Ajab Nour Dissertation

Jellan Khalid Ajab-Nour
The Impact of Foreign Direct Investment on the Economy of Saudi Arabia

Evaluation of the role of the government in promoting FDI in the countryit
MSc Business Economics

Social Sciences School
Department of Economics
City University London
Supervisor: Professor. Keith Pilbem
Student: Jellan Khalid Ajab-Nour
st
Submission Date: 30 September 2010
Project submitted in partial fulfillment of the MSc in Business Economics

department of Economics, City University, London.
Signature _______________
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List of Tables & Figures
- 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
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Table of Contents
II
CHAPTER 1 - INTRODUCTION
1.1
Background
10
1.2
Statement of the Problem
11
1.3
Aims and Objectives
11
1.4
Professional Significance
12
1.5
Dissertation Structure
13
CHAPTER 2 - LITERATURE REVIEW
14
2.1
2.3
II
Definition of Foreign Direct Investment

2.2 Determinants of Foreign Direct Investment
15
2.2.1 Financial Sector Development and Liberalization
15
2.2.2 Business Environment
16
2.2.3 Infrastructure
17
2.2.4 Labor
18
Benefits of Foreign Direct Investment
19
2.3.1 Efficiency
19
2.3.2 Economic Integration
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
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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
Data Collection Schedule
33
3.11
Research Ethics
33
3.12
Limitations of the Study
34
CHAPTER 4 - RESULTS
35
4.1
General Background of Foreign Direct Investment in Saudi Arabia 35
4.2
Business Friendly Environment in Saudi Arabia
37
4.3
Patterns in Foreign Direct Investment Inflows
38
4.4
Impact of Foreign Direct Investment on the Saudi Economy
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
Background on the three FDI Projects in Saudi Arabia
46
4.5.1
Rabigh Refining and Petrochemical Company Petro

Rabigh
46
4.5.2
Rabigh Electricity Company Acwa Power Projects 47
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4.5.3
IV
Etihad Etisalat Company Mobily
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
Crowding out Effect
53
5.7
Determinants of Foreign Direct Investments
53
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V
VI
VII
CHAPTER 6 CONCLUSION & RECOMMENDATIONS
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
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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
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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.
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CHAPTER 1: INTRODUCTION
Ever since the beginning of the current decade, economies and international institutions have
been actively promoting economic integration and globalization.
It has been argued by
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.
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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.
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Analyzing FDI from the perspective of these factors is the purpose of this study.
1.2 Statement of the problem

Given the trend by developing and transition economies to attract FDI flows as a means of
achieving economic growth, technology and knowledge spillovers and raising the standard of
living of the average citizen, it is necessary to analyze the impact that FDI has had on the
Saudi Arabian economy and the benefits it may have brought. Such benefits would be
efficiency, enhancing the workforce, improving domestic production by promoting
competition, If the study reveals that despite large flows of FDI, massive improvements have
not been seen in the standard of living or in the efficiency of local and foreign firms, than it is
important to identify obstacles and suggest policies that can improve the channel through
which FDI can benefit the entire economy and its local industry. Consequently, if the study
reveals that FDI flows have helped the economy raise its welfare and domestic industry
productivity, than policies can be suggested to further focus the economys efforts on
promoting FDI whilst mitigating the negative effects such as exploitation of the workforce
and environmental degradation.
Aims and Objectives

The aim of this study is to analyze the impact of FDI flows on the Saudi economy on
efficiency, technology, employment, and economic integration and activity. The variables to
be analyzed will be obtained from the literature review and consequently the impact that FDI
flows have had on those variables, if any at all, will be assessed in the context of Saudi
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Arabia. The list of objectives are as follows:
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.
Interview management in different industries of the economy as well as officials from

Government authorities to obtain feedback regarding the extent to which FDI has
helped the economy.
Examine any possible impacts that FDI have had.
Provide suitable recommendations.
1.3 Professional Significance

The study of FDI flows and its impact on society is an analysis of the macro economy and
therefore the significance of this report will be primarily for Government authorities such as
the Saudi Arabian General Investment Authority - SAGIA to understand the current impact
that FDI is having on the economy and the type of policies that need to be pursued to limit the
negative impacts of FDI and promote more efficiency, technology, employment, and
economic integration. This is especially important since most economies simply focus on
raising FDI levels and monitoring growth without assessing whether or not technology and
productivity spillovers are taking place and the standard of living of the average individual is
improving. The best example of this is Dubai where FDI flows were stressed and the negative
impacts of it in terms of exploitation of workforce and environmental degradation were
ignored.
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1.4 Dissertation Structure

The following chapter conducts a detailed literature review highlighting the definition of FDI,
the determinants of FDI and the important variables that need to be examined when assessing
the impact of FDI on the host country. This is followed by chapter 3 that analyzes the
methodology used in the study examining the type of data, research philosophy and research
instruments used. In addition, the main hypotheses to be tested are also examined. Chapter 4
and chapter 5 conduct a detailed results and discussion section that investigate the impact of
FDI on Saudi Arabia followed by conclusion and recommendations in Chapter 6.
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.
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CHAPTER 2: LITERATURE REVIEW

