Foreign investment in Saudi Arabia

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Time: March 1, 2018

FDI in Figures

In recent years, FDI flows to Saudi Arabia have followed a downward trend. According to the 2017 World Investment Reportpublished by UNCTAD, the country is the third largest FDI recipient in Western Asia, after Turkey and the United Arab Emirates. In 2016, FDI inflows fell by 8.5% compared to the previous year, reaching USD 7.45 billion, the lowest since 2014.

Political and social tensions, reduced access to credit and the policy of ‘Saudisation’, which started in 2011 and favours a domestic labour force, have all been obstacles to FDI. Nonetheless, the government has invested heavily in national infrastructure to attract investment, and FDI is seen as one of the most effective ways to diversify the economy and provide employment for younger generations. The government recently announced the opening of the retail and wholesale sectors to 100% foreign ownership and has launched a large privatisation programme. Furthermore, The Saudi Capital Market Authority announced measures to ease restrictions on foreign investment in January 2018 and as such, foreign establishments will need to have USD 500 million worth of assets under management instead of USD 1 billion in order to qualify as an investor in the stock market. The authorities welcome FDI due to its ability to transfer technology, employ and train the national workforce, foster economic development and enhance local raw materials. The country’s controlled inflation and relatively stable exchange rate, openness to foreign capital in upstream gas, as well as extensive privatisation programmes are among the advantages attracting investors to the country. The dynamic performance of the banking sector is driving the growth of the non-oil sector. Lastly, access to the world’s largest oil reserves, very low energy costs and a high standard of living are decisive factors for foreign investors.

Foreign Direct Investment 2014 2015 2016
FDI Inward Flow (million USD) 8,012 8,141 7,453
FDI Stock (million USD) 215,909 224,050 231,502
Number of Greenfield Investments*** 97 92 90
FDI Inwards (in % of GFCF****) 4.2 4.2 4.5
FDI Stock (in % of GDP) 28.5 34.4 36.2

Source: UNCTAD, Latest available data.

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country’s Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education, Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.

FDI INFLOWS BY COUNTRY AND INDUSTRY

Main Investing Countries 2016, in %
USA 21.7
United Arab Emirates 20.4
France 9.0
Singapore 7.9
Kuwait 5.2
Malaysia 4.4
Main Invested Sectors 2016, in %
Chemical industry 30.0
Real estate 26.5
Hotels and tourism 9.7
Coal, oil and gas extraction 7.7
Automotive industry 7.0
Machinery 2.5

Source: The Arab Investment & Export Credit Guarantee Corporation – Latest available data.

Form of Company Preferred By Foreign Investors
Joint stock companies and limited liability partnerships are the only companies available to foreign investors. However, it is possible to establish a branch of a foreign company in Saudi Arabia, which may be owned by a single foreign entity except individuals.
Form of Establishment Preferred By Foreign Investors
Joint stock companies and limited liability partnerships are preferred because a foreigner is not allowed to conduct business in Saudi Arabia as a sole proprietor, unless the individual is operating a branch of a foreign company.
Main Foreign Companies
Visit: ‘Top Companies’ at Saudi Business Centre (The Saudi Network).
Sources of Statistics
Central Department of Statistics (in Arabic)

Why You Should Choose to Invest in Saudi Arabia

Strong Points
Once Saudi Arabia became a member of the WTO in 2005, the foreign investment climate in the Kingdom substantially improved. From an investor’s point of view, the country’s strong points are economic stability, the large local market with a high spending power (and a population of over 27 million), sound infrastructure and a well-regulated banking system.
Weak Points
While the country has undertaken reforms to encourage foreign investment, the legal framework in resolving commercial disputes is considered by some to be inadequate. There is a lack of transparency in applying intellectual property legislation, and the Government imposes quotas of Saudi employees in companies. Cases of delayed payment of some government contracts have been reported. The traditionally conservative cultural environment, including the enforced segregation of the sexes in most businesses and social settings, may discourage certain investors who are not accustomed to such practises.
Government Measures to Motivate or Restrict FDI
According to the law on foreign direct investment, foreigners are now allowed to invest in all sectors of the economy, except for specific activities on a “negative list.” This list continues to shrink as Saudi Arabia attempts to liberalise trade. Still, investment in petroleum and mineral projects, among other activities, remains off-limits.Foreign investors are no longer required to take local partners in a number of sectors and may own real estate for company activities. They are allowed to transfer their company money outside the country and can sponsor foreign employees, subject to certain criteria in accordance with the Nitaqat (Saudisation) programme.

In order to facilitate investments in the Kingdom, the Saudi Arabian General Investment Authority(SAGIA) has set up an Investment Services Centre (ISC). The ISC must decide to grant or refuse a license within 30 days of receiving an application from an investor.

