Foreign Direct Investment (FDI) is where a invests in another country with a motive to establish a sustainable interest (Carbaough, 2019). FDI could involve establishing operations in a foreign country by acquiring an enterprise in that country or by making an investment in the country. Saudi Arabia is one of the largest economies in the Middle East. It is oil rich with about 18% of the world’s oil reserves, making it one of the top world exporters of oil. The country’s economy is mainly oil-driven, with over 90% of the total export earnings being oil revenues (Elimam, 2017). However, the county is working to diversify its economy by investing in other sectors. Saudi Arabia is also attracting FDI as a move to diversify its economy. This paper examines the relationship between FDI and economic growth and development in Saudi Arabia.
Role of FDI in Saudi Arabia’s Economic Development
Research shows that foreign direct investment has a positive relationship with a country’s economic growth (Elimam, 2017). In this case, FDI and economic growth have a two-way link since FDI promotes economic growth, which eventually leads to increased flow of FDIs (Carbaugh, 2019; Elimam, 2017). This is not different in the Kingdom of Saudi Arabia (KSA) since the country has gained significant benefits from FDI, similar to other developing countries. Saudi Arabia has made significant efforts to attract foreign investors to its economy. This has resulted in economic growth and development since foreign corporations provide external financing for the country’s economic development. The country has also benefited from the creation of employment opportunities and increased national income and the GDP. FDI has also resulted in the introduction of new investments and products in the country, resulting in increased competitiveness in the market.
The other role of FDI is that it has had both intrinsic and extrinsic effects on the economy since it has increased the country’s development potential while promoting KSA’s economic stability (Elimam, 2017). For instance, FDI plays a significant role in supporting capital markets, generating spillovers in terms of improved management skills and technologies, and improved labor productivity, all of which support KSA’s economic growth and development.
Determinants of FDI
Various factors attract foreign investors in a country. For instance, the policies in a country, including the rules, laws, and regulations regarding foreign investments, affect the country’s attractiveness for FDI (Carbaugh, 2019). For instance, the policies governing the industrial sector in a country impact the investment trends of that country. In addition, the laws set by a country regarding foreign investments impact the volume of FDI. In KSA, the country has developed various policies related to foreign investment, including policies supporting its Vision 2030 to make the country an attractive destination for investors. The country has focused on reforms that support privatization and liberalization to create a common ground for private companies to compete and revitalize the country’s economy. In addition, KSA provides various benefits and incentives to guarantee foreign investors’ trust and promote confidence.
The other key determinant of FDI is political stability. The political environment of a country plays a crucial role in determining its political stability (Elimam, 2017). This has an effect on FDI since political stability makes a country attractive for investments. The economic environment of a country, which includes the economic structure, economic development, and abundance of resources, is also a key determinant of FDI (Kumari & Sharma, 2017). For instance, economic stability in a country creates macroeconomic balances which provide opportunities for foreign investments to thrive. In addition, a country’s economic growth determines its attractiveness to FDI. For instance, research shows that countries with positive, steady, and consistent economic growth attract investors compared to slow-growing economies (Flora & Agrawal, 2014). In this case, most developing countries are not considered as favorable FDI destinations compared to developed economies.
As an emerging economy with an average annual growth of 4%, the KSA is considered to be a favourable destination for foreign investments. In addition, the country ranks 19th among the 25 largest economies and first in Africa and the Middle East (El-Wady, 2020). A country’s natural resources are also a driving force for FDI. For instance, the oil and natural gas resources have a significant relationship with FDI volume in Saudi Arabia. Other factors that attract foreign investments in KSA include the integrated infrastructure in the country, including the largest port on the Red Sea linking three continents (El-Awady, 2020). In addition, the country’s vision 2030 has expanded the country’s competitive capacity, a great financial sector with a good banking sector and stable monetary system, and a young and skilled workforce.
Motives and Types of FDI
One of the greatest motives for FDI is economic growth. For instance, FDI inflows are associated with increased economic growth in the long run. Many studies provide evidence that FDI inflows have a positive relationship with economic growth (Flora & Agrawal, 2014; Elimam, 2017). For instance, FDI enhances efficiencies, supports the transfer of new technologies to the host country, and increases the average labor productivity within the host country. In addition, FDI helps diversify the productive base, creates new job opportunities by creating new income sources resulting in improved quality of life for citizens. In this case, developing and emerging economies rely on FDI inflows as a tool for economic development since it improves labor and management skills, reducing the host country’s underdevelopment levels. The other motive for FDI is improved market proficiency through increased competitiveness and capital inflow. In this case, KSA’s motive for attracting FDI is to achieve high rates of economic growth.
There are various types of FDI. For instance, horizontal FDI refers to a type of FDI where a company invests funds abroad in a sector/industry similar to the investor’s operated business (CFI, 2022). For example, opening a Starbucks coffee shop in KSA can be considered a horizontal FDI. The other type of FDI is vertical FDI, where the investing company invests within its supply chain. The investment made may or may not be in the same industry. An example of vertical FDI is when a US company acquires a foreign company from KSA to supply raw materials or distribute its product. Lastly, a conglomerate FDI is an investment where a company invests in a different industry. In other words, a company sets up a completely different enterprise in another country. An example would be Nike establishing a beverage company in KSA.
Policies the Government should Implement to Promote FDI to Stimulate the Economy
As competition for foreign investments grows, countries are finding new ways to make themselves attractive to foreign investors. In this case, the government must make policy changes to increase its perceived attractiveness to foreign investors. For instance, the KSA must open markets by reducing restrictions on FDI to allow for FDI inflows. Priority should be given to foreign investment laws and regulations to remove barriers to foreign investments in the country. In addition, setting up an investment promotion agency could help increase FDI inflows in Saudi Arabia. This creates a link between foreign investors and the domestic economy, allowing investors to get information on investment opportunities in the country. In addition, the KSA should map the sectors that should be targeted for investments to ensure its foreign investment goals align with the investor’s motives. Developing policies that support infrastructural developments are also needed. This assures the investors an adequate supply of labor, skilled workforce, energy, and availability of transport facilities. Lastly creating a strong and stable financial system can also transform the domestic financial markets attracting foreign entrants.
Implications of Saudi Vision 2030 on FDI
The Kingdom of Saudi Arabia announced an ambitious vision 2030 in 2016. The Vision focuses on creating a vibrant society, a prosperous and thriving economy, and an ambitious country. Vision 2030 has a wide range of implications for FDI in the country since it aims to ensure the country becomes a destination for foreign investments. The country also hopes to benefit from the plan to become a global leader in the petrochemical industry by diversifying and liberalizing the economy (Saudi Vision, 2030). This will attract FDIs in the country. Vision 2030 also leverages KSA’s unique position as the link between Africa, Europe, and Asia. This geographical position will help the country form strategic partnerships to boost trade, industrialization, and economic growth. In addition, the Vision 2030 strategic plan seeks to create an environment that unlocks KSA’s business opportunities by positioning itself as an investment hub for domestic and foreign companies. This will broaden the country’s economic base and create new jobs for its citizens. For instance, KSA’s 2020 goal was to reduce unemployment rates from 12.8% to 9 % (EPD, 2019). Lastly, the Saudi Vision 2030 strategy of opening Saudi Arabia to investments is expected to boost the country’s productivity which will help the KSA in its dream of becoming one of the world’s largest economies. For instance, restructuring the country’s economic cities, deregulating the energy market, and creating special economic zones will improve the business environment attracting foreign investors into the country.
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