The following chapter highlights some of the literature on foreign direct investment. Section
2.1 defines FDI followed by an examination of some of the main determinants of foreign
direct investment as identified by researchers in section 2.2. The main focus of the chapter
however is the benefits of foreign investment for the host country outlined and described in
section 2.3.
2.1. Definition of Foreign Direct Investment

Most researchers identify foreign direct investment as the establishment of a production plant
in a host country by a foreign company. As a result, final and intermediate goods that might
be required by the production plant from abroad or sent by the plant to destinations abroad
would constitute import and export for the host country (Neuhaus, 2005: Neary, 2008). More
importantly, the establishment of such a plant indicates the existence of a long-term
relationship that will result between the host country and the foreign company.
Over time, however, some researchers argue that since it is the long term interest that a
foreign company shows in a host country that is important this implies that other activities
should also constitute FDI such as the investment of a foreign company in purchasing shares
of a local company in the host country with the intention of establishing a long term
relationship (Resmini, 2000). In this way, joint ventures also constitute a form of FDI.
Other researchers have defined foreign direct investment in terms of its impact on an
economys production level and production frontier. In this respect, Yao & Wei (2007) argue
that FDI is an activity that helps to lower the gap between the actual level of production of a
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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.
2.2. Determinants of Foreign Direct Investment

Over time, researchers have identified several factors as being important determinants for
FDI. This section examines some of these factors in detail.
2.2.1. Financial sector development and liberalization

Campos & Kinoshita (2008) analyzed the impact of financial sector development and
liberalization on FDI flows by using independent variables such as supervision, credit
ceilings, financial sector liberalization index and the development of the securities market as
variables indicating the level of financial reform in the country. Significance testing revealed
that economies with a higher financial sector liberalization index and developed securities
market were able to attract a greater inflow of FDI. Furthermore, non-existence of credit
ceilings that aim to restrict bank lending activities and well-supervised banking institutions
resulted in a higher inflow of FDI. The authors also argued that even if the economys current
financial sector is not highly developed it can attract considerable flows of FDI as long as it
implements policies that are designed to develop the financial sector in the future.
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2.2.2. Business Environment

The business/ investment climate can be analyzed in terms of the political, economic and
regulatory environment in the economy.
Researchers have found that the political stability of an economy can positively influence FDI
inflows significantly as they reduce the level of risk and uncertainty involved for foreign
companies (Agarwal & Feils, 2007). In this regard, Busse & Hefeker (2007) argued that
factors such as government stability, internal and external conflict, levels of corruption, ethnic
tensions, law and order, democratic accountability of the Government and the quality of
bureaucracy are significant determinants of foreign direct investment. Nunnenkam & Spatz,
(2007) highlighted the importance of intellectual property rights arguing that greater property
rights would not only increase FDI flows but also improve the quality of FDI.
Similarly, in terms of economic environment, economic instability, high balance of payment
deficits, inflation and inflation uncertainty have a negative and significant impact on FDI
inflows (Apergis & Katrakilidis, 1998 ; Asiedu, 2002 ; Bengoa & Robles, 2003 ; Durham,
2004).
Regulatory environment pertains to regulations that directly affect corporations and foreign
investors such as the corporate tax structure, foreign ownership, labor laws, license
requirements and quotas that aim to restrict corporate activity. The lower the degree of
restrictions and constraints and the lower the tax rates, the greater is the inflow of FDI
(Woodward & Rolfe, 1993).
Political, economic and regulatory environment in total define the governance of the economy
and its institutional setup. Therefore the more efficient the institutional environment the
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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
BUSINESS / INVESTMENT CLIMATE
POLITICAL
REGULATORY
ECONOMIC
INFLATION
CONFLICT
STABILITY
CORRUPTION
TAX
LABOR LAWS
FOREIGN
OWNERSHIP
LAW & ORDER
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
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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.
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Table 1: Overview of important determinants of FDI with associated researchers

DETERMINANT
RESEARCHERS
Financial sector development/liberalization
Campos & Kinoshita (2008)
Business / Investment environment
Agarwal & Feils (2007) ; Busse & Hefeker (2007);

Apergis & Katrakilidis (1998); Woodward & Rolfe
(1993); Kirkpatrick, Parker, Zhang (2006);
Globerman & Shapiro (2002); Nunnenkam &
Spatz, (2007)
Infrastructure
Crozer & Mayer (2004); Wheeler & Mody (2002)
Labor
Coughlin & Segev (2000)
2.3. Benefits of Foreign Direct Investment

Researchers have identified several benefits to a host country that are attributable to foreign
direct investment inflows. Unfortunately there is limited research regarding the impact of FDI
in Saudi Arabia since the country has only recently started to direct policies towards attracting
FDI flows.
Therefore this section will focus on the general conclusions of researchers
regarding the consequences of FDI on the host country.
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.
In the absence of such
competition, consumers are dependent on domestic firms for goods and services and this
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allows local companies to enjoy monopoly power.
They have no incentive to improve
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
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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.
2.3.2. Economic Integration

