Attracting higher foreign direct investment is a key part of the policy roadmap to diversify the Saudi economy. Vision 2030 set a goal of an increase in FDI to $100 billion, or 5.9% of gross domestic product, by 2030. FDI inflows were $29 billion in 2016, when Vision 2030 was announced. Increased FDI will support the development of new industries and sectors, such as artificial intelligence, gaming, advanced manufacturing, mining, renewable energy, and tourism. FDI brings the technology, capital, training capabilities, and business models that are essential for the long-term success and competitiveness of Saudi Arabia’s non-oil economy.

Increasing FDI, however, is a challenging task given the deterioration in the global direct investment environment over the past decade. Global FDI flows have been on a marked downward trend, dropping from over $2.1 trillion in 2015 to $1.4 trillion in 2023. Saudi Arabia is therefore seeking a larger share of a shrinking pie at a time when many other countries are also seeking increased foreign investment to meet their development needs.

Limited Progress

FDI is an investment by a business that is resident in one country in a business that is resident in another with the objective of establishing a lasting interest in that business. FDI differs from portfolio investment, in which the foreign investor has no lasting interest in the company it is investing in.

The Saudi General Authority for Statistics recently revised the kingdom’s FDI data to incorporate the latest international statistical methodologies. This new data shows that FDI inflows into Saudi Arabia in 2023 were $19 billion. While this was less than the inflows in 2021 and 2022 ($27 billion and $33 billion, respectively), the numbers in both years were significantly boosted by state oil company Saudi Aramco’s sale of stakes in an oil and gas pipeline to consortiums of largely foreign investors. While these sales were recorded in the data as foreign direct investment in the “transportation and storage” sector, they were effectively investments in the hydrocarbon sector. Excluding the estimated value of these transactions, FDI inflows to the non-oil economy – a better indication of how FDI may be helping diversification efforts – were $15 billion in 2021 and $19 billion in 2022.

From a longer-term perspective, the 2023 outcome was an improvement on the low FDI inflows in 2019 and 2020, but it was only slightly higher than the $17 billion average annual inflow during 2004-22. At 1.8% of GDP, the FDI inflow in 2023 was only one-third of the annual average during 2006-08 following Saudi Arabia’s accession to the World Trade Organization.

This lack of progress in increasing FDI sits at odds with the kingdom’s regular announcements of large foreign investment deals. These announcements include $20 billion of investments at the 2019 Future Investment Initiative, $10 billion at the Arab-China investment conference in June 2023 (including $5.6 billion from electric car company Human Horizons), $25 billion at the China-Saudi Investment Conference in December 2023, $5.3 billion from Amazon Web Services for datacenters and cloud computing, and a joint venture with Pirelli to build a tire manufacturing facility. A recent report by Emirates NDB using the Financial Times fDi Markets database (which tracks new investment agreements) reported a surge in “greenfield” FDI into Saudi Arabia in 2023 (“greenfield” investments are in new facilities, while “brownfield” investments are in existing facilities).

However, an announcement of a memorandum of understanding or an investment agreement is not the same as an investment inflow recorded in official economic statistics. The latter records the investment only when the transaction takes place, not when it is announced. A memorandum of understanding may or may not materialize into an actual investment, while investments committed under a signed contract may take years to eventuate depending on the project’s scope and complexity. This is likely one of the reasons there is such a large difference between the official data and that in the Emirates NDB report.

A Brighter Future?

The government did not expect FDI to pick up quickly. The annual FDI target set out in the National Investment Strategy for 2023 was $22 billion, only slightly higher than the $19 billion outcome. Nevertheless, achieving $100 billion of FDI annually by 2030 will require a five-fold increase from the 2023 level. This looks like a tall order in an increasingly fragmented global economy.

There are, however, reasons to be optimistic that FDI inflows will pick up in the coming years. Even if they fall short of the 2030 target, higher inflows can still meaningfully contribute to ongoing diversification efforts. The expectation of higher inflows is based on the improvements being made to the investment environment in Saudi Arabia. Empirical studies show that key determinants for attracting FDI include a country’s openness to trade; willingness to allow investors to move money in and out of the country without restriction; the quality of its legal system and its protection of investor rights; the ease with which investors can meet licensing and regulatory requirements and pay taxes; and the quality and skills of the workforce. The results of a recent FDI confidence survey by AT Kearney (based on interviews with senior executives at over 500 global companies) are consistent with these empirical studies. The survey also added “technological and innovation capacity,” “research and development capacity,” “quality of digital infrastructure,” and “government incentives” to the list of the top 10 most important factors considered by global companies when deciding where to invest.

Saudi Arabia has made important progress across many of these dimensions. The 2024 AT Kearney survey showed Saudi Arabia rising to 14th in the global FDI confidence rankings from 24th in 2023, with close to 50% of survey respondents saying they were “more optimistic” about investing in the kingdom. Recent reforms have streamlined the regulatory and licensing processes for starting a business, increased the efficiency of customs clearance procedures, eased many of the ownership restrictions on foreign investors, introduced legal reforms, including a new commercial code, and strengthened the protection of investor rights. Saudi Arabia also has a high-quality digital infrastructure and is offering attractive tax incentives to companies that set up in the country under its Regional Headquarters Policy.

Remaining Constraints

Many of the discussed reforms will take time to boost FDI inflows. For example, the new commercial code, which seeks to integrate Islamic principles into modern legal concepts and provide a more predictable legal environment for businesses, is relatively untested. Courts and tribunals will need to interpret the new code before foreign investors will know with certainty if it addresses previous concerns about the contractual environment.

Despite the positive changes in recent years, there are also several factors that may continue to hold FDI below its potential if unaddressed.

• Workforce skills and labor regulations. The World Bank’s “Enterprise Survey” identified an inadequately educated workforce and inadequate labor regulations as significant obstacles to doing business in Saudi Arabia (along with land availability). A combination of Saudization requirements under the Nitaqat quota program and a shortage of skilled labor available at competitive wages may undercut investment. Attracting skilled foreign labor may also be an issue, with significant wage premiums reportedly needing to be paid to get such workers to relocate to the kingdom. 

• Uncertainty about the investment outlook. Saudi Arabia has set out a roadmap for diversifying its economy under Vision 2030, but questions remain about the scope and cost of giga-projects such as Neom. Foreign investors may choose to sit on the sidelines until these uncertainties are resolved. 

• Reputational issues. A number of events in recent years have hurt public perceptions of Saudi Arabia. Reputational risk may deter some companies from investing in the kingdom.

Finally, Saudi Arabia is not operating in a vacuum. The reforms in Saudi Arabia need to be judged relative to what is happening elsewhere. While Saudi Arabia has implemented significant reforms over the past five years, other countries have not stood still. The United Arab Emirates, for example, has continued to strengthen its appeal to global investors through visa and foreign ownership reforms and rose from 18th to eighth in the 2024 AT Kearney rankings. If Saudi Arabia is going to capture a growing slice of a shrinking pool of global FDI, it cannot slacken its reform drive.