Introduction
Saudi Arabia’s new investment laws are set to replace the Foreign Investment Law of 2000 (‘FIL 2020’) in February. Amid a 56% fall in Saudi Arabia’s Foreign Direct Investment (‘FDI’) in 2023 from 2022, and an overall 9% drop in the West Asian countries, the country’s 2016 programme, these latest laws are expected to make the kingdom a prime destination for global investments. This new law strengthens inclusivity, investor confidence and domestic economic resilience, addressing its strategic objectives like enhancing the ease of doing business and attracting FDI in Saudi Vision 2030, the country’s 2016 programme to uplift its economy, society and culture. The law, however, has its fair share of criticisms as, among other downsides, it risks perpetuating reliance on foreign entities without fundamentally strengthening domestic economic resilience or fostering inclusive growth. Considering this, the blog attempts to outline the key changes brought by legal overhaul and analyse its impact on the possible stakeholders. It shall also later discuss the primary legal challenges posed by the legislation and explore the trajectory of Saudi Arabia’s economic landscape.
Implications of the Key Changes Brought by the Legislation
The liberalising reforms in investment law in Saudi Arabia, being in line with the objectives of economic upliftment, also have a significant impact on its stakeholders:
Elimination of the Saudi Ministry of Investment (‘MISA’) Licence
The existing law mandates foreign investors to obtain a MISA licence, a rather cumbersome and opaque process. The latest law relaxes the registration formalities by scrapping this specific requirement and streamlining the system to cut through the bureaucratic impediments to the entry of foreign businesses. This simplification of regulatory oversight should allow government bodies to concentrate on monitoring compliance and facilitating enabling investment. While the shift simplifies compliance, it also raises questions about maintaining quality and ethical business practices. The new law ensures expanded freedoms, equal footing for domestic and foreign investors, and robust protections, significantly enhancing Saudi Arabia’s appeal as an investment destination. However, the absence of stringent localisation requirements could dilute the economic benefits for local communities, creating domestic dissatisfaction.
Equal Treatment for Foreign and Domestic Investors
The present investment law bars foreign investors from tapping into certain restricted industries like military and security under its Negative List (Annex (B)), which also incorporates several discriminatory practices against foreign investors as reflected in, inter alia, Articles 24 and 22. In the perusal of establishing parity between foreign and domestic investors, the new law removes discriminatory practices and ensures that foreign entities can operate under the same conditions as local businesses. Additionally, increased foreign competition can drive local companies to experience better operational efficiencies; however, it may also cause exacerbated disparities between well-capitalised enterprises and smaller players. While this change increases Saudi Arabia’s appeal as a hub for foreign investment, it may inadvertently intensify competition for domestic firms, especially small and medium enterprises (‘SMEs’), challenging their ability to thrive in a more liberalised market.
Integration of Special Economic Zones (‘SEZs’)
By putting SEZs in the scope of the law’s applicability, the Saudi government extends the width of the regulatory framework. SEZs are poised to attract high-tech industries and specialised services, but questions linger about their integration with the broader economy and their capacity to generate long-term value beyond initial investment booms. Such legal interventions are also likely to benefit schemes like Abdullah Financial District (to economically transform Riyadh) and the Riyadh Tech Oasis (to make the kingdom “the new tech oasis”) by reducing the kingdom’s dependence on oil and fostering growth in sectors like finance and technology, as the MISA calculated its net FDI inflow at SAR 105 billion (p. 13) and targets SAR 140 billion in 2030 (p. 4). Additionally, a more investor-friendly legal framework, including protections against arbitrary policy changes, will encourage long-term commitments from international firms, particularly in high-capital sectors like financial services and technology. The employment opportunities, consequentially, also seem to rise with the setting up of more foreign businesses across various sectors. However, a failure to integrate workforce development into the broader investment strategy could lead to increased socio-economic disparities.
Incorporation of Alternative Dispute Resolution (‘ADR’) Measures
The inclusion of ADR mechanisms under Article 10 (p. 39) of the new law, alongside traditional court recourse, provides investors with efficient and flexible avenues for resolving disputes. This reflects Saudi Arabia’s commitment to creating a business-friendly legal environment. However, the effectiveness of these mechanisms in practice will depend on their accessibility and transparency. Further, this introduction should reduce the judicial burden, enabling quicker dispute resolution, however, the significant challenge of regulatory agencies not being equipped enough to handle increased foreign participation without compromising standards needs to be addressed.
Criticism of the New Legislation and the Way Forward
Saudi Arabia’s new Investment Law is a major milestone in establishing a road map for creating an investor-friendly environment. It can, however, be argued that some lacunae could lead to trouble in its intended impact on the long-term transformation of the economy.