Ogutcu and Balasubramanyam (2003) argue that the long-term impact of foreign direct
investment into a country will be integrating that economy with the rest of the world. This is
especially important given the rising trend towards globalization that is promoting all
economies to open up their markets to international trade. Allowing FDI inflows into a less
developed economy will give its local consumers access to the latest variety of goods and
services and equip its workers with knowledge, skills and modern equipment. This can enable
the developing economy to modernize its domestic firms and allow them to compete
successfully in the international market.
In addition, the authors argue that flows of funds through FDI are more advantageous than
portfolio investment since the former represent a long-term form of investment that implies
not just a flow of funds to the host country, but also a flow of technology, knowledge and
goods and services.
Furthermore, the presence of FDI can also help to raise tax revenues for the local Government
allowing the host country to meet its revenue targets without have to increase tax rates on the
local population.
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2.3.3. Social Factors

Lovei & Gentry (2002) examined the impact that FDI inflows had on poverty and income
levels of the local population. Their results suggested that over the long term, FDI inflows
have been able to reduce poverty in developing countries and raise the standard of living of
the local population. Furthermore, they found a positive and significant relationship between
FDI inflows into a developing country and worker rights in that country. The authors
explained this result by suggesting that workers in less developed countries are unaware of
their rights towards factors such as health and safety and are exploited for this very reason.
Multinational corporations introduce laws that promote a safe and healthy working
environment, promote employee empowerment and support the creation of a decentralized
corporate structure where workers can voice their concerns and suggestions directly to higher
management.
2.3.4. Technology Inflows

Sader (2000) argues that FDI inflows can be associated with technology spillovers that can
have a profound impact in raising the efficiency of industries at different stages of production.
The author argues that multinational corporations often form contracts with local suppliers
and at times provide them with modern technology and equipment in order to produce the
exact components required by the foreign company. They may also equip suppliers with the
relevant skills and training required. Such technology spillovers can help to lower the
technology gap between the developed and developing economies. However, at the same
time, the author argues that such spillover effects are only possible if the technology gap
between the host country and the foreign country are not very wide. In that scenario it would
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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).
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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.
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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.
3.1. Research Philosophy.

There are two main types of research philosophies that can be employed. The positivist
approach is a scientific approach that involves the collection and analysis of data in order to
test a single or series of hypothesis (Reymenyi et al, 1998). Being scientific in nature, the data
is objective and free from the personal opinion of the researcher and this allows the results
from the research to be generalized to the entire population rather than being restricted to the
sample only.
The social constructivist approach, in comparison, adopts a more holistic approach taking into
consideration individuals and the complex relationships that exist between them. Therefore
rather than depend on objective data, feelings, emotions and behavior are all analyzed with
data being subjective in nature, thus preventing generalizations being made (Saunders et al,
2008). Instead the results are specific to the individuals in the sample and may or may not
apply to agents outside of the sample. Furthermore, being subjective in nature, it is possible
for the personal opinion or judgment of the researcher to be present in the conclusion derived
since results are open to different interpretations (Drakopolous, 2009).
In this particular study, the aim is to examine the impact that FDI flows have had on the
Kingdom of Saudi Arabia. The literature review has already highlighted the important affects
that FDI has been seen to have on developing countries and therefore this helps to establish a
series of hypotheses that can be tested using data collected from reports, documents as well as
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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.
3.2. Research Types

Data gathered for research purposes can be experimental or exploratory in nature. The former
refers to the observations gathered after conducting an experiment under controlled conditions
in order to assess the relationship between a series of independent and dependent variables.
On the contrary, the latter refers to the use of tools such as case study analysis, surveys and
interviews that are more descriptive in nature. These tools help to describe the past and
present situation of a particular phenomenon, although they can be subject to the personal
interpretation of the researcher.
Under the following project, given that the impact of FDI on the Kingdom of Saudi Arabia is
being assessed, it is difficult to conduct a controlled experiment and therefore using
exploratory data is more appropriate. Reports and documents that examine changes in
employment, income and other variables for Saudi Arabia over a period of time will be
analyzed and this will form the basis of the secondary data. In addition to this interviews will
be conducted to obtain the personal opinion of Government authority officials and corporate
managers and the results from this will form the basis of the primary data.
In terms of analyzing the data gathered, most of the information obtained from reports and
documents will be quantitative in nature analyzing the changes in variables over a period of
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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.
3.3. Research Questions

The main aim of this study is to analyze the impact that FDI inflows have had on the Saudi
Arabian economy. With this goal in mind, the following are the research questions of the
study:
What are the main areas to which FDI is being directed?
How have employment and income levels changed ever since FDI investment has occurred?
Is there any evidence of technology or productivity spillovers?
Is there any evidence of domestic crowding out seen as a result of FDI flows?
3.4. Research Participants

