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Foreign direct investment refers to the net flow of investment to a foreign country with the aim of acquiring a long term interest in the management and operation of a business entity in that country. It therefore by definition involves the transfer of investments by an individual from his or her native country into a foreign country.
This paper seeks to discuss foreign direct investment in Saudi Arabia. The paper will look at elements of foreign direct investment in the country with respect to its history, types, methods, trend and impacts. The paper will also look into factors that affect foreign direct investment in the country together with projections of such future investments.
Foreign Direct Investment in Saudi Arabia
The level of foreign direct investment in Saudi Arabia is reported to be high. The country has over the past years undergone transformations that have been seemingly aimed at increasing its capacity to accept foreign direct investment.
These transformations seem to have born fruit as foreign direct investment continues to grow in the country and is being identified as one of the highest in the world. The history of development of foreign investment in the country is traced to the form of liberalization of the kingdom’s market that seemingly attracted foreign investors.
This is because the market was made free from restrictions and even regulations that were previously permitted but at the same time discouraged foreign investments into the country.
The history of development of level of foreign direct investments therefore started with development of policies such as “open market, private enterprise policies, and absence of both foreign exchange controls and restrictions on the repatriation of capital and profits” (Shoult 50).
The level of foreign direct investment was again boosted in the year 2000 when the country enacted specific laws that were aimed at fostering the level of such investments in Saudi Arabia.
Such legislation further liberalized Saudi Arabia in terms of investments with foreign investors being allowed to own up to one hundred percent a given enterprises in the country. Foreign direct investment was again boosted in the year 2002 when the country moved in to privatize many of the then government controlled sectors in its economy.
At the same time, the government further reduced limitations over foreign direct investment that was still realized over protection of particular sectors that were excluded from foreign investors. Most of these investment opportunities that the government had reserved from foreign investors were then opened allowing room for foreigners who could be interested in the investments (Shoult 50).
The establishment of Saudi Arabian General Investment Authority in the year 2000 has also played a critical role in the country’s foreign investments. As a regulatory body in terms of licensing foreign direct investment initiatives, the body has successfully registered a tremendous number of projects under foreign direct investment.
In only a span of five years from its establishment, the body managed to register more than two thousand projects that were valued at over fifteen billion U.S. dollars. The distribution of foreign direct investments in the country is also realized to be relatively even in relation to the industries in the country.
Foreign investments are also diversified in terms of sectors in both industrial and service providers. In spite of the increased level of foreign direct investment in the country by the year 2004, there were still increasingly high numbers of interested parties in the country’s foreign direct investment.
A number of applications had by then been made and approved and were just awaiting establishment of their investment projects.
Most of the foreign direct investment proposals for the country were realized from investors from countries such as “the United States, Japan, the United Kingdom, Germany, France, Switzerland, Finland, India and Italy” (Shoult 50). Saudi Arabia has also attracted investors from its Arab neighborhood in the Arab region (Shoult 50).
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The history and development of foreign direct investment in Saudi Arabia significantly evolved from the enactment of “foreign direct investment law, FIL” (Shoult 50) that was undertaken in the year 2000. Under this legislation, the difference and gap between local investments and foreign direct investments was greatly narrowed.
Foreign direct investments became privileged and enjoyed a lot of benefits that were previously limited to local investments only. One of the immediate benefits that foreign investments reaped was the allowance to fully own an enterprise in the country that was previously limited to local investors only.
Foreign investors were then also recognized for loans and funding by the country’s government and were permitted to have more that one enterprise in the country’s economy. The government also regulated the tax system in relation to foreign investment thus inducing more incentives to potential investors to the country (Shoult 50).
The direct foreign investment into the country has however continued to grow over time with the net direct investment inflow reaching about thirty six billion U.S. dollars as compared to the fifteen billion dollars that was realized in by the year 2004.
The country foreign investments had therefore increased by more than one hundred percent in a span of just five years. By the year 2009, Saudi Arabia was among the top countries with heavy foreign direct investments in the whole world.
It was actually ranked at the eighth position globally and the best in the Arab world. This puts Saudi Arabia in line with the world’s economic strongholds such as the United States and China that also enjoys such levels of foreign direct investments.
