Determinants of Fdi in Saudi Arabia

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FOREIGN DIRECT INVESTMENT IN SAUDI ARABIA-AN ECONOMIC DEVELOPMENT PERSPECTIVE Khalid Alkhathlan, Department of Economics, King Saud University, Riyadh, KSA Md.Tarique, College of Business Administration, Al-Kharj, King Saud University, Riyadh, KSA.


Foreign Direct Investment (FDI) plays an important role in stimulating the growth potentials and providing stability to the economy of Saudi Arabia. Our findings show that there are mainly four factors which determine the net FDI flow to Saudi Arabia. These are - GDP, Privatization, Import and Export and Growth rate of GDP. There exists a positive relationship between FDI and GDP and GDP growth rate while it is negatively related to privatisation and imports plus exports taken together showing trade sensitivity. However, the relationship between FDI and GDP growth rate is very weak. The values for the GDP, privatisation and trade sensitivity elasticity to FDI is 1.36, -0.999 and – 0.068 respectively. The marginal effect of GDP growth on FDI is 0.004. The developmental efforts in the country have not been able to attract FDI in a desired amount except the oil sector. To provide stability, self reliance and sustainable growth to the Kingdom of Saudi Arabia (KSA) economy, FDI is needed in both import substitute and export promoting industries.

Keywords: Foreign Direct Investment, Gross Domestic Product, Privatization, Growth Rate.

Foreign Direct Investment (FDI) inflow in a country is considered to be an important waterway for the transmission of new ideas, technologies and business skills among different nations. It can have better impact on the developmental efforts of a country in transition. The prospects for growth can get better with an increase in the total level of capital investment in the economy and by introducing more productive technology and techniques. An essential source of new physical capital is being provided by the foreign investors helping in channelizing the domestic resources into investment. Some countries face shortages of foreign exchange to import foreign products and equipments necessary to put an impetus to the development process. This shortage also slogs the ability of a nation to promote trade links with other nations in the process of globalization. Foreign companies not only make investment in the host country but also make limited trade with parent country, making an increase in the host countries trade, helping it out to integrate with the world economy. The use of FDI as a tool for entering a global market is often considered to be most essential. An intensive growth of the technology in the specific industry also motivates FDI. In addition, many FDIs are motivated by defensive tactics such as responding to a saturated home market or reacting to problems in the home market.

Since the first oil shock in 1973, FDI has been entered into Saudi economy as a minor capital source. Most foreign participation was seen in building productive facilities and providing services under contract, rather than through FDI. In January 1999, Saudi Arabian Government created the Supreme Petroleum and Mineral Affairs Council, separate entity from the Saudi Arabian Oil Company, (ARAMCO), to direct post-production energy policy. In 2000, the Government established a new investment regulatory body, the General Investment Authority. Subject to all appropriate documents being lodged, it processes applications within 30 days. Until April 2000, foreign equity in the industrial sector was limited to 49 per cent. While in principle full foreign ownership was allowed in other sectors (except oil).Wholly foreign owned firms could not bid for government contracts or access cheap credit or tax concessions Foreign companies can now access tax holidays and concessional finance in other sectors, making full foreign ownership more feasible. The present study makes an analysis of factors influencing FDI in Kingdom of Saudi Arabia. The entire...
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