Foreign direct investment (FDI) in Bahrain

FDI in Figures

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty has put significant downward pressure on global FDI in 2022, and new investment project numbers, including greenfield announcements, international project finance (IPF) deals, and cross-border mergers and acquisitions, all shifted in reverse after the first quarter of 2022 to start declining. Cross-border M&A sales were 6% lower and IPF values more than 30% lower in 2022. The outlook for global FDI in 2023 appears weak, with a significant number of economies around the world expected to enter a recession. Negative or slow growth in many economies, further deteriorating financing conditions, investor uncertainty in the face of multiple crises and, especially in developing countries, increasing risks associated with debt levels will put significant downward pressure on FDI (UNCTAD Global Investment Trends Monitor, January 2023). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession.

The Kingdom of Bahrain is very open to foreign investment and has one of the highest FDI stock-to-GDP ratios in the region. According to UNCTAD's 2022 World Investment Report, FDI in Bahrain increased by 73% to USD 1.76 billion in 2021. In the same period, FDI stocks reached USD 33.47 billion. The government has announced plans to continue implementing wide-ranging reforms to attract foreign investment and link it to national development and economic diversification plans. Foreign investment in 2021 was mainly directed at the country's manufacturing, education, healthcare and information technology industries. The main investor countries are Saudi Arabia, Kuwait, India and United Arab Emirates.

The Kingdom of Bahrain was ranked among the top 20 global economies in attracting direct investment, according to the Financial Times’ Greenfield FDI Performance Index 2021. Bahrain ranked 15th among 84 countries from around the world that were included in the report. The Kingdom also ranked 2nd in the Gulf and 3rd in the Middle East and North Africa (EDB Bahrain, 2022).

Bahrain enjoys an open and attractive economic and regulatory environment for international companies looking for a gateway to Gulf and Middle East markets.  The country has the lowest corporate and personal taxes in the Gulf, without any restrictions for free trade zones. Foreign business ownership is fully permitted in more than 95% of all economic activities, eliminating the need to resort to a local partner in most cases. The excellence of the country’s logistical infrastructure is also a major factor of attraction. Moreover, Bahrain offers a large, highly skilled pool of financial workers, a regulatory structure that is both advanced and internationally well-regarded, and a physical connection to Saudi Arabia – by far the largest economy in the Gulf. Beside a strong regional competition, FDI in Bahrain have been limited by the slow advancement of the privatisation programme and a rigid labour market. The absence of true reconciliation between the Sunni monarchy and the predominantly Shiite opposition constitutes a hindrance to FDI. Moreover, new emerging trade centres in the Gulf increased the competition to become a regional financial crossroad. There was a number of prominent local, regional, and international investments in the kingdom in 2020, including from GCC, European, and Asian companies. These companies invested in a number of major sectors including financial services, manufacturing, logistics and retail services, education, healthcare services, real estates, tourism, and ICT.

Bahrain is a significant economic hub in the Gulf Cooperation Council (GCC) area and offers one of the most accommodating investment climates to draw in foreign companies. Bahrain’s currency is freely transferable and tied to the US dollar. That few businesses require local equity participation helps explain Bahrain’s position at the top of the GCC for foreign direct investment (FDI). Bahrain’s Economic Development Board (EDB) said it will be focusing on several initiatives aimed at furthering economic growth and contributing to attracting 2.5 billion USD direct investments across vital economic sectors by 2023 to achieve the objectives of the Kingdom's Economic Recovery Plan.

What to consider if you invest in Bahrain

Strong Points

The advantages of Bahrain in terms of attracting FDI include:
-A largely English-speaking educated and skilled population;
-A tradition of cultural openness based on trade and the country's strategic location in the northern Gulf, with good communications links with Saudi Arabia and an easy access to other Gulf markets;
-Operating costs among the most competitive in the region;
-The most attractive tax regime in the Gulf;
-A solid reputation in the regulation of financial services;
-Excellent quality of life;
-Relatively (in a regional context) diversified economy, with oil, manufacturing (including aluminum and petro-chemicals) and financial sectors;
-Financial and other support from larger regional states, particularly Saudi Arabia.

Weak Points

The potential factors hindering foreign investment include:
- The period of political and civil upheaval that hit in Bahrain in February 2011 and resulted in sporadic outbreaks of unrest fueled by demands for political and social reforms and questions such as housing, employment and sectarian discrimination, all based on tensions between the ruling Sunni minority and the Shia majority;
- Regional instability, including potential for contagion stemming from events in Iran, Iraq and/or Syria;
- The use of official travel bans, which prohibit an individual from leaving the country until a business project or a dispute is resolved; periodically, foreign companies have also experienced difficulties in obtaining work permits and residence visas for expatriate employees due to the policy of promoting the employment of Bahraini citizens;
- Corruption or government intervention in tenders and disputes can be an impediment to FDI;
- Despite economic diversification, there is still a high dependence on oil revenues, directly (own output) and indirectly (regional influence);
- Sharply deteriorated public finances since 2015.

Government Measures to Motivate or Restrict FDI

The Government of Bahrain has a generally liberal approach to foreign investment and actively seeks to attract investors and foreign companies in a competition to be the most attractive country in the Middle-East. Various measures have been taken in this direction, such as the formation of a Supreme Council for privatization in the spring of 2001, the creation of the Bahrain Mumtalakat Holding Company in 2006, whose role is to manage all public investment, and the creation of the Bahrain Investors Center (BIC), designed as a "one stop shop" and providing all business services, licensing and registration. However, the labour policy of "Bahrainization", a quota system which requires employers to hire a minimum percentage of Bahrainis, can cause potential delays and confusion when issuing work permits and renewals.

Bilateral investment conventions signed by Bahrain

See the list of the bilateral agreements signed by Bahrain on the UNCTAD website.