Answer To: Classification: Internal Use CRITICAL THINKING ASSIGNMENT (130 points)...
Soma answered on Apr 07 2021
2
I. Introduction:
Today a growing number of developing countries heavily rely on foreign investment as an engine to economic growth. The inflow of FDI is considered as the important source of external financing that is vital for economic development. FDI also helps to improve the management capabilities and enhance the skills of the labour of the host countries. The volume FDI inflow at the global level has substantially increased since 1990. At the backdrop of globalization, it has reached to the highest level at $681 billion in 2014. FDI lays the foundation that assist to promote growth, generate foreign currency and improve the savings investment imbalance. FDI is found to be more conducive to long run economic development. It helps to achieve rapid pace of economic growth especially for the developing countries by narrowing down the gap between investment and domestic savings and also through bringing the new technology from other countries. (Elimam, 2017)
Oil revenue is the vital pillar for Saudi Arabia’s economic success. Oil revenue constitute approximately 90-95% of the total export earnings in the country. Huge dependence on oil revenue is now outing substantial pressure for diversification, liberalization and reformation. Foreign direct investment has a considerable impact on the economic prosperity of Saudi Arabia. FDI has stimulated the growth potential of the country, both directly and indirectly, and ensure a stability in the kingdom. FDI inflow has a direct impact on the labour market, non-oil private capital formation, new technology and economic growth. The positive relationship between FDI and economic growth is evident both theoretically and empirically in both developing and developed countries. (Bardesi, 2016)
II. Motives for Foreign investment in Saudi Arabia:
In general, FDI inflows give an external support to the economy and helps to reduce the savings investment gap. The motives for foreign direct investment in Saudi Arabia is very prominent. The key motive of Saudi Arabia to promote FDI is to diversify the economy from oil dependence. There are several other motives too. One of the key motives is to gain access to the new markets and explore opportunities. Another motive is the resource seeking motive that would provide the access to the raw materials, natural resources, technological and managerial know how of the domestic country. The third motive is the efficiency motive - it would help to take the advantage of low cost of production and achieve economic efficiency. In the nutshell, the motives behind FDI in Saudi Arabia is to exploit the chelp availability of labours, natural resources, cheap land, intellectual human resources and efficient markets. (Alkhateeb, 2018)
III. Types of Foreign Direct Investment:
There are broadly two types of foreign direct investment in Saudi Arabia - vertical FDI and horizontal FDI. Horizontal FDI refers to producing the same products or delivering the similar service as the firm do in the host country. This occurs when the firm duplicates the same activities with similar value chain in the host country. For example, automobile giant assembles the cars in the home country. But with the Horizontal FDI it can shift the assembling process to Saudi Arabia and enjoys the cost advantage. Hence through horizontal FDI, a country can produce the same product in a different country. Vertical FDI, on the other hand, takes place when a firm moves along the downstream or upstream value chain through FDI. It has an important role in technology spill over. Through vertical FDI, a firm can locate different stages of production in different countries where they can be produced at least cost. For example, Volkswagan, another automobile leader of Germany, does not have distribution in Germany rather it has invested in Saudi Arabia for car dealership through vertical FDI. Volkswagen has engaged in downstream vertical FDI here. In case of horizontal FDI, two countries involved are likely to be similar in size. In contrast, vertical FDI, home country is usually larger than the host country. Like for vertical FDI of Volkswagen, home country is a developed (Germany ) and the host country is developing ( Saudi Arabia). In case of horizontal FDI, the primary objective is to serve the host country in best possible way where as the objective of vertical FDI is to the serve the domestic market. (Soltani)
IV. The role of FDI in Saudi Arabia’s growth of GDP:
. FDI has a vast impact on economic performance of Saudi’s economy both directly and indirectly. FDI has stimulated the growth...