Capital Budgeting Practices in Saudi Manufacturing Firms

Abstract

There is a lack of empirical evidence on how firm-level attributes influence capital budgeting practices in large Saudi manufacturing firms. This study fills the gap, contributing to both academic literature and managerial decision-making. The study investigates prevalent capital budgeting techniques in Saudi manufacturing and examines how firm-level attributes influence method selection through two focused research questions. The literature highlights global dominance of discounted cash flow (DCF) methods, particularly net present value (NPV) and internal rate of return (IRR) but notes variations driven by organisational and contextual factors. The study integrates the Resource-Based View (RBV), Upper Echelons Theory (UET), and Contingency Theory to explain how managerial capabilities, organisational resources, and external conditions shape capital budgeting practices. A quantitative, cross-sectional survey was administered to 84 finance executives from Saudi manufacturing firms, recruited via convenience and snowball sampling. The structured questionnaire measured usage of NPV, IRR, payback period (PP), profitability index (PI) and accounting rate of return (ARR), alongside firm-level variables: managerial experience, leverage, international presence, industry sub-group, and firm size. Descriptive statistics addressed RQ1, independent sample t-tests and Pearson correlation were used to test hypotheses H1–H5, examining relationships between firm-level attributes and method selection. Results show NPV is most widely used, followed by IRR and Payback Period. More experienced executives, larger firms, highly leveraged firms, and those with international operations are significantly more likely to use NPV and IRR, supporting H1, H2, H3, and H5. Industry sub-group affiliation (H4) does not significantly influence method choice, suggesting standardisation across the sector. Use of PP reflects liquidity priorities and contextual constraints. These findings align with RBV, UET and Contingency Theory predictions, also highlighting specific cultural and operational drivers in the Saudi manufacturing context. The study shows importance of adopting DCF methods, but recognises contextual drivers behind non-DCF use. Recommendations include targeted training, policy incentives and further research to explore capital budgeting in smaller firms and other Saudi industrial sectors.