In order to obtain information regarding the historical changes in FDI patterns in the Saudi
Arabian economy, assess changes in trading patterns that might have resulted, identify the
main areas towards which FDI is being directed and examine some of the Government
policies that have aimed to raise the attractiveness of the economy to foreign investors,
officials from the Saudi Arabian General Investment Authority.
At the same time, managers of companies in the oil & gas industry and construction industry
of Saudi Arabia towards which most of the FDI flows have been directed (Saudi Arabian
General Investment Authority, 2010) can provide information regarding the impact that FDI is
- 27 -
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.
3.5 Research Instruments

The main instrument used to gather the primary data will be structured interviews. The
following are some of the questions that will be included in the interview of officials at the
Saudi Arabian Government Investment Authority and Saudi Basic Industries Corporation.
1. What are some of the main industries receiving Foreign Direct Investment in Saudi Arabia?
2. What has been the general impact of FDI flows on the economy?
3. To what extent has employment been generated by FDI inflows?
4. To what extent has income increased due to FDI inflows?
- 28 -
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?
3.6. Secondary Sources

Information regarding changes in FDI flows over time and their impact on economic variables
such as trading volumes, income levels and employment can be obtained primarily through
reports and Government documents that will form the main secondary sources. Reports and
documents often involve a detailed case study analysis of the country in question and can
provide the bulk of the quantitative data required to assess the impact that FDI has had on the
economy. In addition, information from books and articles can highlight any evidence of
increased competition or spillover effects that might have been witnessed in different
industries as well as evidence of the crowding out effect whereby foreign investment
crowds out domestic investment.
- 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).
3.8. Research Process

The research process and methodology used has been explained in detail allowing for the
research to be duplicated for future study. The Government agencies and companies to be
included in the primary data as well as the questions asked in the structured interviews are all
documented.
- 31 -
3.9. Pilot Testing

Pilot testing is essential for the structured interviews, in order to ensure that the participants
fully understand the questions being asked and interpret them correctly. This is especially
important since differences in language and communication styles are factors that can prevent
an effective interview from being conducted. Therefore it is important that complicated
economic or business terminology is not used and the wordings of the structured interview are
such that they can be easily interpreted. Questions asked need to be direct and given that the
Saudi culture is known for emphasizing on both content and context (Geert Hofstede, 2010), it
is important to monitor the context in which the interview is being conducted.
Pilot testing was conducted on family and friends in order to ensure that questions were
interpreted correctly. The results of the testing revealed that certain terminology such as
production and technology spillovers were difficult to understand and were often
misinterpreted.
Therefore it is necessary to supplement the questions being asked with
examples to ensure that the participants have the correct understanding of the question being
asked.
- 32 -
3.10. Data Collection Schedule

Table 2:
Task
ID
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
3.11 Research Ethics

The data to be collected from the study comprises of both secondary and primary data.
Although there is no ethical consideration regarding the secondary data, it is necessary to
understand the culture and norms when administering the primary data. Therefore given the
- 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.
3.12. Limitations of the Study

Due to limited time it was not possible to include a large sample of companies in many
industries and instead only three companies were chosen. As a result, since the data collected
from interview is subjective in nature, it may be that the results from the study are not
representative of the overall population. It would be beneficial to repeat the study with a larger
sample.
It would also be useful to repeat this study focusing on quantitative data regarding
employment and income levels over a period of time and using econometric analysis in order
to ascertain whether FDI inflows is a significant variable in explaining the variations seen in
employment and income. This can help ensure that positive changes in employment and
income levels are due to FDI inflows and not some third factor.
Finally, the study should be repeated collecting data from other countries in the Middle East
that have recently started focusing economic policy towards attracting FDI. In this way, the
results can justify whether FDI inflows have a significant impact on economic variables
regardless of the country being considered.
- 34 -
CHAPTER 4 RESULTS
As mentioned in the methodology, data will be obtained from various primary and secondary
sources.
The primary data will be obtained from interviews conducted of Government
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.
4.1 General Background on Foreign Direct Investment inflows in Saudi

Arabia
SAGIA is the Saudi Arabian General Investment Authority, the main representative of the
investment sector in the country. It is mainly responsible of handling investment services and
attracting potential investors to engage in business opportunities in the kingdom. (Saudi
Arabia General Investment Authority, 2010).
Table 3:
Foreign Direct Investment inflows into Saudi Arabia, 2001-2009 (in US Million dollars).
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).
Source: World Investment Report of UNCTAD 2010.
- 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 (%):
Source: Saudi Arabian General Investment Authority report, 2009.

