The Impact of Non-Oil Exports, FDI, and Services on Economic Growth in Saudi Arabia: An Empirical Analysis

Abstract

This study was designed to reveal the transformation of the Kingdom of Saudi Arabia’s (hereafter referred to as the KSA) economy from an oil-driven one to one not driven solely by oil. Its focus is therefore on investigating the role of non-oil sectors (non-oil exports, foreign direct investment, and services) on economic growth during the 1980–2016 period. As part of the empirical analysis, cointegration, a vector error correction model, variance decomposition, impulse response, and CUSUM analysis were undertaken. The result of the variance decomposition analysis supports an earlier result obtained through the causality analysis, which revealed a unidirectional causality running from FDI to growth, as well as from non-oil exports to services. In the responses of the four variables to one standard deviation, innovations were, on average, found to be inactive in the early stages of the sample forecast period, but all variables demonstrated more pronounced responses after about seven years into the forecast period. Finally, the CUSUM test indicated the stability of the model.

Keywords: Economic Growth, Non-Oil, FDI, Cointegration, Error Correction, Impulse Response

JEL Classification: C33, C32, F43, F21