The legal framework for foreign direct investment in the Kingdom of Saudi Arabia

296 Pages·2012·1.59 MB·English

Al Sewilem, Mohammed (2012) The legal framework for foreign direct 
investment in the Kingdom of Saudi Arabia: theory and practice. PhD Thesis. 
SOAS, University of London 
http://eprints.soas.ac.uk/17354
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The Legal Framework for Foreign Direct Investment
in the Kingdom of Saudi Arabia:
Theory and Practice
A Thesis Submitted in Partial Fulfilment of the Requirements for the Degree of
Doctor of Philosophy in Law
Submitted By:
Mohammed Al Sewilem
Supervised by:
Nicholas Foster
School of Law
School of Oriental and African Studies
University of London

2012
Declaration for PhD Thesis

I have read and understood regulation 17.9 of the Regulations for students of the
School of Oriental and African Studies concerning Plagiarism. I undertake that all the
material presented for examination is my own work and has not been written for me,
in whole or in part, by any other person. I also undertake that any quotation or
paraphrase from the published or unpublished work of another person has been duly
acknowledged in the work which I present for examination.

Signed: ___________________________ Date
Abstract

This thesis examines the nature and significance of the legal framework for
foreign direct investment (FDI) in Saudi Arabia after reforms introduced by the
Foreign Investment Law of 2000 (FIL). This framework is examined in terms of its
practicality and the degree to which Islamic law is reconciled with globalised FDI
laws and related areas.
Saudi Arabia, to reduce its dependence on oil, increased its efforts to attract
FDI for a more diversified economy, technology transfer, and to provide employment
opportunities. Linked to FDI is the privatisation of certain sectors of the economy,
potentially opening them to foreign investors.
Saudi Arabia faces considerable challenges in this area, some are specific to
Muslim-majority countries, and some—particularly those related to merging Islamic
law with Western FDI laws—are unique to Saudi Arabia.
This study provides an analysis of the legal framework for FDI, including: the
practicality of the FIL, its compliance with the World Bank Guidelines on the
Treatment of FDI, and its facilitation of the legal and administrative aspects of FDI;
the correlation between privatisation and FDI in Saudi Arabia; and the recognition of
arbitration as a dispute settlement mechanism. The study examines FDI theories, with
reference to conflicts between FDI and the Islamic nature of the Saudi Arabian legal
system.
This research concludes that FDI in Saudi Arabia has been reasonably
successful, but could be improved. It also shows that Saudi Arabia is capable of
relaxing certain traditional standards in favour of more international regulations
which are not in conflict with Islamic law.
This thesis is the first general study of the new legal framework of FDI in
Saudi Arabia, addressing the link between the Islamic legal environment and the
needs of FDI. It also lays the groundwork for future FDI theories addressing the
unique situation of Muslim-majority countries.
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Acknowledgements

First and foremost, I am deeply and ever grateful to Allah, the most gracious,
the most compassionate for giving me the ability, knowledge, health, and patience to
finish this work.
I would like to express my deep and sincere gratitude to my supervisor, Mr.
Nicholas Foster, for his encouragement, guidance, and endless motivation. This thesis
would not have been completed without his continuous advice and constructive
comments, his wide knowledge, and his logical way of thinking, which have been of
great value. I am highly indebted to his understanding and support during the time of
my mother’s sickness and when she passed away in the middle of my work.
I would like to extend my appreciation to my second supervisor, Professor
Lynn Welchman, for providing her invaluable help during my first year. My sincere
thanks also go to Professor Peter Muchlinski for his much appreciated time and effort
in reviewing my thesis. A special appreciation is due to Ms. Lila Stromer for her
skilful assistance in editing my thesis.
I am particularly grateful to Dr. Issam bin Saeed, the Chief of the Saudi
Arabian Bureau of Experts, for his support and understanding of the time and amount
of work the thesis entailed.
Also I would like to thank the staff of the School of Oriental and African
Studies, the Institute of Advanced Legal Studies, the Supreme Economic Council, the
Bureau of Experts at the Council of Ministers, and the Board of Grievances for their
indispensible assistance throughout different phases of writing this thesis.
My sincere appreciation also goes to the people whom I interviewed and to the
business establishments that replied to my questionnaire.
Last but not least, I owe my late mother a deep and sincere gratitude, for she
was the main motivation for me to advance and succeed, and her memory will always
guide me through every step of my life. I am ever grateful to my wife and children,
for without their warmth, encouragement, and understanding I would not have been
able to finish this work. My love and appreciation goes to my brother and sisters for
their continuous care and affection, and my appreciation and gratitude extends to my
friend and brother-in-law Khalid Abunayyan for his unfaltering faith in me.
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This thesis is dedicated to the memory of my beloved mother; always
guiding me, always in my heart.
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Table of Contents

