones, fashion clothing, western food among others. Franchises such as Swiss Choco and Smoothie Factory which sell chocolate and drinks are a testament to available demand for western products. As a result of the now available demand, the western brands are able to set up the franchises closer to the people, hence the growth of franchises. Cultural integration activities such as education, holiday travels, business trips, etc. also contribute to the exposure of western cultures. When the students, tourists, and businessmen return to their countries, that culture is further spread maintaining the local demand for international franchises (Taylor & Albasri, 2014).

Another reason for the franchise business growth in Saudi Arabia is the high spending power among the Saudis as compared to other Middle East countries. As Khalil (2004) noted, the average spending per household in Saudi Arabia is $246 billion. Shopping is a Saudi leisure activity. Hence, franchises selling fast moving products such as apparels, fast foods, fashion, etc. have a huge market in the Kingdom. In a study about family spending in Saudi Arabia, Al Otaibi and Yasmeen (2014) observed that 34.6% of the people bought groceries 3-5 times in a week, while 32.8% shopped in malls. These statistics indicate the strong purchase strength among the Saudis which western franchises can exploit to increase the market for their products. The results of the study can be illustrated in figure 1 below:

Saudi Arabia's vision 2030 known for prioritizing economic growth is another success factor for the franchise business in the Kingdom. As the vision 2030 postulates, the kingdom aims to encourage private and foreign direct investment in the country to foster economic growth. Part of the efforts will be the creation of a favorable business environment through infrastructural development, favorable business regulations, and government support. As a consequence, franchises are setting up retail stores and restaurant chains which collectively achieve mutual benefits for all. The franchises are able to market their products in the country thus gain a return for investment while the Saudi economy continues to grow. Also, the Saudi National Transformational Plan (NTP) reform has made significant progress in creating sustainable growth avenues.

As Ramady (2010) noted, the sale of crude oil gives the country surplus capital which is invested in public works such as large infrastructure developments. These developments stimulate domestic economic growth while attracting foreign direct investment. King Riyadh Bin Salman has also created transformative development reforms in the Kingdom meant to ensure sustainable economic growth. One of these reforms is the reduction of the Kingdom's dependency on oil revenues by alternative investments such as private investments (Saudi Arabia Country Risk Report, 2018). Privatization of key economic segments such as the Saudi Aramco, a petrochemical company, is meant to help steer rapid economic growth. Opening up the country to foreign direct investment means that international franchises continue to secure their growth.

Challenges of Establishing a Franchise in Saudi Arabia

One of the major risks in establishing a franchise is the cultural differences between the Middle East and Western countries. Elements such as communication barriers due to different languages put the businesses' survival at risk. Franchises such as McDonalds's and Smoothie Factory find it hard to communicate with the market whose majority is Arabic speaking population. The success of a business depends on how well it is able to relate and interact with its clientele. The business marketing strategies such as advertising promotions and offers must reach the target consumer to realize business goals. If a barrier to such communication exists it means the company will not be able to sufficiently get their message to the target market thus limiting potential business. However, this challenge can still be addressed by hiring locals or translators to communicate with the majority of Saudis.

Over-dependence of oil revenues is another challenge for franchises in Saudi Arabia. The Saudi economy is highly reliant on oil revenue whose prices is always in constant fluctuations. As Elachola and Memish (2016) note, when the oil prices fluctuate adversely, the country's economy suffers the same fate through reduction of Gross Domestic Product (GDP). In the GDP is lowered, the population has less money to spend on purchasing products from the set franchises. As the purchasing power is reduced, the business sales are reduced. Cavusgil, Knight, and Riesenberger (2016) argued that this risk is "detrimental to the success of the international franchises in the Kingdom". The solution to this risk is the formulation of pre-emptive measures such as adjusting prices according to existing marke...