Foreign Direct Investment Laws in Saudi Arabia

The Background of the Problem and the Research Question

In Saudi Arabia, foreign direct investment (FDI) includes financial resources attracted for the development of the country’s oil industry and numerous non-oil markets. According to the data provided at the United Nation Conference on Trade and Development (UNCTAD) in 2012 and 2014, Saudi Arabia was the third country in Western Asia in attracting FDI for the development of its industries.1 2 The nation’s modern focus on developing an open trade market, improving policies for private enterprises, and eliminating legal restrictions regarding FDI contribute to the fact that Saudi Arabia is viewed as successfully using other countries’ financial resources.3

In this context, much attention should be paid to the role of an effective legal framework in promoting and attracting FDI. Significant steps on this path included the establishment of the Saudi Arabian General Investment Authority (SAGIA) and the introduction of the Federal Investment Law (FIL) in 2000 along with promoting other legislation in the field.4

However, the problem is that, despite significant increases in FDI that were observed during the period of 2000-2008, there was a period of decline in 2008-2015, and the recent development in the field, as well as the overall situation in the sphere, is not studied effectively.5 There are possibilities that the used legal framework based on the FIL is not operational or appropriate enough in order to contribute to the stable growth of FDI tendencies in Saudi Arabia during two decades. More research is required in this field in order to analyze the specifics of the currently used legal framework regarding FDI and the aspects of the recent development in this area.

The following research questions and sub-questions are formulated for the current study in order to address the stated problem:

  • RQ: How does the legal framework for FDI adopted in Saudi Arabia influence the recent development in the field?
  • Sub-Question 1: How does the FIL influence the FDI regulations in Saudi Arabia in order to achieve changes in attracting foreign investments?
  • Sub-Question 2: What aspects of the Saudi legal system, commercial law, modern regulations, and the rules of the Islamic law have influenced the recent development in the FDI area?

Literature Review: The Argument and Hypothesis

The recent literature on FDI in Saudi Arabia and the associated legal framework are focused on describing how the adoption of the FIL has led to developing the oil-industry sector in the country and what other major legal decisions were made. The Foreign Capital Investment Law of 1979 was oriented to protecting the role of the Saudi government in regulating the oil industry.6 However, global trends influenced the Saudi legislators’ vision of FDI, and the SAGIA was established along with introducing the FIL of 2000 in order to open the country to foreign investments.7 The law was innovative for Saudi Arabia because it allowed the 100% foreign ownership in different types of industrial and commercial projects.8

In subsequent years, the Council of Ministers concentrated on privatizing public sector utilities, and the focus on privatization and FDI became typical of many industries in the country to decrease its dependence on the oil sector.9 The adoption of the FIL has led to financing numerous industrial, non-industrial, and agricultural projects in Saudi Arabia using the resources from the Middle Eastern countries, the United States, the United Kingdom, France, Germany, and others.10

In 2005, Saudi Arabia joined the World Trade Organization and the country’s economic stability attracted even more investors than it was observed after 2000.11 12 In 2015, following a series of laws, the stock market related to such industries as petrochemicals, retailing, and banking among others was opened by the authorities for more active FDI. It is reflected in the Saudi plan of economic development up to 2030 (according to Vision 2030) that guarantees that FDI will be promoted and increase steadily.13

The adoption of the Banking Control Law to regulate taxes and the investment environment of the country and the development of the Insolvency Law seem to contribute to this process.14 15 In this context, it is necessary to focus more on the literature while analyzing how the existing legal framework can provide the effective legal protection for foreign investors in the country.

However, some researchers still present evidence that there are challenges and barriers associated with developing FDI and adopting its legal framework. Jadea and Basir indicate that the integration of FDI into the country’s economic structure is rather problematic because of the necessities of correlating the innovative legislation with the Islamic law and Western patterns within a legal framework.16 Furthermore, there are also data supporting the idea that, after adopting the FIL, both positive and negative aspects were observed in the legal and economic systems of Saudi Arabia, leading to periods of growth and decline. Thus, the period from 2008 to 2011 was not active in attracting FDI.17 18 In this context, it is important to examine what factors characterize the recent development in this sphere in Saudi Arabia.

