The spectre of rivalry overshadowed the Gulf last year, as Saudi Arabia launched a policy to draw multinationals away from its neighbours.

“Programme HQ” stipulated that for foreign businesses to have access to government contracts, they need to have set up regional headquarters (HQs) in the country by January 2024. 

Many companies had been hesitant to move their regional HQ from the UAE or Bahrain to the Saudi capital, Riyadh, sources tell fDi, but access to billion-dollar state contracts and the growing domestic market were enough to move the needle.  

Investors jumped at the chance. A record 126 greenfield project announcements were tracked by fDi Markets into Saudi Arabia in 2021; 55 of these went to Riyadh, with 14 of them representing new HQs. Between 2003 and 2021, only 11 HQ projects were tracked into Riyadh.

Such investments cover a swathe of sectors, from consumer goods and construction to business and financial services. Companies, ranging from US construction firm Bechtel and German transportation company Siemens Mobility, to venture capital investor 500 Startups, all set up their regional HQs in the country last year.

Khalid al-Falih, the country’s minister of investment, said in a statement last year that “for game-changing investors who are looking for the next great global growth opportunity, Saudi Arabia’s potential is ready to be unleashed”.

More stick than carrot

Jack A Kennedy, associate director and head of desk for Middle East and North Africa country risk at S&P Global Market Intelligence, says that the new policy to insist that foreign companies will have to base their HQs in Saudi or lose out on state contracts “represents more of a stick than carrot approach”.

“At the moment it is being facilitated by promises to improve the regulatory environment and improve the social space,” he says; but this, he adds, “presents an image less of fostering competition and more one where the Saudi leadership is confident in leveraging the size of its own domestic market”.

Despite the recent trend towards more stringent adherence to environmental, societal and governance principles, the publicised mass execution of 81 individuals a few weeks ago and the ongoing war in Yemen will do little to deter investors, Mr Kennedy says.

If reputational risks remain, he adds, they are likely to be confined to certain sectors, like the entertainment (TV and cinema) sector, and ultimately outweighed by the opportunities and scale of the Saudi market.

According to Invest Saudi, 44 multinational companies received licences in October 2021 alone and a total of 480 licences are targeted to multinational companies by 2030. It estimates that this will contribute $18bn to the local economy by 2030, creating 30,000 jobs. 

Consultancy firm PwC, which opened its Riyadh HQ office last year, said in a statement in September that it hired 37% of its total regional intake in Saudi Arabia, with around 90% being Saudi Nationals and 53% being female.

Fahad Alhashem, managing director of real estate at the ministry of investment of Saudi Arabia, tells fDi that foreign businesses were already moving to Riyadh before last year, stressing that with the recent opening up of the country, “it’s not really been a challenge to get foreign companies to come to Saudi Arabia”. 

Not just Riyadh

Yet, with the Saudi’s Vision 2030 project to diversify its economy away from over-reliance on oil exports encompassing big infrastructure projects, and with the country eager to open up its tourism sector, firms are looking beyond the capital.

Mr Alhashem says there are investment opportunities elsewhere, such as in new cities like Neom.

US construction company Bechtel also moved their HQ to Riyadh in 2021, having signed an agreement with the government the year before to build two lines of the Riyadh Metro and to build primary infrastructure for the $500bn megacity Neom. Bechtel declined to comment further on their activities in the country.

The ministry estimates that 1.2bn square metres of commercial and residential real estate needs to be developed by 2030, ranging from commercial assets to hard infrastructure, like ports and roads, and soft infrastructure, such as museums, cinemas and mosques. 

With demand for more than $20bn worth of projects in the real estate sector alone, Mr Alhashem says that the ministry is “still looking to attract additional contractors and service providers”. 

In February this year, PwC opened a branch in Al-’Ula, the ancient Saudi city that the government wants to develop into both a new destination for international tourists and a business hub. This will be PwC’s sixth office in the country.

“Having an office in this thriving, nature-rich city will provide us with the opportunity to continue supporting and realising the next chapter of Al-Ula’s enduring legacy as one of the world’s leading sustainable tourism destinations,” Hani Ashkar, a senior partner at PwC, said in a statement. 

Ease of doing business 

Yet, despite the country being the biggest domestic market in the Gulf Cooperation Council (GCC), greenfield foreign direct investment (FDI) into the UAE still trumped that into Saudi Arabia in 2021, by a factor of four in terms of project numbers, according to fDi Markets.

One source with business investments in Saudi Arabia, who asked not to be named, tells fDi that “there is an overhype on the public relations and an underwhelmed effort on the real and efficient tools to attract FDI into the country”, in Riyadh or elsewhere. 

More emphasis needs to be placed on the ease of doing business, meaning “the ease of coming into that country, ease of setting up a corporation, ease of owning your corporation, ease of understanding the tax code, the labour laws — these things have to be clear,” they add.

Transition from the existing legal framework is likely to be hindered by institutional limitations, indicating the likelihood of delays slowing the application of the planned new legal structures

Jack A Kennedy

For now, Mr Kennedy notes that Saudi Arabia still only hosts 5% of regional HQs, with most still located in the UAE or Bahrain due to their more transparent legal systems, business-friendly regulatory systems and more relaxed social environments.

“Transition from the existing legal framework is likely to be hindered by institutional limitations, indicating the likelihood of delays slowing the application of the planned new legal structures,” he says.

But with the country on a mission to publicise as a tourist and investment destination, the invite is still open.

“I think a lot of the challenges that remain for foreign investors is perception. Once people visit, they usually leave surprised. Just come and see for yourself,” Mr Alhashem says.

This article first appeared in the April/May 2022 print edition of fDi Intelligence.