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THE ECONOMIC ROLE OF SMALL AND MEDIUM ENTERPRISES IN THE
REDUCTION OF UNEMPLOYMENT AND INFLATION
IN THE KINGDOM OF SAUDI ARABIA
MAMOUN KHALAF HALAHLEH

Assistant Professor, Department of Business Administration, Aljouf University, Jouf Skaka, King of Saudi Arabia

ABSTRACT
Small and medium enterprises in the Kingdom of Saudi Arabia are considered to be of great importance for their
contribution to economic activity, as they operate side by side with large companies but are of no less importance, as they
accommodate large numbers of workers and thus contribute to reducing unemployment.
Small and medium enterprises face problems in the process of raising funds and some legal challenges for
obtaining capital to start operations, especially as commercial banks are sometimes reluctant to fund high-risk ventures; the
study found that small and medium enterprises contribute significantly to the reduction of unemployment and increase
economic development in the Kingdom without affecting inflation.
KEYWORDS: Economic Role, Small and Medium Enterprises, Unemployment, Inflation
INTRODUCTION
Small and medium enterprises are considered to be the cornerstone of the process of economic and social
development, due to their positive economic repercussions on the national economy in creating new job opportunities and
progressively building the size of their investments as well as their efforts in maximizing added value, increasing sales
volume and playing an effective developmental role in terms of their integration of economic activities with large
institutions. Their vital role appears to be the achievement of economic and social development in that they represent about
80% to 90% of the total operating businesses in most countries of the world.
Most petroleum-producing countries in the Gulf region have been successful in launching a large number of
initiatives for small and medium enterprises, in order to protect their economies from an eventual decline in petroleum
production, but Saudi Arabia has lagged behind in the catch-up, even though it continues to occupy first place among
petroleum-exporting countries in the world. However, the surplus profits resulting from the dramatic rise in petroleum
prices in 2007 led to the realization that the sector of small and medium enterprises represents varied opportunities and
could become self-sufficient in itself in the future and also led to the realization that in order to grow, the sector requires an
improved framework of financing, regulations and legislation.
Although the year 2009 witnessed a global lending crisis, a drop in petroleum prices and economic recession,
experts predicted the return of growth during the year 2010, which should nearly reach the growth rates of the years before
the outbreak of the crisis. The competitive advantages of the Kingdom of Saudi Arabia, with a population of nearly
25 million people, an average per capita income of over 20,000 USD and a high demand for products and services resulted
International Journal of Business
Management & Research (IJBMR)
ISSN(P): 2249-6920; ISSN(E): 2249-8036
Vol. 4, Issue 3, Jun 2014, 105-110
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106 Mamoun Khalaf Halahleh

Impact Factor (JCC): 4.9926 Index Copernicus Value (ICV): 3.0
in the sectors of banking, real estate and entertainment achieving the highest levels of growth. Although these sectors
experienced a period of slowdown in the year 2009, they were expected to return to normal during the year 2010
The Study Importance
It has recently become obvious that small and medium enterprises occupy an important position in the economy in
both the developing and developed countries. The importance of the contribution of small and medium enterprises as a
basic tributary of the economy of Saudi Arabia has also become clear through the employment of qualified personnel and
the increase in the productive capacity of the country. In addition, they help to create balanced economic development by
diversifying the resources of the Kingdom instead of relying entirely on the petroleum sector.
Questions of the Study
What is the contribution of small and medium enterprises to the reduction of unemployment in the Kingdom of
Saudi Arabia?
What is the contribution of small and medium enterprises to the economic development of the Kingdom of Saudi
Arabia?
Hypothesis
The present study seeks to explore the following hypotheses:
The First Hypothesis: There is a relationship between the number of small and medium enterprises and the
reduction in unemployment and inflation.
The Second Hypothesis: There is a relationship between the small and medium enterprises and increases in
national production.
The Concept of Small and Medium Enterprises
There are multiple concepts although there is no an agreed-upon definition because the concepts differ from one
country to another, since from the legal point of view, they are placed in a different framework from that in another
country, however, in Saudi Arabia, the law classifies them in the framework of the size of their capital resources
Reality of the Sector of Small and Medium Enterprises in the Kingdom of Saudi Arabia
Saudi Arabia has a total of 500,000 small and medium enterprises, constituting 93% of all enterprises in the
country.
The reports of the Hong Kong and Shanghai Banking Corporation (HSBC) indicate that small and medium
enterprises in Saudi Arabia are among the most trusted enterprises in the Middle East and North Africa, and most of them
were expecting an increase in both productivity and profits in the year 2010 and onwards.
The petroleum sector and the associated services sector represent about 45% of the total revenues of the country,
55% of gross domestic product, and 90% of export earnings. The Kingdom of Saudi Arabia ranks sixteenth in the Annual
Report of the World Bank on "Doing Business", a considerable advance compared with its rank of 67th three years ago.
Religious tourism, which is mainly based on the annual Hajj, brought in about 12 million visitors in the year 2008,
which is an increase of 34% since the year 2006.
The Economic Role of Small and Medium Enterprises in the Reduction of Unemployment and 107
Inflation in the Kingdom of Saudi Arabia

