Is Saudi Arabia’s Business Environment Conducive to Attracting Foreign Direct Investment in Non-Oil Sectors? Challenges and Implications

Foreign direct investment (herein referred to as FDI) has been viewed through time as one of the core drivers of economic growth. Regardless of their ideological variances, many countries throughout the world today aim to increase the level of competition in order to attract FDI. This study focuses on the Kingdom of Saudi Arabia, an oil rich nation that has until now, predominantly relied on its revenue stream derived from its natural resources. However, now the Kingdom must adapt and respond appropriately to the challenges of global competition, which have consequently forced the government to invest in non-oil sectors. As a result, the Saudi government has encouraged foreign companies to invest in the nation, through its Economic Vision 2030 initiative. However, against a backdrop of declining foreign direct investment (FDI) in recent years and associated factors related to the political, business and economic environment, Saudi Arabia may find it extremely difficult to successfully implement its Economic Vision 2030 without appropriate solutions and adequate planning processes to combat these obstacles to economic growth and revenue diversification. It is therefore necessary to identify the major causes of this declining trend of FDI and implement appropriate methods to improve FDI inflows in order to meet Vision 2030’s specified objectives. In this regard, the study had two main concerns. Firstly, to investigate whether Saudi Arabia’s business environment is conducive to attract FDI, particularly in non-oil sectors. Secondly, to examine the factors that determine the motivation of foreign companies to invest in Saudi Arabia. A mixed method approach of surveying top executives of foreign firms and interviewing top managers of the Saudi Arabian General Investment Authority (SAGIA) was adopted as the research strategy. The quantitative survey data were analysed using descriptive statistics and frequency estimations (Shapiro-Wilk test). For thematic analysis of qualitative data on interviews, the method of Braun and Clark (2006) was used. The key findings are summarised as follows. The main problems of FDI in Saudi Arabia are associated with a decline in the efficiency of financial markets and credit growth, increasing interest rates, restrictive labour laws, slow pace of facilitation steps of FDI, stagnant investment climate, imbalances of crucial natural resources and insufficient guarantees and policies. The Vision 2030 contains a comprehensive plan for a large-scale skills enhancement programme to solve this problem; however, this will undoubtedly take time. Until then, the effect of skills shortage linked to the ‘Saudisation’ of FDI will continue. More than 10,000 foreign firms have closed because of this problem. The negative message sent by these companies may adversely affect the image of Saudi Arabia and thus negatively affect any future FDI inflows. The range of natural resources is very narrow, and hence, costs are high. Notably, lack of quality and consistency are important FDI deterrents. The geographic location of Saudi Arabia gives it a strong strategic advantage. However, negative factors mentioned earlier may counter this advantage compared with other strategically located countries equipped with better services. Market liberalisation in Saudi Arabia is imperfect. Currently, the country is focusing on attracting FDI from selected countries in selected sectors. But with existing limited capabilities, market liberalisation may have limited impact in increasing FDI in Saudi Arabia. Ruled by a monarchy, Saudi Arabia does not have any significant political instability. It can be considered as a stable nation. Rather, Saudi Arabia has a negative image due to gender discrimination. Lack of consistency in business regulations in dealing with the government, bureaucracy, cronyism (Wasta), poor enforcement by the legal and judicial systems and the potential effects of religion and culture have also been identified as FDI- negative factors. Progressive easing of laws and policies not conducive to FDI have been implemented since 2000 but have not been effective. SAGIA has limitations regarding simplification of approval procedures thus making it difficult for FDI seeking firms. Only limited success has been achieved by the Crown Prince and SAGIA in attracting FDI into Vision 2030 projects, primarily because of lack of support from other departments. Global investment forums are not specific to Saudi Arabia; many countries conduct similar conventions to attract FDI. Although policies are being evaluated, actual change has not occurred, even after two years of Vision 2030. Administrative weakness is a barrier to the FDI targeted in the Vision. In addition, Islamic laws are a deterrent to outsiders; at least for foreign investors, personal and religious independence need to be guaranteed to improve FDI outcomes. The findings from the study make a major contribution not only to existing knowledge but also adds to new knowledge highlighting the main problems, barriers, and obstacles of FDI inflows in Saudi Arabia. The study’s findings will also benefit both the SAGIA and foreign firms looking to invest in Saudi Arabia. The study concludes with several recommendations and future research directions.