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The International Journal of Human Resource Management
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The effect of regulations on HRM: private sector firms in Saudi Arabia
Online Publication Date: 01 January 2007 To cite this Article: Mellahi, Kamel (2007) 'The effect of regulations on HRM: private sector firms in Saudi Arabia', The International Journal of Human Resource Management, 18:1, 85 - 99 To link to this article: DOI: 10.1080/09585190601068359 URL: http://dx.doi.org/10.1080/09585190601068359

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Int. J. of Human Resource Management 18:1 January 2007 85 – 99

The effect of regulations on HRM: private sector firms in Saudi Arabia

Kamel Mellahi
Abstract Since the early 2000s, the government in Saudi Arabia has undertaken the task of shaping the HRM function in the private sector through a comprehensive legal framework. Based on extensive review of published information and interviews with Saudi managers, this paper explores the implications of the emerging legal framework for HRM in the private sector, and evaluates the adequacy of changing HRM practices through laws and regulations. The paper discusses the implications of the research findings for private sector managers and policy makers. Keywords HRM; Saudi Arabia; regulations; Saudization.

Introduction Until recently, the government of Saudi Arabia adopted a lax approach to the management of people in the private sector (Mellahi and Wood, 2002). Up to the late 1990s, most of the regulations governing human resource management (HRM) in the private sector were based on a labour law dating back to 1969 (Labor Law – Royal Decree No. M/21, 1969) (Um-Alqura, 1969; Arab Law Quarterly, 2003).1 The scope of the 1969 regulations was limited to contractual issues and did not significantly interfere in the process and the way people were managed in the private sector. As a consequence, employers in the private sector had limited legal obligations towards their predominantly expatriate employees. Atiyyah (1996) reported that, in the absence of strong regulative pressure in Saudi Arabia, unscrupulous private employers treat many foreign workers unfairly, especially unskilled foreign workers. International media and non-government organizations have long claimed that the Saudi government has failed to provide adequate protection for foreign employees, especially in the private sector. Recently the BBC reported that ‘the rights of foreign workers in Saudi Arabia are being abused not only by employers but by the country’s legal system’ (BBC, 2004). In addition to allegations of abuses of foreign workers in the private sector, Bhuian et al. (2001) reported that managers in the Saudi Arabian private sector have become accustomed to a hire and fire culture and employ predominantly employees who fear authority, and work with minimum demands. Since the early 2000s, the government has introduced an extensive legal framework to regulate the management of people in the private sector. This is a result of a combination of factors, such as raising unemployment levels and external pressures. For instance, in an attempt to reduce unemployment, the Saudi government has recently introduced
Kamel Mellahi, The University of Sheffield Management School, 9 Mappin Street, S1 4DT, UK (tel: +44 (0) 114 222 3346; fax: +44 (0) 114 222 3348; e-mail: k.mellahi@sheffield.ac.uk).
The International Journal of Human Resource Management ISSN 0958-5192 print/ISSN 1466-4399 online q 2007 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/09585190601068359