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Advantages of Small and Medium Enterprises
Addition to their ability to produce and work in the different fields of industrial and economic development;
provide job opportunities at low investment costs due to the simple productive skills used because the methods of
production are intensive but have low capital requirements, as well as modest qualifications of the labor required,
which enhance their role in the absorption of the unemployed, who are characterized mostly by low educational
and professional levels, especially in the developing countries;
Spread positive industrial values in society through the capacity development of certain crafts and skills;
Utilize citizens savings and put them to productive use in various fields of investment, instead of squandering
these savings in consumption;
Maximize the use and exploitation of locally available raw materials for the production of finished goods that
contribute to meeting the needs and tastes of consumers, in addition to the ability of these enterprises to produce
handicrafts and food commodities and small and medium consumables obtained from abroad; this helps to bridge
the gap in the demand of the domestic market for these goods, thus contributing to the reduction of the deficit in
the balance of payments;
Cover domestic demand for products for which it is difficult to establish a large-scale industry to produce them
due to the narrow scope of the domestic market as a result of low per capita income, or due to the limited size of
capital accumulation, especially in developing countries.
CONCLUSIONS
Results of Hypotheses
First: Unemployment: In spite of the increasing number of small and medium enterprises, the unemployment
rate has not changed due to the financial crisis, during which the unemployment rate did not change much from
2007 to 2010 and remained around 10% to 11%. Table 1
Second: Inflation: We found that the size of small and medium enterprises has a significant impact in this area,
as inflation was 9.9% during the year 2008 and then dropped to 5.3% during the year 2010; we found a significant
relationship in the impact of small and medium enterprises on lowering inflation. Figure (2)
Third: Gross National Product: We found that the size of small and medium enterprises had a significant
impact in this area, as GNP was 0.1% during the year 2009, and then increased to 4.1% during the year 2010;
we found that there is a significant relationship in the impact of small and medium enterprises on increasing the
gross national product.
RECOMMENDATIONS
It is necessary to focus on small and medium enterprises because they are able to absorb unskilled or semi-skilled
labor, which constitute a large proportion of the labor force in developing countries and at a relatively low job
opportunity cost when compared with large- scale enterprises.
Small and medium enterprises lead to the participation of all segments of society in the economy through the
processes of saving and investment; by directing small savers towards investment and capital mobilization in
small and medium enterprises, instead of towards consumption, increased savings will be the result.
108 Mamoun Khalaf Halahleh

Impact Factor (JCC): 4.9926 Index Copernicus Value (ICV): 3.0
Small and medium enterprises can be considered as an effective mechanism to combat poverty and destitution
through their availability for men and women to become small investors.
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The Economic Role of Small and Medium Enterprises
Inflation in the Kingdom of Saudi Arabia

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Table 1: Unemployment, Inflation a
Year
Indicators
Unemployment
Inflation
Gross National Product


nd Medium Enterprises in the Reduction of Unemployment and

Organization. Financing Social Protection Report of the
January 2004.
Programmes. Website: www.smecorp.gov.my 2006.
Economic Information: 2007, VOL.396.
World Economic Outlook, Sept., 2005, pp. 205, 206,
muenchen.de/
, Inflation and the Gross National Product in the Kingdom
Year
2007 2008 2009 2010
Indicators
Unemployment 11.0% 10.0% 10.5% 10.5%
4.1% 9.9% 5.1% 5.3%
National Product 2.0% 4.2% 0.1% 4.1%

Figure 1
Figure 2
Figure 3
109
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International Social Security
206, 214.
he Kingdom of Saudi Arabia
2010
10.5%
5.3%
4.1%