FDI Inflow in the Economy of Saudi Arabia and Turkey - Case Study Example

With Particular Reference to Two Different MENA Countries, Compare and Contrast FDI into Their Economies and Discuss the Reasons for Any Similaritiesor Differences Table of Contents Introduction 3 FDI Inflow in the Economy of Saudi Arabia 4 FDI Inflow in the Economy of Turkey 6 Comparison and Contrast of FDI into the Economies of Two MENA Countries 7 Conclusion 13 References 15 Introduction The term “MENA” represents Middle East and North Africa regions of world territory. In order to compare and contrast the nature of Foreign Direct Investment (FDI) and its flow with particular reference to two distinct MENA countries, it can be ascertained that the economic aspect has appeared very low in different MENA countries. To attract FDI in MENA countries, special provisions have been taken by the respective investment agencies. Contextually, MENA regions are duly considered to be the home of oil-producing countries in the world, however, these countries never turned as profitable from investment viewpoint. Specially mentioning, owing to the factors of increased level of globalisation and gaining momentum of internationalisation, the entire scenario of FDI in diverse MENA nations has changed extensively. The MENA regions do not secure a significant share of FDI due to improper political environment. The FDI flow with regards to MENA countries has been steadily terrible than other world regions owing to the persistence of changing regulatory policies and most vitally turmoil financial conditions. In this present day context, the above stated scenario has been changing in the form of making the developed as well as developing countries to slowly invest in MENA countries to improve FDI level (World News Media, 2014). With this concern, the essay intends to conduct a comparative analysis between two different MENA nations including Saudi Arabia and Turkey about FDI into their economies. Moreover, the reasons for having any similarity or difference in relation to the aforesaid financial concern with respect to the two selected MENA nations will also be discussed in the essay. FDI Inflow in the Economy of Saudi Arabia Saudi Arabia is recognised to be one of the well recognised MENA regions throughout the globe. Saudi Arabia is an oil-rich economy, which retains 85% share of total revenue, contributing in the developmental process of the economy of the nation at large. It is worth mentioning that in the 20th century, Saudi Arabia has revised its Foreign Investment policy in the form of incorporating corporate as well as trade-related laws to improve its economic growth. As per the study conducted by World News Media (20140, it can be ascertained that Saudi Arabia is amongst the top most attractive countries for FDI inflows in world economy. From the year 1980 to 2010, Saudi Arabia FDI inflow is lodged as the highest. The below chart depicts last 10 year FDI inflows of varied nations including Saudi Arabia. Source: (Sagia, 2014) Specially mentioning, due to high demand of petroleum products, the FDI flow in the economy of Saudi Arabia has steadily increased. This positive improvement eventually made Saudi Arabia as an attractive destination for investment (Saudi Arabia, 2013). As per the world Investment Report 2011, Saudi Arabia is ascertained as the 12th biggest FDI inflow destination amongst the MENA regions. This can be better understood with the help of the following graphical representation: Source: (Sagia, 2014) Moreover, in relation to the above context, high priced petroleum products have boosted government revenue, economic growth and foreign investments in Saudi Arabia by a considerable extent. It can be apparently observed that the government of Saudi Arabia has invested huge figure of capital specifically on technology, power-generation and telecommunication, which certainly improved import as well as export rates in Saudi Arabia, making a wider rise in FDI inflow in the nation (Kayam & et. al., 2009). In addition, as a member of Golf Cooperation council and Arab League, Saudi Arabia has enjoyed free trade of local goods. Moreover, the nation has provided additional loans or incentives to foreign investors to setup manufacturing facilities in its certain regions, which also acted as one of the contributory factors in raising FDI of the nation (World News Media, 2014). In the year 2005, the membership of Saudi Arabia in the World Trade Organisation (WTO) has certainly strengthened foreign investment growth of the nation. Oil product or non-oil products have increased foreign involvement in Saudi Arabia economy. In the current scenario, global economy has been going through a crisis. Notably, in the year 2012, FDI