Following its goal to ensure that Saudi Arabia was among the ten leading countries in the whole world in terms of direct foreign investments by the year 2009 and to make the country the global leader by the year 2010, the Saudi Arabian General Investment Authority can therefore be credited for its success in first place by ensuring increased level of direct foreign investment in the country and then for driving the country to be one of the world’s most attractive investment place.
Currently, Saudi Arabia has captured the interest of investors from countries such as “United States, Kuwait, United Arabs emirates, France and Japan” among others who lead the list of the country’s current foreign investment in that respective order (Moulana 1).
Though the country has consistently grown in terms of its direct foreign investments that has led to its foreign direct investment stock reaching close to one hundred and fifty billion dollars, the Saudi Arabian general investment authority is still not yet satisfied and is promising that it will drive the country to further foreign investments (Moulana 1).
Types and methods of foreign direct investments in Saudi Arabia
Foreign direct investments in Saudi Arabia have developed over time to attract investors from different corners of the world. With this diversity, the nature of the investments is also expected to be diverse following the different nature of countries that are investing in the country.
Countries such as the United States that have different economic systems from those exhibited by more communist countries induce the variety in economic transactions in an environment. The nature and extent of diversity in the country therefore realizes the global category of investments types that are then exported to Saudi Arabia.
There are a variety of types of direct foreign investments. Moosa Imad classified foreign direct investments in terms of the perspectives realized from either the investor or the recipient country. With consideration of an investor’s point of view, foreign direct investments can be classified in terms of being “horizontal FDI, vertical FDI and conglomerate FDI” (Moosa 4).
Horizontal foreign direct investment involves the expansion of an investment into a foreign country yet maintaining the type of product being offered by the investor.
Its main aim is to expand an investment in terms of market control especially in cases where such expansions are not favored by regulations in the investor’s country such as when a further expansion of an enterprise in its original country would pose a threat of monopolizing the country’s market contrary to regulations.
The direct investments would therefore be characterized by the products in the exporting country. Vertical foreign direct investment on the other hand focuses on gaining power and access to either production resources or market for finished products. Investors therefore acquire enterprises that are close to these assets.
Conglomerate type of foreign direct investment is rather an integration of both vertical and horizontal expansion of an investment in a foreign market. Classification of foreign direct investments with respect to the recipient country such as Saudi Arabia can take forms such as “import substituting FDI, export increasing FDI and government initiated FDI” (Moosa 5).
The import substitution effect of foreign direct investment is realized with respect to the establishment of investments for production of commodities that were previously imported by the country.
When the foreign investors inject their capital into the country’s industries, factories are developed and more varieties of commodities are produced locally. As a result importations and cash flow out of the country is reduced.
Exports that increase foreign direct investment comprise those investments that produce commodities for exports. The investment could also export raw materials and bi products to the investing country. An overall impact will all the same be an increased level of exportation by the country.
A foreign investment that is initiated by the government is however characterized and majorly based on moves by the government to attract foreign investors into the country (Moosa 5).
The foreign direct investments into the country after the year 2000 can be significantly be attributed to government initiatives that included legislations and policy makings that focused in attracting investors to Saudi Arabia.
Apart from the drive or nature of foreign direct investments, they can also be classified based on the motives for which they are being sought or established. Under this classification, the direct investments can be categorized as either “expansionary or defensive” (Moosa 5).
Under expansionary foreign investment, the main focus is the advantage gained by the investor in terms of increased productivity, sales and revenues. A defensive foreign investment on the other hand establishes a base for reduced input into the investor’s business.
It is therefore driven with the availability of cheaper resources such as labor and raw materials for investments (Moosa 5). Another approach to the types of foreign direct investments is the nature and extent of acquisition of an enterprise that a foreign investor obtains from his or her investment.
A foreign investor can acquire an enterprise in whole or in part through purchase. Under this approach, the investor can obtain part of the enterprise to have a merger with a local investor or can purchase the entire enterprise to gain a complete control of the enterprise through acquisition.
