Carrots and Sticks

In December we published a blog post about the Saudi government's campaign to attract international companies to set up regional headquarters in Riyadh. Having presented the "carrots" such as 0% corporate tax, procurement preferences, and enhanced lifestyle projects, now the "stick" is revealed. Earlier in February, Saudi announced that the country intends to cease dealing with businesses who have their regional hubs outside of the Kingdom from the end of 2023. So is this the start of a regional investment 'arms race' as some believe or simply Saudi's turn to apply some pressure alongside the incentives?


In general this position is not without precedent in the region. In most cases, where the appropriate legal structure exists, regional governments will only award direct contracts to multinationals via a locally registered operation. Abu Dhabi, Qatar and Dubai have all enforced various versions of this as they accelerated their development with the help of international businesses. Even in Saudi itself, companies bidding for large scale contracts with Saudi Aramco have been expected to invest in tangential projects such as TechnoValley. Where the Saudi announcement differs is in the insistence that the Riyadh operation be a 'regional hq'. What, if any, criteria is applied to qualify for this status will likely determine whether this policy will end up delivering real economic impact or simply generate prestige for the Kingdom.


Currently Dubai is the pre-eminent location in the GCC for regional headquarters and operational hubs, but it hasn't always had that title. Its relentless focus for the last two decades on creating a business-friendly, globally connected and liveable environment has paid huge dividends. This has been mainly at the expense of Bahrain, which for the second half of the 20th century was seen as the international business hub of the Gulf. Essentially, Dubai's position has been won through incentives rather than coercion and its success, whilst not guaranteed in the future, will be hard for Saudi to genuinely challenge over the next decade from its current situation. That it has the ambition is not in doubt, as illustrated in our previous post but, with none of its neighbours standing still, the Kingdom will need to make huge strides to catch up. Without sufficient numbers of good schools, hospitals, a reformed legal system and genuine gender-equality it will not be able to compete.


What we believe to be the most likely outcome is Riyadh being able to claim some success with a high number of nominal relocations and a lower number of genuine 'warts and all' moves. Businesses will afix the status of 'Regional HQ' to their new operation in Riyadh, whilst maintaining larger operations in existing locations. Dubai will likely retain its status as the most attractive location in the region with a more rooted expat population and well established overall offering whilst Abu Dhabi will more likely feel the heat from Saudi as it also operates a similar model.



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