Foreign Investments Risks in Saudi Arabia and Middle East Countries

Foreign Direct Investment may be defined as a firm from a given country making physical investment like building factories or establishing businesses in other countries. Direct investment in equipments, buildings, and machinery contrasts with portfolio investments that are viewed as indirect investments. In current years, through the fast growth as well as change in the patterns of global investment, Foreign Direct Investment (FDI) has been made to entail the acquisition of long term administration interests in companies, organizations and enterprises that are outside the country of the investing firm (Berry, 2008).
It is capable of taking numerous forms like direct acquirement of foreign organizations, companies and firms, building of facilities, investment in joint ventures and strategic deal with local organizations with certification of intellectual properties. In the previous years, FDI has been playing a very significant role in internationalizing business. In reaction to technological changes, as well as improvements in capital markets, enormous changes have taken place in scope, size, as well as the techniques of FDI (Ocampo, 2010).
Foreign direct investment (FDI) is playing a very significant role in the global business. It is capable of providing an organization with new marketing channels as well as new markets, very cheap production facilities, application of new technology, skills products, as well as of financing. For the host country and the foreign firm which is getting the investment, it is capable of providing sources of improved technologies, processes, capital, products, as well as management skills (Pritchard, 1996).

Therefore, it is capable of providing a robust impetus both to economic growth and development. Improved systems of information technology, reduction in the cost of worldwide communication have made the administration of foreign investments very legal as compared to the recent past. The great change in investment and trade policies as well as the authoritarian environment worldwide in the last ten years, including trade tariff liberalization, trade policy, lessening of restrictions on the foreign investment as well as acquisition in numerous countries, and the privatization and deregulation of a number of industries, has possibly been a very important catalyst for the expanded role of FDI (Twomey, 2002).
There are a number of risks that are associated with foreign investments in international setting. This research is of great importance as it points outs and provides a deeper comprehension of the numerous risks that are associated with foreign investment in the international setting (Wells, 1998). Besides, this research is of great importance as it provides the recommendations that if implemented are capable of reducing the risks that are associated with foreign investment. This research is significant since it provides information that is capable of making individuals to come up with informed decisions as far as foreign investment is concerned (Wilson, 2004).
Foreign direct investment plays an important role in the world economy since it bridges the gap between the nations that are wealthy and developed as well as the relatively poor third world countries. Therefore this research is important since it provides information concerning foreign investment, something that affects global economy (Vedavalli, 1998). In addition, multinational corporations are also significant since they create employment opportunities for the host countries’ population thereby improving general living standards of the people. In the Globalized economy, FDI helps encourage specialization and comparative advantage principle which in turn improves global productivity and spur economic growth and development (Ṣabrī, 2008).
Some of the countries that have been able to attract this concept of FDI are the Saudi Arabia and the Middle East because of their natural resources like oil and gas. With the resources in place, these countries have been regarded to poses high level of instability which is normally associated with investment risk as compared to the developed countries. This has become a challenge to them in discouraging FDI into the region. Risk assessment therefore is very useful to investors (Chan, & Gemayel, 2004). Apart from the natural resources, these countries have also put their focus in creating a world class environment that makes the running of business easier and cost effective.

This has been enabled further by several underlying factors such as the availability of low price facilities and services, low cost governmental financing opportunities, the leading in export and import size in the Arab world, within the first seven countries of least inflation rated in the world, the seventy countries in total local savings, within the first best aid countries in exchange rate policies, biggest financial marketing in Middle East, within the best three countries in the world in terms of proprietorship registration cost. 1- Availability of cheap energy, 2- Non-existence of work price. 3- Advanced banks in terms of technology. 4- Easiest labor recruitment and work hours flexibility. 5- Nonexistence of multiple taxation amounting 20%, and it is comprised of a wide market that has more than 22 million people and more others who get accesses to the market worldwide (Alqadah, 2010).
According to Iqbal (2001), there are several policies or strategies which investors who are willing in a foreign region can undertake in order to reduce risks associated in investing in those areas. It is further proposed that a macroeconomic environment is directly related to the level of a countries productivity which has been a challenge in Middle East and North African (MENA) countries as they have been unable to maintain it.
Nevertheless, it has been observed that the FDI inflow is more likely to undergo through some challenges with matters concerning instability which is associated with investment risk. Despite the many empirical studies that have been conducted, examining the trend of FDI inflow in MENA, none has studied and come out with the degree of instability associated with it (Pritchard, 1996).
However, it is believed that some Saudi Arabian and Middle East parts are well integrated with lots of foreign investments while some other parts are yet to accomplish the foreign investment bit of it. With such kind of differences especially when looking at the economy, different leadership, religion composition then one is able to conclude that investment risk can take advantage of this (Moran, 1998).
Some of the factors that are likely to cause this instability in the Saudi Arabia and the Middle East are the international terrorism.