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86 The International Journal of Human Resource Management several laws to force private sector firms to employ Saudis. In addition to unemployment, Saudi Arabia had been recently put under increasing pressure from international bodies such as the International Labour Organization (ILO) and World Trade Organization (WTO) to reform its labour laws with regard to the issues of social protection of workers, labour rights and work standards in the private sector. The government of Saudi Arabia approved a set of new labour laws on 26 September 2005. Soon thereafter, it was granted full membership of the WTO on 11 November 2005.2 The stated objectives of the new legal framework are to replace foreign workers with competent Saudis, create more jobs for Saudis in the private sector, regulate the management of both local and foreign workers, and improve the welfare of Saudi and expatriates working in the private sector. Also, the government intervened through the new labour laws to protect vulnerable workers, and endow workers in the private sector with basic legal rights such as the right to annual leave, health and safety measures, maximum working hours, and maternity leave and safe work environment for female employees. The appropriateness and effectiveness of government interference in HRM in other countries have generated an extensive body of research. In the US, researchers have examined the impact of the affirmative action on the employment status of minorities and protected groups (Konrad and Linnehan, 1995; Blanchard, 1989; Clayton and Tangri, 1989; Braddock and McPartland, 1987; Dobbin et al., 1994). Similar studies were conducted on the impact of gender-based quotas in Sweden (Brown and Wilcher, 1987), affirmative action in South Africa (Adams, 1993; Wood and Mellahi, 2001) and Malaysia’s New Economic Policy programme (Abdullah, 1997; Mellahi and Wood, 2005). However, to the best of the author’s knowledge, no systematic study has examined the impact and effectiveness of recent government laws to shape HRM practices in Saudi Arabia and other Gulf state countries. This paper aims to fill this gap. The primary aim of this paper is to examine the key characteristics of the emerging legal framework, and to explore its implications for HRM policies and practices in the private sector. A secondary aim of this paper is to evaluate the adequacy of changing HRM practices through laws and regulations in Saudi Arabia. The remainder of the paper is structured as follows. In the next section I briefly describe the two main approaches governments use to shape HRM. This is followed by an analysis of the macro context of HRM in Saudi Arabia with specific emphasis on the political and legal environments and labour market. This is followed by a description of the research method adopted in this study and analysis and discussion of results. The paper concludes by summarizing the main findings of the study, and suggests possible future research avenues. Governments and HRM Laws and regulations have a strong influence on organizations. Edelman and Suchman (1997) noted that ‘modern organizations are immersed in a sea of law. They are born through the legal act of incorporation, and they die through the legal act of bankruptcy. In between, . . . hire employees under labor and antidiscrimination law, . . . and engage in production under environmental, and health and safety law’. A large body of literature (see Dunlop, 1958; Botero et al., 2004; Godard, 2002; Kuruvilla, 1996; Kane and Palmer, 1995; Moon, 1991; Moore and Devereaux, 1992) suggests that governments in all countries, albeit to a varying degree, are key actors in shaping HRM policies and practices. They do so through two main approaches: hard or direct interventions in the forms of HRM laws and regulations (Kaufman, 1997), and soft or indirect interventions commonly refered to as normative approaches. Under the hard legal approach,

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Mellahi: The effect of regulations on HRM: Saudi Arabia 87 governments enact laws and regulations and expect or force organizations to obey them. There are two basic assumptions here. First, organizations would not refrain from using undesirable HRM practices unless required to do so by law. Second, non-compliance is very likely to be detected by the government. Research, however, shows that the relationship between laws and conformity is not straightforward. For instance, research shows that legal interventions in HRM are often costly, highly ambiguous and riddled with loopholes (Godard, 2002: 255; Edelman and Suchman, 1997; Stone, 1975). Edelman and Suchman (1997) noted that ‘while law creates sanctions for certain behaviours, it also creates defenses and loopholes that rational organizations may exploit to escape those sanctions’. In addition, the enforcement of laws depends largely on how employers, state officials and lawyers interpret the laws in terms of the certainty and severity of punishment for violations (Edelman et al., 1992; Berger and Luckmann, 1967). Also, organizations are not passive implementers of state laws and regulations. The extent to which organizations conform and obey state laws and regulations is influenced by a wide variety of factors, including, for example, the ability to influence law enforcers, calculating and weighing the cost of not obeying the law with the cost of conforming to it, level of public support for the law, and possible non-legal sanctions inflicted by customers and other influential stakeholders (Godard, 2002). It is worth noting that in countries where the law is viewed as more than a system of incentives and penalties but also a system of moral principles based on sacred values and symbols, organizations, when deciding whether to obey or evade the law, may not respond to it in a pure calculative cost and benefit approach (Edelman and Suchman, 1997; Scholz, 1984; Edelman, 1992). In such contexts, organizations may view the law as a moral framework that guides their activities and therefore adopt the law not in order to evade sanctions, but because they see it as a responsible and proper thing to do. Also, one would expect enforcement of HRM laws and regulations more in rule-based societies than relation-based countries such as Saudi Arabia where laws are often partially enforced and inequitably applied (Schlumberger, 2000: 250). Under the soft or normative approach, governments aim to induce and encourage the diffusion of best or desirable HRM practices, not through laws and regulations, but through a radical change in the assumptions underpinning HRM practices. Governments’ goal here is to shape the cognitive norms that guide managers’ HRM policies and practices. The aim here is to institutionalize certain desired HRM practices by influencing managers’ beliefs about what is good HRM practice and what is not. This is done by providing guidelines and incentives to induce managers to enact and implement HRM practices in accordance with the government strategy. Examples of such practices include Investors in People (IIP) awards in the UK to encourage UK firms to adopt HR policies associated with what is believed to be good HRM practice, and international quality awards, such as ISOs, as recognition for meeting certain international human resource development standards. Similar to the legal approach, the evidence on the effectiveness of the normative approach is not straightforward. The strength of the normative approach lies in winning hearts and minds of managers by emphasizing the need to change HRM practices. Its main limitation is lack of enforcement powers because firms are not legally required to adopt desirable or best practices. It is suggested that effective changes in HRM result from a combination of legal and normative approaches (Godard, 2002: 257). Understandably, the balance between the two approaches will likely vary from country to country. It should be noted that most of the work cited above was not undertaken in emerging and developing countries, and thus

