Paper Example on Foreign Investment Laws of the Kingdom of Saudi Arabia

7 pages
1744 words
Wesleyan University
Type of paper: 
Research paper
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Globalization which is an emerging trend has resulted in close relationships between economies. There is an advertent move by world states to initiate economic and political reforms that liberalize and enable the integration of their domestic economies with the wider international markets. These approach to economic development result in strengthening of local markets as well as achievement of rapid economic development. The Kingdom of Saudi Arabia (KSA) is one of the world states that has proved to be less responsive to the need for liberalization of local economies for foreign investors through properly enforceable formal legislations or laws. The Saudi capital market is far from being a word class market due to the weak reforms and daunting regulations driving away foreign investments

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The Kingdom of Saudi Arabia lacks legislations that control currency exchange. The absence of such controls contributes to a system in which external payments are easily made without excessive taxations or subsidies made on the sale or buying of foreign currency. The lack of currency exchange regulations makes KSA both attractive and unpredictable for foreign investments (Aarts, 2005). For instance, unregulated infiltration of foreign currency may result in the devaluation of the investors primary currency thus instability. On the positive side, investors can freely increase their capital investment from home countries without undue interferences by restrictive money exchange controls. Despite the fact that KSA currency ought to be officially pegged on the International Monetary Funds Special Drawing Rights, its financial agency opted to moderate it against the US Dollar since 1981 (Carrada-Bravo, 2002). KSA is an anarchy characterized by the absence of a written constitution. Nonetheless, the 1992 Royal Decree adopted the Basic Law of KSA which specifies the obligations and processes within the country. Notably, the law is insufficient to regulate the complicated economic space of the state adequately.

The entire systems of KSA are based on the Islamic Sharia law which comes from the Quran and the Sunnah. The medieval texts of the Islamic jurisprudence influence the judges interpretation of the Sharia law (Carrada-Bravo, 2002). One unique thing within Saudi Arabia is the fact that the Sharia law has been adopted in an uncodified form which when intersecting with the absence of legal precedent contribute to uncertainty in the scope and composition of the countrys laws. There was a proposal by the government in 2010 to codify the Shari but is yet to be enforced (Cordesman, 2003). Correctly, regulations gave by royal decree to regulate emerging issues such as intellectual property and business law supplement the Sharia. Nonetheless, the Islamic Sharia remains the first law on commercial and corporate issues.

The Companies Law which is a product of the 1965 royal decree and amended in 1967, 1982 and 1985 regulates the formation of business entities in the Kingdom of Saudi Arabia. Under the Foreign Investment Regulations of the Companies Law, foreign investors have the obligation of obtaining Investment License from the Saudi Arabian General Investment Authority (SAGIA) (Cordesman, 2003). Some forms of foreign investment require pre-approval by the ministry concerned before the issuance of a license from SAGIA.

The structures through which foreign investors can operate in Saudi Arabia are restricted to commercial agencies, limited liability corporations, joint stock ventures, foreign office branch, and representative offices. The most common market structures in KSA is the limited liability companies (LLC) and international office subsidiary (Oxford, 2014). The lack of regular presence in Saudi Arabia limits the ability of foreign ventures to do business within the country. The overseas investment are imposed to appoint local agents or distributors to avoid the violation of Anti-Fronting Law.

Objectives and Structure of the Paper

The aim of this essay is to discuss and critically analyze the foreign investment laws of the Kingdom of Saudi Arabia. It recognizes the fact that foreign investment is a complicated process since its invention as a form of the venture (Oxford, 2014). The western developed countries were the first to introduce foreign investment in Saudi Arabia, especially within the oil industry (Oxford Business Group, 2007). This introduction resulted in concession agreements, attempts by the government to indigenize it and subsequent shift of power and control over the countrys natural resources led to a change in the perception of foreign investment in Saudi Arabia and the Arab world. Based on the primary aim to assess and analyze the legal security of foreign investments in Saudi Arabia, this essay has various sections.

The first section provides brief information about KSA and trends in foreign companys investments in KSA. The second part explores the legislations that govern trade and other activities within Saudi Arabia (Oxford Business Group, 2007). In addition, this section considers the extent of consistency between the sharia law and international trade laws. The third section examines the history of foreign direct investments in KSA. The following part considers the most important aspects of the progressive reforms and new foreign investment laws in the Kingdom of Saudi Arabia. It focuses particularly on the provisions of the KSA Foreign Investment Act, its content and relationship with proximate laws (Carrada-Bravo, 2002). Additionally, it considers the adverse aspects of foreign investment.

