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Question 1
Introduction
Foreign direct investment has played a critical role in the economic development of the Middle East countries. The investment has lifted the lives of the people, the governments have benefited, and the GDP of the region and particular nations have increased (Borensztein et al. 1998, p 115-135). Specifically, foreign direct investment has contributed o employment of the people, technological transfer, skills, and knowledge, and boosted trade. However, it is also imperative to note that while FDI has been critical to the economies of the Middle East countries and by extension the North African Countries there has been a systematic effort to attract such investments while at the same time there have been great resistance or challenges hindering the initiative to be successful in particular nations. As such, the SWOT analysis would be employed to critically examine the position of foreign direct investment in the Middle East.
FDI has stimulated growth and provided avenues for stability in the Middle East economy. Due to the foreign direct investments, the Middle East economies which are largely dependent on oil and natural gas have been able to diversify their economies or sources of revenue. In Saudi Arabia, United Arabs Emirates and Qatar for instance, have been largely oil and gas production countries. Their main source of income has been oil production. The economy of Saudi Arabia for instance is said to be 85 percent dependent on oil and natural gas(Jaouadi, 2014 p. 57). Such dependency on oil has been unsustainable due to the global fluctuation in oil prices which at time are high, while other times are low. Additionally, the US dollar which is the main mode of transaction is not their primary currency hence affects transactions depending on the value of the dollar.
The region has been able to increase their GDP due to foreign direct investment when countries come to invest in their countries and build facilities, exchange knowledge and skills and build capacity in terms of skills transfer (Chan 2016, p. 410). The region has benefited in the technological aspect where advanced technologies have established businesses in the region, Apple, Microsoft, and other big tech companies have invested in the region. Such investments have created employment for their local populations like the youth. Unemployment has been reduced due to increased foreign direct investments. Jaouadi 2014 state that in Saudi Arabia for instance, the first quarter of 2018 registered their highest number of unemployed people at 12.7 percent(p. 56). The number was high due to the reduction in the FDI which were affected by decreased investment.
It is imperative to note that FDI has significantly affected the Middle East region in terms of culture and religion (Jones, and Wren, 2016). The region is predominantly a Muslim region and the Islamic Sharia laws is applicable in most nations. Actually, some countries are purely Islamic states. The trade however, has influenced the culture which is mostly patriarchal to be more accommodative to women. Some aspects of women`s rights have been advocated for. Women were not allowed to be in certain places, watch football games in certain counties, not allowed to drive neither were they allowed to do specific tasks(Syed, et al. 2018). However, with the foreign direct investment, the multilateral corporations have been able to indirectly influence the region to be more accommodative to their women. Women can now drive cars, do some task, and be in other public places like men. It is also vital to mention that oppressive women issues have been condemned like the sexual harassment against women can be attributed to FDI. As such, women have come out to be active and participate in the economic advancement of their states and financial freedom.
Whereas there has been critical areas of which foreign direct investment has affected the economy of the Middle East countries, it is imperative to use SWOT analysis to highlight the scope of the phenomenon.
Strengths
The region is blessed with minerals and specifically oil that has been an attraction to the foreign direct investments. Particularly oil and natural gas has fostered the economy of the region hence creating circulation of money which attracts trade and investments. The region has also invested in the infrastructure that attracts investments.
Weaknesses
The region is faced with constant political instability is most countries that threaten even well advancing countries within the same region. Shafique, and Hussain, 2015 state that it’s very difficult to operate in an environment of political instability since the markets will not be stable (p. 369). The instability is a hindrance to investors who calculate risk verses profits. Additionally, the countries have not demonstrated democratic methods and legal frameworks for dispute resolution mechanisms. The legal system of the region has been criticized for being too conservative and too religiously interconnected with the Islamic doctrines. Furthermore, some companies, or investors have been shy of investing in the region due to the Islamic laws that are deemed to be oppressive to the women. Other organizations would like to balance their leaderships and management between the genders which is not popular in such a patriarchal region.
