Chapter 1 3.2.2023

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CHAPTER 1 INTRODUCTION 1.1 Introduction The first chapter of this thesis opens with the background and rationale of the present study. It provides an overview of the COVID-19 pandemic and outlines its impacts on SMEs in Saudi Arabia. The chapter subsequently describes the problem of the study, objectives of the study, research question and the significance of the study. The chapter concludes with the organization of the thesis. 1.2 Background of the study The COVID-19 pandemic is a global health crisis caused by the spread of the SARS-CoV-2 virus. It was first identified in Wuhan China, in December 2019 and quickly spread throughout the world (Thukral, 2021). Due to its severity, the World Health Organization (WHO) identified the Covid-19 outbreak as a public health emergency of international concern on March 2020 (World Health Organization, 2021). Many never anticipated that this global pandemic will still be ravaging the world after more than one and half years. However, it has caused the world’s greatest disaster affecting social, economic and cultural values especially the high rate of the death victims. The cumulative number of confirmed cases worldwide had reached 678.4millions by the end of 2022 and cumulative death toll had reached 6.8 million (World Health Organization, 2023). The COVID-19 pandemic hit every sector across the globe, the negative impacts on the global economy is geometrically increasing. The impacts of COVID-19 Small and Medium Sized businesses (SMEs) is of a particular concern as they constitute 90% of businesses worldwide (Sonobe et al., 2021).The pandemic created immediate and significant changes to how SMEs do businesses around the world. The spread of COVID-19 has a great impact on the global economy and has brought severe challenges to the survival of SMEs. SMEs around the world have been abruptly confronted with changes in consumption patterns, demands product distribution and consumer behavior. Many SMEs have lost access to their front-line customers and raw materials. Lockdowns and movement restrictions policies set by governments around the world to contain the pandemic prevented key personnel and staff from working, resulting in job losses and significant decrease in demand.

The impact is being felt not only by the individual firms but also within national economies around the globe. According to Kasradze and Zarnadze, (2021) the COVID-19 pandemic caused significant global trade and travel disruptions, particularly across borders. The closure or slowdown of trade by major exporters such as china, the European Union and the United States severely impacted the supply chain. These disruptions have posed major challenges to SMEs affecting their ability to operate and function effectively in the global economy. Research report on the countermeasures and suggestion on the impacts of COVID-19 pandemic on SMEs issued by the China Association for Small and Medium Sized enterprises pointed out that a significant number of SMEs in China are experiencing financial difficulties as a result of the pandemic. Nearly 67.69% of SMEs have reported a decrease in business income while 21.61% are facing challenges in repaying loans and debts on time leading to increased pressure on their operating funds. Additionally, 86.22% of SMEs in China have reported that they are unable to sustain their operations due to insufficient funds (Ma, Liu and Gao, 2021). A survey conducted by the National Federation of Independent Business (NFIB) on 700 companies with less than 360 employees revealed that that more than 75% of SMEs in United have been severely affected by the COVID-19 pandemic(OECD, 2020). Rapid lockdowns and travel restrictions in the United States brought the economy to stand still with the number of people applying for the unemployment benefits soaring to nearly 22 million for the first time since the great depression. In addition the market shrinkage and economic damage caused by the pandemic in Britain, France Japan and other countries are also extremely serious (Hurley et al., 2021). Statistics have shown that in the first quarter of 2020, Gross Domestic Product (GDP) of France fell by 5.3% compared to the previous quarter. Japan's first quarter GDP declined by 3.4% over the previous year, while Brazil's first quarter GDP fell by 0.3% year-on-year. The UK's first quarter GDP also decreased by 1.6% compared to the same period last year, amounting to $703.3 billion (Ma, Liu and Gao, 2021). A survey conducted McKinsey in August 2020 SMEs in the UK established that nearly 80% of the surveyed companies had declined in their operating income during the pandemic (Dimson and Sharma, 2021). Millions of Small and Medium Sized Enterprises around the world face an existential threat. There is also a degree of long-term uncertainty about what happens to SMEs in post COVID-19 era. In March 2020, the International Monetary Fund (IMF) declared that the world had entered a recession due to the COVID-19 pandemic and that the