Foreign investors can also establish an entirely new enterprise in the recipient country through the “green field investments” (OECD 87) approach (OECD 87). It can also take the form “extension of new capital” in which an investor adds to the already existing investment or a “financial restructuring” approach (OECD 87).
The availability of the variety of approaches to foreign direct investment reflects the level of diversity and growth of foreign direct investment in Saudi Arabia (OECD 87).
Trend in foreign direct investment in Saudi Arabia
Existence of foreign direct investment in Saudi Arabia has been significant for over three decades. By early 1970, the country was struggling with balancing flow of capital across its boarders. With a net inflow of investment that was almost negligible in the early 1970s, the country realized a negative net inflow of investment capital after the year 1974.
This means that the level of investments that was leaving Saudi Arabia into other countries was more that the investment that it was receiving from outside. The country’s net foreign direct investment then fluctuated within a mean value of zero with significant deviations being realized in the negative direction.
The country only realized short durations of positive net investment flow which was about two billion U.S. dollars at its maximum in the duration between 1979 and 1981. The level of the country’s foreign direct investment was again negative in the year 1981 before it started rising.
It was during this period that the country realized its significant rise in foreign direct investments which reached ten dollars before starting to decline again. The trend of fluctuating about the mean average of zero resumed in the year 1987 and continued into the twenty first century.
In the year 2002 for instance, Saudi Arabia realized a net investment flow of zero. The foreign investment trend then lowered to negative values before assuming an increasing trend in around the year 2003. It is after this time that Saudi Arabia picked its development in the level of foreign direct investment.
The trend sharply rose to over ten billion U.S. dollars in a span of less that a year. Though the rate of increase in the country’s foreign direct investment slowed down, it continued to increased and almost reached twenty five billion dollars in the year 2008.
The trend however experienced a decrease up to about twenty billion dollars in the year 2009 (Trading 1). The level of foreign direct investment in Saudi Arabia is reported to continue with an increasing trend in its foreign investments.
One of its mains sources of foreign direct investments, the United States, continues to register increasing level of such investments in the country. In the year 2009, for example, the United States’ investment into the country increased by more that half of its investments in Saudi Arabia in the previous year (US 1).
Drivers to foreign direct investment in Saudi Arabia
Foreign direct investments as realized in Saudi Arabia after the year 2000 have adopted an increasing trend. A lot of factors can be attributed to this trend as measures that have been adopted to influence foreign investors into the country. The major factor that has been credited with the improvement of the country’s foreign direct investment is the legislation that the country enacted in the year 2000.
The law for instance allowed foreign investors to have total ownership of investment interests in the country. Before the enactment of the legislation, foreigners were restricted with respect to the percentage of a given enterprise that could be owned.
In other words, a foreign investor was not allowed to solely establish an enterprise or even acquire more that a given percentage of an individual enterprise. The legislation however allowed for complete ownership of businesses by any investor in the country.
Foreign investors were also given all privileges that relates to business operation in the country such as provision of loans. The law also ensured faster processing of licenses by agencies. All these had active roles in attracting investors.
Limitation of ownership and control of a business enterprise had the impact of forcing foreign investors to offer their resources to an environment where they had no total control. This induces insecurity that can discourage an individual from investing.
This can explain the low net investment flow that the country realized before the year 2000. The limited control that investors were allowed must have played the role of scaring investors away (Shoult 50- 54).
The trend however changed after the regulation reflecting the level of confidence that investors gained following the provision that they could own business and control their investments.
Facilitated registrations of foreign investments, liberalization of tax on foreign investments among other changes also acted as incentives to investors who then started moving to make investments in the country.
The legislation therefore played a significant role in determining the direction and level of foreign direct investment in Saudi Arabia by positively influencing direct foreign investment.
Privatization of a number of sectors in the country that was approved by the Saudi Arabian government in the year 2002 can also be identified as a factor that influenced foreign direct investment into the country. This is because it is actually this year in which the foreign direct investments in the country realized a change.
The privatization move therefore played a role as an indicator of the government’s commitment to economic reforms that was to open up the country to international investors. The privatization also provided a chance for investment by giving up enterprises and sectors that were previously owned by the government (Shoult 53).
