Essay: Trade & Foreign Direct Investment In Saudi Arabia

A. Discuss critically the role of Foreign Direct Investment (FDI) in economic development of the Middle East Nations.
B. Has KSA been benefited by FDI? Discuss your answer citing examples from any two fields of the economy.

Prepare a short report with the help of following points:

1. Present the study report with clear Introduction and Conclusion including your own views.
2. Analyze your study with micro and macro environmental forces by using SWOT analysis.
3. Analyze the Political and Economic challenges.

Categories of Trade Components

International trade is the interchange of goods and services between individuals, organisations or governments across national boundaries (Robinson and Balassa, 2018). Trade components have the following categories:

• Consumer goods: final goods ready for consumption. They include automobiles, clothes, household electronics and furniture
• Capital goods: used for production of consumer goods or services. They include machinery and fittings
• Services: they include, payment facilitation services (banking) and medical care.

International trade brings about much competition and efficiency in the market, resulting to availability of affordable consumer goods in the market.

Saudi Arabia’s economy is wholly oil backed (Cia.gov, 2018). The KSA is the largest producer of oil in the world and has the majority of oil reserves in the world. Crude oil exports account for about eighty percent of total exports, and approximately ninety percent of government revenue (GlobalTrade.net, 2018). The state has plans to diversify income sources by putting more focus on industrialisation, food processing and agricultural sectors.

FDI has played a major role in the growth and development of Middle East countries. FDI affects growth of a nation since it affects greatly; capital accumulated over time and importation of new technology into the host country.

Capital accumulation refers to acquisition of extra assets, from investments or profit, used in the process of production (Tejvan, 2018). Capital accumulation comprise of the preceding steps namely: saving, savings assembly and the investment of profits. 

For Instance, when emirates started in 1985, it injected start-up capital of US$ 10 million into the UAE economy. Today, it is the largest international carrier in the world based on mileage and the sixth biggest carrier based on revenues generated (Kumar, 2018). Even though the state owns 100% of Emirates, it generates all of its income from the international market. Precisely, tourists or passengers flown. According to Kumar, Emirates generated a total of US$ 27.9 billion. According to Sheikh Mohammed, Vice President of UAE, in the Emirates Group annual report 2017/2018 the company is set to make additional investment of US$ 150 million to refurbish all aircrafts; to be done by the year 2019(Annual Report 2017/2018, 2018). This is an investment, which will come from profits of the company.

Technology transfer is the process by which utility of technical and scientific knowhow, facility and/or capability takes place in another place/country other than the country where they are primarily developed (Dictionary of International Trade, 2018). The role technology plays in the growth and development of a modern economy derives the importance of transfer of new technology. The need for technology, whether local or imported, grows rapidly across the world. This is because it plays a core role in the sustainability of production in both developed and third world countries. Moreover, the long-term evolution of any business firm widely depends on the ability of the firm to acquire the latest technologies in the market related to the business.

FDI and Capital Accumulation

Technology is not a free good, neither is it a public good. Therefore, it is developed or outsourced. It does not occur as a build-up of generic knowledge and be used repeatedly by any business organisation that would like to have a leeway to it. This is because technologies are extremely peculiar or customized to maximize specific production goals.

Furthermore, efficient technological transfer between nations is highly dependent to the receiving state’s policies on open and closed investing and making better the quality of its native technological capacity. The introduction and usage of foreign technology is a very active procedure. This is because people and organisations must be involved in learning about a new technology, so that it can be useful in the county of import. This is of importance as the state’s regulations on monitoring high-tech translocation deal so that it can decrease piracy and tightly monitor the execution of imported technologies.

Relocation of new technology not only exist through the foreign state’s FDI into the local economy, but also through receiver state’s FDI in the foreign market (Utrs.com, 2018). Some Middle East countries have been broadening their investing listings by depositing huge sums of their excess income in developed countries’ settled firms by getting steak interests.

Up to the 1970s, FDI from Middle East have been going to the building and construction and banking industries of the developed countries. The most popular and staring countries for FDI from Middle East are the United States of America (USA) and Japan. After the late 1970s, manufacture and oil sectors have continued to attract FDI and making governments to begin to search for alternative options like goods and services, accompanied by the related technologies for exporting to the local industrial systems.

A very good sample is the buyout of Santa Fe International Corporation (oil drilling company), which was a USA endeavour, by Kuwait Petroleum Corporation (KPC). The value of the acquisition was US$ 2.49 billion in the early 1980s (Myerson, 2018). The buyout has verified the benefits to Santa Fe since it has been enlarging and broadening more quickly as it never did before it the buyout by KPC. Today, Santa Fe is the most prominent and the most prosperous case-in-point of a merger between Kuwait’s oil treasure and a US technology, allowing for notable mutual rewards.

Conclusion

Capital accumulation and introduction of new technologies are the most significant roles of FDI in the Middle East. Capital accumulation provides the host country with resources to finance development projects. On the other hand, new technologies result to efficient creation of modern products and services, which means that the country is going to have competitive products in the global market. This increases exports, which results to a positive effect on the balance of payment of the host country.

