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Published: Fri, 02 Feb 2018

Foreign Investment in Saudi Arabia


The aim of this dissertation is discussion and critical analysis of foreign investment laws in Saudi Arabia. Foreign investment has a very complicated history since it was first introduced by the oil companies of western developed countries. The history of investment in the oil industry through concession agreement, the establishment of the ARAMCO, the effects of the government to indigenise the industry together with the shift of power and control over the natural resources of the country led to a change in the perception of foreign investment in Saudi Arabia and the Arab world.

This dissertation, regarding the legal security of foreign investment law in Saudi Arabia, is divided into the following sections:

Firstly, it sets out the background of KSA and its relation with the WTO. In addition it sheds light on the reasons for investment in Saudi Arabia and the increased willingness of foreign companies to invest in KSA.

Secondly, it discusses the law which governs KSA: Islamic Shari’a Law. This section also considers how consistent Shari’a Law is with international law as well as examining the judicial structure in KSA and its effectiveness.

Thereafter, the study examines the history of FDI as well as legislative history in KSA.

The following section, considers the most important features of the new foreign investment laws in KSA with particular focus on the Foreign Investment Act and its rules and laws together with other relevant laws. It also considers the negative aspects of foreign investment.

The next section examines the resolutions of foreign investment disputes in KSA through litigation and arbitration after giving a brief description about litigation in KSA together with KSA’s attitude towards arbitration.

The subsequent section consists of discussion and critical analysis of foreign investment in Saudi Arabia.

Finally, the dissertation summarises the findings and concludes with the main themes of the dissertation together with some recommendations.



Globalisation is the order of the day with most countries initiating reforms to liberalise their economies and integrate with global economies to achieve rapid economic development. A significant number of countries have joined the World Trade Organization (WTO) during the last five years which has further accelerated the process of globalization. Furthermore, with many countries due to join the WTO during the next three to four years, the world is progressing towards becoming a global village.

Globalization is ushering the era of low trade barriers and global competition. Companies can no more entirely depend upon their domestic markets. Besides, many developing countries have been opening up their economies to accelerate development and are striving hard to mobilize funds for developing infrastructure and industry through Foreign Direct Investment (FDI). A large number of multinational companies and investment groups are seeking entry to seize the opportunities offered by the emerging economies which offer immense prospects in the areas of telecommunications, power, transport, roads, real estate, manufacturing, banking and insurance etc.

Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise which is resident in an economy other than that in which the foreign direct investor is based. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.

In the last few years, FDI has grown in importance in the global economy, the emerging market countries such as China and India have become the most favoured destinations for FDI and investor confidence in these countries has soared. As per the FDI Confidence Index of Kearney for the year 2005, China and India hold the first and second positions respectively, whereas United States has slipped to third position. The report also discloses that despite rising costs, Eastern Europe enjoys better FDI prospects, while Brazil and Mexico have recovered from lower confidence levels.

By establishing overseas ventures, a company can offset seasonal fluctuations in sales and increase profits in general through exposure to a greater number of prospects. Further technical proficiency is often increased by expanding into markets with greater expertise in certain areas of technology.

In addition, expanding into foreign markets can minimize a company’s risk of losing market shares to customers who themselves take advantage of the global competition to source goods and services from foreign markets.

However, the decision to go international must be made with care as there are many risks and potential obstacles to consider. Cultural and language barriers are among the most obvious of these considerations. Variations in religious beliefs, societal norms and business negotiation styles all have an impact on how business needs to be conducted when dealing with foreign counterparts. Language barriers may present an obstacle when trying to communicate the benefits and advantages of a company’s products and services overseas.

Other difficulties inherent when expanding into foreign markets include economic and political risks, shifting borders and the instability of some foreign governments which can pose a threat to the security of a business overseas. Foreign exchange and the issue of intellectual property protection also need to be considered. In some of the emerging economies, legal and economic systems are not as developed as those of the United States and other developed countries.

