Foreign Direct Investment Trends and Impact on Saudi Arabia

Introduction

Like other countries intent on developing their economies, Saudi Arabia has no doubt realized the need for increased foreign investments in the kingdom. The Saudi Arabia General Investment Authority (SAGIA) 10 x 10 program is an initiative by the government aiming at positioning Saudi among the top 10 most competitive foreign investment destinations in the world by the year 2010 (Oxford Business Group, p. 22). SAGIA was formed in 2000 and has since generated investment enthusiasm from abroad (Siddiqi, p. 44).

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The 10x 10 program is based on three components namely:

  1. National Competitiveness Center– This is an independent organization under the 10 x 10 program that acts as a think-tank for the program. It is mandated with assessing, monitoring and supporting activities that enhance the kingdom’s competitiveness.
  2. Sector opportunities– This sub sector focuses on opening investment opportunities to foreigners. This sub-sector targets three focus areas namely, I) the energy sector, II) the transportation sector and III) the transportation and Knowledge Based Industries (KBIs) (Oxford Business Group, p. 22).
  3. Economic Cities– Under the 10x 10 SAGIA program, the King formed new economic zones within four economic cities within the Kingdom. The cities are Madinah, Hail, Rabigh and Jizan, which were expected to collectively attract an excess of $300 billion annually in FDIs, and the creation of over 1 million employment vacancies (APS Diplomat recorder, p. 1). According to the SAGIA website (www.sagia.gov.sa), the cities catalyze Saudi reforms by easing the way business is done in the Kingdom.

To achieve the 2010 vision that the Kingdom has set for itself in the three target areas, several benchmarks have been put in place. These include an attempt to meet an excess of 300 indicators used by the World economic Forum, the World Bank and the International Finance Commission. To ensure that these benchmarks are being adhered to, the Saudi Government has drafted an action plan, which includes the strategy adopted when working with non-governmental or international organizations. The Kingdom has also established a National Competitive Centre which helps the government streamline the entire process of repositioning itself as a favorable foreign investment destination (Oxford Business Group, p. 23).

Among the key strategic approaches that the 10 x 10 program has so far used to convince more foreign direct investors to consider Saudi as their investment location of choice is the assurance that investors can own 100 percent investment, unlike earlier under the 1979 FDI law where it was required that investors partner with local investors. The 2000 law allows 100 percent FDIs and has thus gone well with most foreign investors (Oxford Business group, p. 27). Moreover, the Kingdom has upped the investment environment by ensuring that foreign investors can now enter the kingdom more easily and that their businesses receive government support to thrive (Siddiqi, p. 44).

The formation of the Supreme Economic Council (SEC) in 1999 was also a step aimed at discouraging deep- rooted bureaucracy in government departments in Saudi Arabia and has served the interests of SAGIA well (Cordesman, p. 327). Under SEC, SAGIA has been able to allow and regulate real estate investments by non-Saudis and has also set new regulations for employers using expatriate labor. Other activities by SAGIA include reducing custom duties, reviewing the state budget and setting new rules that encourage transparency in the passing on of financial and economic data (Cordesman, p. 327).

Saudi Arabia joined the World Trade Organization in December 2005 as one of the measures proposed by a team of government representatives under the leadership of King Abdullah bin Abdul Aziz. The King had vied unsuccessfully for a position in the WTO for 12 years. By joining WTO, Saudi Arabia saw her chances of becoming a global player increase by the virtue of adhering to WTO set standards, regulations, rules and institutional structure (Fitsall et al, p. 238). The King had earlier advocated for structural reforms that would enable the economy to be more liberalized and diversified (The Middle East, p. 50). In order to Join WTO, Saudi took up reforms that improved its FDI laws and commercial laws. In addition, the kingdom devised a new tax system that was better suited for the business environment and reduces most of the Import tariffs. Other actions towards the same goal included the removal of non-trade barriers that the Kingdom had, liberalization of the financial markets, implementation of copyright laws and allowing private capital in sectors like power and water, something that was a reserve of government departments in the past (The Middle East, p. 50).

