Oreign investment and country risks in Saudi Arabia
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Oreign investment and country risks in Saudi Arabia
Saudi Arabia is one of the countries found in the Middle East. This country is the major recipient of the direct foreign investments in the Gulf and Middle-East. As such Foreign Direct Investment stocks are always on the increase. The government of Saudi Arabia has invested heavily in national infrastructures so as to attract investments. The FDIs are the most efficient methods of diversifying national economy and bringing about investment opportunities for the young generations. Because of that the authorities welcome Foreign Direct Investment depending on their capacity to bring in technology, employ and train the workforce, assist economic development and valorize domestic raw materials.
It is the petroleum sectors that account for 45% of the GDP and 90% of the export earnings. The Saudi economy also depends on approximately 6 million overseas workers, especially in the oil and service sectors. After signing the World Trade Organization agreement Saudi Arabia has become a land of opportunity. Being a developing country Saudi Arabia is making the transition from selling its raw materials to a country selling finished goods; this is the case in both the liquid fuels and minerals industries. Saudi Arabia has a 5 year plan for 2005-2009 to create opportunities for employment for its growing population by encouraging industries using skilled manpower to make replacements for imports.
The definition of Foreign Direct Investment (FDI) can be stated as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. This relationship is made up of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). For the investment to qualify as FDI the parent enterprise must have control over its foreign affiliate.
But any decision to invest in a foreign country must be made with care, because there are many risks and potential obstacles to consider. Examples of such risk are cultural and language barriers. In addition,variations in religious beliefs, societal norms, and business negotiation styles all impact on how business needs to be conducted when dealing with foreign countries. The risk Language barriers can present an obstacle when trying to advertise and popularize the benefits and advantages of a companyas products and services overseas.
There are a variety of sources of literature in this area of study with rich sources of information. From the background of history ,many countries in the Middle East region have a higher level of instability which associated with investment risk relative to Developing Countries. In a few of these cases a rational explanation can be arrived at, for example countries that are experiencing conflict like Algeria and Sudan; Such difficult internal conflict is a major setback to any investment as per Garibaldi, et al., 2002. This argument is also supported by Lucas (1990), here Lucas argues that the reason why multinational companies keep on producing in high-cost developed countries is because in addition to other factors, these countries are viewed to be politically stable, while, investments in many a?low-costa? countries, are exposed to political risk.
You will discover that there exists studies that address the impact of economic factors on foreign direct investment flows which show that there is a direct relationship between the following aspects: bureaucracy and growth rate, return on investment and economic openness, infrastructure, government corruption, and inflation on the one hand, and the flow of FDI on the other hand. The studies by Onyeiwa (2003) and Venkataramanyas (2002) were used as models, and in his study Joinsin (1998) proved that there is a direct relationship between the market size, the attractiveness of the domestic market, the availability of infrastructure, the degree of economic stability, and opening the economy to foreign trade; the lack of stability of the exchange rate negatively affects the flow of Foreign Direct Investment to the host State.
In another study carried out Abdel-Rahman (2002) on levels of GDP revealed that there are positive impacts on foreign direct investment, which in turn affect imports, exports, and domestic investment. He observes that the risks of political and social aspects have negative impacts on the flow of direct investment.
In a lot of empirical studies like the works by Hawkins and Lockwood (2001), and Janeba (2002) and others have arrived at the conclusion that political (in) stability was found to bear an impact on the inflow of Foreign Direct Investment. The Same result can be equated to the other Middle East countries as in (; Sadik and Bolbol 2003, Alessandrini, 2000; Onyeiwu, 2003; Mellahi, et al.2003). But it will be discovered that in various other cases this observation is confusing, more so in countries that have stable political situation and yet they still have a low level of Foreign Direct Investment. Simply put, while a stable political environment is desirable, it is not conclusive condition for attracting FDI; some people would expect multinational companies to take advantage of the low production costs in the Middle East region, but others would expect the capacity of these countries to be attractive to Foreign Direct Investment. This has for long time been determined by the existence of natural resources (Chan Gemayel, 2003), however despite such expectations the results are still low.
The report of UNCTAD (2002),on Foreign Direct Investment to the Middle East countries recorded huge decline of 33% dropping in 2002, from $6.7 billion in 2001 to $4.5 billion in 2002, that accounted forapproximately 2.8% of total FDI inflow in the Developing Countries. The reason for that is the serious internal/ regional political instability that faces major Middle East countries like Algeria, Palestine, Iraq Lebanon, Syria, Libya, and Sudan which affect their international relations. In his analysis of Foreign Direct Investment Allessandrini (2000) in Mediterranean Region, he says that the authorization regimes, with the exception of Israel and Lebanon, are still lacking an automatism and transport procedure that is something which is not preferable for the foreign investors.
The research is intended to answer the following question:
1. What are the risks associated with foreign investment in Saudi Arabia?
2. Does political and religious instability affect foreign investment in Saudi Arabia?
3. Is there a relationship between investment and political/religious stability?
4. Does internal conflict affect foreign investment?
The research is intended to prove the hypothesis that political/religious instability and internal conflict affect foreign investment.
The objectives of the research are to;
1. Identify the various risks that a foreign investment face in Saudi Arabia and how such affect foreign direct investment.
2. To come up with recommendations that addresses the various aspects of risks in investing in Saudi Arabia.
3. To determine the relationship between foreign investment and these risks.
Basis of the research
The research will be based on the need to address the foreign direct investment risks that are associated with Middle East countries with specific reference being given to Saudi Arabia. These risks will be analyzed and possible recommendations shall be given.
Data and source of information
The research will base its data on both primary and secondary sources which will include Questionnaire, interviews, journals, textbooks, the internet relevant organization e.g. data from the ministry of foreign trade and investment, ministry of immigration.
The research methodology adapted here would be largely based on a quantitative research method. During the research the data to be collected would be all the primary data collected using a structured questionnaire, thr