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88 The International Journal of Human Resource Management by omission, the literature raises the issues of applicability or otherwise of such findings to the case of Saudi Arabia. HRM context in Saudi Arabia Political and legal contexts The political system in Saudi Arabia dates back to the 1920s, and the establishment of the Kingdom of Saudi Arabia in 1932 by Ibn Sa’ud of the House of Sa’ud. Since then, Saudi Arabia has remained an absolute monarchy, where the King is the chief figure in the government and head of State. The royal family dominates most aspects of political life. Despite a substantive introduction of formal rules-based structures in the management of the economy, personalized and idiosyncratic factors based on informal customs and judgements are still dominant in the management of both private and public organizations (Rice, 2004; Mellahi and Wood, 2002). Saudi Arabia is governed by an Islamic monarchy in which Islam makes up the civil, cultural, economic, legal, political and social fabric of the country. The Saudi Arabia judicial system is built on the fundamental assumption that the Holy Qur’an is the most suitable legal system for the country rather than any secular constitution (Saudinf.com, 2006). The Basic Law adopted in 1992 states that Saudi Arabia is a monarchy ruled by the sons and grandsons of the first king, Abd Al Aziz Al Saud and that the Holy Qur’an is the constitution of the kingdom, which is governed on the basis of Islamic law (Sharia) (The Free Encyclopedia, 2006). Sharia laws are governed by two primary sources: the Holy Qur’an and the teachings of the Prophet Muhammad (the Sunnah). Thus, the law in Saudi Arabia when it is based on Sharia is a system of incentives and penalties as well as a system of moral principles and sacred symbols. The King rules the country through a Council of Ministers. Political parties or trade unions are not allowed (Alzalabani, 2004). The King administers Saudi Arabia through Royal Decrees and Ministerial Decrees. People participate in the political life of the country through the Majlis al-Shura (Consultative Council) which enables them to voice their concerns and communicate their views to the government (see Anderson, 1991; Herb, 1990; Aba-Namay, 1993). The Majlis al-Shura consists of around 90 appointed members and a Chairman who is appointed by the King. The King, however, is the final authority to promulgate laws and determine new policies, although members of bodies such as the Majlis al-Shura may influence the King’s decisions (Al-Twaijry et al., 2003; ´ Kechichian, 2004). Ministers and heads of key departments within ministries have the power to make decisions on matters relating to their responsibilities, subject to them being consistent with Islamic principles and Royal and Ministerial Decrees (Al-Twaijry et al., 2003; Russell, 2004). That is, Royal Decrees may adopt laws and regulations that are not directly based on, but must not contradict, Sharia laws such as some aspects of labour laws, foreign direct investment laws and taxes. Labour market context and the new legal framework Four key factors shape the structure of the labour market in Saudi Arabia: high population growth; heavy reliance on foreign workers; negative stereotype of local workers; and social perceptions towards work in the private sector. First, birth rates in Saudi Arabia are estimated at around 4 per cent per annum which is considered to be one of the highest in the world (Mellahi, 2006). As a result of the high birth rates, the country has a young population with around 60 per cent of the population under the age of 21 (Mellahi and Wood, 2002). Some forecasts show that the population of Saudi Arabia

