Академический Документы
Профессиональный Документы
Культура Документы
Signature _______________
-1-
- Figure 1
17
- Table 1
19
- Table 2
33
- Table 3
35
- Figure 2
36
- Figure 3
38
- Table 4
40
- Table 5
42
- Table 6
43
- Table 7
45
-2-
Table of Contents
II
CHAPTER 1 - INTRODUCTION
1.1
Background
10
1.2
11
1.3
11
1.4
Professional Significance
12
1.5
Dissertation Structure
13
14
2.1
2.3
II
15
15
16
2.2.3 Infrastructure
17
2.2.4 Labor
18
19
2.3.1 Efficiency
19
21
2.3.3
Social Factors
22
2.3.4
Technology Inflows
22
2.3.5
Employment
23
CHAPTER 3 - METHODOLOGY
3.1
14
Research Philosophy
-3-
25
25
III
3.2
Research Types
26
3.3
Research Questions
27
3.4
Research Participants
27
3.5
Research Instruments
28
3.6
Secondary Sources
30
3.7
Hypotheses
31
3.8
Research Process
31
3.9
Pilot testing
32
3.10
33
3.11
Research Ethics
33
3.12
34
CHAPTER 4 - RESULTS
35
4.1
4.2
37
4.3
38
4.4
39
4.5
4.4.1
Wages
40
4.4.2
Employment
42
4.4.3
Economic Activity
43
4.4.4
Economic Integration
45
46
4.5.1
4.5.2
-4-
IV
48
CHAPTER 5 - DISCUSSION
49
5.1
Hypothesis 1
49
5.2
Hypothesis 2
50
5.3
Hypothesis 3
50
5.4
Hypothesis 4
51
5.5
Hypothesis 5
52
5.6
53
5.7
53
-5-
V
VI
VII
54
CHAPTER 7 REFERENCES
58
CHAPTER 8 APPENDIXES
63
8.1
Appendix I
63
8.2
Appendix II
64
8.3
Appendix III
68
8.4
Appendix IV
70
8.5
Appendix V
73
-6-
ACKNOWLEDGEMENTS
Having completed this piece of work I would like to express my deepest gratitude to my family,
and specially my lovely caring parents who have guided me throughout my life, taught me to
stand for my principles and helped me learn that everything is achievable by hard work and full
devotion. Thank you so much for all the support you gave me, I love you the most!
I would like to acknowledge that this dissertation would have not been possible without the
assistance of Prof. Keith Pilbeam who has offered his generous guidance and advice throughout
the year.
Id like to thank the Saudi Arabian government, which offered me the chance to continue with
my studies at City University London. And finally, many thanks to my wonderful friend Dana
Al-Sami who stood with me from the very beginning of my journey!
Regards,
Jellan
-7-
ABSTRACT
This study explores the scope of data regarding relevance between foreign direct investment
attraction as a capital flow into Saudi Arabia as a host country and its determinative influences.
The aim for this academic study is to examine the factors that have mainly promoted economic
growth in Saudi Arabia in contribution to foreign direct investment inflows by investigating the
determinants of FDI and whether they are enhancing the economy of Saudi Arabia. I aim to
examine several important elements that are taken into consideration by potential investors: the
financial sector development and liberalization, the business environment, the infrastructure of
Saudi Arabia, and the work force. Then, I intend to deliberate with reference to the spill over
effect in such a matter and the benefits it may bring in terms of efficiency, employment, social
factors, technology inflows, and finally economic integration. The analysis of my study
necessitates conducting interviews and gathering direct data. Having said that, I would like to
apply a study of three existing FDI projects that are held in Saudi Arabia. I aim to emphasize on
the projects that were investing in Saudi Arabia starting 2000 and up till 2009. The final purpose
is to understand the impact of foreign direct investment as a whole on the Saudi rigid economy.
-8-
CHAPTER 1: INTRODUCTION
Ever since the beginning of the current decade, economies and international institutions have
been actively promoting economic integration and globalization.
economists, that this will result in income convergence, improved standards of living for the
global citizen as well as technology and knowledge transfers. Besides lowering trade barriers,
another important means of achieving globalization is creating an environment that attracts
foreign multinational corporations. FDI flows are known for the many advantages that they
provide to their host country.
FDI in the developing countries has been perceived as an important key resource of economic
enlargement. Potential foreign investors are now being challenged with certain host
government incentives. In reference to recent economic development plans, the future vision
of social, economic, and political prosperity in the country is distinguished as being eventually
related to its ability to invite more FDI inflows in recent years.
In this context, Saudi Arabia has recently introduced policies to attract FDI flows into its
economy in various sectors as a means of achieving diversification and lowering vulnerability
to external shocks. The aim of this study is to assess the impact that FDI flows have had on
the Saudi economy by endorsing efficiency, encouraging the use of technology, involving
economic integration and social factors, empowering the workforce, and increasing
employment levels. In order to examine new policies to be introduced, the authorities can
implement the results in this study to ensure that the benefits of FDI are being obtained whilst
possible negative influences are being mitigated.
-9-
1.1 Background
Prior to the global economic crisis, the UAE was known to be the first destination for FDI
flows by countries all over the world. There was immense growth potential, a rising market
with increasing demand and minimal business regulations. However the surge in FDI resulted
in massive exploitation of the labor force and of the environment, since appropriate
infrastructure and laws were not established to preserve the interests of the workers. Despite
these problems inherent in Dubai followed by the global economic crisis, Dubai is still seen as
the most preferred destination for FDI flows by most investors worldwide and it is the
massive inflow of foreign investment that has helped the economy rebuild itself after the crisis
that caused massive problems especially in the real estate sector (Augustine, 2010).