After reviewing the literature on the legal framework related to regulating FDI in Saudi Arabia, it is possible to formulate the following hypothesis to guide this research: the legal framework for FDI that was adopted in the country has positively influenced the recent development in the field, resulting in the stable growth of investments. Moreover, it is possible to assume that the key role in affecting the recent development in FDI was played by the FIL that was adopted to achieve changes in attracting FDI to the country. In addition, the researcher assumes that certain aspects of the Saudi legal system, commercial law, modern regulations, and the rules of the Islamic law has also influenced the recent development in the FDI field, leading to financing more Saudi projects today.

It is important to note that the argument supporting the formulation of this hypothesis and assumptions is based on the preliminary analysis of the available literature on the topic. In spite of the fact that some researchers accentuate certain challenges in promoting FDI in Saudi Arabia, there is much evidence reported by experts to support the idea that the adopted laws promote FDI in the country, as it is in other states in the Middle Eastern region.19 20 21 22From this perspective, the recently adopted laws in Saudi Arabia regarding FDI and regulations implemented in association with the SAGIA seem to contribute to diversifying the Saudi economy, opening employment opportunities, and expanding the country’s non-oil industries in contrast to the developed oil industry.23 24 25

Furthermore, the research supports the statement that the SAGIA as a regulatory and investment promoting agency, as well as the FIL, played the key role in forming a positive economic environment in Saudi Arabia based on the effectively developed legal framework. It is important to pay attention to the fact that the SAGIA regularly reviews FDI-related activities and associated laws in order to guarantee the effective development of all sectors in Saudi Arabia, and this aspect also requires the further investigation.26 27 28The marker of the positive development in a legal sphere regarding FDI is also the design of the new Insolvency Law that will be effective in order to attract even more investments to new sectors of Saudi Arabia.29

Contribution of the Research to the Existing Literature

In spite of the fact that there are many studies on FDI and associated laws in Saudi Arabia, the majority of these investigations are based on examining what effects the FIL had on opening the country for foreign investment. Another group of studies is related to examining the composition of the existing legal framework related to FDI in Saudi Arabia with the focus on analyzing specific connections between international trends, the Western legal patterns, and the Islamic law.30 31 Still, there is a gap in the existing literature on the topic regarding the examination of the recent development of FDI trends in the country depending on the effectiveness or non-effectiveness of the adopted legal framework.

It is necessary to pay attention to the fact that, in the existing literature, much attention is paid to studying how the innovative course to supporting FDI that was chosen in 2000 has led to the development of the economy of the country.32 Nevertheless, one should note that only limited research is present on discussing how the tendency developed and what other regulations were added to the legal framework influencing its effectiveness. Therefore, it is possible to speak about the gap in the literature regarding the discussion of the recent development and trends in FDI in Saudi Arabia that are based on the existing legal framework. It is also important to discuss how this research can contribute to the existing literature in the area, as well as to theory and practice.

This study will contribute to analyzing how the legal framework for FDI that was adopted in Saudi Arabia could influence the recent development in the field with the focus on current trends in industries and law. As a result, the study will indicate how the FIL could influence the current situation in Saudi Arabia regarding FDI and whether positive tendencies in investing projects are still observed in the country. The planned research will also provide the examination of the aspects of the Saudi legal system that can be discussed as having the most significant impact on the recent development in the FDI area.

Thus, this contribution is important for the existing literature on commercial law and FDI in Saudi Arabia, as well as for the legal and economic literature in the field. The focus will be on discussing the legal framework related to FDI with reference to its recent impact on investments in Saudi Arabia, involving the latest events and updated changes in the legal system. The contribution to practice will include the discussion of potential weaknesses in the existing legal framework in order to address the latest trends and innovations in FDI from the global perspective to influence the economic development of Saudi Arabia.

