Determinants of Foreign Direct Investment in Saudi Arabia: An Empirical Analysis for the Period (1980-2022)

The study aims to analyze the primary determinants of foreign direct investment inflows (FDI) in Saudi Arabia for the period 1980-2022. Utilizing the auto-regressive distributed lag (ARDL) model, it examines both short-run and long-run relationships between FDI and a set of explanatory variables, including per capita income, total foreign exchange reserves, gross capital formation, domestic credit to the private sector, exchange rate, inflation, and trade openness. These variables are presumed to significantly influence FDI inflows into the Saudi economy. The long-run ARDL model reveals a significant positive cointegrating relationship between FDI inflows and both per capita GDP and domestic credit to the private sector. Conversely, the results indicate a significant negative cointegrating relationship with gross capital formation, exchange rate, and trade openness. In contrast, total foreign exchange reserves and inflation demonstrate an insignificant long-run cointegrating relationship with FDI inflows. The short-run error correction model (ECM) identifies a significant positive relationship between FDI inflows and market size as well as the lag of gross capital formation. Conversely, the coefficients for lagged inflation and gross capital formation show a highly significant negative effect on FDI inflows. Meanwhile, trade openness and inflation are statistically insignificant, indicating no short-run impact on FDI inflows. The impulse response functions and variance decomposition analysis revealed that, in the long run FDI in Saudi Arabi is primarily determined by gross capital formation, which accounts for 18.9% of the effect, this is followed by total foreign reserves at 17.7%, per capita GDP at 16.7%, and FDI inflows at 15.1%. The study recommends implementing measures to stimulate GDP growth, increase per capita GDP, and develop the financial sector to enhance foreign direct investment (FDI) inflows.