Realizing the massive benefits of FDI flows for Dubai, the Saudi economy has followed suite
to attract FDI flows into the country by offering low business regulations and easing
restrictions on foreign participation in the economy. This has been largely successful owing to
the fact that the economy has been able to attract massive inflows of FDI increasing from $34
billion in 2005 to $147 billion in 2009. Furthermore in an attempt to reduce the economys
vulnerability to external shocks, Saudi Arabia has successfully diversified its economy
focusing on sectors including utilities, hotels & restaurants and construction. Electricity on its
own attracted FDI inflows rising from $1,371 million in 2005 to $ 6,402 million in 2009
whilst construction industry attracted $1552 million in 2005 rising to 15,378 million in 2009.
Hotel and restaurants also faced substantial increase in FDI flows rising from $34 million to
$784 million (SAGIA, 2010).
Despite these impressive statistics, there is little research analyzing the effects that FDI have
had on the economy in terms of employment, social environment, trade and efficiency.
- 10 -
Analyzing FDI from the perspective of these factors is the purpose of this study.
Analyze the literature to obtain the main variables that FDI is known to effect.
Examine the changes in those variables over a period of time in the context of Saudi
Arabia.
- 12 -
Chapter summary
This chapter has examined the main aims and objectives of the study as well as highlighting
the professional significance and structure. The next chapter conducts a detailed literature
review on FDI and its benefits to society.
- 13 -
country and its steady state production frontier. Furthermore, as a result of the inflow of
advanced technology and knowledge spillover effects of foreign investment, the authors argue
that FDI also has a second function of shifting the host countrys production frontier
outwards. It is this dual function performed by FDI that enables developing countries to
catch up with the more advanced nations in terms of GDP per capita such as China that has
experienced significant growth over the years due to FDI inflows.
- 16 -
greater is the incentive for foreign firms, reducing uncertainty and raising efficiency
(Kirkpatrick, Parker, Zhang, 2006). Furthermore, as argued by Globerman & Shapiro (2002)
good governance infrastructure can not only attract FDI but can also stimulate the
establishment of domestic multinational corporations. However, the benefits of governance in
terms of FDI inflows experiences diminishing returns implying that the positive consequences
for FDI are most pronounced for smaller and developing economies.
These results can be summarized in figure 1 below.
Figure 1: Business /Investment Climate
POLITICAL
REGULATORY
ECONOMIC
INFLATION
CONFLICT
STABILITY
CORRUPTION
TAX
LABOR LAWS
FOREIGN
OWNERSHIP
INFLATION
UNCERTAINTY
HIGH BOP DEFICIT
ECONOMIC
INSTABILITY
2.2.3. Infrastructure
The evidence regarding the importance of infrastructure as a determinant of FDI is mixed
since researchers claim that the result depends on the type of FDI being analyzed. That is
factors such as kilometers of paved highways per capita, number of telephones and
- 17 -
expenditure on road transport have a positive and significant influence on certain industries
towards which inward oriented FDI is being directed but not so in other industries (Pham,
2004).
Other researchers however, argue that infrastructure plays a vital role in developing countries
especially because of its role in promoting agglomeration (Crozer & Mayer, 2004). For
instance, Wheeler & Mody (2002) argue that one of the main factors considered by US
investors in deciding where to invest their funds, is the possibility of agglomeration benefits,
which in turn are promoted through high quality infrastructure. For example developing
countries with high quality infrastructure, situated in Asia, Latin America and Eastern Europe
have been associated with high inflows of FDI.
2.2.4. Labor
Some researchers argue that low cost of labor is one of the most important determinants of
FDI inflows into a host country, however others argue that although this factor was important
in the past, it is no longer significant in determining FDI. Instead availability of skilled
workers and productivity of labor are more relevant factors influencing FDI decisions for
foreign investors. In this regard Coughlin & Segev (2000) found that higher levels of
productivity of the workforce was associated with higher levels of FDI whilst lower levels of
labor cost per unit of labor was associated with higher levels of FDI.
Table 1 below provides an overview of the important determinants of FDI mentioned in this
section together with a list of the associated researchers.
- 18 -
RESEARCHERS
Infrastructure
Labor
2.3.1. Efficiency
Lovei & Gentry (2002) argue that the inflow of FDI can have a dual effect on the host
country. First of all, it can help to increase competition forcing domestic firms to increase
efficiency and lower costs in order to survive in the industry.
competition, consumers are dependent on domestic firms for goods and services and this
- 19 -
production, quality of output or raise efficiency. The high costs associated with inefficient
production is simply transferred over to consumers in the form of higher prices. Hence
competition via foreign firms that are more efficient and can produce at lower cost will not
only force domestic firms to raise efficiency but will also lower prices for consumers
(Organization for Economic Construction and Development, 2002). Liu, Siler, Wang & Wei
(2000) found similar results when examining the impact of FDI inflows into the UK
manufacturing sector between 1991-1995 arguing that the very presence of foreign firms in
the sector resulted in productivity spillovers for domestic firms, raising efficiency and
productivity. However, the authors also argued that the extent by which local firms will
increase efficiency would depend on their current state of technology.
The authors argued that the second impact of FDI inflows would be to restructure local
enterprise itself. The increased number of alliances and partnerships being made between
domestic and foreign firms alters the manner in which these firms operate. That is, local firms
in developing countries are forced to adopt new management styles and modern methods of
production raising the knowledge and efficiency of the overall corporate sector in the
developing country.
However, regarding the spillover effects that FDI can have on local firms to raise efficiency, a
report by the OECD (2002) revealed that there was greater evidence for vertical spillovers to
local firms in different stages of production, than horizontal spillovers. Therefore, it is
important to distinguish between the types of FDI being used. Horizontal FDI is undertaken
by the investor with the incentive of producing the same or similar kind of goods in the host
country aiming to exploit of monopolistic or oligopolistic advantages such as patents or
- 20 -
differentiated products. Vertical FDI is undertaken with the incentive of getting closer to
suppliers (backward) or consumers by acquiring distribution outlets (forward) (Moosa, 2002)
Furthermore, Aitken, Gordon, Haarison (1997) examined FDI flows into Venezuela arguing
that although there was evidence of a positive relationship between foreign equity
participation and plant performance, this relationship was only significant for smaller firms
and not for larger firms.
