RIYADH, 6 February 2006 — Services sectors are likely to be the most impacted by foreign investment due to Saudi Arabia’s WTO (World Trade Organization) membership, because of two reasons: (1) the essential nature of services themselves, and (2) Saudi Arabia’s WTO commitments regarding foreign investment. First, an essential nature of services is that production occurs simultaneously with consumption (think of a repair job, health care, bus transportation, etc).
This is quite unlike goods, in which case production and consumption can be separated by time and place. For example, a car or computer, can be produced in Japan, stored in a warehouse in the UK, and sold to a consumer in Spain much later. But a service cannot be produced or stored for consumption at a different time or location.
For example, medical care is “produced” only when and where it is demanded by the consumer (e.g., patient), and the service provider (e.g., the doctor) has to connect with the consumer. Some services can be provided from across the border (e.g. offshore banking from Bahrain) and some services can be consumed abroad (e.g. medical care in Czechoslovakia). However, expansion of trade in services is most effective when the supplier is located where the consumer is, i.e., through commercial presence or foreign investment and movement of natural persons or individuals.
Foreign investment is a win proposition for Saudi Arabia because it allows access to new and advanced technologies, and it makes foreign companies partners in job creation for Saudis. Hence, under the WTO, Saudi Arabia has committed itself to allow foreign companies to set up local commercial presence in most service sectors.
Full (100 percent) foreign ownership is allowed in computer and related services, R&D, rental and leasing, advertising, market research, management consulting & related areas, technical testing and analysis, Maintenance and repair (excluding maritime vessels, aircraft or other transport equipment), photography, packaging, printing and publishing, convention services, public relations, translation, speciality design, courier services, audiovisual (radio, TV and motion pictures), construction, education, environmental services, recreation, and transportation (except road and rail), etc.
Foreign ownership in the form of a joint venture (JV) with a maximum 75 percent cap on equity, or as a direct branch of a foreign entity is allowed in professional business services (e.g. legal, accounting, auditing & bookkeeping, taxation, architectural engineering and urban planning, medical, dental, & veterinary services, etc).
In telecommunication, banking, insurance, tourism and related services, and distribution services, the Kingdom’s foreign investment commitments vary by subcategories and have different restrictions and/or implementation periods. Restrictions regarding independent foreign workers also exist with a view to Saudization and expatriate labor.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)