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Mellahi: The effect of regulations on HRM: Saudi Arabia 89 might increase from over 25 million in 2005 to 29.6 million in 2010 and by 2030 it could reach 46.3 million. The challenge for the Saudi government is to create sustainable employment for the increasing number of young Saudis joining the labour market. As the public sector is already saturated, the private sector has become the main, and for some types of jobs the only, sector where new jobs are created (Mellahi, 2006; Financial Times, 2000). For instance, data show that in 2002 the private sector employed around 6.2 million people representing 87 per cent of the Kingdom’s labour force, while the public sector employed around 916,000 persons representing 13 per cent of the total workforce (Mellahi, 2006). Looney (2004a) reported that the 1999–2004 Seventh Development Plan estimated that 94.6 per cent of all new job opportunities were going to be created in the private sector, compared with 4.6 in the government sector (Looney, 2004a). Second, the influx of cheap foreign labour since the discovery and commercialization of oil in the 1970s has resulted in the private sector being reliant on cheap manual labour, and often deployed in labour-intensive occupations (Mellahi and Wood, 2002; Mahdi and Barrientos, 2003). Past studies show that one of the key barriers to employment of Saudis in the private sector is the widespread belief among Saudi managers that local workers are much more expensive to hire than expatriates (see Mellahi and Al-Hinai, 2000), as put by a Saudi official in the Saudi Ministry of Planning: ‘Wages should equal the marginal productivity of labour but that in Saudi since we’ve opened the gates to imported labour, we’re talking about the marginal productivity of labour in Bangladesh’ (Economist, 2000: 47). As shown in Table 1, in 2000, the average salaries of non-Saudis relative to Saudi nationals was 33 per cent. In sectors dominated by the private sectors such as sales, services, agriculture and production the averages were 47 per cent, 30 per cent, 31 per cent and 28 per cent respectively. In addition to wage disparities between Saudis and foreign workers, private sector managers generally believe that expatriates are easier to control than local workers (Atiyyah, 1996; Lumsden, 1993). This is because expatriate workers hold work permits for a specific occupation with a specific employer and are prohibited from changing jobs without the consent of their employer or sponsor – kafeel (Longva, 1999; Wapler, 2001). Hence, labour turnover and job-hopping among expatriates does not exist (Bhuian and Al-Jabri, 1996; Mellahi and Wood, 2002).
Table 1 Average monthly wages and compensation: comparison of non-Saudi and Saudi nationals (in S.R.) (Year 2000) Main occupation Professional, technical and related work Administrative Clerical Sales Services Agriculture, animal husbandry and fisherman Production, transport, equipment operator and related work Not reported General average Non-Saudis 4758 13160 3816 2127 1261 1000 1519 2512 2354 Saudi nationals 9394 14858 6212 4537 3975 3191 5420 3963 7034 Percentage non-Saudi to Saudi 51% 88% 61% 47% 30% 31% 28% 63% 33%

Source: Calculated from data provided by the Ministry of Planning (2000), Saudi Arabia (www.planning. gov.sa/docs/107.htm) (accessed 15 August 2002).

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90 The International Journal of Human Resource Management Also, work permits in Saudi Arabia are often valid for one year, and foreign workers do not qualify for permanent residency or naturalization regardless of the length of their stay (for a study of sponsors or kafeel system in Saudi Arabia, see Wapler, 2001). As a result, ` foreign workers have very little bargaining power vis-a-vis their Saudi employers. Third, there is a widespread perception in Saudi Arabia that local workers are less disciplined than their foreign counterparts (Mellahi, 2003; Mellahi and Wood, 2001). This is exacerbated by deeply entrenched negative stereotypes of locals (Mellahi and Wood, 2002). For instance, The Economist (1997) reported that it is commonly alleged that locals will generally demand about six times the salary a skilled foreign worker would be prepared to accept and ‘will not work as hard’. Similarly, one Saudi manager, quoted in The Economist (2000: 47), asked ‘I want to hire Saudis, but why I would hire someone who I know won’t show up, won’t care and can’t be fired?’ Baxter (1998) commented that for ‘youngsters leaving school the barriers against desirable career paths are almost mythical. They will not accept jobs as salesman because this does not befit their social status; they will not take workshop jobs where there is a threat of physical danger. Low salaries are an insult. . . . the Saudi youth has too much pride to swallow’. Fourth, within Saudi Arabia the type of work, sector of employment and social interactions at work determine the social status of the person (Mellahi, 2000). Most of the jobs in the private sector are manual jobs often regarded as lower status jobs by Saudis. Also, most Saudis perceive that their pride and social acceptance are related to the type of work they do (Al-Salamah and Wilson, 2001). According to a survey carried out in 2003, 35 per cent of Saudis reported that they did not want their sons to join the private sector and that jobs other than those of an administrative nature such as technical jobs did not appeal to young Saudis nor did they appeal to their parents (Arab News, 2004a). Within the above context, the new legal framework is aiming to achieve two key objectives. The first objective is to reduce unemployment of locals by forcing private sector firms to employ Saudis and improve the work environment in the private sector to make it more attractive for them (Looney, 2004b). Second, to meet its international obligations, the government is pushing for further reforms in the private sector to meet international labour standards in terms of working conditions, social protection, and fairness and equality between foreign and local workers. In the following section, I examine the process through which the government is reforming HRM in the private sector and implications thereof on HRM policies and practices. Research method Data for this research were obtained from individual face-to-face semi-structured interviews with Saudi managers as well as secondary sources such as recent Ministry of Labor documents and announcements, and articles in Saudi Arabian major newspapers and specialized magazines. Interviewees were asked to comment about the new tendency by the government to shape HRM policies in the private sector and the characteristics of the emerging HRM model. In particular, interviews focused on the characteristics of the new legal HRM framework, the impact of the new legal framework on HRM policies and practices in the private sector, and key characteristics of the emerging HRM model in the private sector. Analysis In this section, I identify and discuss the key themes that emerged from the interviews and published data around the impact of the new legal framework for HRM, and key characteristics of the emerging HRM model.