- 21 -
- 22 -
not be possible for multinational corporations to provide local suppliers with advanced
technology since they would not have the necessary tools and equipment to use it effectively.
In situations where foreign companies have been able to effectively supply host countries and
local firms with modern technology, skills and training, the resulting technology and human
capital spillover effects have been able to raise total factor productivity in the host country
(Djankov, Hoekman, 2000).
2.3.5. Employment
Employment can increase as a result of FDI inflows either because of the additional workers
hired by the multinational corporation themselves, or because of the additional workers hired
by local firms that are replacing their employees hired by the multinational. The impact on
raising employment is greatest the further the economy is from the full level of employment.
However, that does not imply that FDI flows have no impact on employment for countries
that are near to full employment. Instead, researchers have suggested that in such economies
the resulting increase in employment that is witnessed it due to a shift of workers between
productive sectors. Wages can also increase for workers especially since multinational
corporations are usually more able and willing to pay higher wages to attract skilled workers,
than their local counterparts.
However, for certain economies there is a possibility that foreign direct investment leads to a
crowding out effect since foreign funds replace domestic funds and lower domestic
investment through competition for scarce resources. In this scenario, it is possible for FDI
flows to have limited impact on employment, although this is usually a short-term
phenomenon and is unlikely to persist in the long run (OECD, 2002).
- 23 -
Chapter Summary
This chapter had conducted a thorough review of foreign direct investment highlighting the
important determinants of FDI as well as some of the main benefits of FDI for host countries.
In particular, the main determinants have been identified as financial sector development/
liberalization, business environment, infrastructure and labor costs and productivity. The
main benefits of FDI include, technology and human capital spillovers, increased efficiency
and employment, improved social environment and economic integration. The next section
examines the methodology to be used in this project.
- 24 -
CHAPTER 3 - METHODOLOGY
This chapter examines the methodology to be used in this project, highlighting the philosophy,
nature of the data, research questions, research participants and limitations of the study.
- 25 -
structured interviews. The statistics gathered from reports and documents will be objective in
nature although the interviews may be subject to personal interpretation. Overall, the research
is employing the positivist philosophy at large by gathering data to test a series of hypotheses
in order to assess the impact of FDI on the Saudi Arabian economy.
- 26 -
time. In contrast the interview sessions will form the qualitative data used in the study to
ascertain the opinion of officials regarding the impact of FDI on the country.
having in terms of technology and productivity spillovers. This is especially true since such
FDI flows represent vertical FDI, which as seen in the literature review, should show more
evidence of productivity spillovers than horizontal FDI (Moosa, 2002). Management can also
identify any evidence of crowding out that FDI might be having on domestic investment.
The study will interview managers of companies from three main industries in the country
namely: Oil & Gas, Electricity and Telecommunications. For this purpose the management of
Rabigh Refining and Petrochemical Company will be interviewed representing a joint venture
of both Saudi Aramco and Sumitomo chemical company of Japan. In addition management at
the Rabigh Electricity Company will be interviewed to obtain insight on the effects of FDI on
the energy sector. In addition owing to the diversification of the economys funds towards the
promotion of non oil industries such as technology and agriculture, management of Etihad
Etisalat, a joint venture of the Emirates Telecommunications Corporation and six other Saudi
partner companies will be interviewed.
5. Has FDI flows towards infrastructures, oil & gas and construction industries helped to
further raise the attractiveness of the country to foreign investors?
6. Is there any evidence of technology and productivity spillovers that have helped domestic
firms?
7. Is there any evidence that FDI flows have increased competition in the domestic industry?
8. Has FDI flows altered the corporate culture in the industry? For example, have joint
ventures with foreign companies forced local firms to alter their management and production
styles?
9. Is there any evidence that the Saudi economy has experienced increasing trade volumes
ever since the rise in FDI inflows?
10. Have trading patterns changed ever since the rise in FDI inflows?
- Interview questions for management at companies such as Etihad Etisalat (Mobily), Rabigh
Refining and Petrochemical Company (Petro Rabigh), and Rabigh Electricity Company will
be as follows:
1. To what extent is your company dependent on FDI flows for funding?
2. Do you feel that FDI flows / joint ventures have been accompanied with a supply of new
technology or knowledge?
3. In your opinion, will FDI flows from any country to Saudi Arabia result in inflows of
technology and knowledge or does it depend on the country from where FDI is coming from?
4. Do you feel that competition in your industry has become more intense ever since FDI
flows have increased in the country?
- 29 -
5. Has the basic wage increased for the workforce in your company ever since the rise in FDI
inflows / joint ventures?
6. Has foreign direct investment enhanced the skills and productivity of your companys
workforce?
7. Do you feel that companies in the industry were generally less efficient as compared to
foreign firms during the early years of FDI inflow?
8. Has the inflow of FDI into the industry forced you to undergo business process
reengineering or altering your management styles to raise efficiency?
9. Do you feel workers rights or employee empowerment has increased ever since joint
ventures/ FDI inflows into the industry?
- 30 -
3.7. Hypotheses
Given the research results from the literature review, the following is the expected impact of
FDI flows into Saudi Arabia:
Hypothesis 1: Employment in domestic firms should increase albeit with a small time lag
(OECD, 2002).
Hypothesis 2: Employment in foreign firms/ joint ventures should increase albeit with a time
lag.
Hypotheses 3: Social factors and the work environment should improve over time (Lovei &
Gentry, 2002).
Hypothesis 4: Since the technology gap between Saudi Arabia and advanced countries is not
very large, there should be technology spillovers seen from FDI inflows (Sader, 2000).
Hypothesis 5: Competition and productivity should increase resulting in an increase in variety
and / or lower prices for consumers (Lovei & Gentry, 2002).
- 31 -
examples to ensure that the participants have the correct understanding of the question being
asked.
