Foreign direct investment in Saudi Arabia :joint venture equity shares and source country characteristics

Abstract

The thesis explores the nature and determinants of foreign direct investment (FDI) in Saudi Arabia over the period 1960-2005. Saudi Arabia is of interest as it lies between a traditional developed and developing country. The thesis utilises a unique project-based dataset on about 19,000 investments in the Kingdom, of which 5,000 involve foreign ownership. The data were supplied by the government of Saudi Arabia, the first time they have been released for study. Overall, the thesis makes three main contributions. First, it analyzes the nature of FDI in Saudi Arabia. The analysis shows that most FDI has occurred since the major liberalisation under the 2000 Foreign Investment Act, which is comparable in scale to total investment in domestic projects since 1960. By volume of FDI, the thesis highlights the importance of oil and related industries, although the vast majority of projects are non-oil related. These are principally in manufacturing, from nearby Arab states and located in the Middle region around Riyadh. Second, following a review of the relative literature on the determinants of FDI, the thesis analyzes the source characteristics of the investors by aggregating the data at the country level. It finds that a range of factors affect the number of foreign-owned projects, including size, distance, economic freedom and past investment levels, but much poorer explanations are found for the investment scale, possibly reflecting the dominance of the oil sector. Third, following a further literature review, it analyzes the effect of country political risk on the foreign equity share in joint ventures at the project level. Here, it finds that severe risk may actually increase the foreign equity share, which is attributed to the benefits that ownership brings in the form of control. Further, those projects in minority foreign ownership appear most sensitive to risk. These results contribute to a literature, which to date has focused almost solely on the FDI entry mode either as whole or joint venture.