The Determinants of Foreign Direct Investment in The Kingdom of Saudi Arabia

A-M. Abdel-Rahman

No 238, Working Papers from Economic Research Forum

Abstract: This paper investigates the nature of FDI flows into the economy of the Kingdom of Saudi Arabia (KSA), its impacts and the various determinants, which govern its levels and performances. The paper discusses FDI in the KSA with respect to overall trends including stages, sources and their regional, sectoral and sub-sectoral distributions. Positive trends are observable in both contracted and actual FDI stocks with common jumps occurring in the early eighties because of the infusion of massive FDI into the petrochemicals sub-sector of the Kingdom. FDI in the KSA is seen to be predominantly of the Joint venture form while Greenfield investments are expected to accelerate after the imposition of a New Investment Law permitting these types of investments. Sectorally, the Manufacturing sector attracts the largest share of FDI flowing into the Kingdom. This is attributable to the fact that most of FDI tended to flow to the heavy Petrochemical industry comprising the majority's share of total foreign investments in the Kingdom?s Manufacturing sector. The paper then discusses the determinants of both contracted and actual FDI. The roles of market size, economic integration via international trade, wage rates, and country risk in attracting FDI to the KSA were investigated. Empirical methods used to gauge the issues include causality tests on FDI and other variables of the KSA economy plus conventional regression models on the determinants of FDI themselves. Results obtained on the empirical trials show that activity GDP levels affect FDI in its contracted and actual forms positively, significantly and in a robust fashion. Exports proved a significant negative determinant of the KSA's FDI. This was attributed to the fact FDI and exports - which are largely Oil in nature may be viewed as substitutes from the host country perspective. Domestic investments proved to be negative determinants on the contracted FDI with the indication of a possible 'crowding-out' effect in that regard. The socio-political risk variable were mostly significant, thus validating the conjecture that with lower risk, FDI tended to increase for the Kingdom.

Pages: 19 pages
Date: 2002-12-12, Revised 2002-12-12
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Published by The Economic Research Forum (ERF)

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