The Legal Framework for Foreign Direct Investment in the Kingdom of Saudi Arabia: Theory and Practice

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 Copyright © and Moral Rights for this thesis are retained by the author and/or other copyright owners. A copy can be downloaded for personal non‐commercial research or study, without prior permission or charge. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder/s. The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders. When referring to this thesis, full bibliographic details including the author, title, awarding institution and date of the thesis must be given e.g. AUTHOR (year of submission) "Full thesis title", name of the School or Department, PhD Thesis, pagination. 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 I also undertake that any quotation or paraphrase from the published or unpublished work of another person has been duly acknowledged in the work which I present for examination.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. 3 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. 4 This thesis is dedicated to the memory of my beloved mother; always guiding me, always in my heart. 5 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 6 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 ................................................................................

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