ajab nour dissertation

Jellan Khalid Ajab-Nour

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‘’Project submitted in partial fulfillment of the MSc in Business Economics’’ department of Economics, City University, London.

The Impact of Foreign Direct Investment on the Economy of Saudi Arabia

“Evaluation of the role of the government in promoting FDI in the country”it

Signature _______________

MSc Business Economics

Social Sciences School

Department of Economics

City University London

Supervisor: Professor. Keith Pilbem

Student: Jellan Khalid Ajab-Nour

Submission Date: 30st

September 2010


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List of Tables & Figures

- Figure 1 17

- Table 1 19

- Table 2 33

- Table 3 35

- Figure 2 36

- Figure 3 38

- Table 4 40

- Table 5 42

- Table 6 43

- Table 7 45


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Table of Contents

I CHAPTER 1 - INTRODUCTION 9

ν 1.1 Background 10

ν 1.2 Statement of the Problem 11

ν 1.3 Aims and Objectives 11

ν 1.4 Professional Significance 12

ν 1.5 Dissertation Structure 13

II CHAPTER 2 - LITERATURE REVIEW 14

ν 2.1 Definition of Foreign Direct Investment 14

2.2 Determinants of Foreign Direct Investment 15

2.2.1 Financial Sector Development and Liberalization 15

2.2.2 Business Environment 16

2.2.3 Infrastructure 17

2.2.4 Labor 18

ν 2.3 Benefits of Foreign Direct Investment 19

2.3.1 Efficiency 19

2.3.2 Economic Integration 21

2.3.3 Social Factors 22

2.3.4 Technology Inflows 22

2.3.5 Employment 23

II CHAPTER 3 - METHODOLOGY 25

ν 3.1 Research Philosophy 25


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ν 3.2 Research Types 26

ν 3.3 Research Questions 27

ν 3.4 Research Participants 27

ν 3.5 Research Instruments 28

ν 3.6 Secondary Sources 30

ν 3.7 Hypotheses 31

ν 3.8 Research Process 31

ν 3.9 Pilot testing 32

ν 3.10 Data Collection Schedule 33

ν 3.11 Research Ethics 33

ν 3.12 Limitations of the Study 34

III CHAPTER 4 - RESULTS 35

ν 4.1 General Background of Foreign Direct Investment in Saudi Arabia 35

ν 4.2 Business Friendly Environment in Saudi Arabia 37

ν 4.3 Patterns in Foreign Direct Investment Inflows 38

ν 4.4 Impact of Foreign Direct Investment on the Saudi Economy 39

4.4.1 Wages 40

4.4.2 Employment 42

4.4.3 Economic Activity 43

4.4.4 Economic Integration 45

ν 4.5 Background on the three FDI Projects in Saudi Arabia 46

4.5.1 Rabigh Refining and Petrochemical Company – Petro Rabigh 46

4.5.2 Rabigh Electricity Company – Acwa Power Projects 47


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4.5.3 Etihad Etisalat Company – Mobily 48

IV CHAPTER 5 - DISCUSSION 49

ν 5.1 Hypothesis 1 49





ν 5.6 Crowding out Effect 53

ν 5.7 Determinants of Foreign Direct Investments 53


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V CHAPTER 6 – CONCLUSION & RECOMMENDATIONS 54

VI CHAPTER 7 – REFERENCES 58

VII CHAPTER 8 – APPENDIXES 63

ν 8.1 Appendix I 63

ν 8.2 Appendix II 64

ν 8.3 Appendix III 68

ν 8.4 Appendix IV 70

ν 8.5 Appendix V 73


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ACKNOWLEDGEMENTS

Having completed this piece of work I would like to express my deepest gratitude to my family,

and specially my lovely caring parents who have guided me throughout my life, taught me to

stand for my principles and helped me learn that everything is achievable by hard work and full

devotion. Thank you so much for all the support you gave me, I love you the most!

I would like to acknowledge that this dissertation would have not been possible without the

assistance of Prof. Keith Pilbeam who has offered his generous guidance and advice throughout

the year.

I’d like to thank the Saudi Arabian government, which offered me the chance to continue with

my studies at City University London. And finally, many thanks to my wonderful friend ‘”Dana

Al-Sami” who stood with me from the very beginning of my journey!

Regards,

Jellan


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ABSTRACT

This study explores the scope of data regarding relevance between foreign direct investment

attraction as a capital flow into Saudi Arabia as a host country and its determinative influences.

The aim for this academic study is to examine the factors that have mainly promoted economic

growth in Saudi Arabia in contribution to foreign direct investment inflows by investigating the

determinants of FDI and whether they are enhancing the economy of Saudi Arabia. I aim to

examine several important elements that are taken into consideration by potential investors: the

financial sector development and liberalization, the business environment, the infrastructure of

Saudi Arabia, and the work force. Then, I intend to deliberate with reference to the spill over

effect in such a matter and the benefits it may bring in terms of efficiency, employment, social

factors, technology inflows, and finally economic integration. The analysis of my study

necessitates conducting interviews and gathering direct data. Having said that, I would like to

apply a study of three existing FDI projects that are held in Saudi Arabia. I aim to emphasize on

the projects that were investing in Saudi Arabia starting 2000 and up till 2009. The final purpose

is to understand the impact of foreign direct investment as a whole on the Saudi rigid economy.


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CHAPTER 1: INTRODUCTION

Ever since the beginning of the current decade, economies and international institutions have

been actively promoting economic integration and globalization. It has been argued by

economists, that this will result in income convergence, improved standards of living for the

global citizen as well as technology and knowledge transfers. Besides lowering trade barriers,

another important means of achieving globalization is creating an environment that attracts

foreign multinational corporations. FDI flows are known for the many advantages that they

provide to their host country.

FDI in the developing countries has been perceived as an important key resource of economic

enlargement. Potential foreign investors are now being challenged with certain host

government incentives. In reference to recent economic development plans, the future vision

of social, economic, and political prosperity in the country is distinguished as being eventually

related to its ability to invite more FDI inflows in recent years.

In this context, Saudi Arabia has recently introduced policies to attract FDI flows into its

economy in various sectors as a means of achieving diversification and lowering vulnerability

to external shocks. The aim of this study is to assess the impact that FDI flows have had on

the Saudi economy by endorsing efficiency, encouraging the use of technology, involving

economic integration and social factors, empowering the workforce, and increasing

employment levels. In order to examine new policies to be introduced, the authorities can

implement the results in this study to ensure that the benefits of FDI are being obtained whilst

possible negative influences are being mitigated.


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1.1 Background

Prior to the global economic crisis, the UAE was known to be the first destination for FDI

flows by countries all over the world. There was immense growth potential, a rising market

with increasing demand and minimal business regulations. However the surge in FDI resulted

in massive exploitation of the labor force and of the environment, since appropriate

infrastructure and laws were not established to preserve the interests of the workers. Despite

these problems inherent in Dubai followed by the global economic crisis, Dubai is still seen as

the most preferred destination for FDI flows by most investors worldwide and it is the

massive inflow of foreign investment that has helped the economy rebuild itself after the crisis

that caused massive problems especially in the real estate sector (Augustine, 2010).

Realizing the massive benefits of FDI flows for Dubai, the Saudi economy has followed suite

to attract FDI flows into the country by offering low business regulations and easing

restrictions on foreign participation in the economy. This has been largely successful owing to

the fact that the economy has been able to attract massive inflows of FDI increasing from $34

billion in 2005 to $147 billion in 2009. Furthermore in an attempt to reduce the economy’s

vulnerability to external shocks, Saudi Arabia has successfully diversified its economy

focusing on sectors including utilities, hotels & restaurants and construction. Electricity on its

own attracted FDI inflows rising from $1,371 million in 2005 to $ 6,402 million in 2009

whilst construction industry attracted $1552 million in 2005 rising to 15,378 million in 2009.

Hotel and restaurants also faced substantial increase in FDI flows rising from $34 million to

$784 million (SAGIA, 2010).

Despite these impressive statistics, there is little research analyzing the effects that FDI have

had on the economy in terms of employment, social environment, trade and efficiency.


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Analyzing FDI from the perspective of these factors is the purpose of this study.

1.2 Statement of the problem

Given the trend by developing and transition economies to attract FDI flows as a means of

achieving economic growth, technology and knowledge spillovers and raising the standard of

living of the average citizen, it is necessary to analyze the impact that FDI has had on the

Saudi Arabian economy and the benefits it may have brought. Such benefits would be

efficiency, enhancing the workforce, improving domestic production by promoting

competition, If the study reveals that despite large flows of FDI, massive improvements have

not been seen in the standard of living or in the efficiency of local and foreign firms, than it is

important to identify obstacles and suggest policies that can improve the channel through

which FDI can benefit the entire economy and its local industry. Consequently, if the study

reveals that FDI flows have helped the economy raise its welfare and domestic industry

productivity, than policies can be suggested to further focus the economy’s efforts on

promoting FDI whilst mitigating the negative effects such as exploitation of the workforce

and environmental degradation.