length and the depth of the recession was reliant on two things, containing the virus and having an effective coordinated response to the crisis(IMF, 2022). 1.2.1 Overview of Small and Medium-Sized (SMEs) sector in Saudi Arabia Across the globe, Small and medium sized enterprises are recognized as powerful drivers of economic activity. According to Aboradi and Masari, (2018) they represent 90% of businesses and more than 50% of employment worldwide. Each country has its own definition of what constitutes an SME. For instance the European Union defines SMEs by the annual sales turnover, number of employees, annual balance sheet or the size of shareholders’ funds. In the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia, SMEs are businesses that employ less than 250 people and have less than 200 million Riyadh in annual revenue (Alharbi, 2022). However the most adopted definition of SME in Saudi Arabia is shown in the table below: Enterprise Category Number of employees Annual revenue Micro 1-2 Less than USD 27,000 Small 3-49 USD 27,00-1.3 million Medium 50-200 USD 1.3 – 13.3 million Table 1:0 Definition of SMEs adopted in Saudi Arabia. (Source: developed for the purpose of this study) According to the Saudi Arabian General Investment Authority, SMEs account for approximately 99% of all businesses in the country and employ over 70% of the private sector workforce. Around 70% of SMEs in Kingdom of Saudi Arabia are in trade and construction sectors, followed by around 10% in manufacturing (MartinJaouni, 2022). Statistics show that the SMEs sector contributes to around 30% of the Gross Domestic Product (GDP) in the Kingdom of Saudi Arabia. For instance, the contribution Of SMEs to Saudi Arabia GDP increased by 45% between 2016 and 2021. The Saudi Arabia SMEs sector, which has been put in line with goals outlined in their vision 2030 continues to diversify Saudi Arabia economy which has been dependent on oil for several decades. Furthermore the number of SMEs under the vision 2030 grew from 447,000 in 2015 to 614,000 in 2020 (Narayanan, 2023). The Small and Medium Sized enterprises (SMEs) play host of tasks and functions which are critical contributor to the modern economies of the most countries (Bagale et al., 2021). This is the main reason as to why the Kingdom of Saudi Arabia has put on several strategies to make strides to ensure growth of SMEs. The government seeks to support SMEs by

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improving the economic environment and seeking ways to increase its contribution to GDP, diversify sources of income, and expand the production base to meet government goals and functions. The Saudi Arabian government has been actively supporting the growth of SMEs in the country through several initiatives and programs. This include the establishment of Small and Medium Sized enterprises general authority (Monshaat) in 2015, which was formed to promote the development of SMEs and provide them with financial and non- financial support. Even during the COVID-19 pandemic when SMEs operations all over the world were disrupted the Saudi Arabia government offered support that has been instrumental in helping get SMEs back to their feet. These support measures are part of an effort to increase the contribution of SMEs sector to the GDP. Saudi Arabia has a goal to rise the contributions to 35% of GDP by 2030 (Nova, 2022). The kingdom has also implemented regulatory reforms to make easier for SMEs to do business. Latest survey on the Saudi Arabia SMEs has established that the government has reduced the time and cost of starting a business and simplified the process of obtaining permits and licenses. Despite these efforts, SMEs continue to face many internal and external challenges that not only threaten their growth but also their existence. However, with the continued support the government believes that these policy can help support SMEs growth in the country 1.2.2 The impacts of COVID-19 on SMEs in Saudi Arabia The COVID-19 pandemic spread rapidly across the world including Saudi Arabia. The COVID-19 pandemic has had a significant impact on SMEs in Saudi Arabia, as it has on businesses worldwide. SMEs in the country have faced internal and external challenges, including reduced demand, personnel, markets, supply chain disruptions, policy and cash flow issues. According to Nurunnabi et al., (2020) the operating income fell sharply, operating cost rose significantly and operating profits shrank for many SMEs operating in Saudi Arabia. Sources of funds to finance SMEs operations were also affected severely by the pandemic and this had a great impacts on the financial status of SMEs. The pandemic has a relatively large negative impacts on the market which on the other hand affected the performance of Small and Medium Sized Businesses in Saudi Arabia. The pandemic severely affected the market supply, market demand and commodity prices. The decrease in supply caused by COVID-19 is in Saudi Arabia is mainly due to the uncertain supply of products, transportation channels and slower logistic speed. Due to difficulties in supply chain and low demand in the market caused by the pandemic in Saudi Arabia, SMEs