Technology Transfer and FDI

The KSA is a big receiver state of FDI, particularly in contrast to the size of its economy: by the time year 2011 was ending, total inward FDI had reached US$ 187 billion, equal to thirty-four percent of the kingdoms Gross Domestic Product (GDP). Contrary to that, FDI abroad by the KSA are comparatively moderate, as the state’s outward FDI was only equal to just five percent of the kingdom’s GDP by the end of the year 2011 (Unctad.org, 2013).  

KSA easily elevated to a big FDI receiver state in the previous decade: from a yearly mean of US$ 251 million between 1990 and 1999, inward FDI increased to US$ 772 million between 2000 and 2004, then hoped to US$ 24 billion between 2005 and 2011.  In 2005, it was the turnaround position, as inflow FDI rose by more than X6 to get to US$ 12 billion, and preserved the evolution until 2008.  Yet, flows have recorded 3 sequential years of a bearish trend from 2009, subject to both the world-wide economic slump and riots in the zone, and was at US$16 billion in year ended 2011.  

FDI in the KSA elevated by US$ 881.9 million in Q2 of 2018 (Tradingeconomics.com, 2018). In 2017, the kingdom saw FDI collapse to US$ 1.3984 billion from US$ 7.5 billion and from an all-time high of US$ 12.2 billion in the year 2012.

According to the most recent UNCTAD World Investment Report, released on seventh of June 2018, FDI into the KSA had dropped to US$ 1.4 billion, from US$ 7.5 billion in 2016 and from an all-time high of US$ 12.2 billion in the financial year ended 2012. In overall, the global FDI flows dropped by 23 percent to US$ 1.44 trillion (Unctad.org, 2018). Even smaller states like Jordan, which attracted FDI amounting to US$ 1.7 billion in 2017, passed the kingdom by far.

Unctad.org blamed the decrease in FDI into the KSA to fundamental demotion and unsupportive intra-organization debt by international MNEs. For Instance, it directed to the UK/Dutch Shell Group, which disposed fifty percent of its stake in the Sadaf Petrochemicals undertaking to one of its related company, Saudi Basic Industries Corporation (Sabic) for an amount of US$ 820 million in August 2017.

Environmental forces are the factors that affect the growth of an economy. Below are the factors, explained.

• Land: these are the natural resources that are available naturally for extraction and utilized for economic purposes. They include oil, gold, soil, trees.
• Population/ Labor: population is the number of people that live in a particular country. People provide human capital/ labour in an economy. An increasing population means that government and business organizations have more people available for service production.
• Infrastructure: this is tangible capital such as railway lines, factory/works and machine. Good infrastructure reduces the costs of economic transactions and activities.
• Technology: application of scientific methods in trade and industrial production. Modern technology brings about efficiency and faster production and transactions.
• Geopolitics: political events that occur in certain localities, and have the capacity to affect the international scenery (Sicat, 2018). A good instance is the recent China-US trade war and Donald Trump’s threats Saudi Arabia over sanctions.

The above environmental factors are analyzed using SWOT analysis below.

• KSA the largest oil reserves in the world; about ¼ of global total
• The KSA is the largest economy in Middle East
• Political stability
• Stable fiscal system as the kingdom less loans and more wealth
• Rapid increase in income diversification catalysed by the KSA Vision 2030 agenda (Coface.com, 2018).

• The kingdom highly depends on the natural gas and oil industries
• There’s an increasing demand for power by locals
• High and increasing level of domestic unemployment and bad employment creation efforts outcome
• Female participation in economic activities is very low
• There are minimised efforts in encouraging savings as the economy primarily depends on public spending (Coface.com, 2018)

• Energy: the high demand for consumer power guarantees investors of competitive returns and less resistance from government as the government is encouraging private-public partnerships to increase efficiency.
• Education: the KSA is the eighth largest consumer of education in the world. The KSA spends huge sums to send Saudi scholars abroad with the aim of replacing expatriates working in the kingdom in expense of the local population. The government still requires a lot of FDI in this sector to fill the gap.
• Construction: The KSA has the biggest construction market in the region. The government has plans to build industrial cities and improve infrastructure, all this will require construction work.
• Healthcare: population increase in the kingdom continues to demand for better healthcare services and systems.

• Terrorism: terrorist groups; al-Qaida (AQ), al-Qaida in the Arabian Peninsula (AQAP) and Islamic State of Iraq and ash-sham, all have a common goal of overthrowing the Islamic monarchy of the KSA. This is to bring to an end western and American influence in the region (Cia.gov, 2018).
• Oil Production Quotas: in 2017, the KSA signed an OPEC agreement to reduce oil production to 500,000 barrels from 900,000 barrels in 2016. This lead to a recession in the oil driven economy (Coface.com, 2018).

Conclusion

In conclusion, the KSA still stands out as one of the most attractive countries for FDI in the Middle East. Both the government’s willingness to diversify from oil industry and the demand for international goods and services by the domestic market catalysed this trend. Turning of weaknesses to strengths would be easy if the government puts policies that will entice the international investors and prove to them that Saudi Arabia is the place to be. For example, subsidising agricultural projects, which will see introduction of new farming technologies, creation of employment to thousands, if not millions, of locals and a positive effect to the balance of payment of the country since food is one of the major import commodities in the kingdom. In addition, the vast range of investment opportunities in the country puts the country in a competitive edge for FDI, given the combined strength of demand and government policy.

References

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