Foreign Investments Risks In Saudi Arabia And Other Arab Countries A Research Proposal:

Introduction
In the colonial era, foreign investors from imperial States enjoyed total protection. As a result, there was not much talk and worry about risks associated with foreign investments. Protection was also provided through diplomatic channels in cases where in the investment was to be directed into countries not directly under domination of the investor nation. Reinforcement could be given by collective pressure mounted by home governments of the investors. However, the advent of economic nationalism soon after the colonial era served to eliminate military based protection which consequently opened the door to higher foreign investment risk in contemporary society (Sornarajah, 1994).
The exercise of national sovereignty which followed from independence meant that countries became firmly in charge of the way their natural resources were utilized. This was a practice whose jurisdiction was expanded to cover both development and property expropriation risk within the international law confines. The immediate implication of sovereign exercise of unlimited control over resources was that a country would be within the law to alter some of the policies and law provisions as it deems fit as long as they are intended to maximize resource utilization. This would have the effect to provide leeway for the host country to effect strategic adjustments to vital political and fiscal policies hence increase chances for foreign investment risks. This research intends to find out what the risks to foreign investment today are in the international setting; with the aim of finding ways of reducing or avoiding the risks. The research will try to highlight some strategies that may help to encourage foreign investment amid the various risks involved.

II-Statement of the problem
II-1.Overview

With the current raging wave of globalization, many nation states have fear for
potential security threats and have as a result been forced to streamline some Foreign Direct Investment (FDI) regulations as a cautionary measure. This kind of protectionism constitutes actual risk to FDI. There has been concern that there may be variety of FDI risks ranging from social, cultural, nationalistic sentiments, economic, and political risks. The problem arises from fact that FDI is an essential contributor to growth and development of nation states and need be encouraged. Therefore, there is need for a purposive compromise between these two opposing realities if FDI can make meaningful contribution to economic development without harming either the investor or the host country. A starting point would be to assess and understand the various risks likely to be encountered in FDI especially in the economically globalized set up today. This research will undertake to establish some of these facts while addressing the main hypothesis which is; foreign investment in the world today faces great risks.

II-2.The aim and Objectives

The major purpose of this research is to establish risks associated with foreign investment and highlight some avenues of reconciling the negative impacts with the positive contributions of FDI so that foreign investment in the future can be environmentally friendly. It might well be the case that investors are driven by either baseless or exaggerated fears, or for lack of adequate information, or that host governments have grown too hostile, untrustworthy and unnecessarily overprotective. This research undertakes to find answers to some of these puzzling questions. The main objective of this research is to establish a neutral standing that will lay foundation for smoother foreign investment operations in the globalized international economy.

III-Literature Review:

Past research indicate that nationalistic fervor which emerged in the immediate post colonial error traded a big blow to foreign investment (FI) because of the hostility and antagonism that came with it. Host countries pursued and nationalized foreign property while others choose to re-negotiate (Smith et al, 2000). Today, powerful nationalistic fervor such as that which occurred in post colonial time is unlikely. But still, there is real fear in some nation states that uncontrolled foreign investment is likely to restart a fresh platform of economic dominance through home country support of multinational corporations (Sornarajah, 1994). Foreign investors face the risk of xenophobic nationalism in situations where they may be perceived to control the economy, have some political inclinations during administration change periods, or amass and repatriate profits.
It has been observed that governments at times significantly alter their fiscal regimes. This generates exploration and production fiscal risks. This demystifies calculations of investment returns from foreign investments. Usually, the risk/reward calculations are done with assumption that the existing fiscal arrangements will hold throughout the entire investment period. Any shift of goal posts by the host country will jeopardize future investment decisions following the increased return obstacles. When this happens, investment is cut down and production also goes down. Scholars have argued however that investors can be protected from fiscal risks through contractual provisions that would bind the contracting parties through the whole project life.
Political risks have been cited to be a big impediment to foreign direct investment over time. Some long-term projects such as gas and oil investments require an enabling environment. Therefore government and political stability go along way in determining the nature and sustainability of foreign direct investment. Political risks are usually country specific and arise from variety of factors including: civil unrests, threats from outside forces, political instability caused by regime changes, restrictive legislation, border disputes, sabotage, terrorism, expropriation, and activism among others (Hallmark, 1998).
Most foreign investment projects are based on host country’s goodwill and promise of good faith and fairness. Despite all these, an investor can not possibly resist or restrain exercise of expropriation measures by a sovereign host country. Another related risk is to do with currency convertibility and transfer. This occurs in situations where there is no universally accepted currency upon which revenues and expenditures are based. Since these are usually based on the host country’s local currency, depreciation in its value will deal a big blow to the investors. Indexing of local currency to foreign currency to provide a return to investors in their currency would help reduce the risk. But some nations may not readily adopt this policy because it is associated with “economic colonialism”. Another way out would be to adopt political risk insurance.
Another major foreign investment risk emerges from cases of substantial contract changes. Administrations may enact new constitutions, or through Courts, change existing legislation. This will significantly affect the foreign investment contracts in place because such actions are never anticipated or planned for. Other than that, it has been observed at times that incoming governments may for some reasons interfere with foreign investment agreements established under the previous regimes. Such reasons may be based on allegations of corruption involved during the contract set up. In other cases, it may be for the reason that the foreign investment has become too burdensome (onerous) to sustain hence prompt host country interference to mitigate losses. For instance, in the matter of Settebello Ltd v BancoTotta Acores, legislative intervention by Portuguese government changed the contract’s penalty provisions and left the other party without any legal basis to challenge the decision both locally and internationallySettebello Ltd v BancoTottaAcores, [1985] WLR 1050.
Foreign investors often face environmental liability risks in the international community. The recent past have seen growing concerns regarding the profound dangers to which the global environment is exposed through industrial and societal activities. As a result, national and international laws have been developed to regulate investments in projects to comply with safety standards and human rights requirements. It is such liability for violation of environmental requirements that expose foreign investors to uncertainty risks. A lot of the otherwise productive time is wasted as the foreign investors in natural-resource based ventures are subjected to streamlined scrutiny.
The energy sector has been seen to exhibit greater investment risks in contemporary society. The political risks discussed in the foregoing sections tend to shift with oil supply trends. Host countries move fast to renegotiate existing contracts whenever oil markets tighten and push oil prices higher. Given the high global stakes in the energy sector, compounded with the lack of a universal regulatory mechanism on foreign investment in the sector, there is a likely global security threat which stands in the way of foreign investment in the energy sector. Tensions are likely to emerge in the future on the basis of disparities between developing and developed nations hence exacerbate political risks involved in the energy sector.
Foreign investment has been said to be limited in practical scope due to institutional obstacles and risks. This is one aspect that has caused objection to global diversification in the recent past. Some markets may too small, and relatively inefficient and less liquid to attract foreign investors especially from developed nations like the US. Other markets are perceived as presenting misleading market capitalization and issues statistics since banks and holding companies may be the majority shareholders.