Another factor that affected the trend of foreign direct investment in Saudi Arabia was the incentives that the government offered to investors. The Saudi Arabian general investment authority for example offered assistance to foreigners who wanted to invest in the country.
Specific centers were instituted by the government where potential investors could seek possible help from relevant government bodies. The investment authority also ensured its efforts to making sure that necessary recommendations were made for appropriate measures of attracting foreign investments.
The move adopted by the Saudi government to offer contractual preference for commodities that were made in the country also played a role in attracting foreign investments. Those who for example imported commodities into the country would be influenced into producing them in the country in order to access the tenders from the government.
The government also offered incentives with respect to resources such as land which was availed to investors at subsidized prices. Investors were also at the same time offered ownership of property that was connected to their investments.
Incentives were also allowed with respect to corporate tax on foreign investments as well as mobility of foreign capital in the country. These incentives offered attraction to investors contrary to the prior period when the country had restrictions instead of incentives.
The move by the government through its agencies to attract foreign investors is therefore another factor that changed the trend of the Saudi Arabian foreign direct investments (Shoult 55).
Another significant factor towards the increased level of foreign direct investment was the wave of globalization that swept across developing countries. Under globalization, markets were opened for economic activities across the globe.
Territorial restrictions were reduced and a level of freedom with respect to trade was realized. The relaxation of trade restrictions by Saudi Arabia under globalization also played a role in allowing for foreign investments in the country (Brunel 1).
Other factors that affect foreign direct investments in a country include “political stability, technology, and availability of resources, transportation, material and labor cost, economic policy and size and growth of the foreign market” (Wickramasinghe 63).
Saudi Arabia is recorded to have had a number of these factors which have contributed to its increasing foreign direct investments (Wickramasinghe 64). The political system in Saudi Arabia is for example reported to fairly stable.
Though the country has not developed democratic pillars for election of its leaders, there has not been a significant opposition to the government system in the country. The lack of resistance or conflict over the system of governance thus illustrates a stable governing system which promises safety of investments (Estandard, 1).
The country is also rich in resources as realized in “Hydrocarbons, gold, uranium, bauxite, coal, iron, phosphate, tungsten, zinc, silver and copper” among others (State, 1). The country can therefore be concluded to have favorable factors towards attracting foreign direct investment.
The former poorly realized foreign direct investments in the country could therefore be attributed to restrictions that were removed by the country’s legislative measures that were undertaken in the year 2000 (State 1). The country also has a high level of supply of cheap energy which plays an important role in any industrial process.
The availability of cheap resources in the country gives it an advantage over other countries with respect to investor interest as cheap resources associates with higher profitability under same market conditions for finished products. These therefore add to the factors influencing foreign investors into the country (Rahman 4).
Impacts of foreign direct investments in Saudi Arabia
Foreign direct investment has a lot of benefits to the recipient countries, especially in cases where the recipient countries are developing countries. The investments are normally associated with developments in “technologies, management techniques, finance and market access for the production of goods and services” (Rahman 4).
The investments have also been linked with advancements in “quality of domestic production, increased competitiveness domestically and internationally, to increases in exports and improvements in the Balance of Payments (BP) of the host country” (Rahman 4).
The foreign direct investment therefore has a direct impact on the country’s economy which is then transferred to the lives of people in the country in terms of living standards. Saudi Arabia as a country together with its citizens has therefore been beneficiaries of the increasing level of foreign direct investments into the country (Rahman 4).
Foreign direct investment reflects the net inflow of investments into a country. Saudi Arabia was characterized by a poor trend in foreign direct investment with the country experiencing negative foreign direct investments in most periods prior to the year 2002.
The country’s trend in foreign investments however changed in 2002 and improved to become one of the best in the world by the year 2009. The improvement in the country’s foreign direct investment was driven by factors such as government initiatives that were aimed at attracting foreign investors into the country.
The types of direct investments as realized in the country are varied depending on the approach or the motive of the investment. With the increased level of foreign direct investments in Saudi Arabia, the country as well as its individual citizens have benefited from significant economic improvement.
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