A company that wishes to establish business overseas needs to be familiar with the host country’s culture and determine the feasibility of marketing its product or service in that environment. Market conditions must be assessed to ensure that a new company can win a share of the foreign market. Tariffs, duties and compliance with the host country’s import, health and environmental regulations are other important issues to consider as well. As companies make overseas investments, particularly in R & D, several factors dominate their location decisions including lower costs, higher quality labour, the protection of intellectual property rights, reliable educational systems and sophisticated IT infrastructures.

This Dissertation presents a detailed study on the legal environment in the Kingdom of Saudi Arabia to evaluate the risks as well as benefits of Foreign Direct Investment.


Chapter I

  • General Background about Saudi Arabia
  • Saudi Arabia and the WTO
  • Investment in Saudi Arabia
  • Increased willingness of International Companies to invest in Saudi Arabia
  • General Background about Saudi Arabia

Extending across most of the northern and central Arabian Peninsula, Saudi Arabia is a young country that is heir to a rich history. In its western highlands along the Red Sea, lies the Hejaz which is the cradle of Islam and the site of the religion’s holiest cities, Mecca and Medina. In the country’s geographic heartland is a region known as Najd (“Highland”), a vast arid zone that until recent times was a rich pastiche of warring and feuding Bedouin tribes and clans. To the east, along the Persian Gulf, are the country’s abundant oil fields which since the 1960s, have made Saudi Arabia synonymous with petroleum wealth. These three elements: religion, tribalism and untold wealth have fuelled the country’s subsequent history.

It was only with the rise of the Saudi family from Najd which the country is named after and its eventual consolidation of power in the early 20th century that Saudi Arabia began to take on the characteristics of a modern country. The success of the Saudis was due in no small part to the motivating Al Salafyah, an austere form of Islam that was embraced by early family leaders and which became the state creed. This deeply religious conservatism has been accompanied by a tribalism in which competing family groups vie for resources and status which has often made Saudi society difficult for outsiders to comprehend. Enormous oil wealth has fuelled huge and rapid investment in Saudi Arabia’s infrastructure. At present Saudi Arabia is looking to develop its basic structure of governments and judiciary by passing several laws.

In the mid-20th century, most of Saudi Arabia still embraced a traditional lifestyle that had changed little over thousands of years. Since then, the pace of life in Saudi Arabia has accelerated rapidly. The constant flow of pilgrims to Mecca and Medina (vast throngs arrive for the annual hajj, and more pilgrims visit throughout the year for the lesser pilgrimage: the Umrah) had always provided the country with outside contact, however interaction with the outside world has expanded with innovations in transportation, technology and organisation. More recently, petroleum has wrought irreversible domestic changes in educational and social as well as economic areas. Modern methods of production have been superimposed on a traditional society by the introduction of millions of foreign workers and by the employment of hundreds and thousands of Saudis in non-traditional jobs. In addition, tens of thousands of Saudi students have studied abroad, mostly in the United States as well as in the United Kingdom. Television, radio, and the Internet have become common medias of communication and education, in addition highways and airways have replaced traditional means of transportation.

Saudi Arabia, once a country of small cities and towns has become increasingly urban; traditional centres such as Jeddah, Mecca and Medina have grown into large cities and the capital Riyadh, a former oasis town, has grown into a modern metropolis. Many of the region’s traditional nomads, the Bedouins have settled in cities or agrarian communities. The sedentary population of the country view the few remaining Bedouin who maintain a traditional desert lifestyle with deep ambivalence. They are at the same time, a link to the country’s past and its solid foundation.


1.2 Saudi Arabia and the WTO

World Trade Organization (WTO) membership represents one of the key steps for a country to integrate into modern international economic relations. The basic objective of membership is the liberalisation and development of international trade in order to reach sustainable economic growth and total prosperity of signatory countries. The membership is supposed to help access to markets in other countries under more beneficial conditions, serve as an important signal to foreign investors regarding stability and predictability of the economic system, decrease risk factors for potential investors, develop the trade economy, modernise industry and reform economic legislation. The important prerequisites for WTO Membership are political support to the accession process: implementation of effective reforms of the foreign trade system and economic legislation to create a trade market and a legal system which is comparable to the systems of developed trade economies.

