The Kingdom of Saudi Arabia (KSA) is the leader in oil production and one of the members of the Organization of the Petroleum Exporting Countries (OPEC). It is fueled by vast amounts of oil wealth which lead it to be one of the most developed countries in the non-western world.
In between the years of 1970 and 1980, the country saw a large economic boom which led it to have the highest income and the gross domestic product per capita in the eastern area. During this time, it created a plan for the integration of basic transport and communications systems as well as educational development. They added things such as practical skills development and training to their education system as well as improving their health facilities which skyrocketed its growth into a modern country.
It is important to understand the country’s rich economic history when discussing free zones. Currently, the Kingdom of Saudi Arabia does not have any economic free zones as such but all details of foreign land ownership is dictated by the Ministry of Investment of Saudi Arabia (MISA).
What is the Ministry of Investment of Saudi Arabia?
The Ministry of Investment of Saudi Arabia (MISA) is a governing body created with the idea of regulating economic liberalisation in the country and provides licenses which approve investment. The ministry overlooks many different services such as giving advice, providing information on how to acquire an investment license and also are in charge of processing it.
Previously known as the Saudi Arabian General Investment Authority (SAGIA), the ministry was started in 2000 after years of failing to attract foreign direct investment in area such as telecommunications and transport industries. With foreign investment comes increased competition for local companies, this one of the many reasons countries are being economically liberalized. This competitiveness makes sure that local businesses start upgrading themselves to fit the standards that foreign companies bring. For example, they will start selling products with more features for a cheaper price or offer better services which is what customers demand. This makes sure that all businesses are working in the best interest of customers.
There were many things that were acting as a blockage for foreign companies to come and invest in KSA. These factors include conservative environment in terms of culture, manipulated and irrelevant economic data, and strict policies which made them hard to obtain. They started the Ministry of Investment of Saudi Arabia in order to help with economic liberalization as well as to focus on creating and maintaining a sustainable growth.
The Kingdom of Saudi Arabia is also very focused on improving their economic competitiveness with others around the world.
To make sure that they are reaching their goals in terms of staying competitive, the ministry also oversees the comparison of the economy to the standards of over 300 indicators. On top of this the MISA also works towards bettering their service to attract more foreign investors as well as expanding any foreign business propositions to make sure both parties are benefitting. Having built a solid partnership with The Ministry of Investment of Saudi Arabia, AstroLabs can guide you to set up your 100% foreign-owned onshore entity without the need for a local partner with no minimum capital requirement.
The Lack of Free Zones in the Kingdom of Saudi Arabia
Economic free zones are parts of territories where there is little to no tax and import duties for companies. This idea is used to encourage foreign investment and economic growth. An increase in foreign investment will increase competitiveness but also just as importantly it will create jobs as well as increase exports. In the KSA right now, there are no economic free zones as such however, as previously mentioned all foreign land ownership is looked on by the Ministry of Investment of Saudi Arabia.
The Merits and Demerits of SEZs
There are many advantages of a country willing to start a special economic zone otherwise also known as a free zone. Firstly, free zones will create an incentive for foreign direct investment as companies are always looking for ways to reduce costs for their business and increase exports of goods and services.
As previously mentioned, FDIs are very important in boosting employment as they create jobs for locals of the area. One foreign investor can have a large spill-over effect on the economy in general because many other industries start rising and developing to work with the needs of the investor. This will lead to an increase in skilled workers and competitiveness. It can also bring up industries that were failing.
More FDIs also mean that there will be a development in the country’s infrastructures. The increased competitiveness makes other businesses in the country work harder to promote the best of their products as well.
Special economic zones also come with disadvantages which in some cases may outweigh the merit. Free zones means that there will be a loss in revenue for the country that would usually come from the taxation charge. The increase in FDIs means that a lot of people will lose jobs as not all businesses can survive the increased competitiveness. This also means that a lot of people will lose their land because the government needs it to create the SEZ which means it can create a loss of income. Another point is that it can increase urbanization which creates inequality in development.
More About the MISA
It was mentioned how MISA is currently the only way to get land ownership for foreign direct investment. They dictate which area they can set up their companies. This is with the exception of the cities of Mecca and Medina where it is completely prohibited.
During the G20 summit in 2020, the Minister of Investment of KSA, Khalid ah-Fahlil, announced that from 2021 they will start launching special economic zones for some industries. Fahlil described these industries as “having lower investment volumes but higher impact on the economy”. This includes cloud computing, renewable energy, tourism, culture, entertainment, and logistics.
The Saudi economy has faced a couple of hits recently with the impact of the Covid-19 pandemic and the decrease in oil prices but has remained at a 12% growth rate. It was stated that the economy was strong enough to not be very affected and this proves that the Kingdom of Saudi Arabia is ready to start special economic zones. Though the growth rate when the announcement was made was 12% the expected rate was much higher and to achieve it the MISA decided that launching SEZs was the best way to move forward. This goes to show the largely unexplored opportunities that expanding into KSA holds for foreign-owned businesses. Learn more about how you can expand your business into KSA through our descriptive guide on the set up in Saudi process.