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Mellahi: The effect of regulations on HRM: Saudi Arabia 91 The new ‘legal’ HRM context The respondents were almost unanimous in asserting that the HRM function is increasingly becoming a heavily regulated function. There was also a consensus on the key characteristics of the new legal framework governing HRM in the private sector. All but one of the respondents stated that the government is shaping HRM practices by legal regulations and very little soft or normative initiatives. One of the most discussed issues was the increasing difficulty in the employment of foreign workers. For instance, to discourage private sector firms from employing foreign workers, the government is placing legal obstacles in the path of private firms trying to recruit from outside the country. For example, while previously employers could apply for work visas in large blocks, enabling them to bring in large numbers of foreign workers at a time, according to new regulations, they can only apply for one work visa at a time with a two-month period between each subsequent application (see Alzalabani, 2002: 134 for a list of government policies to discourage private sector firms from employing non-Saudis). The new laws have also attempted to clamp down on widespread but illegal HRM practices. For instance, it is reported by the Ministry of Labor that a large proportion of work visas issued to private sector firms are sold on the black market (Arab News, 2004b). This is done through so-called ghost or paper only companies owned by Saudis specializing in importing foreign workers to work freely in Saudi Arabia for a price of around $2,000 for a visa, and further monthly payment for remaining in the country (Al-Ahram, 2004). In order to reduce visa trafficking, the Ministry of Labor has imposed a five-year ban on firms found guilty of illicit trade in work visas. In addition to the ban, an analysis of the Ministry of Labor’s publications by the author reveals that a strong emphasis is put on fines, and loss of reputation in case of non-compliance. For the first time, the government, through the Ministry of Labor, has resorted to a public name and shame policy to persuade organizations not to disregard the new legislation. For example, over the summer of 2005, the lead article of the front webpage of the ministry’s website listed names of companies that were found to scorn the ministry’s policy regarding employment of foreigners and/or employment of Saudis (Regulation No. 49 of Labor Law), and listed the restrictions imposed on these companies to deter other companies from doing the same. Management participation in the making of the law All respondents reported that private sector managers played a passive role in the formulation and/or the timing of the legal framework. While there was an extensive debate about the recent HRM laws, respondents reported that, more often than not, the debates consisted of getting private sector managers and government officials together so that the managers can be indoctrinated with the government’s view in the hope the government wins over private sector’s managers or at least reduces their opposition to it. As a result, several HRM regulations are not realistically grounded in managers’ preferences. For instance, several respondents highlighted the problem with the one size fits all approach often adopted by the government. In addition to lack of contribution to the laws and regulations, respondents emphasized the style used by the government to change HRM practices by regulations. All respondents unequivocally described the way the government is changing the HRM function: implement the law or face strict legal sanctions. Respondents saw the HRM legal framework as more of a stick to be used by the government in case of non-compliance than a carrot to encourage them to redesign their HRM policies.