Abstract ......................................................................................................................... 3
Acknowledgements ...................................................................................................... 4
Table of Cases.............................................................................................................13
Table of Legislation and Decisions...........................................................................16
Glossary of Abbreaviations ....................................................................................... 19
Glossary of Arabic Terms and Transliteration System.......................................... 22
Chapter One: Introduction ....................................................................................... 25
1.1 Saudi Arabian Dependence on Oil and Foreign Direct Investment ........ 26
1.2 Purpose of the Study .................................................................................... 26
1.3 Primary Research Issues Addressed in the Thesis .................................... 28
1.4 Research Methodology ................................................................................. 28
1.4.1 Literature Review .......................................................................... 29
1.4.2 Court Cases .................................................................................... 31
1.4.3 Interviews ....................................................................................... 31
1.4.4 The Questionnaire ......................................................................... 32
1.5 Main Areas of Study ..................................................................................... 33
1.6 Structure of the Thesis ................................................................................. 33
1.7 Technical Matters ......................................................................................... 36
Chapter Two: General Background of Foreign Direct Investment ...................... 37
2.1 Introduction .................................................................................................. 38
2.2 Definitions of FDI ......................................................................................... 39
2.3 Theories of FDI ............................................................................................. 41
2.3.1 The Neo-classical Theory .............................................................. 41
2.3.2 The Dependency Theory ............................................................... 42
2.3.3 The Middle-path Theory ............................................................... 43
2.4 Classifications of FDI ................................................................................... 44
2.4.1 Classification by Type of Production ........................................... 45
2.4.2 Classification by Form or Method of Investing .......................... 46
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2.4.2.1 The Subsidiary Method. ............................................ 46
2.4.2.2 The Joint Venture. ..................................................... 47
2.4.2.3 Production-sharing Agreements. .............................. 48
2.5 Why Transnational Corporations Choose to Invest Abroad ................... 49
2.5.1 The Ownership–Location–Internalisation Paradigm ................ 49
2.5.2 Transparency ................................................................................. 51
2.5.3 Intellectual Property Rights ......................................................... 52
2.6 Benefits Associated with FDI for Host Countries ...................................... 53
2.6.1 Injection of Capital into the Host Country ................................. 53
2.6.2 Spillover Benefits ........................................................................... 54
2.6.2.1 Horizontal Spillovers. ................................................ 56
2.6.2.2 Vertical Spillovers. ..................................................... 56
2.6.2.3 Spillover of Competition............................................ 58
2.6.2.4 Socio-economic Spillovers. ........................................ 59
2.6.2.5 Employment Spillover. .............................................. 60
2.7 Negative Impacts Associated with FDI for Host Countries ...................... 61
2.7.1 Increased Competition from Abroad .......................................... 62
2.7.2 Risk of Abusive Business Practices From Foreign
Enterprises .............................................................................................. 62
2.7.3 Socio-economic Risks .................................................................... 63
2.7.4 Mitigating the Risks of FDI .......................................................... 64
2.8 Sources of FDI Regulations ......................................................................... 64
2.8.1 National Laws ................................................................................ 65
2.8.1.1 Entry and Operational Restrictions. ........................ 65
2.8.1.2 Favourable Legislation. ............................................. 67
2.8.2 Bilateral Investment Treaties ....................................................... 68
2.8.3 International (Multilateral) Regulations ..................................... 70
2.8.3.1 International Customary Law. ................................. 71
2.8.3.2 World Bank’s Guidelines on the Treatment of
Foreign Direct Investment. ................................................... 73
2.8.3.3 FDI Under the WTO System and Other
International Systems. ........................................................... 76
2.9 Conclusion ..................................................................................................... 78
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Chapter Three: Islamic Elements in the Commerical Law Environment in