Aims and Objectives

The aim of this study is to analyze the impact of FDI flows on the Saudi economy on

efficiency, technology, employment, and economic integration and activity. The variables to

be analyzed will be obtained from the literature review and consequently the impact that FDI

flows have had on those variables, if any at all, will be assessed in the context of Saudi


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Arabia. The list of objectives are as follows:

• Analyze the literature to obtain the main variables that FDI is known to effect.

• Examine the changes in those variables over a period of time in the context of Saudi

Arabia.

• Interview management in different industries of the economy as well as officials from

Government authorities to obtain feedback regarding the extent to which FDI has

helped the economy.

• Examine any possible impacts that FDI have had.

• Provide suitable recommendations.

1.3 Professional Significance

The study of FDI flows and its impact on society is an analysis of the macro economy and

therefore the significance of this report will be primarily for Government authorities such as

the Saudi Arabian General Investment Authority - SAGIA to understand the current impact

that FDI is having on the economy and the type of policies that need to be pursued to limit the

negative impacts of FDI and promote more efficiency, technology, employment, and

economic integration. This is especially important since most economies simply focus on

raising FDI levels and monitoring growth without assessing whether or not technology and

productivity spillovers are taking place and the standard of living of the average individual is

improving. The best example of this is Dubai where FDI flows were stressed and the negative

impacts of it in terms of exploitation of workforce and environmental degradation were

ignored.


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1.4 Dissertation Structure

The following chapter conducts a detailed literature review highlighting the definition of FDI,

the determinants of FDI and the important variables that need to be examined when assessing

the impact of FDI on the host country. This is followed by chapter 3 that analyzes the

methodology used in the study examining the type of data, research philosophy and research

instruments used. In addition, the main hypotheses to be tested are also examined. Chapter 4

and chapter 5 conduct a detailed results and discussion section that investigate the impact of

FDI on Saudi Arabia followed by conclusion and recommendations in Chapter 6.

Chapter summary

This chapter has examined the main aims and objectives of the study as well as highlighting

the professional significance and structure. The next chapter conducts a detailed literature

review on FDI and its benefits to society.


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CHAPTER 2: LITERATURE REVIEW

The following chapter highlights some of the literature on foreign direct investment. Section

2.1 defines FDI followed by an examination of some of the main determinants of foreign

direct investment as identified by researchers in section 2.2. The main focus of the chapter

however is the benefits of foreign investment for the host country outlined and described in

section 2.3.

2.1. Definition of Foreign Direct Investment

Most researchers identify foreign direct investment as the establishment of a production plant

in a host country by a foreign company. As a result, final and intermediate goods that might

be required by the production plant from abroad or sent by the plant to destinations abroad

would constitute import and export for the host country (Neuhaus, 2005: Neary, 2008). More

importantly, the establishment of such a plant indicates the existence of a long-term

relationship that will result between the host country and the foreign company.

Over time, however, some researchers argue that since it is the long term interest that a

foreign company shows in a host country that is important this implies that other activities

should also constitute FDI such as the investment of a foreign company in purchasing shares

of a local company in the host country with the intention of establishing a long term

relationship (Resmini, 2000). In this way, joint ventures also constitute a form of FDI.

Other researchers have defined foreign direct investment in terms of its impact on an

economy’s production level and production frontier. In this respect, Yao & Wei (2007) argue

that FDI is an activity that helps to lower the gap between the actual level of production of a


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country and its steady state production frontier. Furthermore, as a result of the inflow of

advanced technology and knowledge spillover effects of foreign investment, the authors argue

that FDI also has a second function of shifting the host country’s production frontier

outwards. It is this dual function performed by FDI that enables developing countries to

‘catch up’ with the more advanced nations in terms of GDP per capita such as China that has

experienced significant growth over the years due to FDI inflows.

2.2. Determinants of Foreign Direct Investment

Over time, researchers have identified several factors as being important determinants for

FDI. This section examines some of these factors in detail.

2.2.1. Financial sector development and liberalization

Campos & Kinoshita (2008) analyzed the impact of financial sector development and

liberalization on FDI flows by using independent variables such as supervision, credit

ceilings, financial sector liberalization index and the development of the securities market as

variables indicating the level of financial reform in the country. Significance testing revealed

that economies with a higher financial sector liberalization index and developed securities

market were able to attract a greater inflow of FDI. Furthermore, non-existence of credit

ceilings that aim to restrict bank lending activities and well-supervised banking institutions

resulted in a higher inflow of FDI. The authors also argued that even if the economy’s current

financial sector is not highly developed it can attract considerable flows of FDI as long as it

implements policies that are designed to develop the financial sector in the future.


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2.2.2. Business Environment

The business/ investment climate can be analyzed in terms of the political, economic and

regulatory environment in the economy.

Researchers have found that the political stability of an economy can positively influence FDI

inflows significantly as they reduce the level of risk and uncertainty involved for foreign

companies (Agarwal & Feils, 2007). In this regard, Busse & Hefeker (2007) argued that

factors such as government stability, internal and external conflict, levels of corruption, ethnic

tensions, law and order, democratic accountability of the Government and the quality of

bureaucracy are significant determinants of foreign direct investment. Nunnenkam & Spatz,

(2007) highlighted the importance of intellectual property rights arguing that greater property

rights would not only increase FDI flows but also improve the quality of FDI.

Similarly, in terms of economic environment, economic instability, high balance of payment

deficits, inflation and inflation uncertainty have a negative and significant impact on FDI

inflows (Apergis & Katrakilidis, 1998 ; Asiedu, 2002 ; Bengoa & Robles, 2003 ; Durham,

2004).

Regulatory environment pertains to regulations that directly affect corporations and foreign

investors such as the corporate tax structure, foreign ownership, labor laws, license

requirements and quotas that aim to restrict corporate activity. The lower the degree of

restrictions and constraints and the lower the tax rates, the greater is the inflow of FDI

(Woodward & Rolfe, 1993).

Political, economic and regulatory environment in total define the governance of the economy

and its institutional setup. Therefore the more efficient the institutional environment the


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greater is the incentive for foreign firms, reducing uncertainty and raising efficiency

(Kirkpatrick, Parker, Zhang, 2006). Furthermore, as argued by Globerman & Shapiro (2002)

good governance infrastructure can not only attract FDI but can also stimulate the

establishment of domestic multinational corporations. However, the benefits of governance in

terms of FDI inflows experiences diminishing returns implying that the positive consequences

for FDI are most pronounced for smaller and developing economies.

These results can be summarized in figure 1 below.

Figure 1: Business /Investment Climate

2.2.3. Infrastructure

The evidence regarding the importance of infrastructure as a determinant of FDI is mixed

since researchers claim that the result depends on the type of FDI being analyzed. That is

factors such as kilometers of paved highways per capita, number of telephones and

BUSINESS / INVESTMENT CLIMATE

POLITICAL REGULATORY ECONOMIC

CONFLICT

STABILITY

CORRUPTION

LAW & ORDER

INFLATION

INFLATION UNCERTAINTY

HIGH BOP DEFICIT

ECONOMIC INSTABILITY

TAX

LABOR LAWS

FOREIGN OWNERSHIP


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expenditure on road transport have a positive and significant influence on certain industries

towards which inward oriented FDI is being directed but not so in other industries (Pham,

2004).

Other researchers however, argue that infrastructure plays a vital role in developing countries

especially because of its role in promoting agglomeration (Crozer & Mayer, 2004). For

instance, Wheeler & Mody (2002) argue that one of the main factors considered by US

investors in deciding where to invest their funds, is the possibility of agglomeration benefits,

which in turn are promoted through high quality infrastructure. For example developing

countries with high quality infrastructure, situated in Asia, Latin America and Eastern Europe

have been associated with high inflows of FDI.

2.2.4. Labor

Some researchers argue that low cost of labor is one of the most important determinants of

FDI inflows into a host country, however others argue that although this factor was important

in the past, it is no longer significant in determining FDI. Instead availability of skilled

workers and productivity of labor are more relevant factors influencing FDI decisions for

foreign investors. In this regard Coughlin & Segev (2000) found that higher levels of

productivity of the workforce was associated with higher levels of FDI whilst lower levels of

labor cost per unit of labor was associated with higher levels of FDI.

Table 1 below provides an overview of the important determinants of FDI mentioned in this

section together with a list of the associated researchers.


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Table 1: Overview of important determinants of FDI with associated researchers

DETERMINANT RESEARCHERS

Financial sector development/liberalization Campos & Kinoshita (2008)

Business / Investment environment Agarwal & Feils (2007) ; Busse & Hefeker (2007);

Apergis & Katrakilidis (1998); Woodward & Rolfe

(1993); Kirkpatrick, Parker, Zhang (2006);

Globerman & Shapiro (2002); Nunnenkam &

Spatz, (2007)

Infrastructure Crozer & Mayer (2004); Wheeler & Mody (2002)

Labor Coughlin & Segev (2000)

2.3. Benefits of Foreign Direct Investment

Researchers have identified several benefits to a host country that are attributable to foreign

direct investment inflows. Unfortunately there is limited research regarding the impact of FDI

in Saudi Arabia since the country has only recently started to direct policies towards attracting

FDI flows. Therefore this section will focus on the general conclusions of researchers

regarding the consequences of FDI on the host country.

