Saudi Arabia’s Strategic Shift: Domestic Investments Take Priority Over Foreign Ventures

The Shift in Investment Strategy

The PIF’s investments in domestic infrastructure and real estate development grew by 15% year-on-year to 233 billion riyals, while foreign investments increased by 14% to 586 billion riyals. This shift aligns with the kingdom’s Vision 2030 plan to diversify its economy away from oil dependence. As part of this strategy, Saudi Arabia has introduced laws and reforms to attract and even mandate investment within its borders.

“The PIF’s report marks a shift from externally driven investments to a focus on domestic opportunities. The days of viewing Saudi Arabia as a mere financial reservoir are ending,” said Tarik Solomon, chairman emeritus at the American Chamber of Commerce in Saudi Arabia, in an interview with CNBC. He emphasized that success in partnering with the PIF now requires more than just seeking profits; it necessitates mutual trust, long-term vision, and meaningful capital contributions.

Foreign Investment and New Regulations

Saudi Arabia is also pushing to attract more foreign investment, with a lofty target of $100 billion in annual foreign direct investment (FDI) by 2030. However, the country remains far from reaching this goal, with current FDI averaging around $12 billion per year since Vision 2030 was launched in 2017. The kingdom’s recently updated Investment Law is intended to help bridge this gap by streamlining processes for foreign investors and aligning their rights and duties with those of citizens.

One notable regulation is the “headquarters law,” which took effect on January 1, 2024. This law requires foreign companies operating in the Gulf to base their Middle Eastern headquarters in Riyadh if they want to secure contracts with the Saudi government. The aim is clear: to make Riyadh a regional business hub while drawing investment into the kingdom.

Skepticism and Challenges Ahead

Despite these ambitions, some experts remain skeptical about the $100 billion FDI target. “The new investment law is absolutely critical to facilitating more FDI, but it remains to be seen whether it will lead to the huge increase and quantum of capital required,” a Gulf-based financier told CNBC, speaking on condition of anonymity.

Solomon echoed these concerns, noting that higher spending on major projects would require higher breakeven oil prices to balance the Saudi budget. “It remains to be seen whether the PIF’s domestic investments will deliver the anticipated returns, especially in a region full of instability and oil-dependent budgets facing prolonged periods of low oil prices,” he said.

Improving Business Conditions

James Swanston, a Middle East and North Africa economist at Capital Economics, noted that the new Investment Law could significantly improve local business conditions by addressing long-standing complaints about unpredictable regulations. The law introduces a simplified registration process, eases the judicial system, and eliminates certain licensing requirements, all of which aim to create a more transparent and investor-friendly environment.

“We’ve argued for a long time that so-called ‘wasta’ (loosely translated as ‘who you know’) has been a major deterrent to foreign companies establishing themselves in Saudi,” Swanston wrote in a recent report.

A Focus on Domestic Transformation

The pivot toward domestic investment is part of a broader effort to transform the Saudi economy. For years, the Gulf region was seen as a source of easy money, but now, local investors are more discerning. “Before it was much easier to come and say, ‘I’m a fund manager from San Francisco, please give me a couple million,’” Marc Nassim, partner and managing director at Dubai-based investment bank Awad Capital, told CNBC last year. “I think that a very small minority of them will be able to take money from the region — they are much more selective than before.”

The kingdom’s priority is now clear: it’s all about driving investment into Saudi Arabia to achieve its ambitious Vision 2030 goals. “PIF has been focused on co-opting investment into Saudi for the last several years,” the Gulf-based financier added. “It took a while for bankers to fully appreciate the scope and scale of the pivot. It’s rightly all about transforming the economy.”