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The Impact of the FDI with SAGIA’s 10×10 program

According to the International finance Corporation (cited by Fitsall et al, p. 238) the 10 x 10 program had succeeded in moving Saudi Arabia’s ranking up to position 38 among the most desirable FDI locations in the world in 2007, up from position 72 in 2006. In 2008, the World Bank ranked the Kingdom at 23rd position, an obvious improvement from previous years. This is a clear indication that the kingdom might meet its target of ranking amongst the top ten positions by 2010. In addition, the Kingdom has a new set of tax incentives that encourages more investors to consider investing in rural areas of the kingdom. But perhaps the highest noticeable effect of the 10 x 10 program is the fact that by 2006, SAGIA had licensed 505 FDI projects valued at approximately US$ 19.2 billion. This was a 107% increase from FDI estimates done in 2005 (Fitsall et al, p. 238). In the same period the United Nation’s Conference on Trade and Development (UNCTAD) (cited by APS diplomat Recorder 1) reported that Saudi was the largest recipient of FDIs in 2006 amongst the Middle East Arabic countries valued at $ 18 billion.

The Kingdom had recorded significant improvements in the process of starting business, which was necessitated by the elimination of the US$ 130,000 minimum-capital requirement and the streamlining of the business registration process. The Kingdom also scored impressive improvements in how investors accessed credit, security measures put in place to protect investors and the revision of laws and regulations that necessitated cross border trading (Siddiqi, p. 44). The 10 x 10 program has no doubt helped Saudi Arabia gain recognition not only by investors from outside the Kingdom, but also by world financial organizations. Such include the World Economic Forum, which in its 2008-2009 global competitive index considered Saudi and ranked the Kingdom at 35th position. The country was also ranked 3rd best country in regard to Macro-economic stability. In a global competitive report, the World Bank further ranked the kingdom at 16th position in its 2008 rank (NCC, 2007).

The 10×10 program Relation to Saudi’s achievements; output of this progress

In Business, it takes clear set goals, a clear strategy and determination to achieve success. Saudi Arabia’s 10 x 10 program has all these components and is thus a clear approach to achieving its targeted 10 or better rank by 2010. The fact that Saudi Arabia realized it’s potential, pinpointed what was hindering the kingdom from achieving her potential and choose ways to overcome such, is a clear indication that the government is determined to open up the kingdom’s borders to world trade. Already, and as discussed earlier in this paper, results of the deliberate effort by the government have already started bearing results.

Seeing that the country has already been ranked 23rd by the world bank in 2008, the 2010 target may seem like an uphill task, especially because the country had only two years to move 13 positions up to its target by the time of the ranking. Although the country may be unable to meet its target, it remains clear (at least by it previous progress), that it will not be badly-off the target. However, only time will tell.

Conclusion

The change in legislation allowing foreign companies to fully own businesses in Saudi Arabia, amendments to tax rates on FDIs, allowing investors to own more than 1 business license, the removal of minimum capital requirement and the requirement that licenses be processed within thirty days of request are among some of the changes that the Saudi government is effecting under the 10 x 10 program. Already, the program has led to increased FDI in the kingdom, something that the government hopes will continue despite the hard economic times experienced in many parts of the world.

Overall, Saudi Arabia is better positioned as an investment destination not only because of the deliberate 10 x 10 program by the government, but also because there are widespread economic reforms in the country, coupled by massive government spending in infrastructure upgrade and management.

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References

  1. APS Diplomat. “Saudi Arabia- Kingdom is Top FDI Recipient in the Arab World”. 2007.
  2. Cordesman, Anthony. Saudi Arabia Enters the Twenty-first Century: The Political, Foreign Policy, economic and Energy Dimensions. Westport CT: Praeger, 2003
  3. Fitsall, et al. Standard Chartered: Middle East And Africa: The Guide to Working Capital Management 2007/2008. Norwich: PPP Company Limited, 2007
  4. NCC. “The National competitive Center.” 2007.
  5. Oxford Business Group. The report Saudi Arabia 2008. Dubai: Oxford Business group,2008
  6. Siddiqi, Moin. “Saudi Arabia: Bucking the Global Trend?” The Middle East Magazine. No. 392. 2008
  7. The Middle East. “Saudi Arabia records Strongest Economic Growth in decades; Burgeoning Money and Credit Growth Gave Fuelled the Assets Markets.” The Middle East Magazine. No. 368. 2006

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