2.3.1. Efficiency

Lovei & Gentry (2002) argue that the inflow of FDI can have a dual effect on the host

country. First of all, it can help to increase competition forcing domestic firms to increase

efficiency and lower costs in order to survive in the industry. In the absence of such

competition, consumers are dependent on domestic firms for goods and services and this


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allows local companies to enjoy monopoly power. They have no incentive to improve

production, quality of output or raise efficiency. The high costs associated with inefficient

production is simply transferred over to consumers in the form of higher prices. Hence

competition via foreign firms that are more efficient and can produce at lower cost will not

only force domestic firms to raise efficiency but will also lower prices for consumers

(Organization for Economic Construction and Development, 2002). Liu, Siler, Wang & Wei

(2000) found similar results when examining the impact of FDI inflows into the UK

manufacturing sector between 1991-1995 arguing that the very presence of foreign firms in

the sector resulted in productivity spillovers for domestic firms, raising efficiency and

productivity. However, the authors also argued that the extent by which local firms will

increase efficiency would depend on their current state of technology.

The authors argued that the second impact of FDI inflows would be to restructure local

enterprise itself. The increased number of alliances and partnerships being made between

domestic and foreign firms alters the manner in which these firms operate. That is, local firms

in developing countries are forced to adopt new management styles and modern methods of

production raising the knowledge and efficiency of the overall corporate sector in the

developing country.

However, regarding the spillover effects that FDI can have on local firms to raise efficiency, a

report by the OECD (2002) revealed that there was greater evidence for vertical spillovers to

local firms in different stages of production, than horizontal spillovers. Therefore, it is

important to distinguish between the types of FDI being used. Horizontal FDI is undertaken

by the investor with the incentive of producing the same or similar kind of goods in the host

country aiming to exploit of monopolistic or oligopolistic advantages such as patents or


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differentiated products. Vertical FDI is undertaken with the incentive of getting closer to

suppliers (backward) or consumers by acquiring distribution outlets (forward) (Moosa, 2002)

Furthermore, Aitken, Gordon, Haarison (1997) examined FDI flows into Venezuela arguing

that although there was evidence of a positive relationship between foreign equity

participation and plant performance, this relationship was only significant for smaller firms

and not for larger firms.

2.3.2. Economic Integration

Ogutcu and Balasubramanyam (2003) argue that the long-term impact of foreign direct

investment into a country will be integrating that economy with the rest of the world. This is

especially important given the rising trend towards globalization that is promoting all

economies to open up their markets to international trade. Allowing FDI inflows into a less

developed economy will give its local consumers access to the latest variety of goods and

services and equip its workers with knowledge, skills and modern equipment. This can enable

the developing economy to modernize its domestic firms and allow them to compete

successfully in the international market.

In addition, the authors argue that flows of funds through FDI are more advantageous than

portfolio investment since the former represent a long-term form of investment that implies

not just a flow of funds to the host country, but also a flow of technology, knowledge and

goods and services.

Furthermore, the presence of FDI can also help to raise tax revenues for the local Government

allowing the host country to meet its revenue targets without have to increase tax rates on the

local population.


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2.3.3. Social Factors

Lovei & Gentry (2002) examined the impact that FDI inflows had on poverty and income

levels of the local population. Their results suggested that over the long term, FDI inflows

have been able to reduce poverty in developing countries and raise the standard of living of

the local population. Furthermore, they found a positive and significant relationship between

FDI inflows into a developing country and worker rights in that country. The authors

explained this result by suggesting that workers in less developed countries are unaware of

their rights towards factors such as health and safety and are exploited for this very reason.

Multinational corporations introduce laws that promote a safe and healthy working

environment, promote employee empowerment and support the creation of a decentralized

corporate structure where workers can voice their concerns and suggestions directly to higher

management.

2.3.4. Technology Inflows

Sader (2000) argues that FDI inflows can be associated with technology spillovers that can

have a profound impact in raising the efficiency of industries at different stages of production.

The author argues that multinational corporations often form contracts with local suppliers

and at times provide them with modern technology and equipment in order to produce the

exact components required by the foreign company. They may also equip suppliers with the

relevant skills and training required. Such technology spillovers can help to lower the

technology gap between the developed and developing economies. However, at the same

time, the author argues that such spillover effects are only possible if the technology gap

between the host country and the foreign country are not very wide. In that scenario it would


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not be possible for multinational corporations to provide local suppliers with advanced

technology since they would not have the necessary tools and equipment to use it effectively.

In situations where foreign companies have been able to effectively supply host countries and

local firms with modern technology, skills and training, the resulting technology and human

capital spillover effects have been able to raise total factor productivity in the host country

(Djankov, Hoekman, 2000).

2.3.5. Employment

Employment can increase as a result of FDI inflows either because of the additional workers

hired by the multinational corporation themselves, or because of the additional workers hired

by local firms that are replacing their employees hired by the multinational. The impact on

raising employment is greatest the further the economy is from the full level of employment.

However, that does not imply that FDI flows have no impact on employment for countries

that are near to full employment. Instead, researchers have suggested that in such economies

the resulting increase in employment that is witnessed it due to a shift of workers between

productive sectors. Wages can also increase for workers especially since multinational

corporations are usually more able and willing to pay higher wages to attract skilled workers,

than their local counterparts.

However, for certain economies there is a possibility that foreign direct investment leads to a

crowding out effect since foreign funds replace domestic funds and lower domestic

investment through competition for scarce resources. In this scenario, it is possible for FDI

flows to have limited impact on employment, although this is usually a short-term

phenomenon and is unlikely to persist in the long run (OECD, 2002).


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Chapter Summary

This chapter had conducted a thorough review of foreign direct investment highlighting the

important determinants of FDI as well as some of the main benefits of FDI for host countries.

In particular, the main determinants have been identified as financial sector development/

liberalization, business environment, infrastructure and labor costs and productivity. The

main benefits of FDI include, technology and human capital spillovers, increased efficiency

and employment, improved social environment and economic integration. The next section

examines the methodology to be used in this project.


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CHAPTER 3 - METHODOLOGY

This chapter examines the methodology to be used in this project, highlighting the philosophy,

nature of the data, research questions, research participants and limitations of the study.

3.1. Research Philosophy.

There are two main types of research philosophies that can be employed. The positivist

approach is a scientific approach that involves the collection and analysis of data in order to

test a single or series of hypothesis (Reymenyi et al, 1998). Being scientific in nature, the data

is objective and free from the personal opinion of the researcher and this allows the results

from the research to be generalized to the entire population rather than being restricted to the

sample only.

The social constructivist approach, in comparison, adopts a more holistic approach taking into

consideration individuals and the complex relationships that exist between them. Therefore

rather than depend on objective data, feelings, emotions and behavior are all analyzed with

data being subjective in nature, thus preventing generalizations being made (Saunders et al,

2008). Instead the results are specific to the individuals in the sample and may or may not

apply to agents outside of the sample. Furthermore, being subjective in nature, it is possible

for the personal opinion or judgment of the researcher to be present in the conclusion derived

since results are open to different interpretations (Drakopolous, 2009).

In this particular study, the aim is to examine the impact that FDI flows have had on the

Kingdom of Saudi Arabia. The literature review has already highlighted the important affects

that FDI has been seen to have on developing countries and therefore this helps to establish a

series of hypotheses that can be tested using data collected from reports, documents as well as


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structured interviews. The statistics gathered from reports and documents will be objective in

nature although the interviews may be subject to personal interpretation. Overall, the research

is employing the positivist philosophy at large by gathering data to test a series of hypotheses

in order to assess the impact of FDI on the Saudi Arabian economy.

3.2. Research Types

Data gathered for research purposes can be experimental or exploratory in nature. The former

refers to the observations gathered after conducting an experiment under controlled conditions

in order to assess the relationship between a series of independent and dependent variables.

On the contrary, the latter refers to the use of tools such as case study analysis, surveys and

interviews that are more descriptive in nature. These tools help to describe the past and

present situation of a particular phenomenon, although they can be subject to the personal

interpretation of the researcher.

Under the following project, given that the impact of FDI on the Kingdom of Saudi Arabia is

being assessed, it is difficult to conduct a controlled experiment and therefore using

exploratory data is more appropriate. Reports and documents that examine changes in

employment, income and other variables for Saudi Arabia over a period of time will be

analyzed and this will form the basis of the secondary data. In addition to this interviews will

be conducted to obtain the personal opinion of Government authority officials and corporate

managers and the results from this will form the basis of the primary data.

In terms of analyzing the data gathered, most of the information obtained from reports and

documents will be quantitative in nature analyzing the changes in variables over a period of


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time. In contrast the interview sessions will form the qualitative data used in the study to

ascertain the opinion of officials regarding the impact of FDI on the country.

3.3. Research Questions

The main aim of this study is to analyze the impact that FDI inflows have had on the Saudi

Arabian economy. With this goal in mind, the following are the research questions of the

study:

What are the main areas to which FDI is being directed?

How have employment and income levels changed ever since FDI investment has occurred?

Is there any evidence of technology or productivity spillovers?

Is there any evidence of domestic crowding out seen as a result of FDI flows?