As indicated in figure 2, an analysis of the sectors from where FDI flows are involved
uncovers that the greatest inflows is in the real estate sector reaching 20.8% of total inflows
followed the petrochemical industries where it reached 16.4%, then 14.9% in refined
- 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)
4.2 Business Friendly Environment in Saudi Arabia

Realizing the potential benefits of FDI inflows, the Saudi Government has expended
considerable resources in creating a business friendly environment and lowering regulations to
encourage the entry of foreign multinational corporations. These changes has increased the
economys rank from the 67th to the 13th position in the World Banks ease of doing business
index and has also been made the number one country to do business in the Middle East.
Furthermore, economists and Government officials expect that the inflows of FDI will
positively influence the GDP growth of the economy causing it to grow at an average of 4.5%
annually (Business Intelligence, 2010).
Besides creating a business friendly environment, the economy has allocated resources to
improving the infrastructure and communications technology of the country known to be
important determinants of FDI inflows (Saudi Arabia General Investment Authority, 2010). It
has also lowered the tax rate on foreign companies from 45% in 2000 to 20% by 2008 and has
introduced a one stop shop for foreign multinationals reducing red tape and introducing a 30
day deadline for decisions on investment applications (Ali, 2008).
- 37 -
4.3 Patterns in Foreign Direct Investment Inflows

Figure 3: FDI inflows in Saudi Arabia by Source (%):
Source: Saudi Arabian General Investment Authority Report, 2009.

Despite the onset of the global financial crisis, Saudi Arabia has been successful in attracting
FDI flows to the economy for various foreign countries. In 2008, the total FDI inflow was
measured at $38.2 billion whilst the total inflow in 2009 was valued at $35.5 billion.
Furthermore as an effort to diversify the economy, FDI flows have been directed to various
sectors including, telecommunications, transportation, real estate, infrastructure, banking, oil
and gas and construction. (World Investment Report of UNCTAD, 2010).
Figure 3, above, is an illustration of an analysis of the countries from where FDI flows are
originating. It reveals that the greatest inflow is from the UAE reaching 15.4% of total inflows
followed by USA, 13.6%, Kuwait takes 11.7%, France, 9%, Netherlands reaches 8.8%, Japan
- 38 -
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).
4.4 Impact of Foreign Direct Investment on the Saudi Economy

According to the report by the Saudi Arabian General Investment Authority in 2010 on the
impact of FDI on the Saudi economy, the following inflows of capital have had substantial
impact on wages, employment, GDP and added value for the economy.
- 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
Source: Trading Economics Indicators in Saudi Arabia, 2010

http://www.tradingeconomics.com/saudi-arabia/indicators/
The report suggests that as a result of FDI, total salaries and wages have increased from
$15.39 billion in 2000 to $22 billion in 2009. This represents almost a tremendous increase in
total salaries being paid. It can be implied that perhaps the standard of living of each person
on average has improved in accordance to the substantial increase in real wages growth (real
growth after subtracting the inflation rate) from the years 2005 to 2009. (Trading Economics,
- 40 -
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.
Source: CIA fact book, 2010.

The Data demonstrated in the table above, indicates that the unemployment rate in Saudi
Arabia have been maintaining a consistent level of increase, barely surpassed the threshold of
$25% during the years of 2003-2005. Thereby representing a substantial decrease of almost
48% relative to recent years. On the other hand, throughout the years from 2006 to 2010 the
unemployment rate decreased significantly reaching 11.6%. Which is a positive indication
that Saudi Arabia has developed new jobs in the market that might be assisted by FDI inflows.
(FDI report, 2009).
The total number of jobs that have been created as a result of FDI projects alone have
increased from 225,000 in 2005 to 375,000 in 2009. Furthermore, in 2009 alone 40,000 jobs
- 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).
4.4.3 Economic Activity

Table 6: GDP Levels in Saudi Arabia
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 -
4.4.4 Economic Integration

Table 7: Foreign trade volumes, 2000-2008
Foreign Trade 2000
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 (%)

Table 7, proves that the foreign trade volume indicators represent a range of values starting
with the year 2000 where an increase in trade volumes was apparent. Recording a value of
$82.259 million of exported goods, while throughout the years, from 2001 to 2008, it showed
a great steady improvement to establish positive shared revenue. The change in exports
improved by 22.8% in 2008, which reflects the importance of the economic activities,
- 45 -
integration, and foreign trade volumes in the national economy.

Increase in FDI flows have also helped to economically integrate Saudi Arabia with the rest of
the world. In particular, this can be demonstrated by the substantial increase in trade volume
over the years. The report reveals that total exports increased from 192,121 billion to 323,070
billion over the four-year period spanning 2005-2009. Which demonstrates the increase of the
percentage of FDI exports projects to the total non-oil exports of the country to improve from
-12.7% to above 22.8%. (Trading Economics, 2010). Although, the primary source of export
revenue for the country is accounted on oil exports, also, a secondary reliable source is the
exports from FDI projects gaining importance amongst the non-oil exports of the country.
(FDI Report, 2009)
4.5 Background on the three projects
4.5.1 Rabigh Refining & Petrochemical Company Petro Rabigh

Rabigh Refining and Petro Chemical Company (Petro Rabigh) is a refining company with a
paid capital of US $2,336,000,000. It involved in the development, construction, and
operation of a combined petroleum refining and petrochemical complex. Including the
production of refined petroleum and petrochemical products, and hydrocarbon products. The
companys objective is to establish a profitable refining and petrochemical enterprise that
converts hydrocarbon natural resources into products that enrich the human life. By
manufacturing refined petroleum products, petrochemical products and other hydrocarbon
- 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)
4.5.2 Rabigh Electricity Company ACWA Power projects