Saudi Arabia, the world’s largest oil exporter and among the world’s twenty largest economies acceded the World Trade Organization (WTO) on December 11, 2005 as the 149th Member after twelve years of strenuous negotiations and multilateral trade agreements. For the Kingdom, which is unique in its socio-economic-religious fabric unlike the other 148 members of the World Trade body, the accession is considered to be a significant move although the Kingdom is not new to international trade as this accounts for 70% of the country’s GDP. The signing of the agreement was preceded by anticipation of favourable and adverse developments to the Saudi Arabia’s economy and society. A year has gone by since the Kingdom joined the WTO, the issues and concerns that preceded the accession continue to exist. Furthermore, the life of common citizens has not changed much although changes on the investment and business front have been taking place albeit in a slow and steady manner. Although one cannot expect miracles in the short span of one year, it is essential to consider whether the country is progressing in the right direction to realize its intended objectives of reforms, globalisation and accession.

This dissertation reviews the objectives behind the accession, reforms undertaken and the experiences of China and India who acceded to the WTO during the last five and ten years respectively. Furthermore, this dissertation identifies that the major objective behind this accession is to explore the possibilities of Foreign Direct Investment.

It is important to remember that neither the advantages nor the challenges of WTO membership are felt immediately after accession. While some substantial changes took place during the accession process, others will take place over the coming years. The WTO membership does not guarantee success in world trade.

Instead, the WTO provides a framework for economic and other reforms which should help Saudi Arabia to become competitive in foreign markets and at the same time, provide an attractive environment for investment. Over time, new market opportunities will emerge for competitive and entrepreneurial firms to appear.

There are significant differences between Saudi Arabia and the countries that acceded to the WTO prior to it in terms of natural resources, socio-culture, agriculture, industrial and technological bases as well as the educational and skill levels of the national workforce. Currently, Saudi Arabia is largely dependent upon an expatriate workforce which to some extent may cut into cost competitiveness due to the high cost of having an expatriate workforce compared to that of China, India and other emerging Asian economies who are endowed with low cost quality workforces.

The most important factor is to raise the competitiveness of domestic products. The situation in the initial years of China’s entry into the WTO reminds us of the unevenness of advantages and disadvantages in different industries and the uncertainty of their changes. Since the impact is unavoidable what we should do is to get to know, master and use the WTO rules and regulations as soon as possible in order to grasp the advantages while avoiding the disadvantages and trying our utmost to turn the challenges into opportunities.

Despite the numerous challenges, accession of the Kingdom to the WTO is likely to have an extensive effect on the structure of the Saudi economy and its society. The private sector is poised to play a bigger role in diversifying the economy, sustaining the growth momentum initiated by reforms and large budgetary allocations, creating new jobs and integrating with the global economies.


1.3 Investment in Saudi Arabia

Although Saudi Arabia is the world’s largest oil exporter, it is not able to fully exploit its competitive advantage in petrochemicals due to the closed nature of the EU market. In fact, Saudi Arabia imports base oil from Europe in order to make lube oil. The EU has somehow managed to exclude the oil producers in the region from some of the downstream processing. WTO accession promises to change this and will make Saudi Arabia a major petrochemical manufacturer in the world.

Moreover, with accession to the WTO Saudi Arabia can maximise its competitive advantage where it has a natural advantage. The country has the cheapest feedstock in the world. Feedstocks (natural gas, natural gas liquids or naphtha out of oil) are needed to make petrochemicals. The cost to Saudi Arabia is below $2 a barrel whether it is in gas barrel equivalents or in oil. This allows Saudi Arabia to start taking over the markets. Germany is the largest producer of petrochemicals in the world today. Despite Saudi Arabia being the third-largest exporter of German products, Germany does not cooperate with Saudi Arabia in petrochemicals or any energy-based industry. By 2015 Saudi Arabia is expected to emerge as the largest producer of petrochemicals in the world.

