Term Paper on "Foreign Investment in Saudi Arabia"

Term Paper 33 pages (9112 words) Sources: 20

[EXCERPT] . . . .

percent of the world's proven oil and gas reserves, the Saudi Arabian government has embarked on an aggressive initiative to diversify the country's economy and provide new employment opportunities for young Saudi nationals entering the job market. As part of this initiative, Saudi Arabia has implemented a number of pro-business foreign direct investment laws that are helping achieve this diversification. The purpose of this study was (a) to determine how the government of Saudi Arabia currently regulates foreign investment; (b) to identify the controlling laws that govern this type of investment; and, if so, what are the requirements; and (c) to analyze Saudi foreign direct investment laws through a series of case studies to gain new insights into how the regulatory framework actually operates and affects foreign direct investment in Saudi Arabia today. To this end, a review of the relevant literature and a series of case studies are presented to identify current challenges, obstacles and opportunities for foreign direct investment in Saudi Arabia today. A summary of the research and important findings are presented in the study's conclusion.

FOREIGN DIRECT INVESTMENT IN SAUDI ARABIA

Chapter One: Introduction

Today, the Kingdom of Saudi Arabia has an oil-based economy and an economy with strong government controls. With around 20% of the world's proven petroleum reserves, Saudi Arabia is also the largest exporter of petroleum and plays a prominent role in the Organization of Petroleum Exporting Countries (OPEC) (Saudi Arabia 2011). This point is also made by Aleisa and Dibooglu (2007) who report, "Saudi Arabia is one of the major players in the world oil market and has a significant role in the OPEC cartel. Its fiscal and monetary policy is endogenous with respect to the oil policy" (p. 101). Not surprisingly, the oil and gas industry provides the lion's share (80%) of the country's budget revenues, almost half (45%) of its GDP, and an overwhelming 90% of Saudi Arabia's export earnings (Saudi Arabia 2011). The Saudi leadership, though, is pursuing a more diversified economy in an effort to reduce the country's reliance on the petroleum sector as well as to provide new employment opportunities for Saudi nationals (Saudi Arabia 2011).

At present, the primary economic diversification initiatives underway in Saudi Arabia include power generation, telecommunications, natural gas exploration, and the petrochemical sectors (Saudi Arabia 2011). Pursuant to these goals, Saudi Arabia approved a new foreign investment code that provides foreign investors with the same incentives, benefits, and assurances that are offered to Saudi nationals and Saudi enterprises (Cordesman 2003). According to Cordesman, "The law allows foreigners to own property either independently or with a Saudi partner. It allows investors to remit funds abroad and reduce taxes by 15% for foreign companies with an annual profit in excess of $26,700" (p. 333).

More recently, Saudi Arabia joined the World Trade Organization in December 2005 in an effort to attract increased foreign investment (Saudi Arabia 2011). In this regard, Idris (2007) reports that, "In October 2005, Saudi Arabia successfully joined the World Trade Organization (WTO) after 12 years of negotiation. This will have a dramatic impact as it opens the kingdom's long protected economy" (p. 36). In addition, the Saudi government has established six so-called "economic cities" throughout the kingdom in another effort to attract additional foreign investment and there are plans to invest $373 billion during the period 2010 to 2014 for further economic development initiatives (Saudi Arabia 2011). According to the promotional literature provided by the Saudi Arabian General Investment Authority:

Each city will feature modern building design, world-class services and infrastructure and ubiquitous connectivity. These built-in advantages, combined with attractive investment incentives and a supportive regulatory environment will create significant competitive advantages for business. SAGIA is also working with leading environmental institutions to ensure that the Economic Cities are developed with minimum negative environmental impact and maximum energy efficiency and sustainability (Economic Cities 2011, p. 1)

In this environment, identifying current regulatory guidance and laws concerning foreign direct investment in Saudi Arabia represents a timely and valuable enterprise which is also the purpose of this study as set forth below.

