Boosting foreign direct investment (FDI) is crucial for Saudi Arabia’s diversification from an oil-based economy, as outlined in Vision 2030, which aims to increase FDI to $100 billion or 5.9% of GDP by 2030. FDI inflows were $29 billion in 2016 when the initiative was launched. The anticipated growth in FDI is expected to propel new industries such as artificial intelligence, gaming, advanced manufacturing, mining, renewable energy, and tourism. FDI is vital as it introduces technology, capital, training, and business models necessary for the sustainability and competitiveness of Saudi Arabia’s non-oil sectors.
Yet, increasing FDI is challenging due to the decline in the global investment climate over the past decade. Worldwide FDI flows have decreased from $2.1 trillion in 2015 to $1.4 trillion in 2023. In this competitive environment, Saudi Arabia is seeking to increase its FDI share.
Limited Progress
FDI represents a business in one country investing in another to establish a lasting relationship, which is distinct from portfolio investment that lacks a long-term commitment. The Saudi General Authority for Statistics has updated the kingdom’s FDI figures using the latest international methodologies, revealing $19 billion in FDI inflows for 2023. Despite being lower than 2021 and 2022, those years were inflated by Saudi Aramco’s pipeline stake sales, which, while categorized under ‘transportation and storage’, essentially represented investments in the hydrocarbons sector. Discounting these transactions, FDI inflows into the non-oil economy were $15 billion in 2021 and $19 billion in 2022.
When compared to previous years, 2023’s FDI inflows marked an improvement over 2019 and 2020, but were only marginally above the $17 billion annual average from 2004-22. Additionally, the 2023 FDI inflow of 1.8% of GDP was just a fraction of the average following Saudi Arabia’s entry into the World Trade Organization in 2006-08.
Contradicting this stagnant progress are the kingdom’s announcements of significant foreign investment deals. These include multi-billion dollar commitments from events like the Future Investment Initiative and Arab-China investment conferences, as well as substantial investments from companies like Amazon Web Services and Pirelli. Nevertheless, signed memoranda or contracts do not equate to immediate FDI inflows, as the official statistics only account for completed transactions.
A Brighter Future?
The Saudi government’s FDI target for 2023 was modest at $22 billion, slightly above the actual inflow. However, realizing the $100 billion annual FDI goal by 2030 demands a considerable increase from the current level. Despite the challenging global economy, there are signs of optimism for increased FDI inflows, which hinge on improvements to the investment environment in Saudi Arabia. Factors that attract FDI include openness to trade, freedom of capital movement, a sound legal system, simplified regulatory and tax processes, and a skilled workforce. Saudi Arabia’s elevation to 14th in the global FDI confidence rankings in 2024, up from 24th in 2023, reflects the positive impact of reforms.
Recent reforms have eased business start-up procedures, optimized customs operations, relaxed foreign ownership limits, and enhanced investor rights protection. Moreover, Saudi Arabia boasts advanced digital infrastructure and offers attractive tax incentives under its Regional Headquarters Policy.
Remaining Constraints
Though the reforms show promise, their effect on FDI inflows will require time to manifest. Additionally, workforce skills, labor regulations, investment uncertainties, and reputational challenges may continue to inhibit FDI growth. Furthermore, Saudi Arabia’s efforts must be evaluated in the context of other nations’ reforms, as countries like the United Arab Emirates also enhance their appeal to global investors. To secure a greater share of diminishing global FDI, Saudi Arabia must persist in its reform agenda.