As everyone adjusts to a world with COVID-19, the government is increasing its focus on nationalist economic policies and localization pressures in Saudi Arabia. The government needs to shift the burden of investment and employment generation onto the private sector rapidly and has returned its focus to its major goal of getting the private sector to contribute 65% of GDP by 2030.

Understanding the need for serious regulatory reform to attract businesses, the government is working on numerous reforms and regulations to improve the operating environment and attract FDI. Examples include initiating judicial reforms to pave the way for a codified legal system, increasing flexibility in expat employment regulations, and passing the Private Sector Participation law. 

However, alongside incentives, the government is also increasing the pressure on companies to localize in the kingdom, such as requiring companies to bring their headquarters to the kingdom by 2024 if they want to contract to the public sector, changing regulations to increase tariffs paid on most imports from the GCC, creating the “Saudi Made” logo to differentiate local firms, and heavily prioritizing local companies in procurement decisions.

Our View

The localization pressures in Saudi Arabia that were starting to emerge with the 2016 oil price crash will further intensify in the post-pandemic period. COVID-19 has increased fiscal pressures and led to a realization that some level of local manufacturing is critical to national security and health, while self-reliance on domestic labor has also become more acute. Furthermore, margin pressures and an uncertain demand outlook are keeping many MNCs hesitant in their emerging-market investments. This combination has increased the urgency to raise private sector investments and ensure any additional resources from MNCs are attracted to Saudi Arabia. Both incentives and stricter requirements for localization will increase, and we expect MNCs across all sectors to expand their local presence. MNCs are increasing their headcount, putting in supportive functions for distributors, and, in some cases, moving in direct and even evaluating some form of local manufacturing. However, we expect companies will be slow to move regional HQs into the kingdom and will wait to see more details on the regulation.

Business Implications

Companies selling to the private sector will continue to see the competitive landscape shift in favor of local and localized firms and will need to prepare for this. Overall competition levels will also rise across all sectors; the kingdom is emerging as the key growth market for most MNCs, and all firms are aiming to get closer to their customers. Businesses will need to adjust their cost assumptions as they localize, as well as ensure they have a long-term Saudi talent pipeline strategy in place. An evaluation of local manufacturing decisions will need to account for higher costs, but also changing trade regulations, increased preferential access, and the comparative opportunity and localization pressures in other emerging EMEA markets.​​​​

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