The fourth section of the essay examines the mechanisms set to resolve disputes arising from foreign investments in KSA. It mainly looks at the use of litigation and arbitration with a proximate focus on KSA's attitude towards arbitration as a mechanism for trade dispute resolution (Carrada-Bravo, 2002). The next part is made up of an in-depth discussion and critical analysis of foreign investment in Saudi Arabia. The last part of the essay summarizes the findings and concludes with a restatement of the main themes and various accompanying recommendations.

Brief Information about KSA and Trends in Foreign Investments

The Saudi Arabian market is relatively stable and attractive to foreign investors as long as they can overcome the first limitations imposed on such ventures. Despite the prevalent political instability in the Middle East, The Saudi economy continues to experience a significant expansion rate (Carrada-Bravo, 2002). In the year 2014, the Saudi GDP growth rate stood at 3.8% which is a healthy pace. The rate of inflation was also within reasonable limits of 2.7% at the end of 2014. The fact that the Saudi government is also committed to ensuring the maintenance of high spending and investment in areas such as healthcare, education, transportation and infrastructure makes it easier for foreign businesses to venture into the market and supplement government initiatives therein.

The stable political and economic environment experienced in the KSA is a critical determinant of the Saudi Arabian governments (SAG) efforts to liberalize the countrys trade and investment practices, diversify its economy from one predominantly based oil as the chief income earner, and increase the employment rates for the young population (Champion, 2003). The Saudi administration encourages investments in virtually all the sectors of its economy with priorities in industry, health, information and communication technology, energy, transportation and life sciences. It is in the process of developing four industrial cities within which the investments would be concentrated.

The Saudi Arabian General Investment Authority (SAGIA) is mandated to provide foreign investors with critical information and assistance to enhance their efficient operations within the international market (Saudi Arabia & Oxford Business Group, 2008). The government agency also maintains and periodically review the scope of activities that the foreign investors can engage in within the Saudi Arabian economy. There is financial incentives and support that investors obtain from the Saudi government through the Saudi Industrial Development Fund (SIDF) (Champion, 2003). SIDF is an autonomous agency within the KSA Ministry of Commerce and Industry (Saudi Arabia & Oxford Business Group, 2008). In addition, the countrys foreign direct investment law allows foreign investors to participate in all ventures except the ones that are listed in the negative list. Among the investments that foreigners are prohibited from engaging in include audio-visual services, exploration, drilling, and production of oil and investments in real estates at Mecca and Medina among others.

Despite the lucrative nature of the Saudi market for foreign investments, there are myriads of limitations imposed on such activities (Sheikh, 2003). For instance, the investors are prohibited from purchasing their commodities from local sources or exporting a certain amount of output. These restrictions are leveraged by the fact that the access of foreigners to foreign exchange is unlimited. In essence, no requirements are made for shares of foreign equity to be reduced within a given period in the Saudi economy. In addition, the investors are not required to declare propriety information to the SAG as a regulatory approval requirement except in cases of health and safety concerns (Champion, 2003). The government does not limit the geographical location of investments or commit a given percentage of local markets to Saudi citizen apart from hiring for them quotas. As an incentive to develop the less developed areas such as Jizan, Hail, and Tabuk the SIDF offers special loan terms to foreign firms that establish within such regions. Saudi Arabia provides a generally attractive investment opportunities of foreigners except for the nature of its legal structures that poses a threat to sustainable ventures in an era where business regulation is an important practice.

Laws and Regulations of Foreign Direct Investment in KSA

The Companies Laws (CL) derived from the sharia law and the royal decree is the primary legislation that governs the operation of companies in Saudi Arabia. The forms of business activities that foreigners can engage in under the KAS Company laws include joint stock companies, general and limited partnerships (Sheikh, 2003). The Sharia law specifies that foreign investors can only establish partnerships and joint stock companies in exceptional cases. The foreign investment law provides that the minimum capital for Limited liability companies should be at SR 500,000 (Sheikh, 2003). Nonetheless, investments in industrial projects attract a capital need of SR 1,000,000 under the foreign investment law and SR 25,000,000 for agricultural projects.

The SAGIA board of directors have the mandate to review the minimum capital investment requirements for foreign investment projects as they deem appropriate. The laws require that the investor fully pays the share capital when the venture is established (Sheikh, 2003). The investor is also obliged to pay cash contributions to the Saudi authorities into a Saudi local bank. This account is frozen after the bank verifies that the investor has followed the due formalities. The foreign investment companies in Saudi Arabia that wish to set up one hundred percent limited liability Company must establish a minority stake in the venture (Sheikh, 2003). A dependent company or an individual of the companys choice is supposed to hold the minority stake.

The current Saudi foreign investment law does not impose foreign investors to take many local...

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