performed poorly (Marmore Team, 2021). Also, the pandemic largely affected personnel mobility in SMEs and reduced working hours. SMEs in Saudi Arabia lost large number of employees due to hard economic times caused by the COVID-19 pandemic. The pandemic has exacerbated the decline in the labor market, causing direct and indirect disruptions to various departments within small and medium-sized enterprises (SMEs). As a result, the number of employees in SMEs has been negatively impacted, impeding the recovery of the production and processing service chain and hindering the overall economic recovery of these businesses (Alhawal, Nurunnabi and Al-Yousef, 2020). The COVID-19 pandemic outbreak caused many SMEs in Saudi Arabia to close, leading to unprecedented disruption of commerce in most industry sector. The Kingdom of Saudi Arabia (KSA) has suffered two shocks, namely the spread of COVID-19. Government policy has responded to these two developments. The main measures taken by the Saudi Arabian government are as follows: i. On March 20, 2020, it announced a private sector support plan of 70 billion riyals (18.7 billion U.S. dollars, or 2.7% of GDP): postponing the payment of government taxes, fees, and other fees provide liquidity to the private sector and increase available funds through the National Development Fund. ii. The Saudi Arabian Monetary Authority (SAMA) lowered its policy interest rate twice in March 2020, reducing repo interest rates by 1.25 points and 0.5% to 1%, respectively. 1.3 Problem Statement. The COVID-19 pandemic has caused a significant impact on social activities and political and economic consequences worldwide the spread of COVID-19 led to a massive shutdown of businesses. The pandemic caused huge disruptions among SMEs in Saudi Arabia, mass layoffs, financial crisis, low sales, employee health concerns and loss of consumer confidence (Monshaat, 2020). The businesses affected more by the COVID-19 pandemic are explicitly small and medium enterprises (SMEs). This effect forces SMEs to change their business models and adapt to this changing environment, where the service industry of the SMEs has taken the most hit. Internal and external challenges that SMEs faced include the forced shutdown of businesses, movement restrictions by the government insufficient working capital and lack of sales. These challenges were due to curfew restriction policies implemented to help reduce the

spread of the pandemic. People were asked to stay home, shops and businesses are requested to remain temporarily close the operation, construction projects are paused, and difficult transitioning to online sales as limited support is available from online vendors (Mohammad, 2020).Businesses across the Kingdom of Saudi Arabia were forced to close as a result of the COVID-19 outbreak, which had a major effect on SMEs. Mass layoffs, financial crises, lower supply and demand, employee health issues, and a decline in customer confidence were only a few of the significant disruptions brought on by the pandemic. Small and medium-sized businesses (SMEs), which often have constrained resources, few staff, and restricted cash flow, were especially susceptible to the pandemic's detrimental effects. For instance many SMEs faced serious financial challenges. To reduce the difficulty of SMEs impacted by COVID-19, several actions were taken by the government of Saudi Arabia's. The loan guarantee program provide low-interest to fund development projects in the health, tourism, real estate, and education sectors with a more significant economic impact to ensure their sustainability (Project Support Fund, 2020). Furthermore, the Saudi Arabia government announced a private sector financing support program worth approximately 50 billion riyals (13.3 million U.S. dollars). This is a private sector stimulus plan for SMEs to provide funds for financing and strengthen business operations. The purpose is to ensure SMEs can sustain and continuously contribute to Saudi’s economy. Hence, it is crucial to know the impact of COVID- 19 on SMEs’ performance in considering the business assistant from the government of Saudi Arabia. 1.4 Research Objective This research aims to understand the impact of COVID-19 among SMEs in Saudi Arabia. Hence, the specific objective as below: i. To examine the relationship between SME’s internal challenges and financial performance. ii. To examine the relationship between SME’s external challenges and financial performance. iii. To examine the moderating effect of business assistance on the relationship of SME’s challenges (internal and external) and financial performance. 1.5 Research Question

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The research questions are developed from research objectives to examine their interrelation among the variables of the research study as follows 1) What are the impacts of the internal challenges to SME’s financial performance? 2) What are the impacts of the external challenges to SME’s financial performance? 3) Does business support play a role in mitigating internal and external challenges to SMEs financial performance? 1.6 Significance of Study The COVID-19 pandemic has caused an unprecedented impacts economies on worldwide, and SMEs in Saudi Arabia are no exception. The findings of this thesis may be valuable to the following interest groups. 1. The study finding will help SMEs in Saudi Arabia to understand the challenges and opportunities presented by the pandemic. It will help them to identify strategies that can be used to survive and thrive in the current environment. The study will provide valuable information that SMEs can use to make informed business decisions. 2. The Saudi government can learn innovative approaches to resolving the internal and external issues that SMEs face in financial performance and contribute to the government's objective of SMEs contributing 20% to 30% of GDP. This research study will benefit the Saudi Arabian government's Vision 2030 objectives for SMEs and SMEs management in addressing issues coming from internal or external obstacles. 3. The study findings will contribute to the SMEs literature by explaining the impacts of COVID-19 Pandemic. It will help to fill the gap in the current knowledge and provide a better understanding of the challenges and opportunities faced by SMEs during the pandemic. 4. The study findings will provide insights that can be used to policy decisions and actions aimed at supporting SMEs in Saudi Arabia during and after the pandemic. Policymakers can use the findings to design appropriate interventions to mitigate the negative impacts of the pandemic on SMEs. 1.7 Definitions