These terrorism activities are normally known to take place both internally and internationally thus causing some physical infliction to people and undermining the social cohesion. Nevertheless, all these attacks are done through being the direct victims of the attacks or their places being used as the centre of terrorism activities. This terrorism has scared away the terrorism investors to invest in those affected areas thus creating some financial risk in those regions (Cordesman, 2004).
The oil prices and the interruptions of the energy might affect the investment in the region. For instance, a terrorism attack if happens to occur in those region, then it means the economic foundations that had already been laid before will be destabilized. Another thing that is likely to cause this instability is the management of the oil prices which are known to be low. This is because of the challenge of the reappearance of the non-OPEC supply thus leaving the foreign investors questioning whether the oil producers in the near future will be able to achieve the price targets that had been set before (James, W. E. 2000). Furthermore with the hydrocarbon resources in place in both Saudi Arabia and Middle East, the demand of oil is likely to fall thus scaring the foreign investors to invest in the oil which its days are numbered. However, one thing to note is that, whether the prices are supposed to be high or not, the first priority which needs to be put in place in a progressing country is the foreign investments (Cordesman, 2004).
However, sociopolitical instability has also affected the Saudi Arabia and the Middle East. This sociopolitical instability is such as riots, demonstrations or even protests which are normally witnessed every now and then. This has made the tourism sector to be affected greatly thus instead of visiting those countries, they have decided to divert their holidays to other countries where security or safety can be provided for them. With this in mind, the message here is that, not only the tourists with this kind of factor are affected but also the foreign investors have become victims of the same (Khalid, 2011).
In the banking sector, insurance and services industries are known to lack completion across Saudi Arabia and Middle East. This has brought about the risk of retrenchment against globalization thus provoking the government into continuing with their protective measures for those industries involved in retrenchment exercise against the foreign completion. This will reduce the exposure to the foreign market competition hence at the end of the day, reducing productivity (Gurría, 2009).
The religion has also contributed to foreign investments run away in most muslim countries like the Saudi Arabia and Middle East whereby, some of the muslims have refused to deal with the western style banks hence caring less of the interests or benefits they are likely to get. There most reliance is on the acceptable goods related to their religion, dividends from shareholding in those companies that manufacture the accepted products and rent from fixed-rate transactions. When it comes to the interest-based banks, some scholars have differed in the interest-based banks whereby they have distinguished them as interest (Faidah in Arabic) and usury (Riba in Arabic). The two distinctions of interest and usury tend to differ because the interests are normally acceptable by the majority. Reasons for the acceptance are because it is considered to be moderate and convenient to those aspiring to borrow in rate conditions while usury is prohibited because of the excessive rates and they tend to take it as exploitation means to the human nature (Elhadj, 2006). This has really scared the foreign investors in investing in such countries where such policies do exist.
In the recent past, the issue of Dubai World department standstill has been an issue of concern to many and many questions have been raised regarding the political risk that the potential investors would be putting themselves into in an attempt to invest in that wealthy Arab nation (Barnard, 2009). The threat that is highly related with this kind of a situation is that, many investors approach the governments of such countries for investment deals which stands greater chances of suffering from breach of contracts in situations like that was observed in Dubai (Barnard, 2009). Experts advice that, investors should have a clear understanding of the region they are intending to trade on before getting into any kind of deals with the host government or other individuals in the host nations. Risk assessment therefore comes in hand to help the investors get a clear understanding of the risk they are about to under take and be in a position to protect and manage these risks effectively (Barnard, 2009).
When comparing Saudi Arabia and Iraq, in terms of investment risks, considerable changes were observed between the two nations more so in terms of all risk rating indexes but not in the economic risk rating index (Girad, & Omran, 2005). Saudi Arabia is known for its rich oil reserves and for the fact that it has been ruled as a monarchy for more than eight decades. The study also found out that, economic risk rating index increased as time passed by in most of the samples that were analyzed (Girad, & Omran, 2005). In 2000, the increase in the economic risk was attributed to high oil prices but it fell later in the year that followed as a result of a fall in the price of oil (Girad, & Omran, 2005). The gulf war has also been cited as one of the contributing factor in increasing the risks of investing in the Middle East. In the early 1991, this crisis was sited as the major factor that contributed to the structural changes in financial, political and composite risk rating indexes. These occurrences have been backed up by some evidences that propose that Saudi Arabia became a safer country after the events of the Gulf crisis as far as financial, political and composite risks are concerned (Hoti, & McAleer, 2002).
