International trade is the interchange of goods and services between individuals, organisations or governments across national boundaries (Robinson and Balassa, 2018). Trade components have the following categories:
International trade brings about much competition and efficiency in the market, resulting to availability of affordable consumer goods in the market.
Saudi Arabia’s economy is wholly oil backed (Cia.gov, 2018). The KSA is the largest producer of oil in the world and has the majority of oil reserves in the world. Crude oil exports account for about eighty percent of total exports, and approximately ninety percent of government revenue (GlobalTrade.net, 2018). The state has plans to diversify income sources by putting more focus on industrialisation, food processing and agricultural sectors.
FDI has played a major role in the growth and development of Middle East countries. FDI affects growth of a nation since it affects greatly; capital accumulated over time and importation of new technology into the host country.
Capital accumulation refers to acquisition of extra assets, from investments or profit, used in the process of production (Tejvan, 2018). Capital accumulation comprise of the preceding steps namely: saving, savings assembly and the investment of profits.
For Instance, when emirates started in 1985, it injected start-up capital of US$ 10 million into the UAE economy. Today, it is the largest international carrier in the world based on mileage and the sixth biggest carrier based on revenues generated (Kumar, 2018). Even though the state owns 100% of Emirates, it generates all of its income from the international market. Precisely, tourists or passengers flown. According to Kumar, Emirates generated a total of US$ 27.9 billion. According to Sheikh Mohammed, Vice President of UAE, in the Emirates Group annual report 2017/2018 the company is set to make additional investment of US$ 150 million to refurbish all aircrafts; to be done by the year 2019(Annual Report 2017/2018, 2018). This is an investment, which will come from profits of the company.
Technology transfer is the process by which utility of technical and scientific knowhow, facility and/or capability takes place in another place/country other than the country where they are primarily developed (Dictionary of International Trade, 2018). The role technology plays in the growth and development of a modern economy derives the importance of transfer of new technology. The need for technology, whether local or imported, grows rapidly across the world. This is because it plays a core role in the sustainability of production in both developed and third world countries. Moreover, the long-term evolution of any business firm widely depends on the ability of the firm to acquire the latest technologies in the market related to the business.
Technology is not a free good, neither is it a public good. Therefore, it is developed or outsourced. It does not occur as a build-up of generic knowledge and be used repeatedly by any business organisation that would like to have a leeway to it. This is because technologies are extremely peculiar or customized to maximize specific production goals.
Furthermore, efficient technological transfer between nations is highly dependent to the receiving state’s policies on open and closed investing and making better the quality of its native technological capacity. The introduction and usage of foreign technology is a very active procedure. This is because people and organisations must be involved in learning about a new technology, so that it can be useful in the county of import. This is of importance as the state’s regulations on monitoring high-tech translocation deal so that it can decrease piracy and tightly monitor the execution of imported technologies.
Relocation of new technology not only exist through the foreign state’s FDI into the local economy, but also through receiver state’s FDI in the foreign market (Utrs.com, 2018). Some Middle East countries have been broadening their investing listings by depositing huge sums of their excess income in developed countries’ settled firms by getting steak interests.
Up to the 1970s, FDI from Middle East have been going to the building and construction and banking industries of the developed countries. The most popular and staring countries for FDI from Middle East are the United States of America (USA) and Japan. After the late 1970s, manufacture and oil sectors have continued to attract FDI and making governments to begin to search for alternative options like goods and services, accompanied by the related technologies for exporting to the local industrial systems.
A very good sample is the buyout of Santa Fe International Corporation (oil drilling company), which was a USA endeavour, by Kuwait Petroleum Corporation (KPC). The value of the acquisition was US$ 2.49 billion in the early 1980s (Myerson, 2018). The buyout has verified the benefits to Santa Fe since it has been enlarging and broadening more quickly as it never did before it the buyout by KPC. Today, Santa Fe is the most prominent and the most prosperous case-in-point of a merger between Kuwait’s oil treasure and a US technology, allowing for notable mutual rewards.
Conclusion
Capital accumulation and introduction of new technologies are the most significant roles of FDI in the Middle East. Capital accumulation provides the host country with resources to finance development projects. On the other hand, new technologies result to efficient creation of modern products and services, which means that the country is going to have competitive products in the global market. This increases exports, which results to a positive effect on the balance of payment of the host country.
The KSA is a big receiver state of FDI, particularly in contrast to the size of its economy: by the time year 2011 was ending, total inward FDI had reached US$ 187 billion, equal to thirty-four percent of the kingdoms Gross Domestic Product (GDP). Contrary to that, FDI abroad by the KSA are comparatively moderate, as the state’s outward FDI was only equal to just five percent of the kingdom’s GDP by the end of the year 2011 (Unctad.org, 2013).
KSA easily elevated to a big FDI receiver state in the previous decade: from a yearly mean of US$ 251 million between 1990 and 1999, inward FDI increased to US$ 772 million between 2000 and 2004, then hoped to US$ 24 billion between 2005 and 2011. In 2005, it was the turnaround position, as inflow FDI rose by more than X6 to get to US$ 12 billion, and preserved the evolution until 2008. Yet, flows have recorded 3 sequential years of a bearish trend from 2009, subject to both the world-wide economic slump and riots in the zone, and was at US$16 billion in year ended 2011.
