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In this era of global instability, West Asia has emerged as a battleground for attracting foreign direct investment (FDI). In the past few years, multiple states have vigorously pushed against each other to establish themselves as the preeminent investment destination in the region. Two players have dominated this race for being the leader in FDI in West Asia so far: Saudi Arabia and the UAE.
Illustration by The Geostrata
SAUDI ARABIA - BUILDING A WEST ASIAN INVESTORS’ HAVEN
Despite difficult geopolitical circumstances and economic uncertainties encircling its crude oil trade, Saudi Arabia has made significant strides in enticing foreign capital. Amidst the ambiguous landscape of West Asia, Saudi Arabia has defied the odds to become a beacon of stability and prosperity, according to the Saudi Arabian General Investment Authority (SAGIA), it attracted over $20.1 billion in FDI in 2022. This surge in investment can be attributed to several factors, including regulatory reforms aimed at liberalising the economy, and more importantly, enhanced investor confidence.
One of the key initiatives driving Saudi Arabia's investment appeal is the ambitious Vision 2030 agenda, spearheaded by Crown Prince Mohammed bin Salman himself where he seeks to diversify the economy from its reliance on oil revenues and propel the Kingdom into a new era of contemporary financial growth.
Under Vision 2030, Saudi Arabia has undertaken sweeping reforms to improve the business environment, promote entrepreneurship, and attract foreign capital across various sectors, including technology, renewable energy, and tourism. The Kingdom has also embarked on an ambitious privatisation agenda, where they have privatised many state-owned enterprises.
The Kingdom has actively pursued strategic diplomatic partnerships and bilateral agreements to bolster its investment ecosystem and attract foreign capital. For instance, Saudi Arabia signed a landmark $265 billion investment deal with China in 2019, signalling its commitment to expanding economic ties and attracting foreign investment.
Saudi Arabia has committed significant resources to infrastructure development, including the construction of mega-projects such as NEOM, a futuristic city envisioned as a global hub for innovation and investment.
Mohammed bin Salman Al Saud has made extraordinary efforts to normalise relations with Israel which appears to be strategically intertwined with Saudi’s broader economic agenda. While geopolitical dynamics and regional stability play a significant role in this endeavour, there's a clear economic calculus at play. By demonstrating a willingness to engage diplomatically with Israel, Saudi Arabia has enhanced its ties with Western nations that have historically supported Israel, thereby opening doors to enhanced cooperation in areas such as defence, technology, and finance.
This multi-faceted approach underscores Saudi Arabia's strategic vision of leveraging geopolitics to advance its economic interests on both regional and global scales. The United States remains a key partner for Saudi Arabia, with bilateral economic ties spanning various sectors, including energy, defence, and technology. The Kingdom's close economic relationship with the U.S. has contributed to its attractiveness as an investment destination for many Western nations.
Despite its remarkable progress, Saudi Arabia faces several challenges in its quest to become the preferred investment destination in West Asia. Geopolitical tensions, regional conflicts, and concerns over human rights have cast a shadow of uncertainty over the Kingdom's investment climate, deterring some investors from being fully committed to long-term ventures.
Additionally, the competition with the UAE for FDI remains fierce, as both countries yearn for the attention of international investors seeking opportunities in the Middle East.
While Saudi Arabia boasts significant advantages, including its vast market size, strategic location, and ambitious reform agenda, it must continue to address investors' concerns and implement reforms to enhance transparency, governance, and legal protections.
Saudi Arabia's bid for foreign investment dominance in West Asia represents a pivotal moment in the region's economic trajectory. However, sustained efforts are needed to foster a conducive environment for investment in the country of Saudi Arabia. Saudi Arabia’s incentivization of FDI must not be viewed in isolation. The UAE has emerged as the greatest competition to Saudi Arabia with its own extensive efforts to increase FDI inflow.