Protection of Foreign Investment

Bilateral investment conventions signed by Saudi Arabia
Saudi Bilateral Investment Agreements
International Controversies Registered By UNCTAD
Visit the UNCTAD website mentioning the dispute between Saudi Arabia and the investor country.
Organizations Offering Their Assistance in Case of Disagreement
ICCWBO , International Chamber of Commerce
ICSID , International Center for settlement of Investment Disputes
Member of the Multilateral Investment Guarantee Agency
Yes

Country Comparison For the Protection of Investors

Saudi Arabia Middle East & North Africa United States Germany
Index of Transaction Transparency* 8.0 6.0 7.0 5.0
Index of Manager’s Responsibility** 8.0 5.0 9.0 5.0
Index of Shareholders’ Power*** 4.0 4.0 4.0 8.0
Index of Investor Protection**** 5.8 4.5 6.5 6.0

Source: Doing Business – Latest available data.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action. **** The Greater the Index, the Higher the Level of Investor Protection.

Procedures Relative to Foreign Investment

Freedom of Establishment
Not guaranteed
Acquisition of Holdings
Possible
Competent Organisation For the Declaration
Ministry of Finance, Saudi Arabia
Requests For Specific Authorisations
Saudi Arabia maintains a Negative List that tabulates sectors not open to foreign investment (visit the SAGIA site and check the Negative List). The sectors currently closed to foreign investment include three manufacturing categories and 19 service industries. The list includes real estate investment in Mecca and Medina, some sub-sectors in printing and publishing, audiovisual and media services, land transportation services excluding inter-city transport by trains, and upstream petroleum. SAGIA periodically reviews the list.Moreover, the SAGIA reviews foreign investors or those wishing to set up a branch in Saudi Arabia on a number of criteria, including their fiscal situation, experience in their field, and Saudisation Plan. A foreign entity cannot invest in the Kingdom outside its field of activity. Activities for industrial LLC’s are limited to the product (machine) or raw material to be produced/used, based on a list of items (in Arabic).

Learn more about Foreign Investment in Saudi Arabia on Globaltrade.net, the Directory for International Trade Service Providers.

Office Real Estate and Land Ownership

Possible Temporary Solutions

There are ready-to-move-in offices available on rent in various business parks across Kingdom’s main cities.

However in case the foreign company is of national interest, the Saudi Government may provide temporary space for a limited period till the company establishes itself in the country.

The Possibility of Buying Land and Industrial and Commercial Buildings
It is possible to purchase land for the purpose of conducting licensed activities and for employee residences. However, land may not be bought by a foreigner for investment purposes only (i.e. real estate trading).
Risk of Expropriation
Negligible. It is possible under Saudi law (if deemed in the “public interest”), but practically never happens.

Investment Aid

Forms of Aid
The Government has created industrial sites attracting foreign investors in Riyadh, Jeddah, Dammam, Qaseem, Al-Ahsa and Mecca. The setting up of a subsidiary allows tax exemptions for 5 years. The State provides electricity, water, fuel, etc. at low prices when industrial plans are involved. The Government encourages partnerships with local companies, granting more aid and advantages to companies whose capital is shared with Saudis. The Department of Industry and Electricity and the Department of Finance should be contacted for more information on the various forms of assistance granted to foreign investors.Foreign investment that fulfils the requirements of the Foreign Capital Investment Code enjoys all privileges of national capital and is entitled to the same treatment, protection, and incentives accorded to national capital, which includes exemption from customs duties on machinery and equipment. The Saudi Arabian General Investment Authority (SAGIA) may be contacted for further information about investment laws and opportunities in Saudi Arabia.

In addition, foreign investors who hire Saudis may benefit from a rewards system, whereby the Government would pay 50% of the employees’ salaries, subject to conditions as specified by the Human Resources Development Fund.

Privileged Geographical Zones
The Government has set up six “Economic Cities” located in Riyadh, Jeddah, Dammam, Qaseem, Al-Ahsa and Makkah in order to attract foreign investment. These cities focus on different industries.
Free Zones
Saudi Arabia does not have duty-free zones or free ports.

However Saudi Arabia is a member of Gulf Cooperation Council (GCC) and Arab League. Saudi Arabia grants special trade and investment privileges to GCC members, allowing free movement of local goods. The Arab League has also agreed to negotiate an Arab free trade zone.

Finally, Saudi Arabia will provide additional incentives and better loan terms to foreign investors who set up their manufacturing facilities in Jizan, Hail and Tabuk.

Organizations Which Finance
Saudi Industrial Development FundSaudi Arabian Basic Industries Corporation (SABIC)

Islamic Development Bank

Investment Opportunities

The Key Sectors of the National Economy
Oil sector
High Potential Sectors
Franchising, Tourism, Banking
Privatization Programmes
The Supreme Economic Council launched a privatisation programme in 2002, which allowed privatisation of 20 state-owned companies in a phased manner. These companies belong to such sectors as: telecommunications, water and drainage, saline water desalination, mining, power, air transportation and related services, railways, some sectors of roadways, postal services, flour mills and silos, seaport services, some municipality services, some educational and social services, some agricultural services, some health services, etc.
Tenders, Projects and Public Procurement
Saudi Tenders
Tenders Info, Tenders in Saudi Arabia
DgMarket, Tenders Worldwide

Sectors Where Investment Opportunities Are Fewer

Monopolistic Sectors
Telecommunications, Electricity
Sectors in Decline
Insurance

 

This article was first published in Santander Trade Portal

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