On the other hand, market efficiency which depicts rate of flow of information and responses in securities may also attract or hinder foreign investment depending on the way the investors perceive it.
Generally, institutional rigidities and bureaucracy make foreign investment an expensive venture. Some of the formal barriers to foreign investment include; security ownership discrimination based on nationality, differential taxation based on investor nationality, and exchange regulations. There may be informal barriers too including; restrictive traditional practices, lack of universal comparison standards, and inaccessibility of market statistics.

IV-Methodology and Statistical tools:

This research intends to utilize both the primary and secondary sources of information. For secondary sources, this research will make use of available scholarly publications from past research. For primary data, this research will use case study analysis and questionnaire tools to collect information from a sample of respondents. Respondents will include officials from Saudi Arabian’s government, international foreign investors and local Saudis nationals with investments abroad. A representative sample of 50 respondents will be used for this research. The purpose of interviewing both foreign and local investors is to establish a wider comparison standard since foreign investment risks experience in Saudi Arabia will most likely vary from those in the wider international community in nature, scale, and scope.
After collection, data will be carefully analyzed to minimize errors and disparity. Data will then be collated and presented using statistical tools such as the mean and averages, percentages, tables and graphs. At this point the research hypothesis “foreign investment in the world today faces great risks” will be tested then conclusions and recommendations drawn from the findings of the exercise.

V-.Expected findings:

Following information from the literature review section, it is expected that findings of this research will not be quite different from what has been the case before. However, some country specific differences may result from changes that might have occurred in policy frameworks in the recent past. Foreign direct investment has been largely affected by the global economic and financial crisis. Such is a great risk to the investors who remain uncertain regarding the economic and financial fluctuations in the international economy.
A study conducted in 2008-2009 by United Nations Conference on Trade and Development (UNCTAD) in 42 countries of the G-20indicated that investment policies of most of them are generally non-restrictive toward foreign investment. This is perhaps due to the general awareness for the need to boost FDI as a way to spur economic development especially in developing nations. But the survey also revealed that these countries still pursued some restrictive measures aimed to limit private and foreign investment in some of their sensitive sectors; and they adopt different investment assessment criteria likely to stir national security concerns.
Political risks are part and parcel of the contemporary global economy. For instance, if the recent political uprisings witnessed in the great Arab world are anything to go by, there is more to foreign investment risks than meets the eye. Terrorism and piracy threats are real and countries have stepped up scrutiny requirements against foreign investors. Concerns of global warming in the International community further compounds uncertainty risks involved in foreign investment.
Furthermore, host countries’ currencies keep fluctuating in value following the global financial and economic crisis implying convertibility and transfer risks for investors. Finally, foreign investment still face institutional barriers (both formal and informal); and this is made worse with the current wave of change that has motivated many nations to review or over hall their constitutions hence exposing both current and potential future foreign investment contracts to significant risks.

V- Conclusion:

Findings of this research will provide a broader understanding of the risks associated with foreign investment in the international setting, recommend ways of reducing these risks and create a better ground for informed future foreign investment decisions in the increasingly complex and uncertainty filled society. This is necessary because foreign direct investment plays a significant role in the world economy by bridging the gap between the wealthy developed nations and the relatively poor third world countries. Furthermore, multinational corporations help create employment opportunities for the host countries’ population hence improve general living standards quality of life) 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.

References

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