Another important advantage is natural gas. Natural gas is sold by Saudi Aramco to the users, whether they are electricity companies, water desalination companies, SABIC or the private sector at 75 cents per million BTUs or the equivalent of $4.35 per barrel. The Germans who are competing with the Saudis, are buying at the equivalent of $62 a barrel today. Hence there is an enormous difference between the two.

Other major fields where there is much potential for investment is in the power, agriculture and transport sectors where there are enormous opportunities and challenges available to foreign investors.


1.4 Increased willingness of International Companies to invest in Saudi Arabia

With regard to investing in projects in Saudi Arabia, foreign entities are no longer required to take Saudi partners (except banking and insurance services). Foreign investment may take one of two forms: (i) a joint venture with a Saudi partner (with no minimum share requirement for the Saudi partner); or (ii) a 100-percent foreign-owned enterprise. Also, foreign investors are now permitted to own real estate in Saudi Arabia for company and housing purposes. In addition, the Kingdom has withdrawn the minimum capital requirements that were applied to agricultural, industrial and services projects. Furthermore, the Government encourages foreign direct investment in infrastructure including power, water, telecommunications and transportation.

The Foreign Direct Investment Law, revised in the year 2000, permits foreigners to invest in all sectors of the economy except for oil exploration, drilling and production. There is no prohibition on foreign investment in refining and petrochemical development. Foreign companies are also eligible for low-cost funding from the Saudi Industrial Development Fund (SIDF) for up to 50 percent of a project cost.

The new Foreign Direct Investment Law had established minimum levels of investment for agricultural projects (USD 6.67 million), industrial projects (USD 1.33 million), and service projects (USD 0.53 million).

There are no restrictions on converting and transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, and lease payments) into a freely usable currency at a legal market-clearing rate. There are no delays for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debts, lease payments, royalties and management fees through normal legal channels. Furthermore, there is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property and imported inputs.


Chapter II

  • The public law in Saudi Arabia

2.2 Islamic law and International Business Law

2.3 Judicial structure in Saudi Arabia

2.4 The effectiveness of the Saudi Arabian judiciary and application of the laws

2.1 The public law in Saudi Arabia

The dogma of Islamic legal science consists of legal opinions which are supported by one or more of the primary or subsidiary sources (masadir) or proofs (adillah) of the Shari’a. There is almost unanimous agreement among the scholars of the different schools of jurisprudence that the Quran and the Sunnah of the Prophet are the only primary sources. In view of Saudi Arabia’s accession into the WTO, it has passed its own basic law so that other WTO members who are dealing with the Kingdom may know the legal risks involved in the Kingdom.

In the Kingdom of Saudi Arabia, Islamic Shari’a is the law applicable to all judicial matters. It should be applied according to the Hanbali school of jurisprudence, however if there is no rule in this school which can be applied to the case being dealt with, or if the application of some rules of the Hanbali school are not in the interests of the public, the other three schools of jurisprudence (Hanafi, Shafei and Maliki) can be consulted. However, considerable changes in the country both economically and socially, particularly over the last few decades, as well as Saudi Arabia’s interest in welcoming FDI have resulted in Royal Decrees, Ministerial Decisions and Administrative Circulars being issued in many fields of activity such as business, banking, intellectual property rights, labour, social security and arbitration, etc. Such legislation is intended to supplement the Shari’a Law and is approved of by it because it is not contrary to Shari’a principles.

In 1993, the Basic Law was passed by Saudi Arabia. The Basic Law of Saudi Arabia is a charter divided into nine chapters, consisting of eighty-three articles. It is in accordance with Shari’a and does not override Islamic laws. Presently Basic Law is considered as a constitution of Saudi Arabia.

