Introduction
Kuwait is a significant player in the international market because it is a major producer of oil and petroleum products. Despite its position in the global business environment, it has a significantly low degree of foreign investment compared to other countries in the region. Businesses across the world are seeking suitable markets in which to offer their goods and services.
The costly nature of trade prompts firms to engage in Foreign Direct Investment (FDI) to remain profitable (Rugman, 2005). The contextualization of the significance of foreign direct investment in Kuwait is essential to understanding the country’s economic status. A comprehensive assessment of the barriers and opportunities for foreign investment and how FDI impacts economic growth is necessary to analyze Kuwait’s standing in the international business landscape.
Importance of FDI for the State of Kuwait
Foreign Direct Investment (FDI) is a significant factor in a country’s economy. FDI has gained importance in Kuwait, which has experienced high growth in recent years. FDI is an investment approach in which a foreigner’s right to own and manage a project is maintained. It is “a long-term investment by a non-resident” with a 10% or higher ownership share (Alhihi, 2020, p. 37). FDI is seen in a variety of forms, including but not limited to buildings, acquisitions in companies, relocations, and mergers. Governments like Kuwait have had to modify specific regulations to create an attractive legal environment where businesses can invest.
Kuwait is determined to encourage business, which is essential for economic growth. The government is focused on encouraging FDI by diversifying economic activities to reduce reliance on revenues from oil export, as outlined in its Vision 2035 document (Alhihi, 2020). The Kuwait government engaged in 83 Bilateral Investment Treaties, 66 of which are already in force, and 12 Treaties with Investment provisions (Alhihi, 2020). Kuwait attracts an estimated 0.029% of global FDI, which is viewed as the lowest among the Gulf Cooperation Council (GCC) nations (Alhihi, 2020). According to the UNCTAD’s World Investment Report, Kuwait’s FDI inflow was 104 U.S. dollars in 2019 and 204 million U.S. dollars in 2018 (Alhihi, 2020). The drop is believed to be the direct result of the lack of diversification in Kuwait’s economy and a decline in oil prices.
FDI is gaining significance in Kuwait because it directly impacts the economy. For instance, the currency value of any given economy is directly impacted by the number of foreign direct investments (Rani et al., 2021). FDI is important because it contributes to the country’s financial stability and aids in the creation of employment opportunities. The trend of FDI investment in Kuwait between 2010 and 2018 is highlighted in Table 1 below, demonstrating the decline of FDI in the country over the period in question.
Table 1 – FDI Trend in Kuwait between 2010 and 2018.
Information gathered regarding the value of FDI in Kuwait is rather worrying. An evaluation of four years of data indicated that between 2015 and 2019, the country accessed a total of 3.2 billion dollars in direct investments (Boresli et al., 2023). In 2013, Kuwait passed a regulation that permits up to 100% business ownership, provided it meets the terms outlined by the Kuwait Direct Investments Authority (KDPIA) (United States Department of State, 2021).
Organizations that desire 100% ownership must create employment opportunities, offer training and education for Kuwaiti nationals, facilitate technology transfer, and utilize the country’s products and services (United States Department of State, 2021). The countries of origin and percentages of investment in Kuwait for the year 2021 are highlighted in Table 2 below, while the sources of portfolio investments are shown in Table 3.
Improvements in the country’s economic performance and Ease of Doing Business Index are expected to boost FDI. To increase the number of foreign investments, the government intends to spend 32 billion U.S. dollars on investments such as a new refinery, a new port, airport expansions, and a clean fuel project (Boresli et al., 2023). These measures are intended to make Kuwait a suitable investment destination for foreign investors.
Opportunities and Barriers for Global Corporations
There are a variety of factors that impact the inflow of FDI in Kuwait. Foreign direct investment policies and business facilitation are factors that encourage global corporations to invest in Kuwait. The reintroduction of the national development plan as a critical element of the 2035 vision highlights the government’s desire to create a conducive business environment (United States Department of State, 2021). The KDPIA is tasked with identifying business proposals, evaluating their validity, and assisting foreign investors with licensing, thus making it easier to establish businesses.
Kuwait improved significantly in the World Bank’s rating for ease of doing business from 133rd to 83rd in 2020 (United States Department of State, 2021). The government has partnered with the World Bank to address issues hindering business operations. As a result, the Kuwait Business Center was created by the Ministry of Commerce and Industry in 2016 (United States Department of State, 2021). The organization provides licenses and sets up companies effectively and efficiently.
