Post summit reflections on FDI in the Middle East

Last week's first annual International Investment Summit in Dubai was a rallying point for everyone involved in foreign direct investment in the Middle East, and this event seems sure to become more and more significant in the future.

But what do we really mean by FDI in the Middle East? And where is it likely to come from? And who is going to benefit?

Mention FDI to bankers and they immediately think of China which received $52 billion in FDI in 2002. This money went mainly into new factories as Western companies seek to exploit cheap labour and Chinese accession to the World Trade Organization.

There is very little FDI in the Middle East mainly because much of the region does not need capital (it has too much, and exports capital), and because foreigners are generally not allowed to invest in stocks, real estate or even joint ventures in restricted sectors. Even fellow GCC nationals are often regarded as foreigners, and investment opportunities kept to local nationals.

This situation is changing. Bahrain allows FDI in all its listed companies. Dubai is allowing foreigners to buy property. And Saudi Arabia is reducing the banned list of sectors that foreign partners can not participate in.

It is a problem for FDI in the Middle East that it can only take place if foreigners are allowed to invest directly in the region. At the summit in Dubai last week it was rather irritating to listen to many speakers complaining about the lack of FDI in the Middle East, while failing to appreciate that the main problem is that foreigners just are not allowed to invest.

In fact, given the very limited amount of FDI that is permitted, the Middle East seems to be doing remarkably well. Abu Dhabi has had no problem is finding foreign partners for its power and water stations, LNG in Oman and Qatar has attracted huge FDI and the Saudi Arabian General Investment Authority has bagged $13 billion of investment in its first three years.

For FDI is a remarkably good thing for any economy. It is not just the money invested. It is the transfer of technology and best management practice that brings real added value. Plus if you engage some of the world's top multinationals in your economy then you start to bring local standards up to world-class levels, and encourage other investors to follow, and provide big new customers for local goods and services.

So regional governments should address the problem of how to bring down the barriers to FDI and introduce the necessary legislation. Saudi Arabia will be bringing forward new laws for the capital markets, mining sector, insurance and financial services in the coming months and this will be watched with great interest.

The UAE could also do more to encourage local companies to allow foreigners to own their shares. Oman could allow expatriates to buy property. The limitations on the size of foreign ownership of joint ventures could be changed across the region.

But the general message for the Middle East is clear: if you want the benefits of foreign direct investment you have to allow it to happen first.