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92 The International Journal of Human Resource Management Impact on HRM Data from interviews indicate that firms in the private sector are reconfiguring their HRM practices so as to meet the new legal requirements which include, for example, achieving the legal target of 75 per cent Saudization, providing female workers with maternity leave of four weeks, and six weeks after childbirth, paying 150 per cent of the regular wage for overtime work, granting all workers a minimum of 15 days vacation annually, arranging for babysitters to take care of children under the age of six for employers employing 50 female workers or more, and providing employees with 21 days minimum annual leave (for the new legal framework see The Royal Embassy of Saudi Arabia in Washington, DC, 2005). It is important to note that most respondents reported that they were adopting the new practices largely because of fear of punishment and not because they believed in the appropriateness of the new HRM practices. Indeed, several managers spoke of the possibility of going back to old practices if the government decided to abandon the new regulations and/or decided not to enforce them. Several articles in the Saudi media reported that the new regulations were costly for private sector organizations and could damage their regional and international competitiveness. For instance, Aljazeera daily quoted ten leading contractors as saying that the Labour Ministry restrictions would make contractors bankrupt (Arab News, 2004b; see also Middle East North Africa Financial Network, 2003). As put by a manager of a private sector firm ‘[such] a unilateral decision will affect business and productivity especially at a time when there is shortage of manpower to execute real estate projects worth billions of dollars’ (Arab Gulf News, 2004). It is worth noting that although the above analysis indicates that there is evidence of a clear demarcation from old HRM practices, respondents raised the issue of impartial implementation of HRM laws and regulations. They argued that the strength and widespread practice of wasta in Saudi Arabia and loopholes in the legal structures may weaken the enforcement of the laws. Wasta is a person’s ability ‘to utilize connections with people, who are both able and prepared to change the course of natural events on that person’s behalf’ (Whiteoak et al., 2006: 81). That is, people with strong wasta may rely on their connections to bend or ignore some aspects of the law. Key characteristics of the emerging HRM model The analysis of the interview data suggests that the key characteristics of the emerging HRM model are: participative decision-making style; legal rights; and workforce diversity.
Consultative decision-making style As more Saudi nationals join the private sector, there is an increasing recognition that a different approach to managing employees in the private sector is needed. Specifically, interviewees reported that human resource managers in the private sector need to be sensitive to the style of decision making that fits best with Saudi employees. For instance, historically, foreign workers’ involvement in the decision making of the firm was minimal and the owner’s decision was usually accepted without question. Respondents reported that Saudi workers, however, tend to prefer a consensual decision-making process or shura in reaching decisions. Shura is an Islamic decision-making process based on consultation (Abuznaid, 2006). It must be pointed out here that when respondents spoke of the move away from an authoritarian style to a more consultative one, they referreed explicitly to Saudi nationals. Respondents expected the new legal framework to have minimum impact on the authoritarian approach towards the management of foreign workers. Several interviewees reported that

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Mellahi: The effect of regulations on HRM: Saudi Arabia 93 there is a tendency to treat and judge Saudi workers with more leniency than foreign workers who are evaluated with stricter standards.
Legal rights and the dual HRM model All but two respondents raised doubts that the ‘equal treatment’ of Saudis and non-Saudis advocated by the government will ever be achieved. This is partly due to the fact that most foreign workers in the private sector are not aware of their rights – as most of them are not able to read or speak Arabic, and those who do may decide to sacrifice their right for fear of deportation. The Arab News noted that ignorance and fear are ‘making it easy for unscrupulous employers to delay wage payments, deny overtime and arbitrarily dismiss (foreign) workers’ (Arab News, 2005). For instance, while the Saudi law requires employers to pay 150 per cent of the regular wage for overtime work and all workers are entitled to a minimum of 15 days vacation annually, the Arab News quoted a Filipino worker saying ‘I work for hours after my shift is over, and I get no money for this, . . . I can’t complain if I’m not getting paid for my overtime work. My company doesn’t listen to what I say. I have worked here for more than two years and still haven’t had a vacation’ (Arab News, 2005). Similarly, the Saudi media have recently reported ample anecdotal evidence to suggest that while the new labour law requires employers to provide at least 30 days notice before employment contracts are terminated, work contracts of foreign workers are often terminated at short notice and sacked workers are deported shortly thereafter. Variation in the enforcement of labour laws is leading to a dual HRM model consisting of HR practices reserved for ‘protected’ Saudi workers who are paid a regular salary or wage, have training and development, are provided with promotion opportunities, and are more involved in the decision-making process. By contrast, despite the legal protection, foreign workers are provided with little or no training, hired and fired at short notice, and have little promotion opportunities or involvement in the decision-making process. Interviewees raised two major concerns over the dual HRM system. First, dual HRM policies are seen by both foreign workers and managers as violating principles of fairness because Saudis are perceived by their foreign counterparts to have received non-work, merit-based preferential treatment. This could lead to intergroup tensions and disrupt workplace relationships. Second, the preferential treatment Saudi workers obtain could stigmatize Saudi workers if foreign co-workers made negative inferences about their qualifications and competences. Diverse workplace