UAE - PARTNERING THE WAY TO A SOUND FDI ECOSYSTEM
Amidst rising global instability, the UAE has cemented its place as a “safe haven” for foreign direct investment, as concluded by experts at the World Investment Forum. The UAE marked its highest ever FDI inflow in 2022, valued at $22.74 billion which only increased in 2023, especially in the greenfield investment sector. According to the United Nations Conference on Trade and Development Report, the UAE ranked second in the world for an annual rate of increase in FDI inflow, placed only behind the United States.
This rising inflow can be observed as an exception to the global trend in FDI flows. With the war waging in the Middle East, geopolitical instability in the region has risen to a dangerous extent for potential investors.
Owing to the incendiary nature of the Israel-Hamas war, the proliferation of the conflict and its hostilities with other parts of the region remains a potent possibility. Furthermore, the war has affected trade and investment flows in the region with investors naturally being sceptical of the financial security of their investments.
Instability in the Middle East in 2023 has only propounded the negative effects on global investment flows from the instability in Europe between Russia and Ukraine, one that escalated to a full scale war in 2022. In a financial market fraught with uncertainty and political instability, how is it that the UAE has managed to attract more FDI than ever before in its history?
This dynamic foreign investment activity in the UAE is the product of a grander strategy by the Gulf state to increase its global presence by lowering the threshold for foreign labour and capital flow into its financial market. In recent years, the UAE has intentionally altered its trade and investment regulations to become more attractive for potential investors as a global business hub. One of the more influential pieces of legislation was the Commercial Companies Law of 2021, which changed the domestic ownership requirements for onshore companies.
Prior to this law, 51% of all capital of such onshore companies needed to be legally owned by a UAE national. However, 100% of the ownership can now be held by a foreign investor.
This phenomenon is not limited to capital investment, but also contributes to bringing an influx of labour, which has been facilitated by relaxing visa requirements for foreign labourers, employers, employees, and companies. In July 2022, the UAE initiated its NextGen FDI Programme which is focused on reducing the time to attain licences, granting of bulk visas, and even incentives for residential leases for foreign companies.
Economic cooperation and increased capital flow are also emerging as the UAE’s greater diplomatic strategy. Over the last few years, it has signed multiple bilateral trade and investment treaties in the form of Comprehensive Economic Partnership Agreements, including one with India in 2022.
Other treaties have been negotiated with states such as Cambodia, Georgia, and Indonesia and even with former competitors or antagonist states such as Israel, Iran, and Turkey. These treaties emphasise economic investment and mutual cooperation while highlighting the UAE’s ambition to become a leading state for global business and investment. In compliance with such ambition, the country has set itself a goal to attract $150 billion worth of foreign direct investment into the country by 2031. To achieve such an ambitious target, the UAE can be seen pursuing diversification on two fronts: its economic partners and economic diversification.
The UAE received increased investment from China in 2023 and in May of 2023, concluded three agreements with Chinese nuclear energy corporations. This treaty arrangement also highlights the UAE’s attempt to diversify its economy and move away from hydrocarbons to greener energy sources. This has been reflected in the profile of industries that have attracted the highest levels of foreign direct investment since 2021. A large chunk of this investment has flowed into major sectors such as fintech, agricultural technology, healthcare, tourism, and energy.
CONCLUSION
The UAE’s efforts to attract FDI must not be viewed in isolation. It is in direct competition for such FDI with Gulf member states, especially Saudi Arabia. According to UNCTAD’s World Investment Report, the UAE ranked first in the “West Asia” region, attracting 47.1% of the cumulative foreign indirect investment in the region.
As the financial importance of the Middle East or West Asia continues to grow and as the Gulf states look to diversify their economies, the competition for FDI is only likely to become hotter.
What remains to be seen is at what point will this competition for FDI between West Asian states reach a boiling point, and more importantly, what will be the implications of such a boiling point? Will there be a mutual pacification leading to greater cooperation rather than competition or will trade relationships dissipate with rising tensions? How things unfold in this region over the next decade will determine the future of the global financial industry.
BY SHAYIQ AHMED SHAH AND VAIBHAV SINGH
TEAM GEOSTRATA
Very good analysis of the oil economies
FDI Inflow has increased exponentially in West Asia