Kuwait has taken significant steps to improve its position as a global business destination. The government incentivizes foreign investors by providing tax exemptions and facilitating currency transfers(Alhihi, 2020). Investors can transfer their capital and profits and share sale proceeds abroad. In addition, investors are protected from arbitrary expropriation, meaning that the government shall confiscate no funds or assets except under specific conditions outlined in the law (Alhihi, 2020). Foreign investors can use land, real estate assets, and foreign labor to maximize overall productivity (Alhihi, 2020). Improvements in FDI are likely to address the nation’s unemployment, among other economic factors (Alharthi, 2022). The aforementioned measures have increased the country’s attractiveness to foreign investors.
There are several barriers that impact the flow of FDI in Kuwait. These elements have contributed to the country’s poor position compared to other GCC nations (Arman et al., 2022). The law mandates that at least 51% of all companies must be partly owned by a Kuwaiti citizen (United States Department of State, 2021). However, the law permits the KDIPA to allow 100% foreign ownership when the organization meets specific criteria (United States Department of State, 2021).
It is vital to note that the aforementioned provision does not apply to sensitive sectors, which may dissuade investors from establishing their organizations in the country. The affected areas include manufacturing fertilizer, gas, coke oven products, and extracting petroleum and related products (United States Department of State, 2021). The rule applies to defense, public administration, social security, and labor recruitment.
Effects of Global Corporations’ FDI on the Kuwaiti Economy
Global corporations’ FDI has had an immense impact on Kuwait’s economy. A bibliometric analysis conducted byCicea and Marinescu (2021) demonstrated a strong link between FDI and economic growth. Kuwait can rely on FDI to improve national industries by facilitating international capital transfer into the domestic market (Alhihi, 2020). The influx of investors facilitates the creation of job opportunities and strengthens Kuwait’s position in the global market. The GDP is a useful indicator of growth in any given economy. An increase in FDI raises demand for the country’s currency, thus positively impacting the exchange rate (Osmanovic & Alvi, 2022). The resultant currency strengthening allows the country to trade profitably in the international market.
Kuwait’s technological capacity has improved immensely due to direct foreign investment. FDI facilitates the nation’s knowledge stock augmentation by encouraging labor training and the adoption of new technologies(Osmanovic & Alvi, 2022). Transferring investment packages containing new technologies is immensely beneficial to Kuwait’s economy. The novel applications can promote growth and increase efficiency in local businesses and national corporations.
The availability of employment opportunities is a significant factor in any economy. Kuwait’s labor market composition differs significantly from other nations in the region. It is estimated that 82.2% of the country’s total labor force as of June 2019 was non-Kuwaiti, while Kuwaiti nationals only made up 17.8% (Schmidt, 2020). Further analysis reveals that most individuals working in the public sector are Kuwaiti nationals. However, only 3.86% of the total labor force in the private sector is accounted for by Kuwaiti nationals (Schmidt, 2020).
The demographic imbalance in the labor sector has been a serious challenge for the country. The promotion of FDI exposes Kuwait’s economy to numerous opportunities that result from partnerships with other countries whose businesses provide employment opportunities for Kuwaiti nationals (Rani et al., 2021). The government’s policies that require foreign companies to offer a specified percentage of opportunities to locals have significantly boosted employment rates, which has translated to economic growth owing to increased productivity.
Human resource development is one of the pillars supporting an economy’s growth. Training is essential for human resource development in organizational and economic contexts. FDI facilitates the entry of organizations that can offer competency-based training based on an individual’s demonstrated ability to accomplish specific tasks (Alainati, 2022). Partnerships with Kuwait’s Public Authority for Applied Education and Training (PAAET) will likely ensure that the country’s labor force receives high-quality training to increase productivity and enhance economic growth (Alainati, 2022). The Ibn Al-Haytham In-Service Training Center in Kuwait links the PAAET and private firms to develop policies to facilitate and encourage human resource development (Alainati, 2022). Introducing innovation-based training methods, many resulting from partnerships with foreign firms, is one of the many benefits of FDI.
Enhanced human resource development increases the labor force’s contribution to economic growth. Highly skilled personnel are highly productive and efficient at their duties. FDI facilitates introducing tried and tested employee training procedures that can be transferred to the nation’s labor force. Adopting training interventions that have demonstrated high success in the international market will likely improve local skills and facilitate innovation in the local market (Alainati, 2022). The efficient use of resources coupled with the development of novel business and investment ideals is likely to spur the growth of Kuwait’s economy.
Conclusion
Foreign direct investment is essential for a country’s economic growth. The Kuwaiti government recognizes the need to promote foreign investment by eliminating barriers and increasing incentives. The government has created institutions and altered its legislative framework to encourage foreign companies to conduct business within the nation’s borders. Foreign investment facilitates economic growth through the creation of employment opportunities, the facilitation of human resource development, and the transfer of technological capacity. The prioritization of foreign direct investment will allow Kuwait to compete favorably in the international market, which is increasingly adopting globalization as the new standard of practice in business.
References
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