Rabigh Electricity Company is a project recently established by Acwa Power Projects. It is
one of the largest Greenfield independent power projects in Saudi Arabia that is sponsored by
ACWA, KEPCO, and SEC. with a paid capital of US $1,503,252,115. The company is located
in Rabigh, which is 150km north of Jeddah city in Saudi Arabia. It is responsible of providing
Rabigh with electricity generated by fuel that is supplied by ARAMCO.
Ever since the start of the company, it was able to create a large number of jobs reaching up to
3,000 jobs, proving the positive effect of FDI into the Saudi economy. (Acwa power projects
annual report, 2009).
- 47 -
4.5.3 Etihad Etisalat Company (Mobily)

Etihad Etisalat is a company operating mobile wireless telecommunications network in the
Kingdom of Saudi Arabia. They develop technology softwares and work on installing
networks and maintaining related softwares. Finally, they are responsible of the Wholesale
and retail trade in computers and electronic equipment, maintenance and operation of such
equipment.
Etihad Etisalat Company, is the second largest authorized telecommunications provider and
services within the kingdom of Saudi Arabia. Ever since the establishment of the company in
the year of 2004, it aims to operate mobile telecommunication networks and provide a variety
of telecommunications services in the Kingdom of Saudi Arabia, such services include, a
Wireless mobile connectivity, data, and internet services.
In terms of the new jobs, the company led to creating jobs that increased the job market
significantly creating 3080 new jobs, which is positive indication of FDI in the economy of
Saudi Arabia. (Etihad Etisalat annual report, 2009).
- 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.
5.1 Hypothesis 1: Employment in domestic firms should increase albeit with

a small time lag.
There is sufficient statistics available regarding the actual employment figures of locals in
domestic firms suggesting that employment rate has increased significantly from the year
2006. Moreover, according to an interview from the relationship manager at SAGIA, the
Governments investment in infrastructure and communications to attract FDI projects is
aimed at ultimately increasing employment for Saudi locals in the country. For instance the
establishment of King Abdullah City is designed to create one million jobs due to the local
and foreign investments it will attract. Though there will be a time lag since it takes time for
foreign companies to enter into the Saudi market and raise demand for local firms through
vertical and horizontal integration. Furthermore cultural differences will further prolong the
time it takes for trust to be established necessary before foreign firms and local firms can enter
into long-term relationships with each other.
- 49 -
5.2 Hypothesis 2: Employment in foreign firms/ joint ventures should

increase albeit with a time lag.
There is evidence in support of this hypothesis from the SAGIA report that states the number
of jobs created from FDI projects alone have increased from 225,000 to 375,000 over a span
of four years. Furthermore, in this case, there is no time lag between FDI inflows and job
creation unlike the case of domestic industry where vertical and horizontal integration is
necessary.
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.
5.5 Hypothesis 5: Competition and productivity should increase resulting in

an increase in variety and / or lower prices for consumers.
According to Lovei & Gentry (2002) foreign competition should bring with it increased
efficiency and productivity for the host country, which results in improved quality, and lower
prices for consumers. The relationship manager at SAGIA agreed that FDI inflows had
resulted in business process re-engineering where local firms where being encouraged to
adopt the latest technology and knowledge and adopt a different culture and resulted in
improved managerial practices and efficiency. Furthermore, Rabigh Refining company and
Rabigh Electronics both agreed that FDI flows had caused their companies to improve
efficiency and alter management practices, although Etihad Etisalat argued that the changes
brought in their industry were not directly due to FDI inflows. Furthermore, all three did agree
that local firms in the industry were less efficient than foreign companies since most of the
foreign multinationals were from countries that were more advanced than Saudi Arabia giving
them a competitive edge in the industry.
Moreover, FDI flows have helped to integrate the economy with the rest of the world and this
has resulted in rising trade volumes, which not only resulted in export revenue, but also
- 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.
5.6. Crowding out Effect

Although the literature has pointed out the potential disadvantages that FDI can bring to host
countries, focusing on the crowding out of domestic investment, there is limited evidence of
such crowding out behavior in Saudi Arabia. Statistics do reveal that a greater percentage of
total investments comprises of foreign investments however the increase in only mild rising
from 45% to 49% during the four year period spanning 2005-2009. Furthermore, there is no
evidence that in terms of absolute figures, FDI has increased at the expense of domestic
investment.
5.7 Determinants of Foreign Direct Investment

Overall the results obtained in the previous chapter support the research in the literature
review suggesting that infrastructure, communications, technology and business friendly
environment are important determinants of FDI flows.
It is for this reason that the
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
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regulations in all sectors including construction, engineering, agriculture, financial services

and construction.
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.
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CHAPTER 6 CONCLUSION AND RECOMMENDATIONS

