Foreign direct investment (FDI) as a channel of technology diffusion : the case of Saudi Arabia

Abstract

Countries' economies should be diversified as much as possible to avoid economic slumps. Saudi Arabia’s economy is highly dependent on oil as a major source of financial resources. However, diversification of economic activities requires improvement in the technological infrastructure of the country. FDI is considered a major source of technology diffusion. When foreign investors move some of their activities to a host country, they create externalities known as Spillovers. Spillovers are created with support of four major channels or effects, which are Demonstration-Imitation, Linkage, Competition and Workers’ Mobility. The aim of this research, hence, is to study the effects of FDI on technology diffusion in Saudi Arabia. It investigates the above mentioned four effects as channels of productivity growth and tries to analyze the spillovers resulting from foreign firms’ operations in the country. Moreover, the study tries to discover the mechanism through which FDI promotes the technology diffusion. This is done by the utilization of the Total Factor Productivity (TFP) analysis. The TFP has been utilized by previous researchers as an indicator of technology flow and separation across cities and countries. The second objective of this research is to study the local investors’ expectation of the future effects of FDI on the technology diffusion in the country. This is done by analyzing interaction between Competition and Linkages. It continues by analyzing the interaction between Training and workers’ Mobility. The third objective of this study is to provide recommendations to the Saudi Arabian General Investment Authority (SAGIA), pertinent to the development of the technology diffusion in Saudi Arabia. To achieve the above mentioned objectives a survey, composed of two parts, was developed. The first part of the survey targeted both foreign and local investors in four major geographical areas of Saudi Arabia. Those areas are the Eastern Province, Riyadh, Qassim and Hail. The second part of the survey targeted the local investors in the same geographical areas. To conduct the data analysis of the first part of the survey, a model is developed based on the Parente and Prescott equation. The data analysis of this portion is conducted using Ordinary Least Square (OLS) regression. The second part of the study is analyzed using the two way Analysis of Variance. In addition, the results of part two analysis were supported by descriptive data analysis. In the first part of study, intra- and inter-industry analyses are performed. In the Inter-Industry level; the study results reveal that there is very limited technology diffusion via the four channels and this result applies without adding control variables related to Size, Age, Location and Type of industry. If those variables are added, our variables of interest lose strength. On the Intra-Industry level, there are two (Chemical and machinery) of seven major business sectors that are not benefiting from FDI existence when it comes to advantages related to technology diffusion. None of the other five sectors, however, is fully benefiting from all the effects. In the analysis, different control variables are added to the analysis to investigate their effects. This includes the Size, Age, Location and the industrial Classification. The results of the second part of the study reveals that interaction between Linkage and Competition is not expected to cause any productivity increase in Saudi Arabia. Moreover, the interaction between Training and workers’ Mobility is not expected to lead to technology diffusion. These results are derived based on local investors’ opinion polls. The result is also supported by extensive descriptive data analysis in which comparison with previous researchers’ results is conducted. In addition, these results are supported by Chi-Square analysis for the sake of accuracy of the hypothesis testing. The research is concluded with recommendations pertinent to the development of the technology diffusion in the country. The actions that are being taken are described, based on the results of this study, Also recommendations for future studies are given at the end of the research.