Kingdom’s new rule on regional headquarters ‘adds impetus’ to growth
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 1 million Saudi riyals ($266,000) can operate in the kingdom without opening 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, 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 the number of global companies opening regional headquarters will reach 480 by 2030.
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 of the
Ministry of Investment and the Royal Commission for Riyadh City, aims to attract multinational companies by offering a host 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 allround 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.
The programme has licensed more than 200 companies since 2021, according to the
Ministry of Investment. “The relocation is expected to contribute to economic diversification, aligning with the objectives of Saudi Vision 2030, and potentially fostering more stable and sustained economic growth,” Arun Leslie John, chief market analyst at Century Financial, said.
“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 Saudis and foreign residents 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 showed.
The flow of foreign direct investment into the kingdom is 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 Saudi Arabia, 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.
“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.
The regulation requires firms to set up a local base in the kingdom or risk losing out on government contracts