3.4. Research Participants

In order to obtain information regarding the historical changes in FDI patterns in the Saudi

Arabian economy, assess changes in trading patterns that might have resulted, identify the

main areas towards which FDI is being directed and examine some of the Government

policies that have aimed to raise the attractiveness of the economy to foreign investors,

officials from the Saudi Arabian General Investment Authority.

At the same time, managers of companies in the oil & gas industry and construction industry

of Saudi Arabia towards which most of the FDI flows have been directed (Saudi Arabian

General Investment Authority, 2010) can provide information regarding the impact that FDI is


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having in terms of technology and productivity spillovers. This is especially true since such

FDI flows represent vertical FDI, which as seen in the literature review, should show more

evidence of productivity spillovers than horizontal FDI (Moosa, 2002). Management can also

identify any evidence of crowding out that FDI might be having on domestic investment.

The study will interview managers of companies from three main industries in the country

namely: Oil & Gas, Electricity and Telecommunications. For this purpose the management of

Rabigh Refining and Petrochemical Company will be interviewed representing a joint venture

of both Saudi Aramco and Sumitomo chemical company of Japan. In addition management at

the Rabigh Electricity Company will be interviewed to obtain insight on the effects of FDI on

the energy sector. In addition owing to the diversification of the economy’s funds towards the

promotion of non oil industries such as technology and agriculture, management of Etihad

Etisalat, a joint venture of the Emirates Telecommunications Corporation and six other Saudi

partner companies will be interviewed.

3.5 Research Instruments

The main instrument used to gather the primary data will be structured interviews. The

following are some of the questions that will be included in the interview of officials at the

Saudi Arabian Government Investment Authority and Saudi Basic Industries Corporation.

1. What are some of the main industries receiving Foreign Direct Investment in Saudi Arabia?

2. What has been the general impact of FDI flows on the economy?

3. To what extent has employment been generated by FDI inflows?

4. To what extent has income increased due to FDI inflows?


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5. Has FDI flows towards infrastructures, oil & gas and construction industries helped to

further raise the attractiveness of the country to foreign investors?

6. Is there any evidence of technology and productivity spillovers that have helped domestic

firms?

7. Is there any evidence that FDI flows have increased competition in the domestic industry?

8. Has FDI flows altered the corporate culture in the industry? For example, have joint

ventures with foreign companies forced local firms to alter their management and production

styles?

9. Is there any evidence that the Saudi economy has experienced increasing trade volumes

ever since the rise in FDI inflows?

10. Have trading patterns changed ever since the rise in FDI inflows?

- Interview questions for management at companies such as Etihad Etisalat (Mobily), Rabigh

Refining and Petrochemical Company (Petro Rabigh), and Rabigh Electricity Company will

be as follows:

1. To what extent is your company dependent on FDI flows for funding?

2. Do you feel that FDI flows / joint ventures have been accompanied with a supply of new

technology or knowledge?

3. In your opinion, will FDI flows from any country to Saudi Arabia result in inflows of

technology and knowledge or does it depend on the country from where FDI is coming from?

4. Do you feel that competition in your industry has become more intense ever since FDI

flows have increased in the country?


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5. Has the basic wage increased for the workforce in your company ever since the rise in FDI

inflows / joint ventures?

6. Has foreign direct investment enhanced the skills and productivity of your company’s

workforce?

7. Do you feel that companies in the industry were generally less efficient as compared to

foreign firms during the early years of FDI inflow?

8. Has the inflow of FDI into the industry forced you to undergo business process

reengineering or altering your management styles to raise efficiency?

9. Do you feel workers rights or employee empowerment has increased ever since joint

ventures/ FDI inflows into the industry?

3.6. Secondary Sources

Information regarding changes in FDI flows over time and their impact on economic variables

such as trading volumes, income levels and employment can be obtained primarily through

reports and Government documents that will form the main secondary sources. Reports and

documents often involve a detailed case study analysis of the country in question and can

provide the bulk of the quantitative data required to assess the impact that FDI has had on the

economy. In addition, information from books and articles can highlight any evidence of

increased competition or spillover effects that might have been witnessed in different

industries as well as evidence of the ‘crowding out’ effect whereby foreign investment

‘crowds out’ domestic investment.


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3.7. Hypotheses

Given the research results from the literature review, the following is the expected impact of

FDI flows into Saudi Arabia:

Hypothesis 1: Employment in domestic firms should increase albeit with a small time lag

(OECD, 2002).

Hypothesis 2: Employment in foreign firms/ joint ventures should increase albeit with a time

lag.

Hypotheses 3: Social factors and the work environment should improve over time (Lovei &

Gentry, 2002).

Hypothesis 4: Since the technology gap between Saudi Arabia and advanced countries is not

very large, there should be technology spillovers seen from FDI inflows (Sader, 2000).

Hypothesis 5: Competition and productivity should increase resulting in an increase in variety

and / or lower prices for consumers (Lovei & Gentry, 2002).

3.8. Research Process

The research process and methodology used has been explained in detail allowing for the

research to be duplicated for future study. The Government agencies and companies to be

included in the primary data as well as the questions asked in the structured interviews are all

documented.


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3.9. Pilot Testing

Pilot testing is essential for the structured interviews, in order to ensure that the participants

fully understand the questions being asked and interpret them correctly. This is especially

important since differences in language and communication styles are factors that can prevent

an effective interview from being conducted. Therefore it is important that complicated

economic or business terminology is not used and the wordings of the structured interview are

such that they can be easily interpreted. Questions asked need to be direct and given that the

Saudi culture is known for emphasizing on both content and context (Geert Hofstede, 2010), it

is important to monitor the context in which the interview is being conducted.

Pilot testing was conducted on family and friends in order to ensure that questions were

interpreted correctly. The results of the testing revealed that certain terminology such as

‘production and technology spillovers’ were difficult to understand and were often

misinterpreted. Therefore it is necessary to supplement the questions being asked with

examples to ensure that the participants have the correct understanding of the question being

asked.


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3.10. Data Collection Schedule

Table 2:

3.11 Research Ethics

The data to be collected from the study comprises of both secondary and primary data.

Although there is no ethical consideration regarding the secondary data, it is necessary to

understand the culture and norms when administering the primary data. Therefore given the

Task ID

Task Name Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9

1 Project Planning

Examine papers regarding the impact of FDI on economic variables

(Literature review)

Examine papers regarding the impact of FDI on economic variables

(Literature review)

Plan the various methods to successfully answer the research questions

2 Library Work

Examines various definitions of FDI and important determinants

Research papers that identify the positive impact that FDI has on the host economy

Analyze the methods by which researcher have collected data in past papers.

Examine previous questionnaires and interviews by researchers and read important ethical issues to consider when administering interviews in Middle Eastern cultures.

Research important points to consider when designing questionnaires and structured interviews

3 Planning Survey

Prepare the questions on the interview

Pilot testing

4 Data Collection

Collect the data from the structured interviews and secondary sources

Use the data to test the hypotheses.

Answer the research questions.


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profound influence of Islam in shaping the culture and norms of Saudi Arabia and the fact that

such cultures rank high in context, it is important that the employees and officials being

interviewed are treated with respect and words are carefully chosen. In addition if members

of the opposite sex are being interviewed then certain norms have to be followed regarding

communication styles such as avoiding prolonged eye contact with the opposite sex that is not

appreciated in such cultures.

3.12. Limitations of the Study

Due to limited time it was not possible to include a large sample of companies in many

industries and instead only three companies were chosen. As a result, since the data collected

from interview is subjective in nature, it may be that the results from the study are not

representative of the overall population. It would be beneficial to repeat the study with a larger

sample.

It would also be useful to repeat this study focusing on quantitative data regarding

employment and income levels over a period of time and using econometric analysis in order

to ascertain whether FDI inflows is a significant variable in explaining the variations seen in

employment and income. This can help ensure that positive changes in employment and

income levels are due to FDI inflows and not some third factor.

Finally, the study should be repeated collecting data from other countries in the Middle East

that have recently started focusing economic policy towards attracting FDI. In this way, the

results can justify whether FDI inflows have a significant impact on economic variables

regardless of the country being considered.


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CHAPTER 4 – RESULTS

As mentioned in the methodology, data will be obtained from various primary and secondary

sources. The primary data will be obtained from interviews conducted of Government

officials at the Saudi Arabian General Investment Authority - SAGIA as well as the

management of Rabigh Electricity Company, Rabigh Refining and Petrochemical Company

(Also known as Petro Rabigh), and Etihad Etisalat (known as Mobily). A general background

on FDI inflows in Saudi Arabia will be revealed before disclosing the results from the

structured interviews and the secondary sources are highlighted in the sections below.

4.1 General Background on Foreign Direct Investment inflows in Saudi

Arabia

SAGIA – is the Saudi Arabian General Investment Authority, the main representative of the

investment sector in the country. It is mainly responsible of handling investment services and

attracting potential investors to engage in business opportunities in the kingdom. (Saudi

Arabia General Investment Authority, 2010).

Table 3:

Foreign Direct Investment inflows into Saudi Arabia, 2001-2009 (in US Million dollars).