- 32 -
Task Name
Week 1
Week 2
Week 3
Project
Planning
Examine
papers
regarding the
impact of FDI
on economic
variables
Examine
papers
regarding
the impact
of FDI on
economic
variables
Plan the
various
methods to
successfully
answer the
research
questions
(Literature
review)
2
Library
Work
Planning
Survey
Data
Collection
Examines
various
definitions of
FDI and
important
determinants
Week 4
Week 5
Examine
previous
questionnaire
s and
interviews by
researchers
and read
important
ethical issues
to consider
when
administering
interviews in
Middle
Eastern
cultures.
Research
important
points to
consider
when
designing
questionnai
res and
structured
interviews
Week 6
Week 7
Week 8
Week 9
Collect the
data from
the
structured
interviews
and
secondary
sources
Use the
data to test
the
hypotheses
.
Answer the
research
questions.
(Literature
review)
Research
papers that
identify the
positive
impact that
FDI has on
the host
economy
Analyze the
methods by
which
researcher
have
collected
data in past
papers.
Prepare
the
questions
on the
interview
Pilot
testing
- 33 -
profound influence of Islam in shaping the culture and norms of Saudi Arabia and the fact that
such cultures rank high in context, it is important that the employees and officials being
interviewed are treated with respect and words are carefully chosen. In addition if members
of the opposite sex are being interviewed then certain norms have to be followed regarding
communication styles such as avoiding prolonged eye contact with the opposite sex that is not
appreciated in such cultures.
- 34 -
CHAPTER 4 RESULTS
As mentioned in the methodology, data will be obtained from various primary and secondary
sources.
officials at the Saudi Arabian General Investment Authority - SAGIA as well as the
management of Rabigh Electricity Company, Rabigh Refining and Petrochemical Company
(Also known as Petro Rabigh), and Etihad Etisalat (known as Mobily). A general background
on FDI inflows in Saudi Arabia will be revealed before disclosing the results from the
structured interviews and the secondary sources are highlighted in the sections below.
FDI inflows
Growth
in
FDI
2001
2002
2003
2004
2005
2006
2007
2008
2009
504
453
778
1,867
12,097
18,293
24,318
38,151
35,514
-11.2%
41.7%
58.3%
84.5%
33.8%
24%
36.2%
-7.42%
inflows (% change).
- 35 -
As indicated in Table 3, the data is withdrawn from the United Nations conference on trade
and development. (World Investment Report 2010). The report shows a gradual increase of
FDI inflows into Saudi Arabia throughout the years. In fact, it shows a drastic increase
starting in year 2004 where it reached $1,867 billion noticing also a significance increase of
$18,293 billion in the year of 2006. Saudi Arabia has been set to be the desired destination of
attracting FDI inflows in the year of 2008, reaching 38,151 billion, which is almost double the
total in 2007.
Figure 2: FDI Inflows into Saudi Arabia (%):
- 36 -
petroleum products, 9.9% in the mining, oil and gas sector, 7.7% in financial services, 7.5% in
contracting, 5.3% in transport, storage and communications, finally 2.9% in electricity and
water supply. (Saudi Arabia General Investment Authority, 2010)
- 37 -
6.1%, and china 4%. This remarkable inflow of FDI has also resulted in a large increase in the
total value of foreign investments and joint ventures increasing from $74 billion in 2005 to
$300 billion in 2009. In addition, the percentage of foreign investments to total investments
have increased from 45% in 2005 to 49% in 2009 suggesting that almost half of the total
investments in the economy is from foreign countries (Saudi Arabia General Investment
Authority, 2009).
- 39 -
4.4.1 Wages
Table 4:
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total
15,390
15,119
15,853
14,783
13,555
14,314
15,964
16,446
21,696
22,000
-1.8%
4.6%
-7.2%
-9.1%
5.3%
10.3%
2.9%
24.1%
1.3%
-1.1%
-1.13%
0.23%
0.58%
0.36%
0.63%
2.31%
4.11%
9.87%
5.05%
-0.42%
4.37%
-6.62%
-8.74%
4.67%
7.99%
-1.21%
14.23%
-3.75%
wages
paid
Percenta
ge change
in wages
growth
Inflation
average
Wages
real
growth
2010). The wages percentage growth have been increasing and decreasing throughout the
years, the percentage in real wages growth showed a percentage of -0.42% in 2001 to a
sudden increase of 7.99 % in 2006, and in 2008 the growth percentage went high to a 14.23%,
which increased the job market, and created numerous new jobs in various fields.
- 41 -
4.4.2 Employment
Table 5: The Decline of Unemployment rate in Saudi Arabia, 2003-2010.
Year
Unemployment
Percentage
Date information
Rate
change
2003
25%
2002
2004
25%
0%
2003
2005
25%
0%
2004 est.
2006
13%
-48%
2004 est.
2007
13%
0%
2004 est.
2008
13%
0%
2004 est.
2009
11.8%
-9.23%
2008 est.
2010
11.6%
-1.69%
2009 est.
- 42 -
were created due to FDI projects in the country. This has drastically helped to lower the
unemployment rate, which was measured at 11.6% in 2010. (Saudi Arabian General
Investment Authority, 2009).
GDP
2000
2001
2002
2003
2004
188.7
183.3
188.8
214.9
250.7
14.5%
-2.9%
2.9%
12.14%
14.3%
-1.1%
-1.13%
0.23%
0.58%
13.4%
-1.77%
2.67%
11.56%
2005
2006
2007
2008
2009
356.6
385.2
475.7
369.7
20.6%
11.2%
7.4%
19%
-28.7%
0.36%
0.63%
2.31%
4.11%
9.87%
5.05%
13.94%
19.97%
8.89%
3.29%
9.13%
-23.65%
315.8
(US
Billion
$)
Nominal
GDP
Growth
Rate
(%)
Inflation
average
(%)
Real
GDP
growth
(%)
- 43 -
Table 6 above, highlights the growing role represented by FDI, with a GDP growth of
approximately 188.7 in 2000 to 369.7 in 2009. The real GDP growth value presented in the
table above, shows that a substantial growth has been taken place starting at a value of
11.56% in 2003, then growing to 19.97% in 2005, and then decreasing to -23.65% in 2009.
This could be explained by the noticed increase in inflation averages from 2006 till 2009.