SMEs: Small and medium-sized businesses are characterized by the number of employees and the annual income they generate. Businesses with 1-5 employees and 0-3 million SR annual revenues are classified as microbusinesses; small businesses with 6-49 employees and 3-40 million SR annual revenues are classified as small enterprises, and medium businesses with 50-249 employees and 40-200 million SR annual revenues are classified as medium enterprises. Internal challenges: These are constraints and barrier factors within the SMEs. According to Naradda Gamage et al. (2020) they refer to the difficulties and obstacles that a business faces within its own organization or operations. These challenges arise from various factors, such as limited resources, lack of funds, qualified human resources, management skills and marketing skills. External challenges: According to Adam and Alarifi, (2021) external challenges refer to the difficulties and obstacles that a Small and Medium Sized enterprises faces outside of its own organization or operations. These challenges arise from various factors including government regulations and policies, economic turndowns, increased competition and limited financing options. 1.8 Thesis Organization This thesis has five main chapters, each of which logically discusses different topics. The first chapter, introduction, presents the background and rationale of the study problem statement as the rationale for the study. It also consist of primary guideline like, Problem statement, research objectives, questions, significance of the study, and definition of terms. The second chapter discusses of the thesis is a comprehensive review of the relevant literature on theory and variables relating to SMEs and COVID-19 pandemic. The literature review concludes with theoretical framework based on the literature. The third chapter presents the research methodology, including research methods, strategy, research technique, and method of data collection, research design, and questionnaire design, and analysis type, statistical tools for analysis, pilot study, and procedure to collect data from respondents. Chapter four is the findings of this study. The findings and discussion were presented based on the research questions and the objectives of this study. The final chapter is the conclusion and recommendation. It provides summary of the key findings, respond to the research questions conclusion of the thesis, its implication, limitation and suggestion for future research. 1.9 Chapter Summary

This chapter is divided in a number of distinct section, the first section discussed on the background and the rationale of the study relating to the impacts of COVID-19 pandemic to the SMEs.The second section outlined the research problem/ the gap addressed in this thesis, deals with external and internal challenges to SMEs financial performance. Research objectives and research questions make up the third division in this thesis. The fourth section discusses the significance of this study and contribution of this research findings. The last section highlights the definitions of the terms and concepts used in this study.

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Reference Aboradi, M. and Masari, R. (2018). Small Medium Sized Enterprises in Saudi Arabia: Conceptualizing an Effective Succession Planning. International Journal of Accounting, Finance and Business (IJAFB) , [online] 3(11), pp.14–32. Available at: http://www.ijafb.com/PDF/IJAFB-2018-11-06-02.pdf [Accessed 8 Aug. 2022]. Adam, N.A. and Alarifi, G. (2021). Innovation practices for survival of small and medium enterprises (SMEs) in the COVID-19 times: the role of external support. Journal of Innovation and Entrepreneurship , [online] 10(1). doi:https://doi.org/10.1186/s13731- 021-00156-6. Alharbi, R.K. (2022). Saudi Arabia ’ s small and medium enterprises (SMES) sector post- Covid-19 recovery: stakeholders’ perception on investment sustainability. International Journal of Organizational Analysis , ahead-of-print(ahead-of-print). doi:https://doi.org/10.1108/ijoa-10-2021-2993. Alhawal, H.M., Nurunnabi, M. and Al-Yousef, N. (2020). The Impact of COVID-19 on SME in Saudi Arabia: A Large-Scale Survey . [online] Available at: https://www.psu.edu.sa/psu/articles/2020/06/25/survey-impact-of-covid-19-on-sme- in-saudi-arabia-white-paper-02_1593062630.pdf [Accessed 11 Nov. 2020]. Bagale, G.S., Vandadi, V.R., Singh, D., Sharma, D.K., Garlapati, D.V.K., Bommisetti, R.K., Gupta, R.K., Setsiawan, R., Subramaniyaswamy, V. and Sengan, S. (2021). Small and medium-sized enterprises’ contribution in digital technology. Annals of Operations Research . [online] doi:https://doi.org/10.1007/s10479-021-04235-5. Dimson, J. and Sharma, R. (2021). UK small and medium-size enterprises: Impact of the COVID-19 crisis | McKinsey . [online] www.mckinsey.com. Available at: https://www.mckinsey.com/industries/public-and-social-sector/our-insights/uk-small- and-medium-size-enterprises-impact-of-the-covid-19-crisis. Hurley, J., Karmakar, S., Markoska, E., Walczak, E. and Walker, D. (2021). Impacts of the COVID-19 Crisis: Evidence from 2 Million UK SMEs. SSRN Electronic Journal . doi:https://doi.org/10.2139/ssrn.3944510.