2001 2002 2003 2004 2005 2006 2007 2008 2009

FDI inflows 504 453 778 1,867 12,097 18,293 24,318 38,151 35,514

Growth in FDI

inflows (% change).

- -11.2% 41.7% 58.3% 84.5% 33.8% 24% 36.2% -7.42%

Source: World Investment Report of UNCTAD 2010.


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As indicated in Table 3, the data is withdrawn from the United Nations conference on trade

and development. (World Investment Report 2010). The report shows a gradual increase of

FDI inflows into Saudi Arabia throughout the years. In fact, it shows a drastic increase

starting in year 2004 where it reached $1,867 billion noticing also a significance increase of

$18,293 billion in the year of 2006. Saudi Arabia has been set to be the desired destination of

attracting FDI inflows in the year of 2008, reaching 38,151 billion, which is almost double the

total in 2007.

Figure 2: FDI Inflows into Saudi Arabia (%):

Source: Saudi Arabian General Investment Authority report, 2009.

As indicated in figure 2, an analysis of the sectors from where FDI flows are involved

uncovers that the greatest inflows is in the real estate sector reaching 20.8% of total inflows

followed the petrochemical industries where it reached 16.4%, then 14.9% in refined


- 37 -

petroleum products, 9.9% in the mining, oil and gas sector, 7.7% in financial services, 7.5% in

contracting, 5.3% in transport, storage and communications, finally 2.9% in electricity and

water supply. (Saudi Arabia General Investment Authority, 2010)

4.2 Business Friendly Environment in Saudi Arabia Realizing the potential benefits of FDI inflows, the Saudi Government has expended

considerable resources in creating a business friendly environment and lowering regulations to

encourage the entry of foreign multinational corporations. These changes has increased the

economy’s rank from the 67th to the 13th position in the World Bank’s ‘ease of doing business’

index and has also been made the number one country to do business in the Middle East.

Furthermore, economists and Government officials expect that the inflows of FDI will

positively influence the GDP growth of the economy causing it to grow at an average of 4.5%

annually (Business Intelligence, 2010).

Besides creating a business friendly environment, the economy has allocated resources to

improving the infrastructure and communications technology of the country known to be

important determinants of FDI inflows (Saudi Arabia General Investment Authority, 2010). It

has also lowered the tax rate on foreign companies from 45% in 2000 to 20% by 2008 and has

introduced a one stop shop for foreign multinationals reducing red tape and introducing a 30

day deadline for decisions on investment applications (Ali, 2008).


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4.3 Patterns in Foreign Direct Investment Inflows

Figure 3: FDI inflows in Saudi Arabia by Source (%):

Source: Saudi Arabian General Investment Authority Report, 2009.

Despite the onset of the global financial crisis, Saudi Arabia has been successful in attracting

FDI flows to the economy for various foreign countries. In 2008, the total FDI inflow was

measured at $38.2 billion whilst the total inflow in 2009 was valued at $35.5 billion.

Furthermore as an effort to diversify the economy, FDI flows have been directed to various

sectors including, telecommunications, transportation, real estate, infrastructure, banking, oil

and gas and construction. (World Investment Report of UNCTAD, 2010).

Figure 3, above, is an illustration of an analysis of the countries from where FDI flows are

originating. It reveals that the greatest inflow is from the UAE reaching 15.4% of total inflows

followed by USA, 13.6%, Kuwait takes 11.7%, France, 9%, Netherlands reaches 8.8%, Japan


- 39 -

6.1%, and china 4%. This remarkable inflow of FDI has also resulted in a large increase in the

total value of foreign investments and joint ventures increasing from $74 billion in 2005 to

$300 billion in 2009. In addition, the percentage of foreign investments to total investments

have increased from 45% in 2005 to 49% in 2009 suggesting that almost half of the total

investments in the economy is from foreign countries (Saudi Arabia General Investment

Authority, 2009).

4.4 Impact of Foreign Direct Investment on the Saudi Economy

According to the report by the Saudi Arabian General Investment Authority in 2010 on the

impact of FDI on the Saudi economy, the following inflows of capital have had substantial

impact on wages, employment, GDP and added value for the economy.


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4.4.1 Wages

Table 4:

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total

wages

paid

15,390 15,119 15,853 14,783 13,555 14,314 15,964 16,446 21,696 22,000

Percenta

ge change

in wages

growth

- -1.8% 4.6% -7.2% -9.1% 5.3% 10.3% 2.9% 24.1% 1.3%

Inflation

average

-1.1% -1.13%

0.23% 0.58% 0.36% 0.63% 2.31% 4.11% 9.87% 5.05%

Wages

real

growth

- -0.42% 4.37% -6.62% -8.74% 4.67% 7.99% -1.21% 14.23% -3.75%

Source: Trading Economics Indicators in Saudi Arabia, 2010

http://www.tradingeconomics.com/saudi-arabia/indicators/

The report suggests that as a result of FDI, total salaries and wages have increased from

$15.39 billion in 2000 to $22 billion in 2009. This represents almost a tremendous increase in

total salaries being paid. It can be implied that perhaps the standard of living of each person

on average has improved in accordance to the substantial increase in real wages growth (real

growth after subtracting the inflation rate) from the years 2005 to 2009. (Trading Economics,



- 41 -

2010). The wages percentage growth have been increasing and decreasing throughout the

years, the percentage in real wages growth showed a percentage of -0.42% in 2001 to a

sudden increase of 7.99 % in 2006, and in 2008 the growth percentage went high to a 14.23%,

which increased the job market, and created numerous new jobs in various fields.


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4.4.2 Employment

Table 5: The Decline of Unemployment rate in Saudi Arabia, 2003-2010.

Year Unemployment

Rate

Percentage

change

Date information

2003 25% - 2002

2004 25% 0% 2003

2005 25% 0% 2004 est.

2006 13% -48% 2004 est.

2007 13% 0% 2004 est.

2008 13% 0% 2004 est.

2009 11.8% -9.23% 2008 est.

2010 11.6% -1.69% 2009 est.

Source: CIA fact book, 2010.

The Data demonstrated in the table above, indicates that the unemployment rate in Saudi

Arabia have been maintaining a consistent level of increase, barely surpassed the threshold of

$25% during the years of 2003-2005. Thereby representing a substantial decrease of almost

48% relative to recent years. On the other hand, throughout the years from 2006 to 2010 the

unemployment rate decreased significantly reaching 11.6%. Which is a positive indication

that Saudi Arabia has developed new jobs in the market that might be assisted by FDI inflows.

(FDI report, 2009).

The total number of jobs that have been created as a result of FDI projects alone have

increased from 225,000 in 2005 to 375,000 in 2009. Furthermore, in 2009 alone 40,000 jobs


- 43 -

were created due to FDI projects in the country. This has drastically helped to lower the

unemployment rate, which was measured at 11.6% in 2010. (Saudi Arabian General

Investment Authority, 2009).

4.4.3 Economic Activity

Table 6: GDP Levels in Saudi Arabia

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

GDP

(US

Billion

$)

188.7 183.3 188.8 214.9 250.7 315.8

356.6 385.2 475.7 369.7

Nominal

GDP

Growth

Rate

(%)

14.5% -2.9% 2.9% 12.14% 14.3% 20.6% 11.2% 7.4% 19% -28.7%

Inflation

average

(%)

-1.1% -1.13%

0.23% 0.58% 0.36% 0.63% 2.31% 4.11% 9.87% 5.05%

Real

GDP

growth

(%)

13.4% -1.77% 2.67% 11.56% 13.94% 19.97% 8.89% 3.29% 9.13% -23.65%



- 44 -

Table 6 above, highlights the growing role represented by FDI, with a GDP growth of

approximately 188.7 in 2000 to 369.7 in 2009. The real GDP growth value presented in the

table above, shows that a substantial growth has been taken place starting at a value of

11.56% in 2003, then growing to 19.97% in 2005, and then decreasing to -23.65% in 2009.

This could be explained by the noticed increase in inflation averages from 2006 till 2009.

(FDI report, 2009).

Although there has been a profound impact on GDP growth and GDP with national income

levels.(CIA, 2010). It has been accompanied by a tremendous increase in sales volume in the

country. According to the SAGIA report, sales increased in the country from $57 billion in

2005 to $105 billion in 2009. Similarly local purchases have increased from $34 billion in

2005 to $60 billion in 2009. (Saudi Arabia General Investment Authority, 2009).


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4.4.4 Economic Integration

Table 7: Foreign trade volumes, 2000-2008

Foreign Trade

Indicators

2000 2001 2002 2003 2004 2005 2006 2007 2008

Exports of

Goods &

Services

82,259 72,980

77,641 98,956 131,848 192,121 225,506

249,285 323,070

Change in

Exports (%)

- -12.7%

6% 21.5% 24.9% 31.4% 14.8%

9.5% 22.8%

Imports of

Goods &

Services

52,932 47,887 49,604 54,725 66,746 87,717 113,495 145,280 176,040

Change in

Imports (%)

- -10.5% 3.5% 9.36% 18% 23.9% 22.7% 21.9% 17.5%


Table 7, proves that the foreign trade volume indicators represent a range of values starting

with the year 2000 where an increase in trade volumes was apparent. Recording a value of

$82.259 million of exported goods, while throughout the years, from 2001 to 2008, it showed

a great steady improvement to establish positive shared revenue. The change in exports

improved by 22.8% in 2008, which reflects the importance of the economic activities,


- 46 -

integration, and foreign trade volumes in the national economy.

