Saudi Arabia’s new regional headquarters regulation takes effect: What will be its impact?

The decision, which could see foreign firms risk losing out on government contracts, came into effect on Monday

FILE PHOTO: Cars drive past the King Abdullah Financial District, north of Riyadh, Saudi Arabia, March 1, 2017. REUTERS/Faisal Al Nasser/File Photo
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Saudi Arabia's regulation for foreign companies to set up regional headquarters in the kingdom will support the country's non-oil economy and improve job creation in the Arab world’s largest economy, according to analysts.

The regulation, which requires firms to set up a local base in the kingdom or risk losing out on government contracts, came into effect on Monday.

However, companies with foreign operations not exceeding one million Saudi riyals ($266,000) can operate in the kingdom without local headquarters.

“We project robust non-oil growth of 5 per cent in 2024, the highest in the GCC, on a continued broad-based expansion of the non-oil economy,” Carla Slim, an economist at Standard Chartered Bank, told The National.

“The headquarters regulation coming into effect adds impetus to the recovery – which has extended beyond a cyclical post-pandemic recovery on the many structural reforms implemented under Vision 2030.”

Saudi Arabia is aiming to increase foreign direct investment as part of its Vision 2030 agenda to diversify its economy away from oil. The kingdom hopes to have 480 global companies establish headquarters in the kingdom by 2030 amid efforts to improve economic output.

In October 2021, 44 companies received government licences to set up headquarters in the country. The companies that had already relocated their regional headquarters by then included PepsiCo, DiDi, Unilever, Siemens, KPMG, Novartis, Baker Hughes, Halliburton, Philips, Flour, Schlumberger, SAP, PwC, Oyo, Boston Scientific and Tim Hortons.

The regional headquarters programme, an initiative by the Ministry of Investment and the Royal Commission for Riyadh City, aims to attract multinational companies by offering a range of benefits and premium support services including a 30-year tax break.

“The law has the potential to benefit every sector including real estate, financial services, tourism and communications, and establish Saudi Arabia as a regional powerhouse with established industries that provide employment opportunities to the locals and result in an all-round development of the economy,” Junaid Ansari, director of the investment strategy and research at Kamco Invest, said.

Several companies have already announced their plans to relocate to the kingdom, including GE Healthcare, Bechtel, Huawei, ABB and Schneider Electric, as part of their regional expansion plans.

PwC has more than 2,300 employees in the kingdom, with Saudi citizens accounting for more than 56 per cent of the team. That group comprises 33 per cent Saudi women.

That shows it is "deeply invested in nurturing local talent and supporting Saudi businesses”, said Riyadh Al Najjar, Middle East chairman of the board and Saudi Arabia's country senior partner at PwC Middle East.

The programme has licensed more than 200 companies since 2021, according to the kingdom's Ministry of Investment.

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GE Healthcare, which also set up its regional headquarters in Riyadh under a new leadership team, is "committed to take the lead in addressing the diverse healthcare needs of the kingdom of Saudi Arabia", said Mohammad El Khoury, the company's general manager of Saudi Arabia.

"The country’s ambitious Vision 2030 will see a dynamic restructuring of its health sector ... and we are more than eager to step up to the occasion and bring our cutting-edge technology and AI-powered data-driven solutions into play."

The relocation of companies to the kingdom "is expected to contribute to economic diversification, aligning with the objectives of Saudi Vision 2030, and potentially fostering more stable and sustained economic growth,” said Arun Leslie John, chief market analyst at Century Financial.

“Saudi Investment Minister [Khalid Al-Falih] estimated that relocating regional headquarters could create up to 50,000 new jobs in the first year. Additionally, the establishment of regional headquarters is predicted to spur job creation across diverse professional fields, injecting vitality into the employment market.”

Employment opportunities for Saudi nationals and foreigners continued to rise in the kingdom amid diversification efforts, with the unemployment rate declining annually in the third quarter of 2023 due to a higher employment rate among women, the latest government data shows.

Foreign direct investment inflows into the kingdom are also expected to rise as more companies relocate to Riyadh.

“It is projected that relocating regional headquarters could attract $100 billion in foreign direct investment by 2030,” Mr John said.

“The directive also holds the promise of enhanced market access, providing local businesses with valuable expertise and support, potentially improving their competitiveness and opening new avenues.”

The demand for office space and residential properties is also expected to increase in the kingdom, supporting construction and other related sectors.

The rise in business travel and relocation will benefit hotels, airlines and travel agencies, according to Yusuf Mansawala, chief market analyst at CPT Markets.

Logistics and supply chain-related sectors are also expected to benefit.

However, challenges remain. The influx of companies and personnel may necessitate rapid infrastructure development and talent acquisition strategies, said Mr Mansawala, adding the kingdom must focus on establishing a transparent and efficient regulatory environment for sustained growth.

“The relocation of regional headquarters to Saudi Arabia presents a promising opportunity for economic growth and diversification. However, the success of this initiative hinges on effectively addressing infrastructure, talent and regulatory challenges,” he said.

Updated: January 04, 2024, 7:15 AM