FDI in the KSA elevated by US$ 881.9 million in Q2 of 2018 (Tradingeconomics.com, 2018). In 2017, the kingdom saw FDI collapse to US$ 1.3984 billion from US$ 7.5 billion and from an all-time high of US$ 12.2 billion in the year 2012.
According to the most recent UNCTAD World Investment Report, released on seventh of June 2018, FDI into the KSA had dropped to US$ 1.4 billion, from US$ 7.5 billion in 2016 and from an all-time high of US$ 12.2 billion in the financial year ended 2012. In overall, the global FDI flows dropped by 23 percent to US$ 1.44 trillion (Unctad.org, 2018). Even smaller states like Jordan, which attracted FDI amounting to US$ 1.7 billion in 2017, passed the kingdom by far.
Unctad.org blamed the decrease in FDI into the KSA to fundamental demotion and unsupportive intra-organization debt by international MNEs. For Instance, it directed to the UK/Dutch Shell Group, which disposed fifty percent of its stake in the Sadaf Petrochemicals undertaking to one of its related company, Saudi Basic Industries Corporation (Sabic) for an amount of US$ 820 million in August 2017.
Environmental forces are the factors that affect the growth of an economy. Below are the factors, explained.
The above environmental factors are analyzed using SWOT analysis below.
Conclusion
In conclusion, the KSA still stands out as one of the most attractive countries for FDI in the Middle East. Both the government’s willingness to diversify from oil industry and the demand for international goods and services by the domestic market catalysed this trend. Turning of weaknesses to strengths would be easy if the government puts policies that will entice the international investors and prove to them that Saudi Arabia is the place to be. For example, subsidising agricultural projects, which will see introduction of new farming technologies, creation of employment to thousands, if not millions, of locals and a positive effect to the balance of payment of the country since food is one of the major import commodities in the kingdom. In addition, the vast range of investment opportunities in the country puts the country in a competitive edge for FDI, given the combined strength of demand and government policy.
References
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Cia.gov. (2018). The World Factbook — Central Intelligence Agency. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html [Accessed 13 Oct. 2018].
Coface.com. (2018). Saudi Arabia / Economic Studies. [Online] Available at: https://www.coface.com/Economic-Studies-and-Country-Risks/Saudi-Arabia [Accessed 14 Oct. 2018]
Dictionary of International Trade. (2018). What is Technology transfer? Definition and meaning. [Online] Available at: https://www.globalnegotiator.com/international-trade/dictionary/technology-transfer/ [Accessed 13 Oct. 2018].
GlobalTrade.net. (2018). International Trade in Saudi Arabia: Browse Our Resources. [Online] Available at: https://www.globaltrade.net/m/c/Saudi-Arabia.html [Accessed 13 Oct. 2018].
Kumar, A. (2018). The world’s biggest airlines in 2018 – Airport Technology. [Online] Airport Technology. Available at: https://www.airport-technology.com/features/worlds-biggest-airlines-2018/ [Accessed 13 Oct. 2018].
Myerson, A. (2018). Kuwaiti Government to Sell Santa Fe’s Petroleum Assets. [Online] Nytimes.com. Available at: https://www.nytimes.com/1994/11/11/business/kuwaiti-government-to-sell-santa-fe-s-petroleum-assets.html [Accessed 14 Oct. 2018].
Robinson, R. and Balassa, B. (2018). International trade. [Online] Encyclopedia Britannica. Available at: https://www.britannica.com/topic/international-trade [Accessed 13 Oct. 2018].
Sicat, G. (2018). External factors affecting the 2018 economy | Philstar.com. [online] philstar.com. Available at: https://www.philstar.com/business/2018/01/31/1782932/external-factors-affecting-2018-economy [Accessed 17 Oct. 2018].
Tejvan (2018). Capital Accumulation. [Online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/glossary/capital-accumulation/ [Accessed 13 Oct. 2018].
Tradingeconomics.com. (2018). Saudi Arabia Foreign Direct Investment – Net Inflows | 2006-2018 | Data. [Online] Available at: https://tradingeconomics.com/saudi-arabia/foreign-direct-investment [Accessed 14 Oct. 2018].
Unctad.org. (2013). Search: FDI in Saudi Arabia. [Online] Available at: https://unctad.org/SearchCenter/Pages/Results.aspx?k=fdi%20in%20Saudi%20arabia [Accessed 14 Oct. 2018].
Utrs.com. (2018). Technology Transfer. [Online] Available at: https://www.utrs.com/technology_transfer.html [Accessed 14 Oct. 2018].
Unctad.org (2018). [Ebook] Geneva: unctad.org, p.xiii. Available at: https://unctad.org/en/PublicationsLibrary/wir2018_overview_en.pdf [Accessed 14 Oct. 2018].
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