De-Risking SME Investment in Saudi Arabia: A Strategic Shift Towards Economic Maturity

Summary

On 12th January at the sidelines of the Standard Incentives for the Industrial Sector program, Saudi Minister of Investment Khalid Al-Falih discussed a new initiative focused on de-risking investments for international small and medium-sized enterprises (SMEs). This marks a significant shift in the Kingdom’s economic strategy and outlook, aiming to attract international SMEs and strengthen domestic enterprises. This reflects a maturation of understanding of economic development patterns that are demonstrated in advanced economies and perhaps a future indication of economic plans following Vision 2030. These developments are of particular interest to UK SMEs and, when considering trade barriers, show that positive change is occurring at an increasingly rapid rate in the Kingdom. If you or your company have any thoughts or concerns with trade in the Saudi market, please consider taking part in SBJBC’s Barriers to Trade project that was launched with a comprehensive survey in January.  

Understanding De-risking in the SME Context

De-risking encompasses the systemic reduction of risks associated with lending to or investing in small and medium enterprises. For SMEs, which are traditionally considered at higher risk due to their limited resources and greater vulnerability to market fluctuations, de-risking is crucial for sustainable growth and development. The process involves comprehensive risk assessment, diversification strategies, enhanced financial support mechanisms, and capacity building initiatives. If Saudi Arabia can provide stronger financial instruments such as credit guarantees or insurance options to protect against unforeseen losses, this may reassure international SMEs that the Kingdom is a potential market for entry. 

De-risking SMEs can help them attract investment, secure loans, and achieve sustainable growth, contributing to stronger overall economic growth for Saudi Arabia. This is in light of the Kingdom attracting large multinationals but, when looking to Germany and France, recognizing the need to encourage SMEs to enter the market and bolster the Saudi economy. 

Mentioning the contribution of SMEs to various European economies such as Germany, where they may contribute 80% of GDP, the Minister indicates possible adjustments to the Vision 2030 plan for SMEs to contribute 30% to the Kingdom’s economy. The importance of SMEs to mature economies is becoming increasingly apparent to Saudi Arabia and this positive development represents a significant opportunity for British SMEs to look towards this vital international market. 

Strategic Value Chain Integration

Value chains refer to the range of activities businesses undertake to bring a product or service from conception, design, production, and delivery. This includes stages like inbound logistics with the receiving and storing of raw materials, operations that transform raw materials into the final product, and outbound logistics with the distribution of the product to customers. Value chains also include marketing and sales as well as providing after-sales support. Each step in the chain adds value to the product and the value chain is critical for understanding how value is created and captured, helping businesses identify areas for improvement and innovation. 

The de-risking initiative recognizes the crucial role of SMEs in global value chains. By reducing risks associated with SME operations, Saudi Arabia aims to strengthen the entire economic ecosystem. This approach acknowledges that robust value chains require reliable SME participants at every stage, from inbound logistics to after-sales service. The initiative particularly focuses on enabling SMEs to provide more consistent inputs, maintain higher quality standards, and integrate more effectively into global value chains. A secure environment also permits SMEs to invest more in innovation, enhancing value chains further while de-risking can also allow SMEs to access broader markets. Through mitigating risks, Saudi Arabia will encourage SMEs to become stronger and more competitive actors in their own respective value chains. This will contribute to the overall resilience and efficiency of the entire system and shows an appreciation by the Kingdom that SMEs can fill value chains more efficiently than larger companies.

Other impacts will be supply chain integration, encouraging more reliable supplier relationships between UK and Saudi businesses, better inventory management, and production planning. Additionally, de-risking has the goal of encouraging more Saudi-UK SME relationships and making collaboration on joint projects or innovations easier. This will lead to a smoother flow of technical expertise and a rise in best practices.  

Saudi Arabia’s Strategic Implementation

This initiative was sprung at the same time as announcements that the Kingdom has committed SR10 billion ($2.66 billion) to activate standardized incentives for the industrial sector. The investment reinforces Saudi’s commitment to fostering a business friendly environment through multiple channels. 

Saudi Arabia aims to help with matchmaking international SMEs with Saudi investors, making it easier for these SMEs to secure funding and find a secure footing. Alongside this, potential de-risking mechanisms like establishing dedicated SME credit bureaus would improve lending assessments that might be enhanced by creating a government-backed loan guarantee scheme designed for international partners. Improving access to credit and capital will greatly support new innovation and speed up the entry into the market for international SMEs. 

Other potential mechanisms that the Kingdom could look towards are streamlining the business registration process, simplifying both the tax and regulatory framework, and reducing the need for international SMEs to require a significant investment in legal advice. 

Learning from Developed Economies

Khalid Al-Falih’s reference to developed economies like Germany reveals several important insights into the Kingdom’s strategic thinking. Firstly, using European economies where SMEs form the backbone of industrial capability is particularly telling as these nations are known for high-value manufacturing, innovation, and technical expertise. Using these economies as a benchmark and not countries like India or China, suggests they’re aiming for quality over pure scale for their economic output. 

Secondly, it shows Saudi Arabia is looking to emulate advanced industrial economies rather than emerging market models. In the UK and France, SMEs contribute around 50% of GDP while in other economies this figure is far higher with SMEs in Italy, Spain, the Netherlands, and Germany contributing anywhere from 60-70% of GDP. This understanding demonstrates that Saudi Arabia is aiming for sustainable industrialization that requires a strong SME base and indicates a desire to move up the value chain rather than compete on cost per unit. This is also a recognition that innovation often stems from specialized SMEs rather than just large corporations. 

