Attracting foreign direct investment in Saudi Arabia

BY Noaman Abdul Majid

The Kingdom of Saudi Arabia (KSA) is positioning itself to be one of the leading global recipients of Foreign Direct Investment (FDI) by 2030. The Kingdom is targeting almost $100 billions of annual FDI by 2030, which would represent 5.7% of the GDP. The share of the private sector in the GDP is targeted to grow up to 65% by that time. Although this is an ambitious target, the country has strong potential to achieve it as it is already ranked 3^rd among the emerging markets globally in the Optimism Ranking of the FDI Confidence Index 2023. The volume of FDI in the KSA tripled from $5 billion in 2011 to $19 in 2021. The National Investment Strategy launched in 2021 articulates a comprehensive roadmap for attracting FDI into the country.

However, as per the World Investment Report, the global FDI fell by 12% in 2022, reaching $1.3 trillion. Some of the main drivers of this decline were the geopolitical tensions in different regions, high inflation, tight monetary policy and soaring public debt. According to the Investment Trends Monitor by UNCTAD, the downward pressures are likely to continue in 2023 as well.

While the potential and strategy of the KSA as a top FDI destination is in full motion as per Vision 2030, the global FDI trends and challenges necessitate that the FDI attraction strategy remains constantly under review by the policy makers. Based on the empirical evidence and experience of other countries in this domain, some of the following factors could assist in managing the risks related to the FDI attraction.

Firstly, it is important to prioritize the key areas of FDI. The Kingdom is pursuing a wide range of very large projects in multiple domains. Since investor preferences keep changing due to volatile global economic scenario, it might be challenging for them to absorb and decide upon all the investment opportunities presented together. Prioritizing and focusing these opportunities as per the investor requirements might be helpful in generating relatively quicker results.

Secondly, a modular approach in developing and presenting mega projects for investments to the global investor community could expedite the process of investment. A lot of big investors like to start small at times. Presenting them smaller opportunities in big projects can set the basis for attracting much larger investments at a later stage. Some economic zones in different countries tried to start too big but were unable to attract the right kind of investors, due to the lack of proof of concept.

Thirdly, it is critical to present only ‘investor ready’ projects to global investors. A lot of homework typically goes into developing any project and investors are more comfortable assessing any project which has passed through the initial phase of planning, stakeholder onboarding and licensing etc.

Fourthly, it is important to focus more on medium term projects. Investors are relatively shy these days with very long term commitments. They are keen to look at projects between a three to five years horizon. The very large scale, long term projects are more suited for public sector and domestic private sector entities.

Fifthly, all projects must have realistic commercial feasibility and economic sustainability. Some of the mega projects might require financial support for many year after being operational. It might create long term systematic economic risks as well. Hence it is important to ensure that these projects become self-sustaining in the near term.

Sixthly, human resource mobilization and training is the key for attracting foreign direct investment. It includes the readiness and availability of local and foreign labor force in the country. Human resource development has to be precisely linked to the foreign investment attraction strategy to ensure that investors do not have recruitment challenges from the very beginning.

Seventhly, the regulatory framework has to be in line with other regional competitors. The Kingdom has significantly upgraded its business-friendly legislative framework, which has been appreciated by stakeholders across the board. Being the largest regional economy by far, the Kingdom has rightly launched its regional headquarters initiative for the sake of further job creation and enhancing economic activity. However, other GCC countries are also making great strides in terms of regulatory framework and ease of doing business to attract the best labor force from the world and to be a regional and global business center. The Kingdom would have to outperform them in this regard to be the legal destination of choice for any foreign investor coming into the Kingdom or the greater Middle East region.

Eighthly, the cost of doing business matters a lot to the foreign investors. This is more important for sophisticated industrial and service oriented projects which require a very high quality of human resources. It becomes even more important if the global economy is generally under stress and investors are keen to contain their overheads. The cost of doing business is a function of a complete ecosystem of various business and lifestyle issues which must be addressed simultaneously. This must be reviewed constantly to ensure that it doesn’t become a prohibitive factor for investors coming into the country.

Ninthly, the private sector must be at the forefront of attracting foreign investment, alongside the public sector. A purely public sector led FDI attraction strategy might be challenging to sustain in the long run as many investors are keen to enter in any country only in partnership with the private sector. Hence, the private sector should be encouraged to develop a foreign investment attraction strategy of their own, which compliments the government’s efforts to bring FDI into the country.

Tenthly, the Kingdom can introduce some offshore investment and wealth management structures which allow local and global investors to use the country’s infrastructure and private wealth for making regional and global investments. This could initially be done on a limited scale with full investor protection, and then gradually expand its horizon. It would also allow top professional services providers to position themselves in the Kingdom, instead of servicing their Saud Arabian clients from other neighboring countries.

To conclude, foreign investment is a cornerstone of the Kingdom’s long term economic development strategy. It must be pursued with the same vigor by all public and private sector institutions to materialize the vision of making the Kingdom one of the largest recipients of FDI in the world.

Noaman Abdul Majid is an international economic development, investment strategy and business restructuring expert. He is the CEO of WIXEMAN, a strategy consulting firm based in the GCC. He advises sovereign wealth funds, public sector institutions and private family offices on financial and business strategy. He is a Fellow Chartered Accountant, Fellow Chartered Management Accountant, Chartered Islamic Finance Professional and Masters in Economics. Email: namajid@wixeman.com .