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Saudi Arabia approves 100% foreign ownership rules e Saudi Arabia’s cabinet has approved rules governing foreign ownership of retail and wholesale businesses in the Kingdom. The regulations, which were first discussed last year, allow foreign investors to own 100% of retail and wholesale businesses in the country. Earlier, the ownership ceiling for foreigners was set at 75%. This initiative is aimed at attracting more regional and international brands to Saudi Arabia, creating more jobs, and boosting non-oil revenue. This has raised concerns regarding the sustainability of the business model of Saudi retailers. e Real estate is key to entering a market: unlike its peers, Al Hokair enjoys favourable access to prime locations in well-located shopping malls owned by its parent shareholder, Al Hokair Group. Fashion retailers such as Inditex continue to compete for good-quality real estate in shopping centres and on high streets. e — Jarir and Extra are more vulnerable to the entry of international retailers such as Apple as barriers of entry are very low for consumer electronics and appliances. Furthermore, the government emphasis on developing tourism and family entertainments (Six Flags, Sea World) represents a potential threat to Jarir and Extra’s business models which still play an ‘entertaining’ role in Saudi Arabia. e — Such initiatives would result in (1) reducing the number of stores; (2) a rapid modernization of the sector; and, (3) a significant increase in labor productivity by adopting merchandising best practices. Rationale for liberalization The rationale for permitting FDI in retail trading is (1) attracting investments in production and marketing; (2) improving the availability of such goods for the consumer; (3) encouraging increased sourcing of goods from Saudi Arabia; and, (4) enhancing competitiveness of Saudi enterprises through access to global designs, technologies and management practices. Typically, global retailers follow a 100%-ownership business model, which explains their reluctance to establish their presence in Saudi Arabia because of the restrictive policy environment. This has been reflected in the little amount of FDI received in the Saudi retail sector. However, we do not believe that such decision will provide foreign investors more ability to have control of a company as the current ownership ceiling of 75% already allows them to pass both ordinary and special resolutions. Key opportunities of 100% foreign ownership initiative: We perceive several opportunities emerging from such an initiative: 1) Capital infusion: FDI is one of the major sources of investments for a developing country like Saudi Arabia wherein it expects investments from multinational companies to improve economic activity, create jobs, share their expertise, back-end infrastructure and research and development in the host country. 2) Boost competition and dampen inflation: the entry of the many multinational corporations will promise intense competition between the different companies offering their brands in a particular product market. This will result in availability of many varieties, reduced prices, and convenient distribution of the marketing offers. 3) Improvement of supply chain: Improvement of supply chain/distribution efficiencies, coupled with capacity building and introduction of modern technology will help arrest wastages, particularly in the food supply chain. OS Merrill Lynch GEMs Paper #26|30 June 2016 61 HOUSE_OVERSIGHT_016171