Saudi Arabia’s recently-announced Investment Law continues the country’s push to open up to more FDI to diversify the oil-dependent economy. Analysts argue it is a step in the right direction, but also highlight the risks engendered by the country’s top-down governance, and the business reforms’ challenging fit with Sharia law which remains the foundation of its jurisdiction. 

On August 11, the country announced the new regime which will replace the existing Foreign Investment Law from next year, unifying local and foreign firms under a single investment rulebook for the first time. It is the latest in a string of legislative changes designed to lift transparency and closer align business law in the Middle East’s biggest economy to international standards. 

“[The law] is part of an evolution of foreign investment law over time. It’s a big jump though,” says Philip Kotsis, a partner and country head of law firm Al Tamimi & Company. “They’re sending a loud and resounding message that foreign investors will be treated equally to local investors.” 

As in other emerging markets with historically weak and opaque business rules, concerns over an uneven playing field between local and foreign firms has been a bottleneck to FDI. As such, the law’s “non-discrimination” principle and pledge “to preserve fair competition” is its most significant element, says Pat Thaker, editorial director for the Middle East and Africa at the Economist Intelligence Unit.

Vision 2030 hype v reality

The new law comes amid a rush of interest by foreign firms looking to ride the country’s Vision 2030 ambition, as confirmed by the rising amount of FDI project announcements tracked by fDi Markets data. Unctad data also reflects strong inbound FDI levels in the post-pandemic years, although some of that momentum waned in 2023.  

“Vision 2030 has grabbed the attention of investors around the world,” says Torbjorn Soltvedt, Verisk Maplecroft’s principal Middle East and north Africa analyst. However, he believes that for foreign investors to “buy into” the vision of a new Saudi Arabia, and to achieve the government’s $100bn FDI target, they need to overcome hesitancies regarding social and governance challenges baked into Saudi’s profile, and which are beyond the scope of any business law. 

For example, the new law does not address “the most pressing investor concerns, relating to perceptions about governance and human rights”, he adds. Women’s rights have significantly improved in recent years, and the religious police’s powers have diminished. However Mr Soltvedt notes these changes are driven by a “top-down approach” (Saudi Arabia remains an absolute monarchy) with “little room for civil society to play a role in those changes”.

Under local Sharia law, “religion will always be at the centre of society and no investment law will override that”, says one local source speaking on the condition of anonymity.

Business bottlenecks

Nonetheless, those working with investors on the ground agree the law tackles the most restrictive red tape and ease-of-doing-business challenges. “It’s all about improving trust, giving investors more security and overcoming certain bottlenecks,” says Zoë Harries, chief partnerships and sales officer at PIF Projects. 

A simplified registration process will replace the current foreign investor licensing regime, which Omar Al Humaid, a Riyadh-based partner at Al Tamimi & Company, says can be “quite burdensome from an ease-of-doing-business perspective”. Details of the new process will be announced next year, but he understands it could simply mean notifying the Ministry of Investment, which would significantly reduce the time to get foreign-owned businesses up and running. 

The negative list remains. However, foreign investors will for the first time be able apply for an exception on a project-by-project basis. The law formally recognises the use of alternative dispute resolution (ADR). As Mr Al Humaid says, “practically, it was always possible to use ADR” as an alternative to the Saudi courts, but the law “closes any loopholes for pushback when it comes to requesting arbitration”.

One business-related hurdle the law doesn’t solve is labour. “Looking for talent on the ground can be quite time-consuming, especially given Saudisation requirements…it takes time to find the right candidate to fill certain roles,” says Mr Al Humaid. 

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‘A big step’

The Investment Law continues a series of reforms since 2016 that aim to clear the regulatory path for more FDI in a country historically closed off from the west. 

These include allowing 100% foreign ownership of domestic companies, the first bankruptcy law, and replacing the Saudi Arabian General Investment Authority with the Ministry of Investment.

“The ongoing wave of policy, legal, and regulatory reforms is contributing to further economic diversification … unlocking the potential for new investments,” says Fawaz Bilbeisi, International Finance Corporation’s country manager.

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