Saudia Arabia: A Discouragement to FDI? ............................................................. 80
3.1 Introduction .................................................................................................. 81
3.2 Fundamentals of Islamic Law ..................................................................... 82
3.2.1 The Qur’an and the Sunnah ......................................................... 83
3.2.2 Is There Law in Islam? ................................................................. 84
3.3 The Non-separation of Law and Religion in Saudi Arabia and Islam as
the Basis of the Legal System ............................................................................ 86
3.3.1 The Hanbali School and the Rejection of Qiyas .......................... 88
3.3.2 The Narrow Interpretation of the Law in the Saudi Legal
System ...................................................................................................... 90
3.3.3 Hesitation on Codification of Islamic Law in Saudi Arabia ...... 92
3.4 Islamic Commercial Law ............................................................................. 93
3.4.1 Islamic Commercial Law before Western Influence ................. 94
3.4.2 The Terms and Conditions of Contracts in the Islamic Legal
System ...................................................................................................... 94
3.4.3 Limitations Within the Contract-making Process ..................... 96
3.4.3.1 The Prohibition of Riba ............................................. 96
3.4.3.2 The Prohibition of Gharar ........................................ 99
3.4.3.3 The Prohibition of Speculative Risk. ...................... 101
3.5 State Commercial Regulations .................................................................. 103
3.5.1 The Need for Another Commercial Law System ..................... 103
3.5.2 Duality in Saudi Arabian Law ................................................... 105
3.5.3 The Role of Islamic Scholars in the State .................................. 107
3.5.4 The Introduction of Modern Law into the Saudi Legal System110
3.5.5 The Influence of Egyptian Law Based on French Law ............ 110
3.6 State Commercial Tribunals ..................................................................... 114
3.6.1 Resolving Tension between Law and Shari’ah ......................... 114
3.6.2 Dual Systems of Judiciary: The Competent Authority Deciding
Investment Disputes ............................................................................. 116
3.7 Conclusion ................................................................................................... 119
Chapter Four: FDI in Saudi Arabia, the Need for Change, and the Foreign
Investment Law of 2000 ........................................................................................... 122
4.1 Introduction ................................................................................................ 124
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4.2 Historical Background for the Necessity of Change ............................... 125
4.3 Economic Growth of Saudi Arabia: The Five-Year Development
Plans ................................................................................................................... 126
4.3.1 The First Development Plan ....................................................... 126
4.3.2 The Second Development Plan ................................................... 127
4.3.3 The Third Development Plan ..................................................... 129
4.3.4 The Fourth Development Plan ................................................... 129
4.3.5 The Fifth and Sixth Development Plans .................................... 130
4.3.6 The Seventh Development Plan .................................................. 130
4.3.7 The Eighth Development Plan .................................................... 131
4.3.8 The Ninth Development Plan ..................................................... 131
4.4 Reasons for the Enactment of the FIL ...................................................... 132
4.5 Objectives of the FIL .................................................................................. 136
4.5.1 Creating Jobs for Saudi Nationals ............................................. 137
4.5.2 Encouraging Technology Transfer ............................................ 138
4.5.3 Meeting the Requirements for World Trade Organization
Membership .......................................................................................... 139
4.5.4 Enhancement of Multi- and Bilateral Trade Agreements ....... 140
4.6 Administrative and Legal Obstacles Preventing Implementation of the
Foreign Investment Policy ............................................................................... 141
4.7 The Adoption of the FIL ............................................................................ 142
4.8 Saudi Arabian General Investment Authority: The Agency Responsible
for Foreign Investment Policy ......................................................................... 144
4.9 The Establishment of a New Regulation Regarding Violations of the
FIL ..................................................................................................................... 147
4.10 Definitions of Foreign Investment under Saudi Law ............................ 149
4.10.1 Restrictive Definition under the 1979 Law ............................. 149
4.10.2 Definition of Foreign Investment under the FIL .................... 150
4.11 The Negative List: Activities Excluded from Foreign Investment ....... 151
4.12 Additional Licensing Conditions and Criteria under the FIL ............. 153
4.13 Forms of Foreign Investment Enterprises under the 1979 Law .......... 154
4.14 Barriers to Entry of Foreign Investment ............................................... 156
4.14.1 Licensing and Registration Procedures for Foreign
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