Thirdly, encouraging international SMEs to enter the market in greater numbers is a recognition of increasing economic maturity. It’s an understanding that a robust private and SME sector is a hallmark of developed economies and that reliance on large state enterprises or multinationals alone is not sufficient nor sustainable. Across OECD countries, SMEs typically make up 99% of firms in an economy on average, a statistic that is represented across the UK, French, German, and Italian economies. Economic sophistication is directly linked to having a diverse business ecosystem and greater SME density is aimed at correlating with economic resilience. 

Finally, this initiative represents a policy direction signal. It suggests that the Kingdom is likely to implement policies similar to those used in European economies to support SMEs and may indicate a future focus on technical education and vocational training. This is common in countries like Germany where SMEs not only employ roughly 60% of the workforce but also support 82% of apprenticeships, essential for supporting a skilled and educated population to generate high-value goods and services. It may also point to the potential development of specialized financing mechanisms for SMEs and this may lead to a greater emphasis on industry clusters and specialized regions similar to what Saudi Arabia already has set up in their special economic zones. 

Benefits for International SMEs

The initiative presents an opportunity for international SMEs, particularly those from the UK, to more easily access this rapidly growing economy. The benefits may include reduced transaction risks, more predictable payment cycles, and simplified due diligence processes. The program specifically aims to facilitate knowledge transfer and technical expertise sharing between international and local Saudi forms to create mutual growth opportunities.  It will also help reassure SMEs that typically only operate in their own domestic economy, or within Europe to explore new markets. 

By reducing the risks, Saudi Arabia lowers the barriers to entry and allows SMEs to explore an unfamiliar market with greater confidence. A key benefit for UK SMEs is reduced transaction risk. Facing lower risks when engaging in business transactions with Saudi counterparts through more predictable payment cycles and contract fulfilment will inspire confidence in new operations. Market access is critical so simplifying the due diligence process will ease the establishment of new business relationships, as will encouraging more direct business relationships rather than requiring intermediaries or sponsors. 

Long-term Strategic Implications

A de-risking initiative in some ways signifies more than just economic diversification; it represents a fundamental shift in the Kingdom’s approach to economic development and maturity. The focus on supporting SME growth indicates a move away from a reliance on Giga projects and state-led development towards a more organic and bottom-up economic growth model. This shift acknowledges that true diversification requires thousands more smaller, specialized businesses rather than a reliance on large corporations. Furthermore, it shows an understanding that SMEs are often more effective at creating specialized products and services while typically being more adaptable than large corporations. Creating a more resilient economic fabric is an essential role for SMEs and one that Saudi Arabia requires to protect themselves against oil price fluctuations and economic uncertainty.  

In the theme of economic diversification under Vision 2030, de-risking SMEs serves to further reduce the dependency on oil revenue while simultaneously developing knowledge-based industries. In line with this, greater international SME involvement will create a more dynamic and mature private sector, fostering greater competition and ideally bettering technological advancement through innovation.

International business will create additional jobs for Saudi nationals, moving the country away from employment opportunities based primarily in the public sector. In France, Germany, the UK, and the Netherlands, SMEs account for about 60-65% of employment while in Italy this can be as high as 80% of employment. Currently, in Saudi Arabia, SMEs account for 45% of employment. SMEs typically create more jobs per unit of invested capital than large corporations while being more efficient at knowledge transfer due to closer working relationships with other SMEs. Greater innovation and competition will foster entrepreneurial skills in the Kingdom, building a skilled workforce.

In line with private sector growth, joint ventures between international and domestic SMEs will strengthen domestic supply chains, develop the export capabilities of the Kingdom, and build international business networks allowing Saudi Arabia to enjoy the benefits of globalization. Together, this will demonstrate market openness and a business friendly environment, boosting international confidence in the country and nurturing long-term business relationships that exist across the developed world. 

Advantages of Saudi Arabia for UK SMEs

Saudi Arabia presents several unique advantages for UK SMEs to operate there compared with the UK. As an example, UK businesses suffer from high energy prices whereas in Saudi, energy costs are very low which will benefit energy intensive SMEs such as those within the tech or manufacturing sectors. Moreover, UK markets are far more saturated than in Saudi, allowing UK SMEs to enjoy less competition and providing early operators the chance to claim a greater market share in the Kingdom. Lower levels of tax make Saudi an appealing economy to be based in and the geographical position of the country opens up many more surrounding markets to export opportunities. This may help the UK, which is still struggling to find its place amongst its regional markets following the fallout from the EU exit. 

Where there are still challenges in Saudi Arabia, rapid advancements are being made to rectify them. For now, issues surrounding late payment, obtaining finance, and regulations may be potential trade barriers but this initiative indicates that the Kingdom is looking to review these issues. 

Conclusion

A de-risking drive is an announcement that British SMEs pay close attention to. Saudi Arabia’s SME de-risking initiative represents a sophisticated understanding of economic development patterns seen in developed economies such as Germany and the UK. By fostering an environment that supports both domestic and international SMEs, the Kingdom is laying the groundwork for a more resilient, diversified, and sustainable economic future. The fresh plan will encourage SMEs to collaborate with local Saudi firms, fostering innovation and shared growth while strengthening critical value chains. The de-risking should ideally offset an SMEs lack of credit history, limited ecosystems, and increased costs of production. The approach not only supports Vision 2030’s objectives but positions the Kingdom as an increasingly attractive market for international SME investment and collaboration. 

The Saudi British Joint Business Council is looking to support UK SMEs and businesses by announcing a new barriers to trade project. This project, through a comprehensive survey and report, will look to identify trends and crucial insights from first hand accounts of UK businesses operating or looking to enter Saudi Arabia. The results will add to the current constructive dialogue and encourage long-term change and discussion about continuous improvement in the Saudi business environment. To take part in this survey, please contact robert@sbjbc.org for more information.