Like other Gulf countries, Saudi Arabia is pushing ahead with economic diversification plans to prepare for a post-oil future, leading it to vie for foreign capital and human talent.

The kingdom is halfway through Vision 2030, an initiative by the Saudi crown prince, which includes building megacities, opening the country to tourism, and developing an industrial sector.

The recent mandate to foreign companies to locate their regional headquarters (HQs) in the kingdom, or stand to lose hundreds of billions of dollars in government contracts if based elsewhere, is part of that plan.

The pace of change in Saudi Arabia and the potential for profitable government business is too attractive to pass up, and unsurprisingly, the program generated more than the expected results – over 200 global companies, including Baker Hughes, PepsiCo, and Philips, have signed up for the program.

“The government aims to have 480 companies open regional HQs by 2030. The push for this relocation aims to ensure a sustained presence of these companies in the kingdom and focus on job creation for Saudi nationals is evident,” says Anil Singh, SVP & Country Leader of TASC KSA.

The move also signals the kingdom’s ambition to become a central business hub in the region. “Saudi aims to leverage its strategic geographic location, significant investments in infrastructure, and comprehensive economic reforms to attract global businesses. For Saudi, relocating HQs means creating jobs, attracting FDIs.” says Riyadh Al Najjar, Middle East Chairman of the Board and KSA Country Senior Partner at PwC.

CHALLENGES AND BENEFITS

The companies that committed to the move are given tangible benefits for their efforts. The country will offer tax incentives for foreign companies, including a 30-year exemption for corporate income tax.

IBM is one of the many global tech giants that have shifted regional HQs to Riyadh. “Establishing our regional HQs in Riyadh indicates the thriving tech ecosystem, world-class ICT infrastructure, and conducive business landscape in the country, which are key factors in attracting global technology leaders,” says Ayman AlRashed, Regional Vice President of IBM.

However, relocating regional HQs to Riyadh initially presents foreign companies with challenges, such as adapting to a new business environment and talent acquisition. 

A survey conducted by TASC in Saudi Arabia revealed that 43% of respondents identified a shortage of suitable applicants as a major concern. Retaining talent will also become a challenge, with 17% facing stiff competition from other employers. Companies will need to differentiate themselves and stand out in the highly competitive Saudi market with their products, services, and value propositions.

More specifically, Al Najjar says that recruiting and retaining qualified local talent as part of the kingdom’s Saudization initiative while maintaining a diverse and inclusive workforce can pose another challenge for companies relocating their HQs to Riyadh.

Initially, understanding the Saudi Arabian regulatory environment will require a lot of time and effort for any organization moving their regional HQs to Saudi Arabia, says Singh. 

However, “the long-term benefits include access to a growing market, tax incentives, and opportunities arising from government infrastructure projects,” says Swapnil Pillai, Associate Director of Research at Savills Middle East.

Establishing regional HQs allows for opportunities for growth and expansion. “With Saudi having a large consumer base and an ambitious economic diversification program, companies will experience significant growth opportunities across various sectors such as healthcare, technology, renewable energy, tourism, and entertainment,” says Al Najjar.

It will open doors to more opportunities and partnerships in various sectors. In addition, setting a base in Riyadh makes room for the broader MENA region, facilitating market penetration and expanding the companies’ footprint, says AlRashed. 

“The 30-year tax relief for regional HQs is a big advantage.”

He adds that the move will help directly support the company’s regional clients. “This proximity can lead to a better understanding of client needs and the ability to provide more responsive and personalized services.”

Ultimately, the decision to relocate hinges on each company’s unique circumstances and risk tolerance. “It’s essential for companies to carefully evaluate these factors and formulate strategies tailored to their specific needs and objectives,” says Singh.

CHANGE AND MARKET ADAPTATION

While relocating regional HQs brings significant changes for the companies as they navigate regulatory adjustments to comply with Saudi regulations and policies, the Saudi market must adapt accordingly to support the expanded operations and logistics. Pillai says there is an increased demand for office space. 

This shift in the business landscape requires Riyadh’s infrastructure and services to evolve and expand to accommodate the growing demand.

“There’s a need for flexibility and adaptability from both companies and the Saudi government,“ Singh adds.

The kingdom’s economy will benefit immensely from such relocations, especially in sectors like technology, finance, and consulting, as well as in the realm of giga projects, where Riyadh is quickly establishing itself as a global hub, adds Al Najjar.

THE NEXT BUSINESS HUB?

Until now, Dubai, the UAE’s commercial and financial hub, which has built its economy on its open-for-business credentials, has been the preferred hub of multinational companies. It hosts the largest number of regional HQs in the Middle East.

“The regional HQs move positions the kingdom in direct competition with regional business hubs, notably Dubai — the commercial capital of the UAE, home to the highest concentration of Middle East regional headquarters,” says Singh. 

Although the UAE’s strategic location, advanced infrastructure, and business-friendly environment have made it an attractive destination for international businesses, Saudi Arabia, with its unique strengths, including its size, natural resources, and ongoing reforms and infrastructure projects, is improving the business climate, says Al Najjar.

Experts agree that the HQ program is in its early stages and believe that the Gulf state will eventually become a business hub.

“The strong international interest, government initiatives, and economic growth indicate its potential to rival other mature markets,” says Pillai.

The initial success of the HQ program signifies confidence in the kingdom’s business environment. The country plans to double the population and economy of its capital city, which is currently home to some 7 million people, in the next decade and has moved to improve the quality of life.

“The HQ program shows the competition between Saudi Arabia and other regional hubs, and the kingdom may become a standard choice for foreign companies seeking a strong presence in the largest regional market,” says Singh.