The aim of this paper was to analyze the impact of FDI flows on the Saudi Arabian economy.
This was particularly important given the significance of FDI in helping to integrate
economies with the rest of the world and the apparent advantages of FDI in terms of
transferring knowledge and technology from the home country to the host country. In
addition, the literature has associated FDI with benefits such as improved social environment
for workers, increased competition, efficiency and reduced unemployment. It is important to
assess the extent to which these advantages have impacted the Saudi Arabian economy as well
as highlighting any domestic investment crowding out that might have resulted from FDI
flows as well as to suggest possible recommendations. The results from this study can guide
Saudi officials regarding whether or not FDI should be actively promoted and the means by
which any negative impact of FDI flows can be mitigated.
The results suggest that employment and efficiency have definitely increased as a result of
FDI flows with companies experiencing business process reengineering and altering
management styles to raise efficiency. Furthermore, FDI has helped to economically integrate
Saudi Arabia with the rest of the world evident from increase in trade flows as well as
producing technology and productivity spillovers resulting in raised efficiency of domestic
firms and industries as well. Finally, FDI flows have also helped to boost trade especially
among the non-oil & gas sectors. In this regard, data suggests that the proportion of exports
from FDI projects among total non-oil & gas exports of the country have increased
substantially.
Although the three interviews structured in this research suggest that FDI did not necessarily
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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.
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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
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lowering the economys vulnerability to external shocks. Furthermore, it should focus on

attracting FDI from advanced nations so as to obtain the resulting technology and productivity
spillover benefits. However, since there is no apparent benefit recorded in terms of social
environment, the authorities need to increase regulations on ensuring that working standards,
monetary and non-monetary benefits and worker rights are being monitored.
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.
Harrison, A. (1994). Spillovers, foreign investment and export
behavior. Journal of international economics. Vol. 43 Issue 1-2.

Agarwal, J. Feils, D. (2007). Political risk and the internationalization of firms: An empirical
study of Canadian based export and FDI firms. Canadian Journal of Administrative Sciences.
Vol. 24 Issue 3. P.165-181
Ali, J. (2008). Saudi reforems tell a tale of success in raking in FDI. Gulf News. Retrieved on
14th September, 2010 from http://gulfnews.com/business/opinion/saudi-reforms-tell-a-tale-of
success-in-raking-in-fdi-1.138624
Apergis,N. Katrakilidis, C. (1998). Does inflation uncertainty matter in foreign direct
investment decisions? An empirical investigation for Portugal, Spain and Greece.International
Review for economics and business. 45 (729-744)
Asiedu, E. (2002). On the determinants of Foreign Direct Investment to developing countries?
Is Africa different? World Development. Vol. 30 Issue. 1. P. 107-119.
Augustine, B. (2010). Dubai still the top destination for MENA investors. Gulf News.
Retrieved by 14th September, 2010 from http://gulfnews.com/business/investment/dubai-stillthe-top-destination-for-mena-investors-1.679005
Bengoa, M. Robles, S. (2003). Foreign direct investment, economic freedom and growth:
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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
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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.
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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.
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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.
Balasubramanyam, V. (2003). Attracting international investment for
development. Paris: OECD Publication.

Organization for Economic Construction and Development. (2002). Foreign Direct
Investment for Development: Maximizing benefits and minimizing costs. Washington D. C.
OECD.
Pham, H. (2004). FDI and development in Vietnam: Policy implications. Institute of
Southeast Asian Studies. Singapore: ISEAS
Resmini, L. (2000). The determinants of FDI in the CEECs: New Evidence from sectoral
patterns. Economics of transition. Vol. 8 Issue 3 p. 665-689.
Reymenyi, D. Williams, B. Money, A. Swartz, E. (1998). Doing research in business
management. An introduction to process and method. London: Sage.
Sader, F. (2000). Attracting Foreign Direct Investment. Washington D.C. World Bank
Publications.
SAGIA, Saudi Arabian General Investment Authority. (2010). Annual report of FDI. Saudi
Arabia 2010. Saudi Arabian General Investment Authority.
Trading Economics (2010), Indicators of Saudi Arabia. Retrieved on Sept 17th,2010. Accessed
online at < http://www.tradingeconomics.com/saudi-arabia/indicators/>
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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.
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CHAPTER 8 - APPENDIXES
8.1 Appendix I
Dear Sir/Madam,
I am currently completing a degree in economics at City University London and my topic is

about evaluating the impact of Foreign Direct Investment to the Saudi Arabian economy
within several fundamentals.
In order to make a satisfactory conclusion I would like to request information about the
company profile for at least the past 10 years (if applicable) in order to make the studies that
will aid me to do this, the data you provide will not be used outside this project.
If you have any queries or would like to know any further details about this project, please
feel free to contact me.
I would like to take this opportunity to thank you in advance for your time and effort, as it is
very much appreciated.
Best Regards,
Jellan
- 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 -
8.3 Appendix III

Mr. Hyunchan Lee
Chief Financial officer
Rabigh Electricity Company (ACWA power projects).
Companys debt to equity ratio is about 79 to 21. Almost 27% of debt comes from foreign
banks and 40% of equity comes from foreign shareholder.
Major contractor is Chinese company which is responsible for the engineering, procurement
and construction (EPC Turnkey Contract).
2. Do you feel that FDI flows / joint ventures have been accompanied with a supply of
new technology or knowledge?
In terms of raising the fund on a non-recourse basis and EPC Turnkey contract management,
we could mention that there is new knowledge implication.
technology and knowledge or does it depend on the country from where FDI is coming
from?
It rather depends on the country which makes FDI into KSA.
Intensity of competition is not only dependent upon the government policy but also the market
situation. Normally, it is being said that the utility business is more dependent upon the
- 69 -
government policy when it comes to the FDI.

