Location motivations for foreign direct investment in the petrochemicals industry: the case of Saudi Arabia

Abstract

Foreign Direct Investment (FDI) is an important source of capital and economic growth in developing countries. It provides a package of new technologies, management techniques, finance and market access for the production of goods and services. However, attracting FDI is a major challenge for host countries, as they face the challenge of identifying the major factors that motivate and affect the FDI location decision, and also the key competitive drivers that determine FDI location. After reviewing the literature on FDI, we identified the major location factors for FDI with regard to the petrochemicals industry. These location factors are as follows: cost factors, market factors, economic factors, infrastructure and technological factors, political and legal factors, and social and cultural factors. We have noticed that previous studies have failed to discuss the complexity of the relative importance of location factors in relation to a specific industry and a specific country, and the competitiveness of these factors in terms of other FDI locations. This study therefore aims to fill the gap in the literature by examining the relative importance of the location factors on FDI location decision, and the major competitive forces that determine the attraction of FDI inflows in the petrochemicals industry in Saudi Arabia. We have found in this study that the most important location factors that affect the location decisions for FDI in the Saudi petrochemicals industry are cost factors, followed by political and legal factors, and infrastructure and technological factors. An interesting finding of this study is that economic factors, followed by market factors, and social and cultural factors, which in previous studies in the literature have been found to be important factors for multinational enterprises‘ (MNEs) location decisions for FDI have not been found in this study to be important for FDI location decisions in the Saudi petrochemicals industry. Another finding of this study is that the most competitive location factors for FDI inflows in the Saudi petrochemicals industry are cost factors, political and legal factors, followed by infrastructure and technological factors, and economic factors. This study found that market factors and social and cultural factors are not the key competitive drivers in terms of attracting FDI inflows into the Saudi petrochemicals industry.