Foreign Direct Investment in the KSA Harvard Case Solution & Analysis

Chapter No.4

Analysis and Findings

Foreign Direct Investment in the KSA

            Saudi Arabia possesses one of the biggest economies in the MENA (Middle East and North Africa) region. Its GDP has consistently increased during the last couple of years; the figure touched 698.4 billion (SR) Saudi Riyals in the year 2001. The real Gross Domestic Product (GDP) was 4.9 percent in 2000, and forecasted to further increase by around 1.2 percent in the next year. There are various factors that contribute to the economy of the Saudi Arabia; and the key contributing sector is Mining with 185.6 billion Saudi Riyal in the year 2001, where the major contribution in this sector comes from the manufacturing of Crude Petroleum and Natural Gas. The inflation rate in the year 2000 was -0.8 percent and -0.5 percent in the year 2001, current account balance (CA) of the Saudi Arabia was -6.8 billion US $ in the year 1999 that was the reason for the surplus of US Dollars 7.0 billion in the year 2000.

            In the year 2000, the value of merchandise exports was 69.5 US $ and were comprised mainly of petroleum products and crude oil, imports merchandize were valued at 33.4 US $ billion which were contained mostly of industrial goods, food and metals. The trade balance for the same year was US $ 36.1 billion. In the eighties, budget deficits were consistently affected the economy due to a decrease in the oil prices. In the year 1999, cumulative government debt was very high and forecasted at $139 billion. Kingdom of Saudi Arabia’s economy is mainly dependent on the oil with revenues contributed up to 90 to 95 percent of total KSA’s exports and around 35 to 40 percent of the country’s Gross Domestic Product (GDP).

            Due to the rapid increase in the oil revenues in the year 1974, Saudi Arabia’s economy raised at a fast pace during the 1970’s and 1980’s. Higher oil prices led to the development and production of more oil fields across the world, the manufacturing of other energy alternatives, and the oil consumption decreased at global level. Because of it, global prices of oil increased rapidly in the eighties. The oil production of the Saudi Arabia had increased to around 10 million barrels per day during that era. Revenues also decreased dramatically and consequently it caused enormous budget deficits. In the year 1997, Kingdom of Saudi Arabia coped with various challenges and threats due to a decrease in the oil prices. There were several factors affected the performance of the KSA’s economy, including the economic crisis in East Asian region, and rapid increase in the non-OPEC (Organization of the Petroleum Exporting Countries) oil production, and the demand for oil.

            Kingdom of Saudi Arabia was involved in various oil production agreements and contracts in the year 1998. This resulted in a significant change in the oil prices in the beginning of the year 1999. Change in the prices enhanced the country’s economic future outlook, though Saudi Arabia remains to face challenges of both short and long-term aspects to boost the economy. To achieve the desired objective of reform and liberalization, the instruments and mechanisms concentrated on privatization and to attract healthy investment environment in the region. There was a massive improvement in the country’s economy and investment in the private sector was boosted a lot. Foreign Direct Investment also proved to be a significant factor in the country’s growth to liberalize the economy and boost different sectors.

Types of FDI in the KSA economy

            Foreign Direct Investment in the Saudi Arabia mainly comprises of the three forms, Joint Ventures, Greenfield Investments and the investments focused to the Offset programs. Joint ventures were the main form prior to the New Investment Law and encompassed ventures combined with the Kingdom of Saudi Arabia’s governments firms and institutions. Greenfield investments in the Saudi Arabia production and distribution facilities are comparatively new concept encouraged by the New Investment Law. Mostly, foreign companies are not familiar with the Mergers and Acquisitions (M&A). The New Investment Law facilitated Greenfield investment in a positive manner for the purpose of efficient acquisitions. Meanwhile, it is difficult to cope with the rapid increase in capacity and level of competition. The predominant form- Joint ventures could be either Equity Joint Ventures (EJV) or CJV (Contractual Joint Ventures). Equity Joint Ventures are usually limited liability firms backed and financed by the members who share both profit and risk equally. Contractual Joint Ventures signify to the collaboration between two distinct economic entities who reach contracts in a co-operative venture on matter such as the investment or limitation for cooperation, the distribution of profit or earnings, the sharing of losses and risks, the method of management and operation and the ownership of the property upon cancellation of the venture...................

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