Increase in FDI flows have also helped to economically integrate Saudi Arabia with the rest of

the world. In particular, this can be demonstrated by the substantial increase in trade volume

over the years. The report reveals that total exports increased from 192,121 billion to 323,070

billion over the four-year period spanning 2005-2009. Which demonstrates the increase of the

percentage of FDI export’s projects to the total non-oil exports of the country to improve from

-12.7% to above 22.8%. (Trading Economics, 2010). Although, the primary source of export

revenue for the country is accounted on oil exports, also, a secondary reliable source is the

exports from FDI projects gaining importance amongst the non-oil exports of the country.

(FDI Report, 2009)

4.5 Background on the three projects

4.5.1 Rabigh Refining & Petrochemical Company – Petro Rabigh Rabigh Refining and Petro Chemical Company (Petro Rabigh) is a refining company with a

paid capital of US $2,336,000,000. It involved in the development, construction, and

operation of a combined petroleum refining and petrochemical complex. Including the

production of refined petroleum and petrochemical products, and hydrocarbon products. The

company’s objective is to establish a profitable refining and petrochemical enterprise that

converts hydrocarbon natural resources into products that enrich the human life. By

manufacturing refined petroleum products, petrochemical products and other hydrocarbon


- 47 -

products, which include the following: gasoline, naphtha, jet, diesel, fuel oil, polyethylene,

monoethylene glycol, polypropylene and propylene oxide.

In concern of jobs creation, the company made significant progress towards the recruitment

and development of a skilled workforce. It has established training programs in coordination

with specialized institutes, especially in the operation and maintenance aspects of the plants.

Total number of employees has reached about 2,200 by the end of December 2009. (Rabigh

Refining & Petrochemical Company report, 2009)

4.5.2 Rabigh Electricity Company – ACWA Power projects Rabigh Electricity Company is a project recently established by Acwa Power Projects. It is

one of the largest Greenfield independent power projects in Saudi Arabia that is sponsored by

ACWA, KEPCO, and SEC. with a paid capital of US $1,503,252,115. The company is located

in Rabigh, which is 150km north of Jeddah city in Saudi Arabia. It is responsible of providing

Rabigh with electricity generated by fuel that is supplied by ARAMCO.

Ever since the start of the company, it was able to create a large number of jobs reaching up to

3,000 jobs, proving the positive effect of FDI into the Saudi economy. (Acwa power projects

annual report, 2009).


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4.5.3 Etihad Etisalat Company (Mobily) Etihad Etisalat is a company operating mobile wireless telecommunications network in the

Kingdom of Saudi Arabia. They develop technology software’s and work on installing

networks and maintaining related softwares. Finally, they are responsible of the Wholesale

and retail trade in computers and electronic equipment, maintenance and operation of such

equipment.

Etihad Etisalat Company, is the second largest authorized telecommunications provider and

services within the kingdom of Saudi Arabia. Ever since the establishment of the company in

the year of 2004, it aims to operate mobile telecommunication networks and provide a variety

of telecommunications services in the Kingdom of Saudi Arabia, such services include, a

Wireless mobile connectivity, data, and internet services.

In terms of the new jobs, the company led to creating jobs that increased the job market

significantly creating 3080 new jobs, which is positive indication of FDI in the economy of

Saudi Arabia. (Etihad Etisalat annual report, 2009).


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CHAPTER 5 - DISCUSSION

The paper had previously analyzed the impact of FDI flows into Saudi Arabia. In particular,

the literature review highlighted for five main benefits that FDI flows can have for an

economy namely: technology spillovers, economic integration, employment, efficiency and

standard of living (social factors). At the same time there are possibilities of crowding out of

domestic investment that needs to be minimized. These results had helped to generate five

hypotheses. The following sections analyze the results for each hypothesis.

5.1 Hypothesis 1: Employment in domestic firms should increase albeit with

a small time lag.

There is sufficient statistics available regarding the actual employment figures of locals in

domestic firms suggesting that employment rate has increased significantly from the year

2006. Moreover, according to an interview from the relationship manager at SAGIA, the

Government’s investment in infrastructure and communications to attract FDI projects is

aimed at ultimately increasing employment for Saudi locals in the country. For instance the

establishment of King Abdullah City is designed to create one million jobs due to the local

and foreign investments it will attract. Though there will be a time lag since it takes time for

foreign companies to enter into the Saudi market and raise demand for local firms through

vertical and horizontal integration. Furthermore cultural differences will further prolong the

time it takes for trust to be established necessary before foreign firms and local firms can enter

into long-term relationships with each other.


- 50 -

5.2 Hypothesis 2: Employment in foreign firms/ joint ventures should

increase albeit with a time lag.

There is evidence in support of this hypothesis from the SAGIA report that states the number

of jobs created from FDI projects alone have increased from 225,000 to 375,000 over a span

of four years. Furthermore, in this case, there is no time lag between FDI inflows and job

creation unlike the case of domestic industry where vertical and horizontal integration is

necessary.

5.3 Hypothesis 3: The social environment should improve for workers over

time.

According to Lovei & Gentry (2002) inflows of FDI help to increase GDP and income per

capita over time thus raising the standard of living of the average citizen. In this case, both

primary and secondary data support this view. Results suggest that total salaries and wages

have increased from $15.39 billion to $22 billion over the years 2000 to 2009. Assuming that

the labor force has not doubled during the same time, this would suggest an increase in

income per capita for people employed in the labor market.

However, there is not such strong support from the interviews. Except for Etihad Etisalat that

confirmed increase in salaries, Rabigh Electric denied any such increase in their company

employees whilst Rabigh Refining and Petrochemical Company stated that it depended on the

nature of the industry. However, SAGIA reported that income per capita measured at $20,000

in 2007 was expected to increase to $33,000 by 2020. Therefore it is not guaranteed that FDI

inflows into a country will necessarily lead to an increase in income per capita.


- 51 -

However, regarding factors such as employee empowerment, all three companies denied that

there was any significant difference in this factor given FDI flows or joint ventures. Instead,

they agreed that employee empowerment was not so much dependent on FDI but rather the

culture of the host country and the nature of the FDI flows.

5.4 Hypothesis 4: Since the technology gap between Saudi Arabia and

advanced countries is not very large, technology spillovers are caused by

FDI inflows.

Although there was limited evidence from secondary sources regarding the extent to which

FDI was contributing to positive spillovers in the country, interviews did reveal that

technology and knowledge spillovers were definitely part of the many benefits accompanying

FDI flows. An Official from SAGIA reported that technology spillovers have helped to

increase efficiency for the economy, goods market competition and have helped to further

encourage, local, regional and international capital flows. This is consistent with the theory

from Sader (2002) who highlighted the positive influence that FDI has on technology and

knowledge spillovers.

In addition, according to the management of Rabigh Electricity Company and Rabigh

Refinery (Petro Rabigh), spillovers do exist especially when foreign companies bring

knowledge of management processes and methodologies used in their home countries which

are usually adopted in the host country and are beneficial especially if the host country is less

developed. For instance, Etihad Etisalat, a local owned Telecommunications Company was

able to build its own fiber optic network 12,600 km long due to the knowledge and technology


- 52 -

it had gained from FDI flows being directed towards the telecommunications industry.

However, all three companies agreed technology spillovers are rather gained from the country

from where the FDI is originating. Fortunate for Saudi Arabia, since its main FDI partners are

more advanced nations such as the US, France and Japan, it is likely that most of the FDI

inflows for Saudi Arabia result in technology spillovers.

5.5 Hypothesis 5: Competition and productivity should increase resulting in

an increase in variety and / or lower prices for consumers.

According to Lovei & Gentry (2002) foreign competition should bring with it increased

efficiency and productivity for the host country, which results in improved quality, and lower

prices for consumers. The relationship manager at SAGIA agreed that FDI inflows had

resulted in business process re-engineering where local firms where being encouraged to

adopt the latest technology and knowledge and adopt a different culture and resulted in

improved managerial practices and efficiency. Furthermore, Rabigh Refining company and

Rabigh Electronics both agreed that FDI flows had caused their companies to improve

efficiency and alter management practices, although Etihad Etisalat argued that the changes

brought in their industry were not directly due to FDI inflows. Furthermore, all three did agree

that local firms in the industry were less efficient than foreign companies since most of the

foreign multinationals were from countries that were more advanced than Saudi Arabia giving

them a competitive edge in the industry.

Moreover, FDI flows have helped to integrate the economy with the rest of the world and this

has resulted in rising trade volumes, which not only resulted in export revenue, but also


- 53 -

increased the competitive environment for local firms forcing them to increase efficiency if

they wish to remain in the industry. The fact that the Saudi Government has directed FDI

inflows to all sectors rather than simply oil and gas industries further helps to improve the

efficiency standards of local companies in all industries.