The workplace in the private sector is becoming more diverse because of the recent increase of Saudis employed in the sector. Diversity here refers to workgroups composed of Saudis and non-Saudis. Interviewees noted that segregation between Saudis and non-Saudis is declining in the workplace. They noted that the two groups – Saudis and non-Saudis – respond differently to different decision styles, do not share the same work habits, and seldom socialize together outside work (for differences in work values between locals and foreign workers see Ali et al., 1995). This is due in part to the fact that Saudis are raised in a society in which, from birth onwards, people are integrated into a few strong and cohesive in-groups made of families and tribes with whom they socialize and identify. Several interviewees observed that lack of socialization between Saudis and non-Saudis, especially after work, often leads the two groups to develop group-based prejudices which leads each group to draw erroneous or exaggerated conclusions about the other. Further, they asserted that issues associated with heterogeneity of the workforce, such as assumptions about how the group should function, approach to work, coupled with the disproportionate share of privilege Saudi

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94 The International Journal of Human Resource Management workers enjoy, may result in a fragmented workplace that is becoming exceedingly difficult to manage. Discussion Historically, interference by the Saudi government in the process of managing HRM in the private sector was kept to a bare minimum (Chaudhry, 1994). Employers have few legal obligations towards employees, especially foreign unskilled workers, who worked under harsh conditions, were treated unfairly by a minority of unscrupulous private sector firms, and could readily be laid off and sent home at short notice (Atiyyah, 1990). Since the early 2000s, the Saudi Arabian government stepped in to regulate the management of people in the private sector by enacting a comprehensive legal framework to increase the participation of locals in the private sector, strengthen workers’ rights, and provide provisions for weak and vulnerable segments of the labour markets such as unskilled foreign workers and women. The analysis undertaken in the previous sections provides evidence to suggest that, so far, legislation constitutes the main effort made by the government to cope with the internal (high unemployment) and external (ILO and WTO) pressures for change. The analysis also suggests that the legal intervention by the Saudi government is leading to widespread changes in HRM practices. On the one hand, the new legal framework is resulting in employment of more Saudis in the private sector, a shift towards a participative decision style for Saudi workers, and standardized HRM practices across the private sector. On the other hand, it is creating an HRM model that is dual and discriminatory in its practice; one paternalistic HRM model for Saudi nationals and another authoritarian HRM model based on tight managerial control for foreign workers. This may create tension between local and foreign workers and it will be interesting to see how organizations reconcile the two practices side by side. For instance, pursuing the two paradigms to managing local and foreign employees may produce conflicts in managing work teams. The different expectations, work habits, attitudes towards work, and feeling of entitlement for a good working environment by Saudi nationals may lead to tension between Saudi employees and non-Saudis. Given the top-down approach adopted by the Saudi government to shape HRM in the private sector, and the way laws and regulations have been communicated and implemented, the changes in HRM are occurring primarily at the ‘practice’ level where private sector managers are only meeting their formal legal obligations. For example, private sector organizations conform to the Saudization quotas because of fear of sanctions, and not because they believe that it is immoral not to do so. That is, private sector managers are not changing their basic assumptions about how to manage human resources in the private sector. The analysis provided evidence to suggest that, so far, the new legal framework has neither changed nor seriously challenged the value system underpinning old HRM practices in the private sector. As a result, private sector organizations may engage in cynical window-dressing activities by, for example, recruiting Saudis to meet the legal quotas but not necessarily involving them effectively in the organization. The results of this study highlight the limitations of changing HRM practices solely through top-down legislation, and underscores the needs for a complementary approach comprising both legal and normative approaches. This is in line with previous research that argued that attempts by governments to shape HRM policies and practices are more effective when legal regulations are complemented by normative initiatives (Godard, 2002: 257).

