British Firm Investment in Saudi Arabia: Motivations and Barriers

Introduction

The increasing interconnectivity of the world economy, combined with the effects of the recent global recession, has necessarily prompted a reevaluation of foreign investment strategies for firms around the world. The issue of direct investment in foreign countries — through partnerships, franchise contracts, or acquisitions — has also been reexamined, though it has remained more steady in recent years due to a somewhat greater dependence on market forces rather than the direct availability of capital (Siddiqi 2009). This paper provides a preliminary examination of the perceived motivations and barriers to direct investment in Saudi Arabia among British firms.

Saudi Arabia has long focused its considerable oil wealth on the development of infrastructure and the expansion of its domestic market, which has caused both capital investors and potential direct investors to view the country quite favorably over the years (Siddiqi 2009; Siddiqi 2005). This does not mean that the path to direct investment in Saudi Arabia has been entirely cleared, however, and there are still several perceived barriers to direct investment in the country, as well as real issues that dissuade potential direct investments by foreign firms (Siddiqi 2008; Bushnak 2001). The reality of these problems is not the focus of this study; rather, the perceptions of both the motivations and barriers to direct investment in Saudi Arabia — specifically by British firms — are addressed through a systematic and literature-supported qualitative analysis of current officers across a wide array of British enterprises.

The primary aim of this study is to identify the main motivations and barriers to direct investment in Saudi Arabia as perceived by officers of British firms. Ascertaining the nature of perceived barriers will allow for further research into the reality of those barriers and the degree to which they interfere with real-world direct investment attempts, potentially painting a more realistic and more favorable picture of direct investment than current perceptions allow. The identification of primary perceived motivational factors will also suggest firm needs in direct investment opportunities.

Aims, Objectives, and Research Questions

Beyond simple identification of motivational factors and barriers, this research attempts to determine the degree to which each barrier is seen as primary and significant. Such qualitative ranking and assessment of motivational factors is also conducted, establishing a preliminary understanding of the needs of diverse firms representing very different industries when considering direct investment opportunities in foreign countries generally, and Saudi Arabia specifically. The purpose of these objectives is to provide a clearer picture of the overall needs and concerns of British firms when contemplating direct investment in Saudi Arabia, which will suggest avenues for future marketing and finance research, as well as possibly indicating practical actions that can be taken in Saudi Arabia and by firms poised for direct investment abroad.

The primary research question developed for this study is relatively straightforward: what are the perceived motivational factors and barriers to direct investment in Saudi Arabia among officers of British firms? All data collected relates directly to this question, and all analysis was undertaken specifically to this end. Identification of perception rather than reality — in firms both with and without existing investment in Saudi Arabia — was specifically sought.

This primary question can be broken down into smaller constituent questions, which were addressed through the research instruments. Identification of firm types and levels of investment in Saudi Arabia were ascertained in order to make comparative and multi-industry analysis more valid. Research questions and analysis techniques were also designed to assess the degree to which each identified barrier and motivational factor was perceived as a major influence on direct investment decisions; while still qualitative in nature, the research attempted to semi-quantify the persistence of certain perceptions regarding Saudi Arabia.

Rationale for Qualitative Methodology

A quantitative study could also serve, at least partially, to demonstrate the existence of perceived motivational factors and barriers to direct investment in Saudi Arabia through cost comparison analyses, taxation levels and infrastructure costs, and other financially measurable figures. Other forms of qualitative analysis — including case study examinations of actual direct investment scenarios by British firms in Saudi Arabia — could also be utilized to develop an understanding of the research questions. Each of these alternatives has certain inefficiencies and imprecisions that render the methods chosen more effective.

The sheer volume of detail is one major problem with a quantitative analysis; the other, far more insurmountable issue is the absence of the human factor. This study purposely addresses perceptions of issues pertaining to direct investment, because it is from these perceptions — and not necessarily from on-the-ground financial realities — that decisions are made. Other forms of qualitative analysis would provide much of this same information, but there is no more direct way to assess the perceptions of a problem or opportunity than to ask the pertinent parties what their perceptions are. Though interviews were hoped for, no affirmative responses to interview requests were received; however, the return rate of the questionnaires was sufficient to lend the research preliminary validity and breadth of scope.

Literature Review: Saudi Arabia's Investment Climate

Significant barriers to direct investment in Saudi Arabia have been prevalent in the past, and it is quite possible that today's perceptions of such barriers are based more on a persistence of awareness of these problems than on a persistence of the problems themselves (Bushnak 2001). There were significant infrastructure issues — specifically regarding water supplies — in Saudi Arabia at the start of the previous decade, and while some challenges have persisted in the desert country, it is the persistence of perception rather than the problems themselves that now poses the greater barrier. Many of these issues have been largely addressed through investment and privatization (Bushnak 2001).

By mid-decade, continued private and government investment in infrastructure was paying large dividends, increasing the country's wealth dramatically and changing the perceived opportunities for many individuals and firms (Siddiqi 2005). Specifically cited for a dramatic increase in the country's appeal to foreign investors was the passage of economic liberalization measures, especially the capital market law that took effect in July 2004 (Siddiqi 2005). The same period saw a massive improvement in the nation's handling of direct investments, which became much more easily facilitated and profitable for foreign firms than had previously been the case (Siddiqi 2005). This is of particular interest to the present research, as it is clear from some responses that changes to real-world opportunities and systems have not registered with all British firms.

By 2006, foreign direct investment in Saudi Arabia reached the equivalent of an estimated eighteen billion U.S. dollars, representing a fifty-one percent increase over foreign investments in the country during the previous year (Smith 2008). An overemphasis on the country's oil wealth and petrochemical potential has clouded perceptions of other opportunities, however; while many investors are taking advantage of Saudi Arabia's growing domestic market and infrastructure, others remain stuck in an outdated view of the country (Smith 2008). This research ascertains which of these perceptions have been most persistent and present the largest barriers to foreign investment in Saudi Arabia.

As Saudi Arabia entered the global financial crisis, businesses there continued to expand. The global contraction of capital availability did little to slow the rapid expansion of Saudi Arabia's economy, with a GDP that nearly doubled in the five-year period ending in the last quarter of 2008 (Siddiqi 2008). The nation also carried an estimated budget surplus of over one hundred billion dollars, making continued expansion of infrastructure spending — as well as the provision of incentives to domestic and foreign business development — highly likely (Siddiqi 2008). Oil revenues, though not the sole source of Saudi Arabia's wealth and stability, played a major part in the country's ability to weather the economic storm largely unscathed (Siddiqi 2008).

A similar analysis at the end of 2009 shows that the country did take a hit from the global economic downturn, as was unavoidable, but the picture remains far from dire for Saudi Arabia's economy (Siddiqi 2009). Infrastructure investment continued, and a more in-depth analysis of Saudi Arabia's long-term spending and industries shows that non-oil sectors combined for growth of more than five percent over the previous five years, with manufacturing, transportation, and telecommunications each increasing nearly ten percent over the same period (Siddiqi 2009). All of this points to considerable potential profitability through direct investment in the country, and such investment has continued despite tightened capital availability worldwide (Siddiqi 2009). Despite this phenomenal and continued growth, however, the real motivational factors are often overshadowed by perceived barriers to investment.

Conclusion

The perceived barriers and motivations to direct investment by British firms in Saudi Arabia do not necessarily reflect an accurate understanding of the real-world situation for direct investors in the country. The persistence of infrastructure concerns despite the rapid and continued expansion of infrastructure through both private and government spending is limiting many firms in their international potential. Further research detailing the reasons behind these perceptions and more effective methods for disseminating accurate information is recommended.