inflows have decreased in developed, developing and transition economies. Currently, Saudi Arabia experiences nearly about 40% foreign investments flowing into the Arab regions. Besides in the segment of oil production, Saudi Arabia also invested in varied business sectors such as telecommunication, non-petroleum products and technology among others. These activities certainly generated highest revenue for Saudi Arabia, which resulted in making broader FDI inflow within the nation (Cetingulec, 2014). FDI Inflow in the Economy of Turkey On the other hand, Turkey is another one of the MENA countries, which has been playing a prominent role in developing the world economy. In recent times, Turkey’s FDI inflow has surprised economic experts by generating maximum FDI inflows through making huge development in its construction industry. The below graphical illustration projects the fluctuating trend of FDI within Turkey: Source: (World News Media, 2014) Turkey is known as world’s fastest-growing economics in recent decade. Due to economic pitfall, Turkey has been undergoing through financial crisis. It can be apparently observed in this regard that Turkey slowly recovered from its financial position from the devastating economic crisis. The foreign investments in the nation have been improved periodically due to its geographical location. Turkey is surrounded with several trading partners such as Germany, Iraq, Egypt and United Arab Emirates. Sustainable growth, economic stability and intellectual property rights have generated a positive look for Turkey in terms of FDI inflow. The foreign investors are free to invest in any business field within Turkey that entailed financial services, environment technologies, tourism, machinery, energy and infrastructure. This eventually attracted the global investors to make substantial investments in the above stated business fields, which eventually contributed in raising FDI inflow within the economy of Turkey at large (Cetingulec, 2014). The below graphical representation displays Turkey’s foreign direct investment inflow in the current year i.e. 2014: Source: (The Economist, 2014) Comparison and Contrast of FDI into the Economies of Two MENA Countries From the above discussion, it has been quite apparent that Saudi Arabia and Turkey have shown extensive improvements in raising FDI inflow in their respective economies. Notably, Saudi Arabia has generated most of its funds from petroleum and non-petroleum products. On the other hand, Turkey obtained extensive level of funds from varied businesses. Specially mentioning, the flow of foreign investments is higher in Turkey than Saudi Arabia. In recent times, to improve foreign investments, Saudi Arabia redesigned its entire economic structure. Thus, for reducing unemployment, the nation invested much capital in non-petroleum products. On the contrary, Turkey’s unemployment rate is lower than Saudi Arabia. With the incorporation of varied businesses or industries, Turkey’s employment rate is identified to be higher than Saudi Arabia (Cetingulec, 2014). The below diagram depicts the unemployment rate of Saudi Arabia and Turkey. Source: (The Economist, 2014) It is worth mentioning that Saudi Arabia invested extensive amount of money in varied industries or business such as telecommunication, technology and non-petroleum products for raising foreign investments or FDI inflow. In terms of similarities, it can be inferred that substantial investments in multiple industries also support Turkey in developing FDI inflow. As a major oil producer in the world, Saudi Arabia earns highest revenue and thus, it possesses higher GDP per capita. Similarly, Turkey also holds highest GDP rate in terms of obtaining major proportion of earnings from import as well as export of products (Allam, 2014). The below graphical illustration depicts the GDP difference between Saudi Arabia and Turkey: Source: (The Economist, 2014) In relation to the above context, it can be affirmed that the changing economic growth also imposes adverse impact on foreign investments and likewise on FDI inflow. Due to inflation, most of the country’s economy remained in a stagnant position. Turkey is one of such nations, whose economic growth has been fallen due to inflation. On the other hand, Saudi Arabia’s economic conditions has been apparently noted to get least effected from recession and inflation due to its strong business or industrial position in the modern economy. Evidently, Turkey’s inflation rate is quite higher than Saudi Arabia, which affects FDI inflow of the nation at large inflation rate (Allam, 2014). The below graphical representation depicts the inflation rate of Saudi Arabia and Turkey. Source: (The Economist, 2014) For ensuring