(FDI report, 2009).
Although there has been a profound impact on GDP growth and GDP with national income
levels.(CIA, 2010). It has been accompanied by a tremendous increase in sales volume in the
country. According to the SAGIA report, sales increased in the country from $57 billion in
2005 to $105 billion in 2009. Similarly local purchases have increased from $34 billion in
2005 to $60 billion in 2009. (Saudi Arabia General Investment Authority, 2009).
- 44 -
2001
2002
2003
2004
2005
77,641
98,956
131,848
192,121
6%
21.5%
24.9%
31.4%
47,887
49,604
54,725
66,746
87,717
-10.5%
3.5%
9.36%
18%
23.9%
2006
2007
2008
249,285
323,070
9.5%
22.8%
113,495
145,280
176,040
22.7%
21.9%
17.5%
Indicators
Exports
of 82,259
Goods
&
72,980
225,506
Services
in -
Change
-12.7%
14.8%
Exports (%)
Imports
of 52,932
Goods
&
Services
in -
Change
Imports (%)
- 45 -
- 46 -
products, which include the following: gasoline, naphtha, jet, diesel, fuel oil, polyethylene,
monoethylene glycol, polypropylene and propylene oxide.
In concern of jobs creation, the company made significant progress towards the recruitment
and development of a skilled workforce. It has established training programs in coordination
with specialized institutes, especially in the operation and maintenance aspects of the plants.
Total number of employees has reached about 2,200 by the end of December 2009. (Rabigh
Refining & Petrochemical Company report, 2009)
- 47 -
- 48 -
CHAPTER 5 - DISCUSSION
The paper had previously analyzed the impact of FDI flows into Saudi Arabia. In particular,
the literature review highlighted for five main benefits that FDI flows can have for an
economy namely: technology spillovers, economic integration, employment, efficiency and
standard of living (social factors). At the same time there are possibilities of crowding out of
domestic investment that needs to be minimized. These results had helped to generate five
hypotheses. The following sections analyze the results for each hypothesis.
5.3 Hypothesis 3: The social environment should improve for workers over
time.
According to Lovei & Gentry (2002) inflows of FDI help to increase GDP and income per
capita over time thus raising the standard of living of the average citizen. In this case, both
primary and secondary data support this view. Results suggest that total salaries and wages
have increased from $15.39 billion to $22 billion over the years 2000 to 2009. Assuming that
the labor force has not doubled during the same time, this would suggest an increase in
income per capita for people employed in the labor market.
However, there is not such strong support from the interviews. Except for Etihad Etisalat that
confirmed increase in salaries, Rabigh Electric denied any such increase in their company
employees whilst Rabigh Refining and Petrochemical Company stated that it depended on the
nature of the industry. However, SAGIA reported that income per capita measured at $20,000
in 2007 was expected to increase to $33,000 by 2020. Therefore it is not guaranteed that FDI
inflows into a country will necessarily lead to an increase in income per capita.
- 50 -
However, regarding factors such as employee empowerment, all three companies denied that
there was any significant difference in this factor given FDI flows or joint ventures. Instead,
they agreed that employee empowerment was not so much dependent on FDI but rather the
culture of the host country and the nature of the FDI flows.
5.4 Hypothesis 4: Since the technology gap between Saudi Arabia and
advanced countries is not very large, technology spillovers are caused by
FDI inflows.
Although there was limited evidence from secondary sources regarding the extent to which
FDI was contributing to positive spillovers in the country, interviews did reveal that
technology and knowledge spillovers were definitely part of the many benefits accompanying
FDI flows. An Official from SAGIA reported that technology spillovers have helped to
increase efficiency for the economy, goods market competition and have helped to further
encourage, local, regional and international capital flows. This is consistent with the theory
from Sader (2002) who highlighted the positive influence that FDI has on technology and
knowledge spillovers.
In addition, according to the management of Rabigh Electricity Company and Rabigh
Refinery (Petro Rabigh), spillovers do exist especially when foreign companies bring
knowledge of management processes and methodologies used in their home countries which
are usually adopted in the host country and are beneficial especially if the host country is less
developed. For instance, Etihad Etisalat, a local owned Telecommunications Company was
able to build its own fiber optic network 12,600 km long due to the knowledge and technology
- 51 -
it had gained from FDI flows being directed towards the telecommunications industry.
However, all three companies agreed technology spillovers are rather gained from the country
from where the FDI is originating. Fortunate for Saudi Arabia, since its main FDI partners are
more advanced nations such as the US, France and Japan, it is likely that most of the FDI
inflows for Saudi Arabia result in technology spillovers.
- 52 -
increased the competitive environment for local firms forcing them to increase efficiency if
they wish to remain in the industry. The fact that the Saudi Government has directed FDI
inflows to all sectors rather than simply oil and gas industries further helps to improve the
efficiency standards of local companies in all industries.
Government of Saudi Arabia has spent massive funds in improving the economy in these
areas to attract foreign investment. According to the relationship manager at SAGIA, $400
billion was being allocated to improve the technology and infrastructure of the country with
the aim of attracting FDI and furthermore the economy had been diversified easing business
- 53 -
Chapter Summary
Overall this chapter has examined the results from the primary and secondary data sources
concluding that FDI does have positive influences on technology and knowledge spillovers,
but it also depends on the home country from where the FDI is originating from and
furthermore, any important impact on local firms usually occurs with a time lag. Furthermore,
there are positive impacts on employment and efficiency although limited evidence was
present suggesting that FDI flows had improved the social environment in terms of employee
empowerment or increase in wages.
- 54 -
- 55 -
affect the increase in wages which might influence the social environment and the standard of
living and employee empowerment, secondary data from reports and other articles suggest
that there is a noticed positive change in wages meaning that FDI have led to an increase in
wages and salaries. In addition, although technology spillovers are directly dependent on the
home country from where the FDI is originating, the data from the research also suggest that
FDI will inevitably lead to technology spillovers.