In the recent past, the Arab world has been faced by a lot of wars which have been termed as the Arab Revolution which has been marked with war (Greene, 2011). This event has had far reaching effects not only on the affected countries but also on the entire world in general. The Arab nations being the leading producers and marketers of oil, have a high influence on the world market in times of crisis. The crisis also caused a lot of negative effects to investors within those affected countries where by business premises were destroyed and foreigners within those countries chased out of the cities and towns (Greene, 2011). As a fact, in Egypt the equity market was reported to have suffered a two day 16% decline in the first week of the political turmoil. Currently, many foreign investors are just confused about the future of the Arab nations due to this political crisis (Greene, 2011). Foreign investors in Saudi Arabia who have ventured into the oil market have been said to be in a state of uncertainty is the fact that, the Saudis’ have never been transparent on the issue regarding their oil reserves and have a long time maintained that they have the potential to cater for any shortfalls that may arise as a result of a short fall from any of the other Arab nations. Observers have however come out clearly over this issue and have pointed out that, Saudi Arabia’s oil reserves may be in a threat of declining a claim that puts oil investors in a threat (Greene, 2011).
When planning to invest in a foreign region the investor is required to evaluate the market in order to be aware of the risk he is planning to undertake (Barnard, 2009). Many ways have been laid down to evaluate these risks in order to come up with an appropriate pricing method. One proposal that has been made is based on a world Capital Asset Pricing Model (CAMP) and it has pointed out that the returns that an investment gets back are highly influenced by how much the investment contributes to the market regardless of its volatility. Havey (1991) has been able to prove that this idea is applicable in a well established market provided that the underlying risk is allowed to change over time. The main draw back that comes along with this idea is that, by the mere fact that it requires a well established market, in situations of a developing market, the idea is not applicable and it can not be depended upon by persons who are willing to invest in the foreign country (Havey, 1991). It has previously been reported that, emerging markets are very volatile and therefore posses a great risk to individuals who are willing to invest in those kind of markets (Erb, et al, 1995).
In regard to how investors are focusing on how to be rewarded in times of a change in risk in the world market, it has been shown that this aspect is clearly demonstrated by the time varying world beta (Beakaert, & Harvey, 1995). Despite this observation, further observations have been made regarding less integrated markets and it has been observed that this kind of market is at a high risk of suffering from local market inefficiencies as a result of barriers to portfolio investments beyond the borders, differences in the transaction costs, inside trading, differences in the ways laws are enforced, matters related with the currency (Girad, & Omran, 2005). It has come to the realization of the experts that, the extent of integration with the world financial market is the key element in determining what risks explain risk premiums in capital markets (Erb, et al, 1995). A proposal that has been made therefore calls for an asset pricing model that is a multifactor framework and that captures both local and common risk attributes. A more elaborated method of analyzing risk has been suggested by Erb et al (1995) where by it was proposed that it was of great importance to include the concept of the sovereign credit risk in the country risk rating model.
The study goes a step further to explain the concept of return generating process by relating it to potential risks such as political risks, economic risk, financial risk and how the country is rated internationally in the Country Risk Guide (Erb, et al, 1995). It has therefore been concluded by a majority that, a “multifactor” CAMP method of assessing risk associated with investing is capable of incorporating several risk premiums together which will facilitate the calculation of the rewards that are expected in exchange of bearing the risks attached to a security (Girad, & Omran, 2005, Erb, et al, 1995). Political risk, economic risk, financial risk are some of the factors that have been described as potential factors which can be used to explain individual stock risk premiums at country index and stock levels.
In study conducted by Girad, & Omran, (2005) aiming at identifying the risks that are involved when investing in five emerging Arab capital markets, it emerged from the study that, a constant beta is not a recommendable proxy for risk in this emerging Arab markets but a multifactor CAMP was found to be very effective in estimating the returns that the investors would be expecting in exchange for the risk they have put on securities in the countries where they are investing (Girad, & Omran, 2005). The study further demonstrated that, pricing models were much better than CAMP since they included both the firm’s fundamentals and the country risk rating factors unlike the CAMP, which only included the firms’ fundamentals (Girad, & Omran, 2005).
The study further provided a clear understanding of three areas as far as asset pricing is concerned in relation to emerging markets in the Arab nations (Girad, & Omran, 2005). One of the contributions that was made is that, there is a possibility of finding large stocks to being more riskier than small stocks, despite the fact that majority of Arab nations have started to concentrate on a process of privatization and stock liberalization with an aim of making their markets better and have an improvement in their area of governance, there are still some underlying factors that are still a threat to foreign investments in those countries which include lack of financial transparency and political instability and the third issue relates to how country risk ratings can be brought together to form a country risk factor using a factor analysis (Girad, & Omran, 2005).
The study further suggests that, political risks are most likely to thrive in the Arab stock for quite a long period of time a factor that has been pointed out as key element that strongly affects the local market development and in the estimation of risk associated with investing in those countries (Girad, & Omran, 2005). In conclusion, it was pointed out that, in order to attract more foreign investors in the Arab countries, it is necessary for them to improve on their political stability through restructuring their institutions and legal frameworks to improve on transparency, eradicate corruption, improve on their ways of enforcing law and order and improve on their effort in marketing their potential in order to attract investors (Girad, & Omran, 2005).

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