Despite Basic Law being promised since the era of King Feisal it was only implemented by King Fahd in 1992. The resulting Constitutional Government is fundamentally different from Western style social order. Article 1 of the Basic Law of Government states that ‘God’s Book and the Sunnah‘ are the substantive constitution of Saudi Arabia, being only amended by reforms of state organisation. The Saudi Arabian monarchy is religion bound and the new Consultative Council is subject to nomination and re-nomination by the king. In addition, the Kingdom has three different wings: the Judicial Council, the Executive Council and the Regulatory Council with the king being the head of these three councils.

  • Islamic law and International business law (Is Islamic law inconsistent with international business law?)

The Islamic law is developed from the origin of its tradition. The main sources of this law are the Quran and Shari’a Laws whereas the international law is developed by way of customs. Under Islamic law, contracts which involve speculation are not permissible and are considered void. However, Islamic law does not prohibit general commercial speculation. Rather the concern is to prohibit forms of speculation which are regarded as akin to gambling. The test is whether something has been gained by chance rather than by productive effort. Of course this distinction presents practical difficulties. The distinction between general commercial speculation in genuine commercial trading and speculation regarded as gambling is not very clear. In each case the commercial substance of the transaction must be analysed to evaluate whether or not it is permissible under Islamic law. The best way of understanding how the distinction is drawn is to look at some examples. If an Islamic financier was to provide capital by way of an equity interest in a vehicle being set up to operate a new Shari’a compliant business, such funding would be regarded as acceptable since the speculation in this case is the commercial speculation as to whether or not the new venture will succeed. On the other hand, speculation undertaken when entering into a conventional over-the-counter derivative would not be permitted, the gain being regarded as deriving from chance rather than involving the necessary productive effort.

Contracts where one party is regarded as having gained unjustly at the expense of another party are also considered void. Again it is not clear exactly what would amount to unjust enrichment and each contract is considered on a case by case basis. It should be noted that the Shari’a principle of unjust enrichment is wider in its scope than the principle as applied by the English laws of restitution as the Shari’a not only applies to an enrichment of one party at the expense of another which cannot be justified, but also to the enrichment of one party who exercises undue influence or duress over another. For example, it is not possible for a creditor to benefit financially from penalising a non-performing or defaulting debtor by charging and retaining a default fee. Although it is possible to charge a default fee and pay the proceeds of that fee to charity since it is considered that the obligation to pay this fee would serve to encourage the debtor to discharge its contractual obligations in a timely manner.

Under Islamic law, money is regarded as having no intrinsic value and also no time value and is seen merely as a means of exchange. Since as noted above, Islamic principles require that any return on funds provided by the financier be earned by way of profit derived from a commercial risk taken by the financier, the payment and receipt of interest (riba) under Islamic law is prohibited and any obligation to pay interest is considered void. Contracts which contain uncertainty (gharrar), particularly any uncertainty as to one of the fundamental terms of the contract, such as the subject matter, price or time for delivery are again considered void. Again, the Islamic principle of gharrar is wider than the English common law principle of uncertainty. Whereas case laws such as G. Scammel & Nephew Ltd v Ouston have established that an agreement may not be binding if a definite meaning cannot be given due to the vagueness or uncertainty of certain terms, the Shari’a principle is wider in two main ways. Firstly, whereas English common law will permit some vagueness provided that it can be resolved by interpretation, or by examining the intention and/or conduct of the parties, the Shari’a requires absolute certainty on all fundamental terms. Secondly the Shari’a does not permit a contract where uncertainty may arise out of the actual subject matter or substance of a contract. For example a conventional insurance arrangement is not permitted (haram) on the basis of, amongst other things, uncertainty (gharrar) on the basis that it is uncertain whether the insured event will occur or not. However a major break through in Saudi Arabia is that an Insurance law has been passed and …