As a means of attracting FDI, the Government of Saudi Arabia has eased business regulations
and restrictions on foreign participation in local industry as well as diversifying economic
activities as an attempt to attract FDI flows in various non oil & gas sectors including,
telecommunications, construction, financial services and agriculture. This has made the
economy currently the best for FDI flows in the Middle Eastern region and has raised its ranks
from the 67th position to the 13th position among World Banks ease of doing business index.
In addition, foreign investments have been targeting only the energy sector putting aside other
important sectors. On the contrary, they have been recently considering investing in other
divisions that might contribute majorly into their markets. Accordingly, Saudi Arabia should
expand further their investment policies in order to guide foreign investments towards the
most efficient and profitable strategic sectors in the economy, such as industrial and
agricultural sectors.
Saudi Arabia needs to attract more domestic and foreign investments into its region, this takes
place by progressing in the economic, structural, and regularity levels. Some factors that may
restrain Saudi Arabia from promoting FDI into its economy might be extreme altitudes of
bureaucracy and corruption, low enforcement of legislation, excessive control of the public
sector and slow implementation of privatization agendas.
- 56 -
The Saudi government needs to adjust its policies in order to enhance more FDI inflows into
its economy, by taking the appropriate assessments aimed and persuading more domestic and
foreign investments. Within that context, the following policy preferences are to be
recommended:
- Improving government policies given that private investors are highly responsive to good
governance.
- To augment the infrastructure segment, intensely transportation and communication
infrastructures. A valuable approach would be by entrenching partnerships with the private
sector.
- Developing the current corporate atmosphere into a more flexible and efficient
environment.
- Provide wider facilities by accessing credit in order to reinforce the legal rights or debtors
and lenders.
- Updating regional integration by working on liberalization services and investment flows.
- The investment authority must consider forceful actions against willful defaulters.
- Accelerate the process of privatization and improve performance that contracts with the
remaining public enterprises, as it will definitely have a positive impact on the investment
climate with a most preferable influence on the stock market.
- SAGIA should become more flexible with their regularity rules when it comes to entry, exit,
and location aspects.
Therefore, it is recommended that the Saudi authorities continue to step up their efforts in
promoting FDI especially in the non-oil & gas sectors as a means of diversification and
- 57 -
This is
especially important to prevent widespread exploitation of the local labor force. In addition,
authorities should focus on CSR and sustainable development since FDI flows and the
accompanied rise in economic activity can result in rapid degradation of the environment.
Authorities should not simply focus on GDP, growth, trade and employment, but should
ensure that the benefits of FDI are equally spread out for both entrepreneurs and workers and
the environment is being protected.
- 58 -
CHAPTER 7 REFERENCES
Acwa power international projects. (2009). Annual report. Saudi Arabia 2009. Rabigh
Electricity Company.
Aitken, B.
Gorden, G.
- 59 -
New evidence from Latin America. European Journal of Political Economy. Vol. 19 Issue 3 p.
529-545
Busse, M. Hefeker, C. (2007). Political risks, Institutions and Foreign Direct Investment.
European Journal of Political Economy. Vol. 23 Issue 2. P.397-415.
Business Intelligence. (2010). Saudi Arabia Foreign Direct Investment to grow 20% in 2010.
Retrieved
on
14th
September,
2010
from
http://www.bi-
me.com/main.php?c=3&cg=3&t=1&id=45418
Campos, N. Kinoshita, Y. (2008). Foreign Direct Investment and structural reforms.
Washington D.C: International Monetary Fund.
CIA. (2010). Kingdom of Saudi Arabia. Retrieved on 14th September, 2010 from
https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html
Coughlin, C. Segev, E. (2000). Foreign Direct Invesment in China. A spatial econometric
study. The World Economy. Vol. 23 Issue 1 p. 1-23.
Crozer, M. Mayer, T. (2004). How do firms Agglomerate? A study of Foreign Direct
Investment in France. Regional Science and Urban Economics. Vol. 34 Issue 1 p.27-54.
Djankov, S. Hoekman, B.(2000). Foreign Investment and productivity growth in Czech
enterprises. World Bank of Economic Review. Vol. 14 Issue 1. P.49-64.
Durham, J. (2004). Absorptive capacity and the effects of foreign direct investment and equity
foreign portfolio investment on economic growth. European Economic Review. Vol. 48 Issue
2. P. 285-306
Drakopolous, S. (2009). Origins and development of the trend towards value free economics.
Journal of history of economic thought. Vol. 19 p.286-300.
- 60 -
FDI Report (2009), " Foreign Direct Investment Report: Economic And Social Commission
for Western Asia ESCWA." New York
Geert Hofstede. (2010). Arab world. Retrieved on 19th August, 2010 from http://www.geerthofstede.com/hofstede_arab_world.shtml
Globerman, S. Shapiro, D. (2002). Global foreign direct investment flows. The role of
governance infrastructure. World Development. Vol. 30 Issue 11. P. 1899-1919.
Kirkpatrick, C. Parker, D. Zhang, Y. (2006). Foreign Direct Investment in infrastructure in
developing countries: Does regulation make a difference? Transnational corporations. Vol. 15
No. 1.
Liu, X. Siler, P. Wang, C. Wei,Y. (2000). Productivity spillovers from foreign direct
investment: Evidence from UK industry level panel data. Journal of International Business
Studies. Vol. 31 Issue 3. P. 407-425.
Lovei, M. Gentry, B. (2002). The environmental implications of foreign investments.
Washington D.C. World Bank Publications.
MENA FN. (2010). Saudi Arabia - $26.6 billion to attract FDI. Retrieved on 19th August,
2010 from http://www.menafn.com/qn_news_story_s.asp?StoryId=1093265824
Mobily (2009), Etihad Etisalat: Continuous Conactivity. Retrieved at Sept 18th, 2010.
Moosa, I. (2002). Foreign direct investment: theory, evidence and practice. New York:
Palgrave.
Neary, J.P. (2008). Trade costs and Foreign Direct Investment. International Review of
Economic & Finance. Vol. 18 Issue 2 p.207-218.
