Firms’ HRM Capacity and Responses to Shifts in Regulatory Demands: The Case of Private Sector Firms and Coercive Employment Quota Systems in Saudi Arabia

This thesis furthers our understanding of how regulations, organisational strategy and firm-level Human Resource Management (HRM) capacity interact to enable a firm to cope with changing regulations. Specifically, it focuses on the recent changes in the Saudi labour market following the introduction of the Nitaqat regulations, aimed at increasing the employment of Saudi nationals in the private sector. Earlier approaches had largely failed as they were poorly designed and weakly enforced. However, Nitaqat operates to a strict quota based system and is underpinned by much stronger monitoring and strict penalties. To study the interaction between regulatory system and HRM capacity, this thesis adopts the framework provided by the concept of Dynamic Capabilities as this offers an invaluable tool to understand the interaction between organisational capacity, organisational strategy and the regulatory environment. The research design meant it was possible to compare the impact of two very different approaches to labour market regulation on organisational behaviour and, in doing so, shed light on the type of HRM capacity a firm needs in order to cope with the demands of externally imposed regulations. Methodologically, this thesis adopts a qualitative approach and semi structured interviews as the dominant tool for data collection, and it is based on six case studies, three from the service sector and three manufacturing sector. The cases provided evidence that the shift in regulatory approach triggered changes of HRM capacity in some firms but the precise nature of any change is dependent on the circumstances of the individual firm and in particular on their prevailing business strategy, and HRM strategy and capacity. In turn, HRM capacity creates the scope for choice of strategic response although the actual approach was dependent on factors specific to that firm. Equally, a firm that fails to develop HRM capacity seems to be limited in how it can respond to a regulatory shock. In effect, the relationship between regulatory demand and HRM capacity is strongly mediated by organisational strategy. In other words, HRM capacity reflects and enables organisational strategy rather than forming a direct response to the regulatory environment. This is not to say that the regulatory environment has no impact, but it was clear from this research that different firms have different levels of exposure and vulnerability to the regulatory demands. Even under Nitaqat, one firm was found to have retained an old approach to HRM capacity, since it was still able to recruit from a large pool of relatively cheap labour and not offer any sustained training or development after their employment. This suggests that the HRM capacity need by the firm is linked to organisational strategy rather than the regulatory framework. In turn, organisational strategy, in terms of the recruitment of Saudi nationals, was found to be influenced by factors such as the attitudes of senior staff, the extent that the firm felt it owed a favour to the state and some very specific dynamics in the labour market that affected that firm (in one instance there were no trained Saudi staff who could be recruited to a key role in the firm). This also presents a complex view of when regulations can be effective. What is clear is there is weak linkage between regulatory regime and specific organisational response but if the regulations are strictly enforced, there is much less scope for complete rejection.