Methodology

The qualitative methodology is selected for this research in order to address the set research question and sub-questions. The review of the primary and secondary literature in the context of the qualitative method will be supported by conducting interviews with representatives of organizations in Saudi Arabia where projects are financed through FDI. For the literature review, primary sources will include FDI-related legal documents, laws, initiatives, and court cases in Saudi Arabia that can effectively illustrate the existing legal framework associated with this issue.33

The focus will be on examining the past and updated laws and regulations adopted in Saudi Arabia in order to understand their impact on the recent development of the sphere. Secondary sources will include publications and studies on the topic of the legal framework for FDI in Saudi Arabia and its effectiveness to stimulate the economic progress in the country.

The information gathered with the help of the literature review needs to be supported by other data according to the principle of triangulation that is used in the qualitative methodology. Semi-structured interviews will be conducted with the representatives of organizations that are directly connected with promoting FDI in Saudi Arabia for the purpose of identifying factual effects of the existing legal framework on the recent development in the field.

It is important to understand what actual advantages or barriers caused by laws and regulations on FDI in Saudi Arabia can influence the development of this area in the country today. It is necessary to note that the information collected with the help of the literature review and interviews will be analyzed and compared in order to respond to the set research question and associated sub-questions.

Bibliography

Abidin ISZ, Haseeb M, Azam M and Islam R, ‘Foreign Direct Investment, Financial Development, International Trade and Energy Consumption: Panel Data Evidence from Selected ASEAN Countries’ (2015) 5 International Journal of Energy Economics and Policy 841.

Al Khathlan K, ‘Foreign Direct Investment Inflows and Economic Growth in Saudi Arabia: A Co-Integration Analysis’ (2013) 4 Review of Economics & Finance 70.

Alavinasab SM, ‘Determinants of Foreign Direct Investment in Iran’ (2013) 3 International Journal of Academic Research in Business and Social Sciences 258.

Albassam B, ‘Does Saudi Arabia’s Economy Benefit from Foreign Investments?’ (2015) 22 Benchmarking: An International Journal 1214.

Alsharif DT, ‘How Saudi Arabia Shows It Is Open for BusinessArab News (Riyadh, 2018). Web.

Dudley D, ‘Saudi Arabia Suffers Shock Collapse in Inward InvestmentForbes (New York, 2018). Web.

Foreign Capital Investment Law (1979) 17/111421H 11/21.

Gawad GMA and Muramalla VSSR, ‘Foreign Direct Investment (FDI) and Its Effects on Oil, Gas and Refinery Production and Their Exports: An Applied Study’ (2013) 4 Journal of Economics and Sustainable Development 21.

Held D and Ulrichsen K, The Transformation of the Gulf: Politics, Economics and The Global Order (Routledge 2013).

Hussein K, FDI Trends in the Arab Region (United Nations Economic and Social Commission for Western Asia 2014).

Iamsiraroj S and Ali Ulubaşoğlu M, ‘Foreign Direct Investment and Economic Growth: A Real Relationship or Wishful Thinking?’ (2015) 51 Economic Modelling 200.

Iamsiraroj S, ‘The Foreign Direct Investment–Economic Growth Nexus’ (2016) 42 International Review of Economics & Finance 116.

International Trade Administration, ‘Saudi Arabia – 1-Openness to and Restriction on Foreign Investment’ (Export.gov, 2017). Web.

Jabri A, Guesmi K and Abid I, ‘Determinants of Foreign Direct Investment in MENA Region: Panel Co-Integration Analysis’ (2013) 29 The Journal of Applied Business Research 1103.

Jadea AK and Basir SM, ‘Legal Regime of Foreign Direct Investment in Saudi Arabia within 2008–2015’ (2017) 3 Imperial Journal of Interdisciplinary Research 479.

KSA Foreign Investment Law (2000) Royal Decree no. M/15 1421/10.

Moser S, Swain M, and Alkhabbaz M, ‘King Abdullah Economic City: Engineering Saudi Arabia’s Post-Oil Future’ (2015) 45 Cities 71.