- 61 -
Neuhaus, M. (2005). The impact of FDI on economic growth: An analysis for the transition
countries. Heidelberg: Physica Verlag
Nunnenkam, P. Spatz, J.(2007). Intellectual property rights and foreign direct investment. A
disaggregated analysis. Review of World Economics. Vol. 140, Issue 3. P.393-414
Ogutcu, M.
- 62 -
UNCTAD, United Nations Conference on Trade and Development (2010), World Investment
Report: Investing in a low-carbon Ecomony.
Wheeler, D. Mody, A. (2002). International investment location decisions: The case of US
firms. Journal of International Economics. Vol. 22 Issue 1-2 p. 57-76.
Woodward, D. Rolfe, R. (1993). The location of export oriented FDI in the Carribbean Basin.
Journal of international Business Studies. Palgrave MacMillan Journals vol. 24 Issue 1. P.121144.
Yao, S. Wei, K. (2007). Economic growth in the presence of Foreign Direct Investment: The
perspective of newly industrializing economies. Journal of comparative economics. Vol. 35
Issue 1 p. 211-234.
- 63 -
CHAPTER 8 - APPENDIXES
8.1 Appendix I
Dear Sir/Madam,
- 64 -
8.2 Appendix II
Mr. Saud Shakir
Relationship manager GCF
Saudi Arabian General Investment Authority - SAGIA, Riyadh Kingdom of Saudi Arabia.
1. What are some of the main industries receiving Foreign Direct Investment in Saudi
Arabia?
Previously, the Saudi economy has been majorly dependent on oil (and therefore
petrochemicals) in every aspect, whether it was for export oriented purposes or even foreign
direct investment inflows into Saudi Arabia. Therefore, it has not been able to attract FDI
inflows in other sectors. Currently, realizing that the kingdom is one of the most efficient
energy intensive industries, it would be more appropriate to attract various types of industries
into our country by letting foreign investors realize that they are cost cutting and taking up
higher production levels when investing in our region. By setting a budget of 400 billion
dollars in infrastructure development, we were able to specialize in construction, engineering,
agriculture, financial services, and industrialization (plastics is a good example).
2. What has been the general impact of FDI flows on the economy?
First of all, I would like to point out that our King Abdullah Bin Abdul-Aziz The custodian
of the two holy mosques - has launched The Saudi Arabian General Investment authority in
order to initiate obvious improvement in the Saudi economy. You might as well consider that
SAGIA is recognized to be the 9th in macro stability amongst the world in a very short period
of time. Their main purpose was to bring its trade regime into a standard that is recognized by
WTO. They have further enhanced their investment laws to make it easier for foreign
- 65 -
companies to establish themselves in Saudi Arabia. Basically the laws ascertain a framework
to expand the foreign investment environment in the country. Starting from creating jobs and
housing for the Saudi Arabian population and reaching to being more efficient than business
and management processes implemented by domestic companies. The government believes it
is more effective to introduce recent foreign investments to the country, as they will instigate
technology and expertise into the business climate in Saudi Arabia. Also seeking innovation
depending on market size and technological readiness. The government also claims to seek
financial diversification, goods market efficiency, and labor market efficiency.
3. To what extent has employment been generated by FDI inflows?
I believe attracting foreign direct investment (FDI) has been a key aspect for a better
employment development strategy, as investment is considered a decisive component for
output growth and employment generation. With an improved business climate, new ventures
will be able to attract growing investment, providing them with greater employment volume
and contributing to economic diversification. For example, King Abdullah Economic city
the largest of four new economic cities planned in various regions of the kingdom and
designed to attract overseas investments and create job opportunities for Saudis- is expecting
to house at least two million people and create nearly a million jobs.
4. To what extent has income increased due to FDI inflows?
The kingdom is currently recording very minimal changes in income but within a positive
range. Our plan is to have our GDP increased by $100 billion by 2020, while we are expecting
to record a per capita income forecast to rise from $20,000 in 2007 to approximately $33,000
by 2020.
- 66 -
5. Has FDI flows towards infrastructures, oil & gas and construction industries helped to
further raise the attractiveness of the country to foreign investors?
I believe these components take numerous initiatives to increase FDI inflows in strategic areas
of the economy, as they are all importantly considered by potential investors in any
prospective FDI project in a host country.
6. Is there any evidence of technology and productivity spillovers that have helped
domestic firms?
Yes indeed they have, technology and productivity spillovers have been majorly contributing
to a greater level of local investment as well as regional and international foreign direct
investments into the kingdom. Particularly in terms of increasing goods market competition,
efficiency, and promoting economies of scale.
7. Is there any evidence that FDI flows have increased competition in the domestic
industry?
Yes, since we are interested in bringing FDI projects that are related to know how technology
our main aim is to gain knowledge from experienced workers in the investor country to maybe
inexperienced labor workers in our country as a host to all FDI inflows. Our plan is to
promote specialization and therefore improve the trade regime in Saudi Arabia. If this takes
place, then you might as well detect a great progress in imports and exports movements.
However, we assure providing both domestic companies and foreign investors with equal
benefits, incentives, and guarantees.
8. Has FDI flows altered the corporate culture in the industry? For example, have joint
ventures with foreign companies forced local firms to alter their management and
- 67 -
production styles?
They were not necessarily forced or obliged to change their own policies, but yes I can judge
that theres an improvement in management behavior and production styles. As I mentioned,
we are interested in bringing know-how technology into the countrys economic identity. And
therefore, FDI is believed to be changing the whole scheme of running investments in the
country.
9. Is there any evidence that the Saudi economy has experienced increasing trade
volumes ever since the rise in FDI inflows?
Since we know that the success in trade policy can be assessed on the basis of its actual
contribution towards improving market access, and its ability to minimize consequences of
openness, trade liberalization and globalization on the domestic market. I can assure you that
the impact of development and growth on trade volumes can be measured through its
influences on increases in investments, job creation, and technology spillovers. A good
example would be the obvious change in import to export movements annually since the rise
in FDI inflows into Saudi Arabia.
