Small businesses are a critical asset for every country since they have a beneficial effect on the economy. They also have a positive influence on unemployment by creating additional jobs. However, in some countries, small business owners face challenges due to economic, political, or legislative factors. Addressing these barriers can help countries to become more prosperous and develop entrepreneurship. The present paper will consider the environment for small businesses in Saudi Arabia, including the challenges they experience, their importance to the country’s economy, and their role in reducing unemployment.
Challenges Faced by Small Businesses in Saudi Arabia
While most countries create and implement strategies to assist businesses and corporations in their development, a small business might experience unique problems that require a more targeted approach. In Saudi Arabia, there are several critical factors that impede the growth of small businesses and cause them to fail. First of all, small businesses in Saudi Arabia often experience financial challenges related to obtaining funds for starting and operating a company (Al-Ghamri, 2016a). Many small business owners in Europe and the West rely on loans and government subsidies for financial assistance. In Saudi Arabia, mechanisms for the financing of small businesses are often ineffective, and many entrepreneurs opt to enter a different career in order to be able to support their families (Al-Ghamri, 2016a). For example, a recent report suggests that the loan program for small and medium enterprises (SMEs), developed by the Saudi government, focuses on businesses in the construction industry, with a low share of funds available to entrepreneurs in other sectors (Jeddah Chamber, 2016). Given that most small enterprises are shops, workshops, or service companies, this program is ineffective in providing financial assistance for small business development.
The second factor that has a significant influence on the success of small businesses in Saudi Arabia is inadequate knowledge of business and management processes among potential entrepreneurs. A study by Al-Ghamri (2016a) shows that many small business owners do not have adequate knowledge of accounting, management, and leadership, which leads to poor business performance. In addition, those who consider starting a small business might hesitate to do so because of these knowledge gaps. Educational programs and business and management are present in Saudi Arabia. However, they are often expensive, provide low quality of education, or are located in large cities (Al-Ghamri, 2016c). Thus, these programs are inaccessible to rural residents who do not have a high household income.
Another significant factor influencing the success of small businesses is competition. Al-Ghamri (2016a) notes that markets in Saudi Arabia are saturated with low-cost products from Chinese manufacturers, making it harder for local entrepreneurs to succeed. This shows that the government lacks an effective mechanism of encouraging domestic market growth by limiting imports or providing funding to allow small local businesses to offer competitive prices on products. Establishing this mechanism is essential to enabling the growth of small businesses and improving their contribution to the economy.
Lastly, the factor of gender inequality in Saudi Arabia also plays a substantial role in impairing small business development. As shown by Al-Ghamri (2016b), women in Saudi Arabia face more challenges than men while trying to start and run a business. In particular, they experience restrictions in terms of business activity in specific sectors and usually lack financial independence from male family members, which prevents them from starting a business (Al-Ghamri, 2016b). Female owners of existing businesses also face the risk of having their business taken away by their husband, father, or son (Al-Ghamri, 2016a). Reducing discrimination against women in Saudi Arabia and improving the range of opportunities available to them would have a positive impact on the growth of small businesses.
The Importance of Small Businesses for the Economy
Small businesses are necessary for economic growth as they contribute to the gross domestic product (GDP), reduce unemployment, and contribute to government funds through taxes. Small businesses also improve infrastructure in rural areas by providing services and products to populations. Partnering with small businesses in construction and other projects enables the government to reduce expenses and create new jobs, thus also supporting the economy. These positive influences are particularly evident in countries with a high share of SMEs in various industries. In Saudi Arabia, there are almost two million small and medium enterprises that operate in areas such as construction, retail, manufacturing, and services (Jeddah Chamber, 2016). The large number of SMEs means that the contribution of small businesses to the economy of Saudi Arabia is significant. Indeed, SMEs constitute 33% of the country’s GDP and provide 25% of all jobs available in the country (Jeddah Chamber, 2016). Although tax rates for small businesses are rather low, the large number of such enterprises means that their role in economic growth and development is critical.
Unemployment: Problem and Solutions
Unemployment is a significant issue in Saudi Arabia that impacts the well-being of its citizens and limits economic prosperity. In 2018, unemployment in the country reached a record high of 12.9% (Torchia, 2018). Such a high level of unemployment is dangerous for the economy since it impacts the growth of industry and limits the number of people who pay taxes. One potential solution to the issue that is currently used by the government is to encourage companies to hire Saudi citizens, thus limiting the recruitment of foreign employees. This policy has an apparent effect on international companies in the region, which usually prefer employing international specialists.
Another possible solution to the issue is to provide more support for small businesses, thus encouraging their growth and development. Because small and medium enterprises already employ a significant number of Saudi nationals, an increase in the number of SMEs would assist in reducing unemployment. In particular, the government should focus on providing financial assistance and education to prospective entrepreneurs, as well as lowering gender discrimination to improve employment rates among women.
All in all, small businesses are crucial to the economy of Saudi Arabia since they improve employment rates, contribute to taxes paid, and add to the country’s GDP. Nevertheless, small business owners face a number of serious challenges that force them to close their business or impair profitability. The key problems identified in the research are the lack of education in business management, financial constraints, gender discrimination, and competition from foreign companies. It is recommended that the government addresses these barriers, thus helping small businesses to grow in size and number and contribute more to the economy. This goal could be achieved by improving the availability of education programs in business management, enhancing the range and scope of financial assistance programs, and controlling the business activity of foreign competitors in the region.
Al-Ghamri, N. S. (2016a). Causes of small businesses’ failure: An exploratory study within Jeddah’s governorate in Saudi Arabia. International Journal of Small Business and Entrepreneurship Research, 4(2), 1-35.
Al-Ghamri, N. (2016b). Challenges facing business women and their negative impact on the performance of small businesses in the province of Jeddah in Saudi Arabia. International Journal of Business and Management, 11(9), 96-116.
Al-Ghamri, N. S. (2016c). The obstacles facing young Saudi men and women getting jobs in small businesses sector. International Journal of Business and Social Research, 6(4), 48-68.
Jeddah Chamber. (2016). Small-medium enterprises in Saudi Arabia report. Web.
Torchia, A. (2018). Saudi unemployment stays at record high as companies struggle. Reuters. Web.