To provide an overview of FDI feasibility in the Kingdom I have consulted with multiple sources, both online and offline. Recent statistics conclude that FDI feasibility in Saudi Arabia has been improving, partially explained by the numerous reforms and incentive programs created by the government to attract foreign investment, develop the private sector and improve the ease of doing business. Nevertheless, there are still weaknesses in the KSA business environment that require consideration. I will conclude the essay by suggesting policy implications for the Saudi government to adopt, aimed at improving the feasibility of FDI in the kingdom.

Definition of Foreign Direct Investment (FDI)

For this essay I will use the following definition of Foreign Direct Investment: “FDI is a controlling ownership in a business enterprise in one country by an entity based in another country".

Investment Landscape in Saudi Arabia

Drawing on existing research, I will now outline the main factors that may underpin (strengths) and undermine (weaknesses) FDI in the Kingdom of Saudi Arabia.

Strengths

Since joining the World Trade Organization in 2005, the Kingdom of Saudi Arabia has been hailed as a feasible place for FDI, mainly due to the following factors:

● Economic stability and strength decrease uncertainty for long-term investments;

● Largest world oil reserves;

● Being a large local market with a high spending power, revenue potential and proximity to other major markets.

● Government is engaged in a strategy of economic diversification (with the program Saudi Vision 2030)

● Developed infrastructure

● Consolidated finance system and relatively well-regulated banking system

● The business climate has been improving due to legislative reforms that have made it easier to set up and operate an FDI.

A report from Lloyds Banking Trade highlights 7 principles for investment currently guiding the government that underpin trust amongst investors: “Non- discrimination, investment protection, investment sustainability, enhanced transparency, protection of public policy concerns, ease of entry for employees, and the transfer of knowledge and technology”

Furthermore, I had the opportunity to speak with Mrs. Khlood A. Aldukheil, the 1st Saudi Women to be a Chartered Financial Analyst (CFA) in 2003, and currently the Managing Director of Aldukheil Financial Group. Her inspiring lecture stressed the “strong desire to improve the ease of doing business in Saudi Arabia”. Dwelling on one of the pillars of Vision 2030, Mrs Aldukheil explained how Saudi Arabia is striving to diversify its economy from oil by engaging in privatizations and improving the feasibility of FDI through incentives, roadshows (such as the “Davos in the Desert” Conferences), and implementing necessary regulation. International firms are therefore incentivized to enter the Saudi market given the economic advantages related to stability, market size, and improved business climate and opportunities.

Weaknesses

Nevertheless, disadvantages remain in the kingdom’s business environment:

● Cultural distance and conservative cultural environment;

● Problems with contract enforcement, handling commercial litigations and resolving insolvency issues;

● Lack of transparency in applying intellectual property legislation;

● Government-imposed quotas on Saudi employees in companies;

● Cases of delayed payments of some government contracts;

● Relatively restrictive visa policy for all workers;

● Strong role of religion in economics, finance and management may not be adequate in a business context.

I also had the opportunity to discuss the ease of doing business in Saudi Arabia with the respectable Al Shura member, Ms. Hoda-Al-Helassi. While hailing the centralized monarchy in Saudi Arabia as a source of stability underpinning business in the Kingdom, Ms. Hoda-Al-Helassi also admits that “In regards to transparency in business, we [KSA] still have a long way to go”.

Government Intervention

The government of Saudi Arabia has taken significant measures to improve the ease of doing business in the kingdom, mainly through SAGIAderegulation and Vision 2030.

SAGIA Deregulation

SAGIA was created during the year 2000 as part of an effort to formalize the process of economic liberalization in Saudi Arabia. It is responsible for “managing the investment environment in the Kingdom”, with the objective to achieve economic growth by creating a pro-business environment, providing services to investors and fostering investment opportunities in key sectors of the economy.

Obtaining a license to invest from SAGIA has been known as a tedious and onerous process characterized by costly bureaucracies and complex legal and vetting procedures. However, in the year of 2018 the government announced a number of SAGIA reforms consisting in reducing documentation requirements to simple investment plans, financial ability statements and economic impact studies. Foreign investors also started enjoying a “fast track service to receive investment licenses within a maximum of 5 days”, with the option to extend licenses for up to a 15-year period.

Vision 2030

The economic pillar of Vision 2030 is aimed at further opening Saudi Arabia for business to boost productivity and diversify the Saudi economy to become one of the largest in the world. Improving the business environment, restructuring economic cities and creating especial deregulation zones are some of the measures currently in process of implementation.

More specifically, concrete approaches to create an attractive business environment for foreign investors are listed below and depicted in the diagram on the right:

● Establishment of public-private partnerships;

● Ensuring quality of business services;

● Coordination with legislative authorities to review and update current regulations;

● Capitalize on government’s real estate;

● Allocate prime areas within cities for educational institutions, retail and entertainment centres;

● Enable banks and other financial institutions to adapt their financial products and services to the needs of each sector, ranging from large project capital funding to short-term working capital for small businesses;

● Strict application of international legal and commercial regulations;

● Deregulation on movement of people and goods, and simplification of customs procedures.

Besides Vision 2030 and SAGIA reforms, the Kingdom has enhanced FDI with other measures. For example, in 2016, Saudi Arabia authorised the acquisition of up to 100% of assets by foreign investors in retail and wholesale trade. The government is also making efforts to attract FDI in the sectors of renewable energy and entertainment.

Empirical Evidence

FDI values have been rather unstable in the past years. The tables below provide numbers for FDI for the periods of 2012-2014 and 2016-2018.

In 2018, the stock of FDI rose slightly (+ 1.4%) and reached $230bn, by far the highest number among Arab countries. Furthermore, the increase in FDI Inward Flow from 2017 to 2018 is explained by the opening of four more industries to FDI (recruitment and employment services, real estate brokerage, audio-visual and media services, and land transport services). It is also interesting to look at the evolution of FDI inflows by country and industry between 2010 and 2017, as shown in the tables below.

2010 (expressed in $bn)

2017 (as a %)

According to a Lloyds Bank Trade report, the main success cases of past FDI inflows include the Aubin Group from the UK, which invested $743M to establish a chemical manufacturing facility in Saudi Arabia, DuPont from the US, which opened a reverse osmosis water treatment facility, and Alphabet (aka Google), which started building multiple data centres in the Kingdom.

Moreover, there is data on the ease of doing business, in which Saudi Arabia ranks 92nd out of 190 economies in the World Bank's 2019 Doing Business report, with a score higher than the regional average in the Middle East and North Africa.

Conclusion and Policy Implications

The Kingdom of Saudi Arabia brings multiple advantages that make foreign direct investment feasible, which is reflected on the abovementioned international rankings. Nevertheless, factors undermining investor confidence are still persistent to this date, which may explain why FDI inflows remain unstable.

To address these weaknesses, the government should focus its efforts on corruption crackdown and improve policy environment through setting up appropriate institutions to solve disputes, enforce business rights and fully develop the country’s financial system. Moreover, macroeconomic stability should be highly prioritized, especially in today’s global unstable environment. It is important to consider the volatility of oil prices, which will continue to largely affect the Saudi economy while Vision 2030 does not come into full effect and as long as the kingdom remains dependent on oil revenues.

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My name is Guilherme Hortinha, I am 20 years old and I am currently finishing my business management degree at King’s College London. I will start working as a Business Development Representative at Amazon Web Services London from September 2020. I am interested in Saudi Arabia as an open-minded individual looking further than the west to grasp potential future opportunities. One of the many opportunities is foreign direct investment in Saudi Arabia, which this essay will cover.