greater success in global scenario, demographic factors always played a vital part. For instance, in relation to one of the demographic factors such as population, Turkey stands higher than Saudi Arabia. In Turkey, most of the populaces are identified to the aged ones, whereas, Saudi Arabia’s population is mostly noted to be the younger people, which eventually contributes in raising its economic growth as compared to other MENA nations like Turkey. Due to the persistence of political and social violence, Saudi Arabia’s population is lower than Turkey. It can be apparently observed in this similar concern that the population density of Saudi Arabia is 12 per sq. km. and 102 per sq. km. for Turkey. In terms of labour force, Turkey is higher than Saudi Arabia (Banco Santander, S.A., 2013). These can be duly considered as certain imperative factors that contributed in attracting foreign investments and also developing FDI inflows. Economically, Turkey is strong as compared to Saudi Arabia. Previously, the trades conducted in Saudi Arabia trade were hampered due to restricted trade policies. For this particular reason, Saudi Arabia’s economic growth and FDI inflow remained much stagnant for a limited time. However, after becoming a member of WTO, the businesses conducted in Saudi Arabia business developed immensely due to the prevalence of unrestricted trade policies. In the previous five years, Saudi Arabia gained $141 billion from foreign direct investments. As per the recent data, Saudi Arabia attained SR2.688 trillion from the sale of foreign assets. Due to economic turmoil, Turkey’s FDI inflows have been dropped by 23% in recent years. Apart from service sector, manufacturing segment has always been a leading industry for Turkey, which supported the economy of the nation to develop its FDI inflow immensely. In contrast, from the manufacturing industry, Turkey accounted only 27% FDI inflows (The Economist, 2014). In emerging business markets, Turkish economy is driven by the economic conditions of developed as well as developing countries. In present scenario, Turkey’s economy experienced downfall in FDI inflows. On the other hand, Saudi Arabia’s FDI inflows have reached higher level in last 2-3 years. This might be owing to the reason that most of the new investors belonging to developed as well as developing countries invested in Saudi Arabia because of its surprise steady financial growth. In earlier years, due to political and social disturbances, Saudi Arabia remained far behind in attracting the potential investors. However, in contrast, it can be found that Turkey has attained most foreign investments in previous years because of minimum prevalence of the above stated disturbances. It is worth mentioning that the factors including controlled inflation and stable exchange rates, openness to foreign capital and privatisation programs have certainly generated new advantages for the foreign investors. In this regard, Turkey’s rapid growth has stopped due to economic vulnerable situation. In the year 2008, during the happening of worldwide financial crisis, FDI inflows within Turkey dropped to $19.7 million. Prior to the year 2008, the rate of the same can be ascertained as $20.1 billion. During the preceding three years, Turkey’s FDI remained much fluctuated. This can be justified with reference to the fact that it amounted to $13.2 billion in the year 2012 and $12.7 billion in 2013(The Economist, 2014; Saudi FDI, n.d; Al Arabiya, 2013). The economic conditions of Saudi Arabia and Turkey remained quite different from one another. It is worth mentioning in this regard that Turkey’s economic condition is more matured than Saudi Arabia. On the other hand, Turkey’s labour force is also identified to be quite high as compared to Saudi Arabia. To improve the growth process of any country, workforce is regarded as one of the ultimate sources. Every country needs labour force and capital to sustain in this developing world. In this regard, Saudi Arabia possesses both the aforesaid two factors that eventually made the economy of the nation to attract foreign investments and most vitally raise FDI inflow. In case of Turkey, the situation seems to be quite different in the form of minimising its economic growth due to varied factors. Due to less investments and unstable workforce, Turkey has been undergoing through trouble situations (World News Media, 2014). As per the report published in The Economist (2014), Saudi Arabia has the probable chance of attracting foreign investments and raise FDI inflows than Turkey in this present business scenario. High foreign investment and improved technological support has been making Saudi Arabia stronger than Turkey in relation to the above context. Due