Statement of the Problem

Foreign investors are faced with some daunting challenges when it comes to selecting a target country for investment. Among the most important of these challenges is the country's business climate which can reasonably be expected to have a profound effect on the success of such investments (Lee, Baimukhamedova & Akhmetova 2010). Therefore, identifying the current state of foreign direct investment in emerging economies such as Saudi Arabia is an essential element in the process, a need that directly relates to the study's purpose which is set forth below.

Statement of the Purpose

The purpose of this study was three-fold as follows:

1. To determine how the government of Saudi Arabia currently regulates foreign investment;

2. To identify the controlling laws that govern this type of investment; and, if so, what are the requirements?

3. To analyze Saudi foreign direct investment laws through a series of arbitral case studies to gain new insights into how the regulatory framework actually operates and affects foreign direct investment in Saudi Arabia today.

Overview of the Study

This study used a four-chapter format to achieve the above-stated purpose. Chapter one of the study was used to introduce the topics under consideration, including a discussion concerning the selection of the topics, a statement of the problem to be considered as well as a statement of the problem. Chapter two of the study provides a review of the relevant literature concerning current foreign direct investment issues in Saudi Arabia as well as controlling legislation that has been implemented in recent years to facilitate new foreign direct investment in the Kingdom. Chapter three of the study presents a series of case studies of arbitration of contracts in Saudi Arabia involving supranational parties, and the concluding chapter provides a summary of the research and conclusions.

Chapter Two: Review and Analysis

Background and Overview

Following the accession of Saudi Arabia to the World Trade Organization in 2005, the kingdom has emerged as a hot spot of foreign direct investment activity (Investing in Saudi Arabia 2011). Across the board, Saudi Arabia has taken steps to transition its harvest-based economic activities into value-added activities that provide new opportunities for growth and employment (Investing in Saudi Arabia 2011). The current Saudi five-year plan for economic development includes priorities for creating new employment opportunities for younger Saudi nationals who are expected to enter the workforce in the coming years (Investing in Saudi Arabia 2011).

For potential foreign direct investors, this may be a particular salient issue since it will likely affect what types of jobs that will be expected from newly established enterprises and how Saudi nationals may expect to be treated. For instance, Idris (2007) points out that even Saudi leadership teams are faced with similar challenges as they seek to provide new employment opportunities for Saudi up-and-comers: "Executives and managers in Saudi Arabia face great challenges in their endeavor to improve the performance of their organizations. The greatest challenges of all are cultural issues and work practices that limit employee performance levels compared with those in Western international companies" (p. 37). Based on his personal interviews with Saudi executives and his long-term empirical observations, Idris (2007) concludes that, "Keeping and raising a wide base of Saudi technical and skilled labor staff is a challenge because Saudis are more motivated by status and position. Many young Saudis have grown up in luxury, seeing their parents getting well-paid, high-status positions" (p. 37).

There are some powerful cross-cultural issues that will inevitably affect any foreign direct investment initiative that must therefore be taken into account when formulating plans for the Saudi market. In this regard, Idris reports that, "Studies of the culture in Saudi Arabia have indicated that it is fairly homogenous, like most Middle Eastern nations, due mainly to the profound effects of Islamic teachings on the society. Islam infiltrates in all aspects of life in Saudi Arabia, and there is a strong marriage of Islam and state" (p. 38). Western investors may be particularly perplexed by the effect these fundamentally different worldviews have on contractual obligations and performance, which can reasonably be expected to lead to contractual disputes. For instance, Idris points out that, "Islam influences all decisions for Arabs including business decisions. Fatalism is away of life in the Middle East, and Saudis believe that the ultimate control over the environment is in the hands of God. This contrasts sharply with the culture in the United States, which has a strong control orientation regarding the environment" (2007, p. 38).

The difference in perspective concerning performance and contractual obligations is exemplified in the Saudi proverb, "There is something good in every delay"; however, as Idris emphasize, "Unforeseen delays are unacceptable excuses in the Western world" (2007, p. 38). Before assuming that Dr. Idris bases his analysis on a warped ethnocentric view of Saudi Arabia, it should not pointed out that he is the chief of the engineering… READ MORE

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