Negative List and Sectoral Restrictions
The negative list refers to sectors and activities where foreign investment is restricted or prohibited, ensuring certain industries remain under national control. The List has gone through years of distortion and has now considerably evolved from its original form. Unlike the earlier years, the present approaches have narrowed down the list to specific industries and liberalised sectors for foreign investment. Thus, this evolution traces an increasingly relaxed foreign investment approach that opens greater opportunities across industries. However, sectors like petroleum exploration and military manufacturing, critical to the Saudi Arabian economy, remain off-limits, underscoring a strategic retention of control over sensitive industries. The possibility of exemptions for only a few specific restricted areas, however, raises concerns about the scope for favouritism or inequitable access. Criteria for such exemptions, if they lack transparency and uniformity in application, may easily lean into perceptions of bias, damaging investor confidence. Exempli gratia, industries that are exempted apparently may have a higher tendency to benefit connected firms, creating an uneven playing ground to the disadvantage of smaller or less politically aligned firms.
To address concerns about the transparency of granting exemptions, Saudi Arabia can set up an independent oversight body whose mandate will entail monitoring the process. This body could make public the detailed criteria for granting exemptions as well as periodic reports on the approvals, rejections, and justifications. It could be further enhanced by a digital, publicly accessible portal for accepting and processing applications for exemptions. Ensured participation of international auditing firms and meeting global best practices in transparency as described in the OECD Guidelines for Multinational Enterprises[1] would further complement investor confidence.
Over-Reliance on Foreign Capital
Another problem lies in over-relying on foreign capital for economic diversification. Increasingly promising FDI figures also expose a developing country with conditions to more external shocks in times of global recessions or geopolitical conflicts.
The government should consider developing local entrepreneurship and SME ecosystem initiatives to solve this problem. Subsidised loans, skills development programs, as well as relaxed registration methods for Saudi entrepreneurs could stimulate local investor activity. Such collaboration will also involve implementing more public-private partnerships to earn more Saudi nationals into high-value sectors through education and training programs.
Challenges in Compliance and Enforcement
The implementation of compliance-measures-scrutiny is all the more relevant concerning regulatory capacity. This law establishes an intricate compliance framework; however, doubts about Saudi Arabia’s ability to institute an institutional infrastructure capable of enforcing this framework consistently and fairly across sectors might arise. Such inconsistency would perhaps be felt as a phenomenon of legal uncertainty for prospective investors. Furthermore, this would create a legal vacuum for foreign investors unfamiliar with local nuances in regulatory standards. For example, the Saudization policy requiring a certain percentage of Saudi nationals to be hired by a company tends to be inconsistently applied and leaves businesses confused. The lack of a unified regulatory body to oversee compliance exacerbates this issue, potentially deterring investors who prioritise legal predictability.
Efforts can also be made to compare the enforcement practices of Saudi Arabia with international standards through the collaboration of international organizations such as the World Bank. Third-party audits being done periodically and a public database showing the compliance records of companies would also be important to ensure consistent enforcement.
Prioritising Short-Term Economic Gains Over Sustainability
The law, attracting foreign investments, seems to eventually emphasise immediate economic benefits rather than long-term structural reforms. Although tax incentives and hassle-free procedures generate good immediate results, they do little to solve long-standing issues like youth unemployment coupled with reliance on oil revenues. The critics insist that the law should have provisions to encourage job creation for Saudi nationals, along with SME assistance.
To institutionalise long-term sustainability in the country vis-a-vis investment policies, the government should bring environmental, social, and governance (‘ESG’) principles into the picture. Strengthening its Saudization policy to compel foreign investors to reserve specific numbers of jobs within the country and incentivising investments in areas that would ordinarily yield social dividends, like education and hospitals, would therefore help address structural questions of the economy.
Conclusion
The new investment law of Saudi Arabia is envisioned as a leap in the context of economic modernisation and diversification in line with its Vision 2030. It deregulates and improves competitiveness in the international arena; however, there may be new questions emerging on the law regarding transparency, compliance, and sustainability in the long run. Looking at these issues from the angle of incorporation of ESG, building local entrepreneurship initiatives and ensuring that all stakeholders are given a level playing ground need to be considered. Balancing an inflow of foreign capital with foundations in local capacity building and prioritising structural reforms over short-term benefits will allow Saudi Arabia to make the transition from oil dependency to a sustainable global investment hub. The transformation will largely depend on the effective enforcement and the confidence built among different stakeholders to achieve their successful realisation.
This blog is written by Inika Dular, Student at the Rajiv Gandhi National University of Law, Punjab.
[1] OECD, OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD Publishing 2023) https://doi.org/10.1787/81f92357-en 21. accessed Jan 5 2025