International Investment, Collaboration, and Contractual Strategies

Introduction

Saudi Arabia has emerged as an investment destination for both European and non-European countries. The country boasts of the fastest growing economy in the Middle East as well as a youthful population with the taste of western trends and culture (Taylor & Albasri, 2014). It is prudent to note that Saudi Arabia is a peaceful country. This has created a favorable environment for development and prosperity of franchises in Saudi Arabia. The presence of numerous oil wells has also contributed to the continuous influx of foreign investors in the country as it gives economic confidence required for investment. This paper seeks to discuss striking observation noted among US franchises in Saudi Arabia, the favorable factors that encourage establishment and prosperity of these franchises, and the risks involved associated with establishing franchises in Saudi Arabia.

Striking Observation about US Franchises in Saudi Arabia

One striking observation is that the franchise concepts are majorly focused on food, beverages, restaurant, apparel, health, and retail sectors. These franchises have had their root in the Saudi Arabian market and enjoying considerable operation efficiency in the country's market. Another striking observation is that middle-level franchises are slowly dominating the Saudi Arabia market. Thus, they can be easily established by the youthful Saudi Arabian population in partnership with foreign investors since most of them do not require very high capital to start.

Why Franchises Are Successful in Saudi Arabia

Saudi Arabia has the fastest growing market in the Middle East due to the presence of oil wells that are instrumental in providing back up plans hence economic confidence as well as ample capital availability. In addition, Saudi Arabia has low inflation rates and taxes. This provides a good ground for the thriving of various franchises. Moreover, Saudi Arabia has a youthful population with the youths under 25 years accounting for 57% of the entire Saudi Arabian population (Estimo Jr, 2018). The youths generally prefer starting up and managing own businesses. This is instrumental as it opens more opportunities for franchising sector growth. Exposure of Saudis to western culture and trends is another factor that has led to the establishment and growth of franchises in Saudi Arabia is. As a matter of fact, most Saudis have traveled abroad for studies, holidays, or business trips. As a result, they have been exposed to the taste of western culture and trends (Taylor & Albasri, 2014). For this reason, many western and American brand names have penetrated Saudi Arabia market. It is also prudent to note that the influx of millions of religious tourist in Saudi Arabia annually has promoted the growth of franchises in the retail sector.

Another important desirable factor that has led to the growth of franchises in Saudi Arabia is high internet penetration. Admittedly, internet penetration has enabled online ordering of goods as well as home delivery possible. This has successfully created a channel in which local companies grow and reach a wide market. Furthermore, Saudis have an expansive population with a relatively higher spending power compared to other countries in the Middle East. By 2015, Saudi Arabia's household spending stood at 246 billion USD (Khalil, 2014). Most Saudis like shopping during leisure time. This hobby has made Saudi Arabia a market paradise for shoppers. Saudis are likely to visit malls at least once per week. This has led to construction and growth of shopping malls which in turn play a pivotal role in boosting franchises in Saudi Arabia.

It is essential to note that the country's vision 2030 which prioritizes economic growth has also positively contributed to the growth of franchises in Saudi Arabia. Further, the NTP reform has been instrumental in providing relevant avenues for growth. Kuepper (2018) acknowledges the fact that crude oil has been a major factor for the growth of franchise in Saudi Arabia. This has resulted in continuous cash surpluses that most governments have spent on public works to stimulate domestic economic growth which as in turn encouraged investors from European and non-European countries to heavily invest in this country. There have also been relaxed social norms leading to the emergence of freedom of choice in Saudi Arabian market.

Another point to note is that Saudi Arabia has well-developed roads that facilitate franchise development since it allows movement of people and goods from one place to another. Saudi Arabia has a well-regulated banking system. This enables various investors, both local and foreign to borrow money at the relatively lower interest rate and use for the establishment and operation of franchises. Saudi Arabia has formed partnerships and trade agreements with foreign investors. This has proved pivotal as it has encouraged Foreign Direct Investment (FDI) which as a positive effect on the economy as FDI boosts economic development. Improved economy results in increased sales thus a boost to franchises (Buthe, & Milner, 2014; FinancialMirror, 2013).

Risks Involved in Establishing a Franchise in Saudi Arabia

There are many risks involved in international business. These risks, when they occur, can be very detrimental to the success of an international business (Cavusgil, Knight, & Riesenberger, 2016). There are regional uncertainties in the Arab world. Saudi Arabia is bordered by countries such as Iraq, Yemen, Iran, and Syria that are constantly in war. In most cases, these countries threaten the peace and productivity of Saudi Arabia (Kuepper, 2016). This scares away investors as they fear losing their investment. Another risk factor is the high under-employment and unemployment rates which can potentially fuel militancy in Saudi Arabia (Rogmans, 2013). This also can lead to social unrest thus loss of investments.

It is worthy to understand that the economy of Saudi Arabia is over-reliant on oil. This is a challenge to the economy of Saudi Arabia. Negative fluctuations of oil prices adversely lower the economy of the country because it lowers GDP of a country (Elachola, & Memish, 2016). The decrease in GDP has detrimental effects on businesses as it leads to a decline in sales thus low profitability to a business. The ramification for this is that external investors are discouraged from establishing franchises in Saudi Arabia. Another risk factor of franchising in Saudi Arabia is low data transparency and integrity. Elnaim (2013) explains that Saudi Arabia has in the recent past experienced multiple cyber-terrorism attacks that have put data of various institutions in jeopardy. For example, the computers of Aramco, a state-owned company that produces oil, were attacked by a computer virus that erased hard drives and destroyed the data stored in them. Another cyber-attack was on the official website of a public university, King Saud University, in which cyber-terrorists hacked databases of more than 800 users and a site for sharing files (Elnaim, 2013). Therefore, this is a challenge to investors wishing to establish franchises in Saudi Arabia. They should develop various methodologies that will ensure the uttermost security of their business data.

Conclusion

The economy of Saudi Arabia has grown over the years due to the presence of oil wells in the country. In addition, the youthful population of this country accounts for more than half the entire population of Saudi Arabia. This has led to the escalating establishment of franchises in Saudi Arabia. The country has many favorable factors that make it a major investment destination. The country has a good percentage of its population exposed to European cultures and trends. This has enabled foreign investors to successfully establish franchises in Saudi Arabia as there is a readily available market. Moreover, the use of the internet has gain prominence in the country, thereby facilitating online purchase and delivery as well as reaching a wider market clientele. Other factors that have facilitated the growth of franchises include well-developed roads and vision 2030 of Saudi Arabia. Admittedly, there are risk factors that threaten entry and establishment of franchises in Saudi Arabia. These factors include regional uncertainties, cyber-terrorism, fall of oil prices, unemployed youths, and so on. Thus, foreign investors need to analyze these factors before venturing into business in Saudi Arabia. This involves developing strategic measures that will minimize or eliminate some of the risk factors such as cyber-terrorism.

References

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