to inflation in Turkey, most of the foreign investors do not desire to invest capital in the businesses of the nation. This kind of risk generally hampered Turkey’s economic growth (The Economist, 2014). To recover from varied risk situations, Turkey has been slowly going for making other investments. As per the report of World News Media (2014), Turkey’s economic growth has been going upwards day-by-day. On the other hand, Saudi Arabia remained less affected from economic imbalance situations. For this particular reason, Saudi Arabia’s economy has been least affected from the aforesaid risk factors (World News Media, 2014). While determining the level of FDI inflows in the economies of the two MENA nations, it can be affirmed that Saudi Arabia remained least affected from varied economic pitfall situations that have been elaborately discussed above. Besides the economic conditions, the FDI inflows of Saudi Arabia also got affected from varied political and social problems. These problems eventually hampered the normal lifestyle of the people belonging to Saudi Arabia. From economic perspective, Saudi Arabia is in a stable situation, but on the other side, most of the parts of Saudi Arabia have been badly affected by political and social problems. In contrast, Turkey’s political and social life is identified to be more peaceful than Saudi Arabia. The lifestyle of people of Turkey is more stable and normal than Saudi Arabia. It is worth mentioning that the cultural factors entailing lifestyle and culture always create a positive impact among investors’ minds. In earlier years, most of the foreign investors avoid Saudi Arabia region for making extensive investments due to the persistence of violent situations. Turkey is noted to be creating a positive impact among foreign investors through its multiple business and quality lifestyle. For this particular reason, investors from different countries have been investing in diverse industrial sectors in Turkey. Due to this positive impact, the FDI inflows in Turkey are expected to raise in future as compared to others MENA regions throughout the globe (World News Media, 2014). Conclusion From the above analysis and discussion, it can be comprehended that the two MENA nations Saudi Arabia and Turkey have been able to attract foreign investments and raise FDI inflows in their respective economies. It has been apparently observed that both the aforesaid countries possess certain similarities along with differences in terms of having the potential to fulfil the aforesaid objective. Besides, FDI inflow rates have been lodged highest in the economies of the above stated two nations. It is worth mentioning that the different MENA countries have been steadily gained from massive FDI inflows, which certainly aided in enhancing the economies of these nations at large as compared to others. Specially mentioning, Turkey has improved its financial growth by attracting the foreign investors to make extensive level of investments. It can be apparently observed that varied political along with social problems have always hampered the growth of Saudi Arabia by a considerable extent. The government of Saudi Arabia has adopted certain effective measures in balancing its political and social situations for making more improvements in future. By taking into concern various improvement factors, it can be inferred that Saudi Arabia possesses biggest scope to attain massive improvements from the perspectives of economic, political as well as socially. It is quite important to note that for sustaining in this global economy and obtaining effective recovery in crisis, it is suggested that Turkey needs to be more stable in taking any significant measure. Notably, Turkey’s economy is more matured than Saudi Arabia. In order to mark in global economy, the government of Saudi Arabia requires using effective strategies to sustain and remain top in the context of FDI inflows. In conclusion, it can be affirmed that both the countries impose greater impact on the global economy with its present foreign direct investment rate. References Al Arabiya, 2013. Saudi Remains Most Attractive Site For Foreign Investment In Arab World. Buisness Economy, [Online] Available at http://english.alarabiya.net/en/business/economy/2014/11/20/U-S-announces-50-mln-to-support-Moroccan-young-entrepreneurs.html [Accessed November 21, 2014]. Allam, A., 2014. Saudi Red Tape Frustrates Foreign Investment. Investing In the Arab world. [Online] available at http://www.ft.com/cms/s/0/3c6413ce-a381-11e3-aa85-00144feab7de.html#axzz3Ji2zTavX [Accessed November 21, 2014]. Banco Santander, S.A., 2013. Saudi Arabia: Foreign Investment. Santander Trade. 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