5. Has the basic wage increased for the workforce in your company ever since the rise in
FDI inflows / joint ventures?
This is not the case of RABEC being launched on FDI from the beginning.
workforce?
This is not because of FDI but because of the business necessity. However, it could be said
that the company being on FDI generally has more change to enjoy the benefit of large
foreign exposure.
I would say the foreign firm in its early stages is less efficient and this is common problem to
the multi-national company regardless of the existence of FDI.
Because of large foreign exposure, there are always challenges to the company, which might
result in reengineering or renovation of the management.
This is dependent upon the industrial practice of a hosting country. If the hosting country is
less developed, the company with FDI tends to provide more right to its employee.
- 70 -
8.4 Appendix IV
Mr. Bader Jamal Al- Mutlaq
Operations manager
Mobily Etisalat, Riyadh Kingdom of Saudi Arabia.
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
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
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should serve as another technology improvement indicator and a growth driver in the
telecommunications industry.
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.
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).
Yes, it has.
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.
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.
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
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.

Rabigh Refining and Petrochemical Company (also known as Petro Rabigh) is a joint
stock company that is equally owned by Saudi Aramco and Sumitomo Chemical (in Japan).
Funding is mainly generated from an overseas investment loan and IPO proceeds as well as
subordinated loans. However, Sumitomo Chemical as a foreign investor is involved in
providing a proportion of 9%of the total funds. Another 9% is coming from Saudi ARAMCO.
2. Do you feel that FDI flows / joint ventures have been accompanied with a supply of
Yes, of course. It provides information about the technology being used in the production
process back in the country where FDI is coming from, which of course might be a new
process to be introduced to the host country.
from?
Depends on the country where the investment is coming from. However, while many believe
that funding is an essential element in having an FDI inflow into a host country, we seek
investments that will benefit us with other means such as technology and knowledge transfer.
- 74 -
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.
It rather depends on the realized profits of investment projects and the nature of industry it is
involved in.
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.
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 -
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.
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 -

Ajab Nour Dissertation

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Ajab Nour Dissertation

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Jellan Khalid Ajab-Nour

The Impact of Foreign Direct Investment on the Economy of Saudi Arabia

MSc Business Economics

Submission Date: 30 September 2010

Project submitted in partial fulfillment of the MSc in Business Economics

Jellan Khalid Ajab-Nour

List of Tables & Figures

Jellan Khalid Ajab-Nour

Statement of the Problem

Aims and Objectives

CHAPTER 2 - LITERATURE REVIEW

Definition of Foreign Direct Investment

2.2.1 Financial Sector Development and Liberalization

2.2.2 Business Environment

Benefits of Foreign Direct Investment

2.3.2 Economic Integration

Jellan Khalid Ajab-Nour

Data Collection Schedule

Limitations of the Study

General Background of Foreign Direct Investment in Saudi Arabia 35

Business Friendly Environment in Saudi Arabia

Patterns in Foreign Direct Investment Inflows

Impact of Foreign Direct Investment on the Saudi Economy

Background on the three FDI Projects in Saudi Arabia

Rabigh Refining and Petrochemical Company Petro

Rabigh Electricity Company Acwa Power Projects 47

Jellan Khalid Ajab-Nour

Etihad Etisalat Company Mobily

Crowding out Effect

Determinants of Foreign Direct Investments

Jellan Khalid Ajab-Nour

CHAPTER 6 CONCLUSION & RECOMMENDATIONS

Jellan Khalid Ajab-Nour

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It has been argued by

Jellan Khalid Ajab-Nour

Jellan Khalid Ajab-Nour

1.2 Statement of the problem

Aims and Objectives

Jellan Khalid Ajab-Nour

Arabia. The list of objectives are as follows:

Interview management in different industries of the economy as well as officials from

Examine any possible impacts that FDI have had.

Provide suitable recommendations.

1.3 Professional Significance

Jellan Khalid Ajab-Nour

1.4 Dissertation Structure

Jellan Khalid Ajab-Nour

CHAPTER 2: LITERATURE REVIEW

2.1. Definition of Foreign Direct Investment

Jellan Khalid Ajab-Nour

2.2. Determinants of Foreign Direct Investment

2.2.1. Financial sector development and liberalization

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2.2.2. Business Environment

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BUSINESS / INVESTMENT CLIMATE

LAW & ORDER

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Jellan Khalid Ajab-Nour

Table 1: Overview of important determinants of FDI with associated researchers

Financial sector development/liberalization

Campos & Kinoshita (2008)