The performance of the Saudi economy: An industry-level analysis and a firm-level analysis

A key policy objective of policymakers throughout the world is to achieve stable economic growth by designing policies aimed at improving the productivity and financial performance of firms and the industries in which they operate. With this aim, one of the key visions of the government of Saudi Arabia for 2030 is to consolidate the process of structural change by moving away from an oil-based economy towards a more diversified, profitable, efficient, and globally engaged economy. Using a rich set of state of the art econometric methodologies, this thesis examines the factors underlying productivity and financial performance of the Saudi economy at the firm and industry levels. Our analysis covers the years from 2005 to 2018, a period of gradual structural change of the Saudi economy in response to diversification strategies. We paid particular attention to the effect of export and labour market restructure on the performance at the industry level. Furthermore, we analysis how institutional investors would affect the performance and financial decisions of Saudi manufacturing listed firms. The first empirical chapter of this thesis starts with an estimation of technical efficiency (TE) at the industry level, using data envelopment analysis (DEA) and stochastic frontier approach (SFA). The main contribution of this chapter is to examine for the first time the implications that exporting and governmental policies to stimulate employment (namely the Nitaqat programme) have had on industrial efficiency over the period 2005-2017. Our results reveal that the restructuring the labour market, through the Nitaqat programme, has led to increases in the estimated TE at the industry level. Moreover, exporting has had a positive impact on technical efficiency, suggesting that the adoption of exporting policies are suitable strategies to enhance greater economic performance in the Saudi economy. The second empirical chapter examines the productivity and financial performance of Saudi manufacturing listed firms over the period 2010–2018. Concretely, it examines whether a higher concentration of institutional investors and a larger level of debt influence the performance of Saudi firms. While previous works have examined the importance of these factors separately (i.e. McConnell and Servaes (1995); Liang et al. (2011) and (Lin and Fu, 2017)), the main novelty of this chapter is the analysis of the interplay between these two monitoring devices in shaping firm’s performance. Our results indicate firms’ productivity and financial performance increases with the number of institutional investors, however this positive effect weakens as the level of leverage increases. Taken together, our findings suggest that institutional investors and leverage act as substitutive monitoring devices to increase firm’s performance. From a policy perspective, this chapter provides solid evidence that level of leverage of firms play an important role in the relationship between institutional investors and firm performance. Thus, in order to mitigate agency costs and improve firm performance, policymakers may find it optimal to recommend the utilisation of a lower level of debt and encourage the use of institutional investors as a monitoring device. Finally, the third empirical chapter of this thesis examines the relationship between institutional investors and the speed of adjustment (SOA) towards optimal levels of capital structure using firm-level manufacturing data for Saudi Arabia over the period 2010 to 2018. This chapter builds on the study of Liao et al. (2015) that has found a positive connection between institutional investors and the speed at which firms adjust their capital structure. We contribute to this literature by exploring whether the growth opportunities available to a firm affects the extent to which institutional investors help to speed up the rate of adjustment towards optimal levels of capital structure. In line with Liao et al. (2015) findings, our results show that as the number of institutional investors increase, firms converge faster towards the optimum capital structure. But more interestingly, our findings reveal that the positive impact of institutional investors on the SOA towards optimal levels of capital structure weakens as the level of growth opportunities available to firms increases. An intuitive explanation for this result is that the agency conflicts between managers and shareholders are particularly severe in firms with less growth opportunities and the SOA towards the optimal capital structure level is expected to be slower for such firms. From a public policy perspective our results provide a solid evidence that the presence of monitoring devices—such as institutional investors—intended to mitigate agency costs and affecting the SOA is more pronounced in firms with less growth opportunities