Opportunities
The region has opportunities to trade with herself among the member countries and have money circulation within the same region. The region has opportunities in the potentiality of individual countries with high economic growth rate like Turkey, Israel, Qatar, and Kingdom of Saudi Arabia among other nations. Such countries like the Saudi Arabia, has a vision 2030 program that will extensively raise the economic levels of Saudi Arabia on trade, infrastructure, construction, health and entertainment. In return, the region will benefit from such. Additionally, within the Middle East, there are independent bodies that foster economic growth like the Gulf Cooperation Council (GCC) constituting Saudi Arabia, Kuwait, Qatar, United Arabs Emirates, Oman and Bahrain which are engaged in the adoption of a new economic front for the region.
Threats
The region which is highly dependent of the oil and natural gas proceeds are threatened by the low oil prices that rock the market. The business becomes less competitive hence threatening the economic security of the region. It is therefore important to note that foreign direct investments have assisted the economic growth of the region with employment creation, transfer of skills, managerial knowledge and capital which drives economies of the region.
Question B.
Introduction
For about fifty years, the economy of the Kingdom of Saudi Arabia has boomed. The growth rate as per the GDP is recorded to be the world`s third fastest after China and the republic of South Korea. The forecast for the per capita income is projected to rise from 25,000 US dollars in 2012 to 33,500 US dollars in 2020 (Ozturk, and Al-Mulali, 2015 p. 1003). As the kingdom strives to diversify her economy from traditional pillars which were hydrocarbon-based firms. The kingdom is establishing a reputation as an ideal destination for Foreign Direct Investment (FDI). Just like most countries globally, Foreign Direct Investment helps a nation to diversify their economy. Moreover, FDI is a vital component of economic growth of a nation since it brings not only capital to a State, but also critical in facilitating skills, technology and knowledge transfer. Furthermore, foreign direct investment is essential in providing access to global markets besides developing managerial and organizational practices. Therefore, most countries, just like the Kingdom of Saudi Arabia, have invested in attracting FDI since it has significant impact in an economy.
In the recent past years, the foreign direct investment to the Kingdom of Saudi Arabia have trailed a descending trend. Between 2016 and 2017 alone, the FDI contacted from US$ 7.4 billion to US$ 1.4 billion (Dudley, 2018). The reasons for such is the decline in investments in 2017 and the subsequent intracompany loans from the multinationals. The KSA is reported to be the leading recipient of foreign direct investment in the West Asia. The nation saw an increase in its flows in the region from a 53 percentage in 2009 to a 27 percentage in 2015 and a subsequent 6 percent in 2017. It is however important to mention that the stock of FDI rose by 0.3% reaching 232 billion within 2017(Syed, Ali, and Hennekam, 2018 p. 167). As such, the US, Singapore, Kuwait, Malaysia, United Arabs Emirates and France constituted the main investors in Saudi Arabia in the year 2016. The World Bank, in their Doing Business Report, ranked Saudi Arabia at 92nd position out of 190 with a score of 62.5 higher than Middle East and the North Africa at 56.72 (Dudley, 2018).
The Saudi Arabia economy is largely dependent on oil revenues and much of her trade was on oil until the government decided to heavily diversify the economy hence DFI has contributed a lot in trade. Foreign trade has been significant to the economy of Saudi Arabia. In Saudi Arabia, the employment sector has benefited significantly through the FDI which is being encouraged by the government. Foreign direct investment has been an integral part in the surge in economic growth in the Kingdom of Saudi Arabia. FDI is not only a transfer of money but also a combination of asserts like technologies, marketing, and managerial capabilities(Komninos, 2018 p. 651). An inflow of FDI enhances economic growth thus creating more opportunities for job creation and employments. FDI creates employment for the people through the incoming financials, technology transfers and experts human resource skills.
For instance, in the first quarter of 2018, Saudi Arabia registered the highest unemployment rate for the nation`s history. These could be attributed to the reduction in the amount of foreign direct investment money flow in the country. Such reduction were precipitated by decline in investments and intracompany loans from certain multinationals in 2017. As such, the ripple effects was the unemployment in 2018. Before 2018 for instance, when there was good investment in terms of FDI, the unemployment rate were very low.