5.6. Crowding out Effect

Although the literature has pointed out the potential disadvantages that FDI can bring to host

countries, focusing on the crowding out of domestic investment, there is limited evidence of

such crowding out behavior in Saudi Arabia. Statistics do reveal that a greater percentage of

total investments comprises of foreign investments however the increase in only mild rising

from 45% to 49% during the four year period spanning 2005-2009. Furthermore, there is no

evidence that in terms of absolute figures, FDI has increased at the expense of domestic

investment.

5.7 Determinants of Foreign Direct Investment

Overall the results obtained in the previous chapter support the research in the literature

review suggesting that infrastructure, communications, technology and business friendly

environment are important determinants of FDI flows. It is for this reason that the

Government of Saudi Arabia has spent massive funds in improving the economy in these

areas to attract foreign investment. According to the relationship manager at SAGIA, $400

billion was being allocated to improve the technology and infrastructure of the country with

the aim of attracting FDI and furthermore the economy had been diversified easing business


- 54 -

regulations in all sectors including construction, engineering, agriculture, financial services

and construction.

Chapter Summary

Overall this chapter has examined the results from the primary and secondary data sources

concluding that FDI does have positive influences on technology and knowledge spillovers,

but it also depends on the home country from where the FDI is originating from and

furthermore, any important impact on local firms usually occurs with a time lag. Furthermore,

there are positive impacts on employment and efficiency although limited evidence was

present suggesting that FDI flows had improved the social environment in terms of employee

empowerment or increase in wages.


- 55 -

CHAPTER 6 – CONCLUSION AND RECOMMENDATIONS

The aim of this paper was to analyze the impact of FDI flows on the Saudi Arabian economy.

This was particularly important given the significance of FDI in helping to integrate

economies with the rest of the world and the apparent advantages of FDI in terms of

transferring knowledge and technology from the home country to the host country. In

addition, the literature has associated FDI with benefits such as improved social environment

for workers, increased competition, efficiency and reduced unemployment. It is important to

assess the extent to which these advantages have impacted the Saudi Arabian economy as well

as highlighting any domestic investment crowding out that might have resulted from FDI

flows as well as to suggest possible recommendations. The results from this study can guide

Saudi officials regarding whether or not FDI should be actively promoted and the means by

which any negative impact of FDI flows can be mitigated.

The results suggest that employment and efficiency have definitely increased as a result of

FDI flows with companies experiencing business process reengineering and altering

management styles to raise efficiency. Furthermore, FDI has helped to economically integrate

Saudi Arabia with the rest of the world evident from increase in trade flows as well as

producing technology and productivity spillovers resulting in raised efficiency of domestic

firms and industries as well. Finally, FDI flows have also helped to boost trade especially

among the non-oil & gas sectors. In this regard, data suggests that the proportion of exports

from FDI projects among total non-oil & gas exports of the country have increased

substantially.

Although the three interviews structured in this research suggest that FDI did not necessarily


- 56 -

affect the increase in wages which might influence the social environment and the standard of

living and employee empowerment, secondary data from reports and other articles suggest

that there is a noticed positive change in wages meaning that FDI have led to an increase in

wages and salaries. In addition, although technology spillovers are directly dependent on the

home country from where the FDI is originating, the data from the research also suggest that

FDI will inevitably lead to technology spillovers.

As a means of attracting FDI, the Government of Saudi Arabia has eased business regulations

and restrictions on foreign participation in local industry as well as diversifying economic

activities as an attempt to attract FDI flows in various non oil & gas sectors including,

telecommunications, construction, financial services and agriculture. This has made the

economy currently the best for FDI flows in the Middle Eastern region and has raised its ranks

from the 67th position to the 13th position among World Bank’s ‘ease of doing business index’.

In addition, foreign investments have been targeting only the energy sector putting aside other

important sectors. On the contrary, they have been recently considering investing in other

divisions that might contribute majorly into their markets. Accordingly, Saudi Arabia should

expand further their investment policies in order to guide foreign investments towards the

most efficient and profitable strategic sectors in the economy, such as industrial and

agricultural sectors.

Saudi Arabia needs to attract more domestic and foreign investments into its region, this takes

place by progressing in the economic, structural, and regularity levels. Some factors that may

restrain Saudi Arabia from promoting FDI into its economy might be extreme altitudes of

bureaucracy and corruption, low enforcement of legislation, excessive control of the public

sector and slow implementation of privatization agendas.


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The Saudi government needs to adjust its policies in order to enhance more FDI inflows into

its economy, by taking the appropriate assessments aimed and persuading more domestic and

foreign investments. Within that context, the following policy preferences are to be

recommended:

- Improving government policies given that private investors are highly responsive to good

governance.

- To augment the infrastructure segment, intensely transportation and communication

infrastructures. A valuable approach would be by entrenching partnerships with the private

sector.

- Developing the current corporate atmosphere into a more flexible and efficient

environment.

- Provide wider facilities by accessing credit in order to reinforce the legal rights or debtors

and lenders.

- Updating regional integration by working on liberalization services and investment flows.

- The investment authority must consider forceful actions against willful defaulters.

- Accelerate the process of privatization and improve performance that contracts with the

remaining public enterprises, as it will definitely have a positive impact on the investment

climate with a most preferable influence on the stock market.

- SAGIA should become more flexible with their regularity rules when it comes to entry, exit,

and location aspects.

Therefore, it is recommended that the Saudi authorities continue to step up their efforts in

promoting FDI especially in the non-oil & gas sectors as a means of diversification and


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lowering the economy’s vulnerability to external shocks. Furthermore, it should focus on

attracting FDI from advanced nations so as to obtain the resulting technology and productivity

spillover benefits. However, since there is no apparent benefit recorded in terms of social

environment, the authorities need to increase regulations on ensuring that working standards,

monetary and non-monetary benefits and worker rights are being monitored. This is

especially important to prevent widespread exploitation of the local labor force. In addition,

authorities should focus on CSR and sustainable development since FDI flows and the

accompanied rise in economic activity can result in rapid degradation of the environment.

Authorities should not simply focus on GDP, growth, trade and employment, but should

ensure that the benefits of FDI are equally spread out for both entrepreneurs and workers and

the environment is being protected.


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CHAPTER 8 - APPENDIXES

8.1 Appendix I

Dear Sir/Madam,

I am currently completing a degree in economics at City University London and my topic is

about evaluating the impact of Foreign Direct Investment to the Saudi Arabian economy

within several fundamentals.

In order to make a satisfactory conclusion I would like to request information about the

company profile for at least the past 10 years (if applicable) in order to make the studies that

will aid me to do this, the data you provide will not be used outside this project.

If you have any queries or would like to know any further details about this project, please

feel free to contact me.

I would like to take this opportunity to thank you in advance for your time and effort, as it is

very much appreciated.

Best Regards,

Jellan


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8.2 Appendix II Mr. Saud Shakir

Relationship manager – GCF

Saudi Arabian General Investment Authority - SAGIA, Riyadh – Kingdom of Saudi Arabia.

1. What are some of the main industries receiving Foreign Direct Investment in Saudi

Arabia?

Previously, the Saudi economy has been majorly dependent on oil (and therefore

petrochemicals) in every aspect, whether it was for export oriented purposes or even foreign

direct investment inflows into Saudi Arabia. Therefore, it has not been able to attract FDI

inflows in other sectors. Currently, realizing that the kingdom is one of the most efficient

energy intensive industries, it would be more appropriate to attract various types of industries

into our country by letting foreign investors realize that they are cost cutting and taking up

higher production levels when investing in our region. By setting a budget of 400 billion

dollars in infrastructure development, we were able to specialize in construction, engineering,

agriculture, financial services, and industrialization (plastics is a good example).

2. What has been the general impact of FDI flows on the economy?

First of all, I would like to point out that our King Abdullah Bin Abdul-Aziz – The custodian

of the two holy mosques - has launched The Saudi Arabian General Investment authority in

order to initiate obvious improvement in the Saudi economy. You might as well consider that

SAGIA is recognized to be the 9th in macro stability amongst the world in a very short period

of time. Their main purpose was to bring its trade regime into a standard that is recognized by

WTO. They have further enhanced their investment laws to make it easier for foreign


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companies to establish themselves in Saudi Arabia. Basically the laws ascertain a framework

to expand the foreign investment environment in the country. Starting from creating jobs and

housing for the Saudi Arabian population and reaching to being more efficient than business

and management processes implemented by domestic companies. The government believes it

is more effective to introduce recent foreign investments to the country, as they will instigate

technology and expertise into the business climate in Saudi Arabia. Also seeking innovation

depending on market size and technological readiness. The government also claims to seek

financial diversification, goods market efficiency, and labor market efficiency.

3. To what extent has employment been generated by FDI inflows?

I believe attracting foreign direct investment (FDI) has been a key aspect for a better

employment development strategy, as investment is considered a decisive component for

output growth and employment generation. With an improved business climate, new ventures

will be able to attract growing investment, providing them with greater employment volume

and contributing to economic diversification. For example, King Abdullah Economic city –

the largest of four new economic cities planned in various regions of the kingdom and

designed to attract overseas investments and create job opportunities for Saudis- is expecting

to house at least two million people and create nearly a million jobs.