  • Judicial structure in KSA

Since Saudi Arabia is an Islamic state, its judicial system is based on Islamic law (Shari’a) for both criminal and civil cases. At the top of the legal system is the King, who acts as the final court of appeal and as a source of pardon. The Saudi court system consists of three main parts, the largest being the Shari’a Courts which hear most cases in the Saudi Arabian legal system. The Shari’a courts are organised into several categories: Courts of the First Instance (Summary and General Courts), Courts of Cassation and the Supreme Judicial Council. Supplementing the Shari’a courts is the Board of Grievances which hears cases that involve the government. The third part of the Saudi court system consists of various committees within government ministries that address specific disputes, such as labour issues.

In April 2005, a royal order approved in principle, a plan to reorganise the judicial system. On October 1st 2007, a royal order approved the new system. Changes included the establishment of a Supreme Court and special commercial, labour and administrative courts. Shari’a refers to the body of Islamic law. It serves as a guideline for all legal matters in Saudi Arabia. In the Shari’a and therefore in Saudi Arabia, there is no difference between the sacred and the secular aspects of society. Muslims derive Shari’a law primarily from the Holy Qur’an and secondarily from the Sunnah, the practices and sayings of the Prophet Muhammad during his lifetime. The third source is ‘Ijma’, the consensus of opinion of Muslim scholars on the principles involved in a specific case occurring after the death of the Prophet. Analogy (Qias) is the fourth source of law. In Saudi Arabia the criminal law, like many other countries places the burden of proof on the state and the Shari’a presumes that a defendant is innocent until proven guilty. Only in serious crimes or in cases of repeat offenders is one likely to witness severe punishments.

With regard to the judicial system in Saudi Arabia, the Judiciary Act conferred Shari’a courts with general jurisdiction over all judicial matters such as criminal, civil, property and matrimonial claims, etc. The Shari’a courts do not decline jurisdiction unless other judicial bodies have been given exclusive jurisdiction. The translation of Article 26 of the Judiciary Act reads: “The Courts (Shari’a Courts) shall have a jurisdiction over all types of disputes and crimes except those excluded by Law …”. There is another judicial body which is completely independent from the Shari’a Courts, namely the Board of Grievances which was initially formed as an administrative court. Furthermore, there are a number of committees that are empowered to adjudicate certain disputes which are linked to the Board of Grievances such as the Customs Committee, the Committee for Implementing Sea Port Codes, the Committee for Implementing Copyright and Trademark Codes, the Committee for Implementing the Private Medical Establishments Codes and the Committee for dealing with claims related to Commercial Deception. There are also a number of quasi-judicial committees which are completely independent from the Shari’a Courts and the Board of Grievances, such as the Commercial Papers Committees, the Saudi Arabian Monetary Agency’s Committee for Banking Disputes and the Commissions for the Settlement of Labour Disputes.

Being of potential importance, the Shari’a judicial system was regulated in the early days of the unification of Saudi Arabia since that time, these regulations have been amended three times. The first step towards regulating the Shari’a Courts was taken in 1927 by the issuing of the Formation of the Shari’a Courts Act. This Act contained twenty-four Articles regulating Shari’a Courts, judges and other related matters. In 1938 another regulation was issued called the Concentration of the Shari’a Judicial Responsibilities Act. This Act was a significant step along the road to improving the system. It included 282 Articles giving a detailed regulation of Judges and their supervision, the Courts, their types and jurisdiction, etc. In 1952 a further regulation which maintained the same name was issued. However, this regulation did not make significant changes to the previous regulations.

Finally, the current Judiciary Act was issued in 1975. It contains several sections covering various aspects of the judicial system such as provisions securing the independence and impartiality of the courts, the types of courts and their jurisdiction, the judges, their appointment and promotions as well as the role of the Ministry of Justice.

Judges are expected to perform their judicial functions independently and impartially. The translation of Article 1 of the Judiciary Act provides that: “Judges are independent and not subject to any authority in ren

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