IMF (2022). The IMF and COVID-19 (Coronavirus) . [online] IMF. Available at: https://www.imf.org/en/Topics/imf-and-covid19 [Accessed 27 Apr. 2020]. Kasradze, T. and Zarnadze, N. (2021). Learning Losses Caused by the Covid-19 Pandemic - A Significant Threat to Economic Development. European Journal of Education , 4(1), p.92. doi:https://doi.org/10.26417/175nzz76a. Ma, Z., Liu, Y. and Gao, Y. (2021). Research on the impact of COVID-19 on Chinese small and medium-sized enterprises: Evidence from Beijing. PLOS ONE , [online] 16(12), p.e0257036. doi:https://doi.org/10.1371/journal.pone.0257036. Marmore Team (2021). Saudi Arabia eases regulation to support SMEs and Entrepreneurs | Marmore MENA Insights . [online] www.marmoremena.com. Available at: https://www.marmoremena.com/en/insights/saudi-arabia-eases-regulation-to-support- smes-and-entrepreneurs/. MartinJaouni (2022). Blog | Funding Souq . [online] fundingsouq.com. Available at: https://www.fundingsouq.com/en/blog/smes-key-drivers-of-sustainable-growth [Accessed 8 Apr. 2023]. Naradda Gamage, S.K., Ekanayake, E., Abeyrathne, G., Prasanna, R., Jayasundara, J. and Rajapakshe, P. (2020). A Review of Global Challenges and Survival Strategies of Small and Medium Enterprises (SMEs). Economies , [online] 8(4), p.79. doi:https://doi.org/10.3390/economies8040079. Narayanan, N. (2023). SMEs are Saudi Arabia’s driving force for economic growth . [online] Arab News. Available at: https://www.arabnews.com/node/2224911/business- economy. Nova, R.A. (2022). Saudi Arabia: The number of small and medium enterprises increased by 9,7 percent . [online] Agenzia Nova. Available at: https://www.agenzianova.com/en/news/arabia-saudita-il-numero-piccole-e-medie- imprese-e-aumentato-del-97-per-cento/ [Accessed 8 Apr. 2023]. Nurunnabi, M., Hisham, M., Alhawal and Hoque (2020). Impact of COVID-19: How CEOs Respond to SMEs Recovery Planning in Saudi Arabia . [online] Available at:

https://www.snc.org.sa/L20/wp-content/uploads/2021/02/2-How-CEOs-Respond-to- SMEs-Recovery-Planning-FP.pdf. OECD (2020). Coronavirus (COVID-19): SME policy responses . [online] OECD. Available at: https://www.oecd.org/coronavirus/policy-responses/coronavirus-covid-19-sme- policy-responses-04440101/. Sonobe, T., Takeda, A., Yoshida, S. and Truong, H.T. (2021). The Impacts of the COVID-19 Pandemic on Micro, Small, and Medium Enterprises in Asia and Their Digitalization Responses. SSRN Electronic Journal . [online] doi:https://doi.org/10.2139/ssrn.3912355. Thukral, E. (2021). COVID ‐ 19: Small and medium enterprises challenges and responses with creativity, innovation, and entrepreneurship. Strategic Change , [online] 30(2), pp.153–158. doi:https://doi.org/10.1002/jsc.2399. WHO (2023). WHO COVID-19 dashboard . [online] World Health Organization. Available at: https://covid19.who.int/. World Health Organization (2021). WHO Coronavirus (COVID-19) Dashboard . [online] Who.int. Available at: https://covid19.who.int/data.

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