10. Have trading patterns changed ever since the rise in FDI inflows?
Definitely, the government has undertaken positive moves towards increasing involvement in
the trading system related to trading agreements, transport, and trade facilitation.
- 68 -
- 70 -
8.4 Appendix IV
Mr. Bader Jamal Al- Mutlaq
Operations manager
Mobily Etisalat, Riyadh Kingdom of Saudi Arabia.
1. To what extent is your company dependent on FDI flows for funding?
Etihad Etisalat, operating under the name of Mobily, was granted the second mobile license in
Saudi Arabia at a cost of SR12.21 Billion (equivalent to $2.25 billion). Once this was
initiated, the Saudi Telecommunication Company (STC) had their monopoly over mobile
services ended. The joint venture included Emirates Telecommunication Corporation as a
major shareholder with a share of 35%. And six other Saudi companies are required to be
partner companies by the regulator communications and Information Technology Commission
(CITC).
2.Do you feel that FDI flows / joint ventures have been accompanied with a supply of
new technology or knowledge?
As you know, Saudi Telecommunication Company (STC) was handling mobile services for
Saudi Arabia over a given monopoly for years. Now that Mobily Etisalat was started, existing
technologies from the mother company in UAE were introduced against STC. Increasing
competition is a potential for more growth. Mobily has been undergoing an aggressive
marketing strategy to increase its total subscriber base to 9.7 million subscribers in a given
period. Respectively, Mobily is currently developing its own network and is building a 12,600
km long fibre optic network. To establish a presence in the nascent broadband market, which
- 71 -
should serve as another technology improvement indicator and a growth driver in the
telecommunications industry.
3. In your opinion, will FDI flows from any country to Saudi Arabia result in inflows of
technology and knowledge or does it depend on the country from where FDI is coming
from?
I believe the purpose of initiating FDI inflows in any given country is the generation of profits
by providing funds purely, or promoting technology and knowledge in the host country.
However, it rather depends on the country where the FDI is coming from.
4. Do you feel that competition in your industry has become more intense ever since FDI
flows have increased in the country?
Yes, from two perspectives; firstly offering innovative services such as the introduction of
3.5G back in 2006 and offering the blackberry Internet services which supports huge banks
and corporations in the kingdom. We also undergo aggressive marketing strategies and our
offerings and services that are based on a purely competitive base between the three existing
companies specializing in the telecommunication services (STC, Mobily, and recently Zain).
5. Has the basic wage increased for the workforce in your company ever since the rise in
FDI inflows / joint ventures?
Yes, it has.
6. Has foreign direct investment enhanced the skills and productivity of your companys
workforce?
Definitely, STC was relatively unprepared to face the entry of Mobily since theyve been
experiencing a long period of monopoly over telecommunications services. This of course has
- 72 -
enabled Mobily to capture more than 30% of market share in less than two years time. STC
has recognized the threat and this is why they started working on improving their
infrastructure to face regional competition and upgrade their broadband and customized
services.
7. Do you feel that companies in the industry were generally less efficient as compared to
foreign firms during the early years of FDI inflow?
From my experience, I believe that the entry of Mobily Etisalat has brought a lot of benefits in
the field of telecommunication services. Especially that STC was a monopoly and Mobily
Etisalat entered the market breaking the monopoly as part of encouragement for the private
sector to develop their utility services instead of depending majorly on the oil based economy.
8. Has the inflow of FDI into the industry forced you to undergo business process
reengineering or altering your management styles to raise efficiency?
That is not necessarily because of the FDI influence on the corporation. We do seek excellent
performance and therefore we try to innovate and improve as much as it is possible for us to
do so.
9.Do you feel workers rights or employee empowerment has increased ever since joint
ventures/ FDI inflows into the industry?
Again I should mention that this might not be related to the fact that Mobily Etisalat is an FDI
project. It is dependent on many factors that are related to our business structure rather than
FDI.
- 73 -
8.5: Appendix V
Mr. Samir al Muthana
Public relations manager.
Rabigh Refining and Petrochemical Company (Petro Rabigh), KSA.
- 74 -
4. Do you feel that competition in your industry has become more intense ever since FDI
flows have increased in the country?
Yes, FDI inflows have major linkages and spillovers to domestic firms, and although the
challenge may be crowding out domestic firms, it is for the best to increase efficiency and
productivity within a specific field as a result of a foreign investment. I believe it is rather a
good thing to have domestic firms more prepared for global competition.
5. Has the basic wage increased for the workforce in your company ever since the rise in
FDI inflows / joint ventures?
It rather depends on the realized profits of investment projects and the nature of industry it is
involved in.
6. Has foreign direct investment enhanced the skills and productivity of your companys
workforce?
Yes, FDI policy mainly aims to enhance maximum value addition along with technology
transfer, and when it comes to our companys workforce I believe that FDI had its influences
on our workforce, in terms of knowledge transfer and learnt skills.
7. Do you feel that companies in the industry were generally less efficient as compared to
foreign firms during the early years of FDI inflow?
Yes I do, as you know, Saudi Arabia has never been lacking the funding element to seek
foreign investments into its projects. We purely attract FDI projects for improved trades,
globalization, technology, and employment purposes. We seek to improve our countrys
economy and funding has never been a barrier in doing so.
- 75 -
8. Has the inflow of FDI into the industry forced you to undergo business process
reengineering or altering your management styles to raise efficiency?
Definitely, a great example would be the Saudi ARAMCO project starting back in the 30s
where it was purely an FDI venture. Back then we didnt have much experience and so we
gained a lot from the foreign investors expertise and management processes in the field. I
believe this is one of the main benefits of FDI inflows into a host country.
9. Do you feel workers rights or employee empowerment has increased ever since joint
ventures/ FDI inflows into the industry?
Workers rights are backed by the governments ministry of labor and do not have much to do
with joint ventures or FDI projects flowing into the country. However, I would like to
emphasize that learnt skills are gained from foreign companies entering our industries and we
have recorded an enormous development in the field.
- 76 -