4. To what extent has income increased due to FDI inflows?

The kingdom is currently recording very minimal changes in income but within a positive

range. Our plan is to have our GDP increased by $100 billion by 2020, while we are expecting

to record a per capita income forecast to rise from $20,000 in 2007 to approximately $33,000

by 2020.


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5. Has FDI flows towards infrastructures, oil & gas and construction industries helped to

further raise the attractiveness of the country to foreign investors?

I believe these components take numerous initiatives to increase FDI inflows in strategic areas

of the economy, as they are all importantly considered by potential investors in any

prospective FDI project in a host country.

6. Is there any evidence of technology and productivity spillovers that have helped

domestic firms?

Yes indeed they have, technology and productivity spillovers have been majorly contributing

to a greater level of local investment as well as regional and international foreign direct

investments into the kingdom. Particularly in terms of increasing goods market competition,

efficiency, and promoting economies of scale.

7. Is there any evidence that FDI flows have increased competition in the domestic

industry?

Yes, since we are interested in bringing FDI projects that are related to know how technology

our main aim is to gain knowledge from experienced workers in the investor country to maybe

inexperienced labor workers in our country as a host to all FDI inflows. Our plan is to

promote specialization and therefore improve the trade regime in Saudi Arabia. If this takes

place, then you might as well detect a great progress in imports and exports movements.

However, we assure providing both domestic companies and foreign investors with equal

benefits, incentives, and guarantees.

8. Has FDI flows altered the corporate culture in the industry? For example, have joint

ventures with foreign companies forced local firms to alter their management and


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production styles?

They were not necessarily forced or obliged to change their own policies, but yes I can judge

that there’s an improvement in management behavior and production styles. As I mentioned,

we are interested in bringing know-how technology into the country’s economic identity. And

therefore, FDI is believed to be changing the whole scheme of running investments in the

country.

9. Is there any evidence that the Saudi economy has experienced increasing trade

volumes ever since the rise in FDI inflows?

Since we know that the success in trade policy can be assessed on the basis of its actual

contribution towards improving market access, and its ability to minimize consequences of

openness, trade liberalization and globalization on the domestic market. I can assure you that

the impact of development and growth on trade volumes can be measured through its

influences on increases in investments, job creation, and technology spillovers. A good

example would be the obvious change in import to export movements annually since the rise

in FDI inflows into Saudi Arabia.

10. Have trading patterns changed ever since the rise in FDI inflows?

Definitely, the government has undertaken positive moves towards increasing involvement in

the trading system related to trading agreements, transport, and trade facilitation.


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8.3 Appendix III Mr. Hyunchan Lee

Chief Financial officer

Rabigh Electricity Company (ACWA power projects).


Company’s debt to equity ratio is about 79 to 21. Almost 27% of debt comes from foreign

banks and 40% of equity comes from foreign shareholder.

Major contractor is Chinese company which is responsible for the engineering, procurement

and construction (EPC Turnkey Contract).

2. Do you feel that FDI flows / joint ventures have been accompanied with a supply of

new technology or knowledge?

In terms of raising the fund on a non-recourse basis and EPC Turnkey contract management,

we could mention that there is new knowledge implication.


technology and knowledge or does it depend on the country from where FDI is coming

from?

It rather depends on the country which makes FDI into KSA.



Intensity of competition is not only dependent upon the government policy but also the market

situation. Normally, it is being said that the utility business is more dependent upon the


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government policy when it comes to the FDI.

5. Has the basic wage increased for the workforce in your company ever since the rise in

FDI inflows / joint ventures?

This is not the case of RABEC being launched on FDI from the beginning.


workforce?

This is not because of FDI but because of the business necessity. However, it could be said

that the company being on FDI generally has more change to enjoy the benefit of large

foreign exposure.



I would say the foreign firm in its early stages is less efficient and this is common problem to

the multi-national company regardless of the existence of FDI.



Because of large foreign exposure, there are always challenges to the company, which might

result in reengineering or renovation of the management.



This is dependent upon the industrial practice of a hosting country. If the hosting country is

less developed, the company with FDI tends to provide more right to its employee.


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8.4 Appendix IV

Mr. Bader Jamal Al- Mutlaq

Operations manager

Mobily Etisalat, Riyadh – Kingdom of Saudi Arabia.


Etihad Etisalat, operating under the name of Mobily, was granted the second mobile license in

Saudi Arabia at a cost of SR12.21 Billion (equivalent to $2.25 billion). Once this was

initiated, the Saudi Telecommunication Company (STC) had their monopoly over mobile

services ended. The joint venture included Emirates Telecommunication Corporation as a

major shareholder with a share of 35%. And six other Saudi companies are required to be

partner companies by the regulator communications and Information Technology Commission

(CITC).

2.Do you feel that FDI flows / joint ventures have been accompanied with a supply of


As you know, Saudi Telecommunication Company (STC) was handling mobile services for

Saudi Arabia over a given monopoly for years. Now that Mobily Etisalat was started, existing

technologies from the mother company in UAE were introduced against STC. Increasing

competition is a potential for more growth. Mobily has been undergoing an aggressive

marketing strategy to increase its total subscriber base to 9.7 million subscribers in a given

period. Respectively, Mobily is currently developing its own network and is building a 12,600

km long fibre optic network. To establish a presence in the nascent broadband market, which


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should serve as another technology improvement indicator and a growth driver in the

telecommunications industry.



from?

I believe the purpose of initiating FDI inflows in any given country is the generation of profits

by providing funds purely, or promoting technology and knowledge in the host country.

However, it rather depends on the country where the FDI is coming from.



Yes, from two perspectives; firstly offering innovative services such as the introduction of

3.5G back in 2006 and offering the blackberry Internet services which supports huge banks

and corporations in the kingdom. We also undergo aggressive marketing strategies and our

offerings and services that are based on a purely competitive base between the three existing

companies specializing in the telecommunication services (STC, Mobily, and recently Zain).



Yes, it has.


workforce?

Definitely, STC was relatively unprepared to face the entry of Mobily since they’ve been

experiencing a long period of monopoly over telecommunications services. This of course has


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enabled Mobily to capture more than 30% of market share in less than two years time. STC

has recognized the threat and this is why they started working on improving their

infrastructure to face regional competition and upgrade their broadband and customized

services.



From my experience, I believe that the entry of Mobily Etisalat has brought a lot of benefits in

the field of telecommunication services. Especially that STC was a monopoly and Mobily

Etisalat entered the market breaking the monopoly as part of encouragement for the private

sector to develop their utility services instead of depending majorly on the oil based economy.



That is not necessarily because of the FDI influence on the corporation. We do seek excellent

performance and therefore we try to innovate and improve as much as it is possible for us to

do so.

9.Do you feel workers rights or employee empowerment has increased ever since joint


Again I should mention that this might not be related to the fact that Mobily Etisalat is an FDI

project. It is dependent on many factors that are related to our business structure rather than

FDI.


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8.5: Appendix V Mr. Samir al Muthana Public relations manager.

Rabigh Refining and Petrochemical Company (Petro Rabigh), KSA.


Rabigh Refining and Petrochemical Company (also known as ‘’Petro Rabigh’’) is a joint

stock company that is equally owned by Saudi Aramco and Sumitomo Chemical (in Japan).

Funding is mainly generated from an overseas investment loan and IPO proceeds as well as

subordinated loans. However, Sumitomo Chemical as a foreign investor is involved in

providing a proportion of 9%of the total funds. Another 9% is coming from Saudi ARAMCO.

2. Do you feel that FDI flows / joint ventures have been accompanied with a supply of


Yes, of course. It provides information about the technology being used in the production

process back in the country where FDI is coming from, which of course might be a new

process to be introduced to the host country.



from?

Depends on the country where the investment is coming from. However, while many believe

that funding is an essential element in having an FDI inflow into a host country, we seek

investments that will benefit us with other means such as technology and knowledge transfer.


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Yes, FDI inflows have major linkages and spillovers to domestic firms, and although the

challenge may be crowding out domestic firms, it is for the best to increase efficiency and

productivity within a specific field as a result of a foreign investment. I believe it is rather a

good thing to have domestic firms more prepared for global competition.



It rather depends on the realized profits of investment projects and the nature of industry it is

involved in.


workforce?

Yes, FDI policy mainly aims to enhance maximum value addition along with technology

transfer, and when it comes to our company’s workforce I believe that FDI had its influences

on our workforce, in terms of knowledge transfer and learnt skills.



Yes I do, as you know, Saudi Arabia has never been lacking the funding element to seek

foreign investments into its projects. We purely attract FDI projects for improved trades,

globalization, technology, and employment purposes. We seek to improve our country’s

economy and funding has never been a barrier in doing so.


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Definitely, a great example would be the Saudi ARAMCO project starting back in the 30’s

where it was purely an FDI venture. Back then we didn’t have much experience and so we

gained a lot from the foreign investor’s expertise and management processes in the field. I

believe this is one of the main benefits of FDI inflows into a host country.



Worker’s rights are backed by the government’s ministry of labor and do not have much to do

with joint ventures or FDI projects flowing into the country. However, I would like to

emphasize that learnt skills are gained from foreign companies entering our industries and we

have recorded an enormous development in the field.

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