Oxford Business Group, ‘New Legislation in Saudi Arabia to Attract Foreign Investment’ (Oxford Business Group, 2018). Web.

— — ‘Saudi Arabia Well Placed to Take Advantage of Its Trade and Investment Strengths’ (Oxford Business Group, 2018). Web.

Qureshi R and Medabesh A, ‘Saudi Arabia’s Declining Foreign Direct Investment Inflows: Inept Marketing Strategy?’ (2016) 4 International Journal of Economics, Commerce and Management 335.

Rogmans T and Ebbers H, ‘The Determinants of Foreign Direct Investment in the Middle East North Africa Region’ (2013) 8 International Journal of Emerging Markets 240.

Sbia R, Shahbaz M and Hamdi H, ‘A Contribution of Foreign Direct Investment, Clean Energy, Trade Openness, Carbon Emissions and Economic Growth to Energy Demand in UAE’ (2014) 36 Economic Modelling 191.

Shahbaz M, Nasreen S, Abbas F and Anis O, ‘Does Foreign Direct Investment Impede Environmental Quality in High-, Middle-, and Low-Income Countries?’ (2015) 51 Energy Economics 275.

Sillah B, ‘Human Capital, Foreign Direct Investment Stock, Trade and the Technology Diffusion in Saudi Arabia 1974-2011’ (2015) 42 Journal of Economic Studies 101.

Taylor S, Bogdan R and DeVault M, Introduction to Qualitative Research Methods: A Guidebook and Resource (John Wiley & Sons 2015).