Source: Komninos, 2018
Chemical industries and real estate are some aspects of the economy that have benefited significantly from the FDI in Saudi Arabia. Saudi Arabia for instance, received investment of 30% of their chemical industry from the US while United Arabs Emirates invested 26 percent in the real estate industry. Such investments are critical in increasing the economic growth of the nation and fostering employment opportunities to the citizen.
SWOT analysis is imperative in the analysis of the impact of FDI in the economy of the Kingdom of Saudi Arabia and be able to site from which tow fields of the economy has FDI impacted. The strengths, weaknesses, opportunities and threats in Saudi government are factors that affect doing business within the nation.
- Strengths
It is imperative to note that the government of the kingdom of Saudi Arabia has heavily invested in their infrastructure as an attempt to lure investors and investments to the country. On the same line, FDI is perceived to be a good avenue not only to attract investment, but also in diversification of the economy from an oil and natural gas dependent economy and job creation for young generation. The government`s decision to open a retail and wholesale sector for foreign ownership and a program on privatization are some key strengths the country has shown towards attracting FDI. The capital Markets Authority of the Saudi government announced reduction on foreign investments restrictions. For instance, the government announced decrease from 1 billion dollars to 500 million US dollars(Yousef, 2017 p. 403) for stock market investment. Investors are also attracted to Saudi Arabia due to their stable exchange rates, controlled inflation, dynamic banking sector performance, and the access companies have to the largest world oil reserve, a higher standard of living and the low energy costs.
- Weaknesses
The political and social tensions in the kingdom of Saudi Arabia has been a barrier to foreign direct investment. In addition, in 2011, the nation adopted the “Saudisation” policy which favors domestic labour. Such policies and political and social environments have been a hindrance to FDI. The other weakness is that most investors still believe that legal frameworks of dispute or conflict resolution are weak or inadequate. The Saudi Arabian government is also criticized for imposing certain quota of employees to organizations.
- Opportunities
Opportunities to advance the FDI in Saudi Arabia lie in the formation of the Saudi Arabia General Investment Authority (SAGIA). The body also set up an investment Service center that is mandated with approving or rejecting applications to invest in the country within thirty days. Such an initiative is an opportunity for investors who can know their fate within the shortest time possible. Conversely, the nation launched vision 2030 that enshrines various opportunities for investors in education, housing, energy, health and entertainment.
- Threats
Some visible threats to foreign direct investment in Saudi Arabia are weak political governance, deteriorating geopolitical environment of the region and the conservative and a biased cultural practice under the Islamic law that is seen as oppressive to women.
Bibliography
Alshahrani, M.S.A. and Alsadiq, M.A.J., 2014. Economic growth and government spending in Saudi Arabia: An empirical investigation. International Monetary Fund.
Borensztein, E., De Gregorio, J. and Lee, J.W., 1998. How does foreign direct investment affect economic growth? 1. Journal of international Economics, 45(1), pp.115-135.
Chan, S. ed., 2016. Foreign direct investment in a changing global political economy. Springer.
El Mallakh, R., 2015. Saudi Arabia: Rush to Development (RLE Economy of Middle East): Profile of an energy economy and investment. Routledge.
Jaouadi, S., 2014. Could foreign direct investment increase unemployment: case of KSA. The international journal’s research journal of economics and business studies, 3(9), pp.51-56.
Jones, J. and Wren, C., 2016. Foreign direct investment and the regional economy. Routledge.
Komninos, N., 2018. Technology and intelligent city strategies in Saudi Arabia. Google Scholar.
Ozturk, I. and Al-Mulali, U., 2015. Natural gas consumption and economic growth nexus: Panel data analysis for GCC countries. Renewable and Sustainable Energy Reviews, 51, pp.998-1003.
Shafique, S. and Hussain, Z., 2015. The impact of foreign direct investment (FDI) on economic growth.
Syed, J., Ali, F. and Hennekam, S., 2018. Gender equality in employment in Saudi Arabia: a relational perspective. Career Development International, 23(2), pp.163-177.
Yousef Alkhateeb, T.T., Sultan, Z.A.S. and Ahmad, N.A.A., 2017. Oil price and employment nexus in Saudi Arabia.