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Mellahi: The effect of regulations on HRM: Saudi Arabia 95 Conclusions and implications Given the exploratory nature of this study, it would be appropriate to take the following suggestions for the Saudi government and managers in the private sector with caution. First, Saudi Arabia’s accession to the WTO in 2005 means that transnational bodies such as the ILO and WTO will closely monitor Saudi Arabia’s adherence to international labour standards in areas such as safety of the working environment, fairness of employment relations system and non-discriminatory work practices. Thus, Saudi Arabia has to stamp down on several undesirable practices especially exploitation and poor treatment of labour in the private sector. However, as pointed out earlier, while the legal framework is necessary to achieve the above, it is not sufficient. This study shows that when it comes to foreign workers, there are significant discrepancies between the letter of the law and the actual practices. While the new legal framework provides weak and vulnerable foreign workers with a potentially powerful tool against unlawful exploitation and abuse by unscrupulous managers, most foreign workers are unaware of their legal rights and/or are restrained financially or psychologically from challenging their employers. One way of dealing with this problem is popularizing labour laws among foreign workers, educating them on their legal rights, and establishing legal assistance centres and agencies to provide workers with financial and legal support. Second, the analysis indicates that there is a deep-seated resistance to some aspects of the new legal HRM framework. Past research suggests that legal rules that are perceived to be unlawful and/or unfair encounter great resistance and are less likely to be supported and obeyed by managers (Edelman and Suchman, 1997). In addition to introducing laws that do not readily fit into the private sector’s ways of managing people, the government delegitimated old HRM practices without helping managers to develop new ones. Private sector organizations should not only be told what to do, but may need assistance on how to do it. Thus, we suggest that in addition to laws and regulations, the government should also appeal to the moral conscience of Saudi employers to change their HRM practices as well as make real efforts to create the necessary conditions for change to deinstitutionalize undesirable HRM practices in the private sector. Third, given the lack of tolerance for critical upward feedback in Saudi Arabia, open complaints about government initiatives are unusual. Managers in the private sector may adhere to the practice of telling the government what it wants to hear about the new legal framework and the impact it is having on HRM as opposed to what it should be told. Thus, publicly, private sector managers may give the impression that all is well and may even appear to support government initiatives. Consequently, some of the problems with the emerging HRM model may remain invisible and go unrecognized in the short term. It may therefore be some time before the unintended consequences of the new legal framework surface and are diagnosed. In this sense, this paper serves as an early warning of potential adverse effects of the new legal framework for HRM in the private sector. Fourth, private sector managers need to recognize that Saudization is a reality in the Saudi labour market today and little can be done to reverse it. Although one recognizes that, at present, there is no clear business case for the increasing number of Saudis in the private sector, given the legal, social and political imperatives to employ Saudis, one expects firms that invest their resources in reconfiguring their HRM practices to take advantage of the opportunities the new labour market reality offers and limit the damage it might cause would outperform those that fail to make such investments. Thus, old HRM practices have to be transformed to fit the new labour market reality. In particular, private sector managers should move from tokenism practices whereby Saudi workers

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96 The International Journal of Human Resource Management are used primarily to show the firm’s commitment to, and support of, the Saudization strategy, and develop innovative ways to manage Saudi workers effectively. Fifth, workforce diversity is another workplace reality. However, while the workforce in the private sector is becoming more diverse, entrenched values and behaviours towards the management of foreign employees have not changed. The legal framework has not been sufficient for ensuring the protection of foreign workers, and private sector managers at best have paid lip service to equal treatment of employees. If not managed properly, diversity is likely to have harmful workplace consequences such as disruptive in-group conflicts, which can harm performance. Therefore, managers in the private sector should focus on managing diversity by building HRM practices and developing skills needed to manage diverse work groups, facilitate effective interactions among employees to learn from each other, and facilitate effective group functioning. This study raises a number of questions that need to be addressed in future research. There is an obvious need to explore the impact of Saudi Arabia’s accession to the WTO on HRM practices in the country. Another interesting avenue for future research would be to explore the impact of the emerging HRM practices on performance. At the individual level, future inquiry into the interactions between Saudis and foreign workers in the private sector would be warranted. Finally, although this study focused on Saudi Arabia, it raises fundamental question about the appropriateness of engineering HRM policies and practices through laws and regulations. I hope that this exploratory paper attracts more research on the ways governments transform HRM in emerging and developing countries.

Notes
1 The full text of the 1969 Labour Law can be downloaded from The Embassy of Saudi Arabia in

Washington’s website: www.springerlink.com/(otzz1b55mpgsl4z2lbcxvx55)/app/home/ contribution.asp?referrer ¼ nav&backto ¼ issue,9,9;journal,2,27;linkingpublicationresults, 1:103030,1&nav_parent_previous.x ¼ 1 or www.contractoremployee.com/Forum/uploads/ CTS/Saudi%20Labour%20Law-English.pdf. 2 Given the economic, social and political importance of Saudization to Saudi Arabia, the country was granted a ‘national treatment’ exemption by the WTO to continue with the Saudization plan (see Bourland et al., 2006).

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