Footnotes

  1. Gaber Mohamed Abdel Gawad and Venkata Sai Srinivasa Rao Muramalla, ‘Foreign Direct Investment (FDI) and Its Effects on Oil, Gas and Refinery Production and Their Exports: An Applied Study’ (2013) 4 Journal of Economics and Sustainable Development 23.
  2. Khaled Hussein, FDI Trends in the Arab Region (United Nations Economic and Social Commission for Western Asia 2014) 8-12.
  3. Bassam Albassam, ‘Does Saudi Arabia’s Economy Benefit from Foreign Investments?’ (2015) 22 Benchmarking: An International Journal 1215.
  4. Oxford Business Group, ‘New Legislation in Saudi Arabia to Attract Foreign Investment’ (Oxford Business Group, 2018). Web.
  5. Alenazi Khaled Jadea and Salawati Mat Basir, ‘Legal Regime of Foreign Direct Investment in Saudi Arabia within 2008–2015’ (2017) 3 Imperial Journal of Interdisciplinary Research 481.
  6. Foreign Capital Investment Law (1979) 17/111421H 11/21.
  7. KSA Foreign Investment Law (2000) Royal Decree no. M/15 1421/10.
  8. Khalid Al Khathlan, ‘Foreign Direct Investment Inflows and Economic Growth in Saudi Arabia: A Co-Integration Analysis’ (2013) 4 Review of Economics & Finance 71-73.
  9. Bukhari Sillah, ‘Human Capital, Foreign Direct Investment Stock, Trade and the Technology Diffusion in Saudi Arabia 1974-2011’ (2015) 42 Journal of Economic Studies 102.
  10. Alenazi Khaled Jadea and Salawati Mat Basir, ‘Legal Regime of Foreign Direct Investment in Saudi Arabia within 2008–2015’ (2017) 3 Imperial Journal of Interdisciplinary Research 480.
  11. Bukhari Sillah, ‘Human Capital, Foreign Direct Investment Stock, Trade and the Technology Diffusion in Saudi Arabia 1974-2011’ (2015) 42 Journal of Economic Studies 102.
  12. Riyazuddin Qureshi and Ali Medabesh, ‘Saudi Arabia’s Declining Foreign Direct Investment Inflows: Inept Marketing Strategy?’ (2016) 4 International Journal of Economics, Commerce and Management 336-337.
  13. International Trade Administration, ‘Saudi Arabia – 1-Openness to and Restriction on Foreign Investment’ (Export.gov, 2017). Web.
  14. Dimah Talal Alsharif, ‘How Saudi Arabia Shows It Is Open for Business’ Arab News (Riyadh, 2018). Web.
  15. International Trade Administration, ‘Saudi Arabia – 1-Openness to and Restriction on Foreign Investment’ (Export.gov, 2017). Web.
  16. Alenazi Khaled Jadea and Salawati Mat Basir, ‘Legal Regime of Foreign Direct Investment in Saudi Arabia within 2008–2015’ (2017) 3 Imperial Journal of Interdisciplinary Research 481.
  17. Riyazuddin Qureshi and Ali Medabesh, ‘Saudi Arabia’s Declining Foreign Direct Investment Inflows: Inept Marketing Strategy?’ (2016) 4 International Journal of Economics, Commerce and Management 337.
  18. Tim Rogmans and Haico Ebbers, ‘The Determinants of Foreign Direct Investment in the Middle East North Africa Region’ (2013) 8 International Journal of Emerging Markets 241.
  19. Abdelkarim Jabri, Khaled Guesmi and Ilyes Abid, ‘Determinants of Foreign Direct Investment in MENA Region: Panel Co-Integration Analysis’ (2013) 29 The Journal of Applied Business Research 1104.
  20. Irwan Shah Zainal Abidin, Muhammad Haseeb, Muhammad Azam and Rabiul Islam, ‘Foreign Direct Investment, Financial Development, International Trade and Energy Consumption: Panel Data Evidence from Selected ASEAN Countries’ (2015) 5 International Journal of Energy Economics and Policy 843.
  21. Rashid Sbia, Muhammad Shahbaz and Helmi Hamdi, ‘A Contribution of Foreign Direct Investment, Clean Energy, Trade Openness, Carbon Emissions and Economic Growth to Energy Demand in UAE’ (2014) 36 Economic Modelling 193.
  22. Seyed Mohammad Alavinasab, ‘Determinants of Foreign Direct Investment in Iran’ (2013) 3 International Journal of Academic Research in Business and Social Sciences 259.
  23. Sasi Iamsiraroj, ‘The Foreign Direct Investment–Economic Growth Nexus’ (2016) 42 International Review of Economics & Finance 118.
  24. Sasi Iamsiraroj and Mehmet Ali Ulubaşoğlu, ‘Foreign Direct Investment and Economic Growth: A Real Relationship or Wishful Thinking?’ (2015) 51 Economic Modelling 202.
  25. Muhammad Shahbaz, Samia Nasreen, Faisal Abbas and Omri Anis, ‘Does Foreign Direct Investment Impede Environmental Quality in High-, Middle-, and Low-Income Countries?’ (2015) 51 Energy Economics 276-277.
  26. Dominic Dudley, ‘Saudi Arabia Suffers Shock Collapse in Inward Investment’ Forbes (New York, 2018). Web.
  27. International Trade Administration, ‘Saudi Arabia – 1-Openness to and Restriction on Foreign Investment’ (Export.gov, 2017). Web.
  28. Oxford Business Group, ‘Saudi Arabia Well Placed to Take Advantage of Its Trade and Investment Strengths’ (Oxford Business Group, 2018). Web.
  29. International Trade Administration, ‘Saudi Arabia – 1-Openness to and Restriction on Foreign Investment’ (Export.gov, 2017). Web.
  30. Sarah Moser, Marian Swain, and Mohammed Alkhabbaz, ‘King Abdullah Economic City: Engineering Saudi Arabia’s Post-Oil Future’ (2015) 45 Cities 71.
  31. Alenazi Khaled Jadea and Salawati Mat Basir, ‘Legal Regime of Foreign Direct Investment in Saudi Arabia within 2008–2015’ (2017) 3 Imperial Journal of Interdisciplinary Research 481.
  32. David Held and Kristian Ulrichsen, The Transformation of the Gulf: Politics, Economics and The Global Order (Routledge 2013) 112.
  33. Steven Taylor, Robert Bogdan and Marjorie DeVault, Introduction to Qualitative Research Methods: A Guidebook and Resource (John Wiley & Sons 2015) 84.