Analysis of Global Competitiveness of Kuwait Using Diamond of National Advantage
This paper analyzes the global competitiveness of Kuwait based on Porter’s Diamond Model of National Advantage. Four determinants, factor, demand, supporting industries and firm strategy, structure and rivalry were considered in the review. Factor conditions analyzed were natural resources, generalized factors, and human resources. The paper also proposes some policies that the country can adopt to improve foreign direct investments (FDIs).
Kuwait is among top suppliers of crude oil in the world. According to Shea & Spilling (2010), the country has about 101 billion barrels of crude oil, which is about 9% of global oil reserves. The country’s oil is expected to last for over 100 years. So any company investing in Kuwait is assured of a continuous supply of petroleum fuel for the next century. Again, the petroleum products are readily available at stable prices in Kuwait. The country’s processed about 1.0 million barrels of petroleum products per day against a demand of 345,000 barrels per day (Organization of Petroleum Exporting Countries, OPEC, 2016), Figure 1 below shows the prices of gasoline in Kuwait from December 2016 to April 2017. Other than oil, Kuwait’s most valuable natural resource is natural harbor which serves as an international trade and transportation conduit in the Persian Gulf (Isiorho & Gritzner, 2002). However, the country lacks permanent freshwater supply (DiPiazza, 2007). Hence, companies that rely on the massive amount of water to do production cannot operate optimally in the country.
Figure 1: Monthly Gasoline Prices per Liter in Kuwaiti Dinar
Source: Global Oil Prices
Kuwait heavily relies on road transport. The country has no railroad network. The country’s road network links every urban center and extends to countries such as Iraq and Saudi Arabia. Most of the road, over 80%, is well paved with bitumen. According to Global Competitiveness Report 2016-2017 by World Economic Forum, the country was ranked 53rd in the world in quality of roads. Figure 2 below shows a typical road in Kuwait. Apart from roads, Kuwait has five main ports namely Ash Shuaiba, Ash Shuwaikh, Mina Doha, Az Zour and Mina Abdullah. These ports are used to import and export goods including hydrocarbons and machinery. According to Singh (2010), Kuwait has a Free Trade Zone at Shuwaikh Port which provides business-friendly incentives such as tax exemptions and 100% foreign ownership. The country has one main international airport, Kuwait International Airport. The other airports with paved runways belong to the military. Global Competitiveness Report 2016-2017 places the country at position 106 in terms of quality of airport infrastructure. Again Kuwait has relatively modern communication network. The country has one of the highest mobile cellular subscriptions in the worlds, 230% according to International Telecommunication Union, ITU, (2016). According to Consolidated Kuwait National ICT Indicators Report, 2016, fixed and cellular network covers 100% of the country, with 97% under 4G network. The same report also indicates that 80% of Kuwaiti households access the internet, mainly through cellular mobile. According to State of Internet Report 2016 prepared by Akamai, Kuwait is ranked 81st in internet speed globally. So the country has the infrastructure needed to support business operations and logistics.
Typical Road in Kuwait
(Source: The Times)
Kuwait is categorized as high human development country by United Nations Development Programme. It is placed in position 51 globally in human resource development index. Higher HDI means that workers in Kuwait are healthy have modest access to knowledge and a decent standard of living. Figure 3 below shows the trend in the country’s HDI. The country attracts some of the highly skilled workforce from other nations who makes up about 70% of the population according to Gulf Times (April 26, 2016). The Consolidated Kuwait National ICT Indicators Report 2016 shows that Kuwait has about 22,000 ICT professional, out of which 60% are expatriates. The reliance on foreign skilled workers is the main undoing to the country’s labor sector.
Kuwait’s HDI from 1990 to 2014
(Source: United Nations Development Programme)
Kuwait is not a large market. Data from World Bank shows that the country’s population was 3.9 million in 2015. As a small market, the demand for products and services is not as high as in countries such as the United States with over 300 million people. Nonetheless, the demand for digital devices is very high according to Oxford Business Group (2013). The Consolidated Kuwait National ICT Indicators Report (2016) showed that 99.9% of the households have smart phones. The Oxford Business Group (2013) also says that Kuwait’s consumers are increasingly becoming sophisticated especially in the technology market. They take quality seriously. To this end, it is a country companies can rely on to provide future insights for innovation and future upgrades.
Related and Supporting Industries
The Global Competitiveness Report 2016 puts Kuwait in position 30 in terms of local suppliers’ quantity ahead of big economies such as Australia, Bahrain, Brazil, India, Israel, Mexico, Russia, Thailand, and Turkey. This statistic is an indication that the country has access to competitive local suppliers that can be used to drive innovation. However, Kuwait does not have many specialized training institutions such as Massachusetts Institute of Technology in the United States and Indian Institute of Technology that are known to produce highly skilled programmers. To this end, the flow of information between companies and specialized training institutions may be limited.
Firm Strategy, Structure and Rivalry
Kuwait allows the formation of limited companies under Commercial Companies Law. However, the foreign ownership of the companies is limited to about 49%. This form of ownership means that the locals control limited companies which may not be appropriate for many multinationals. The country is commodity based, so most competitive companies have are in long term sectors that include oil industry. Finally, the privatization has led to intense competition among business rivals in Kuwait according to Oxford Business Group. Consequently, there is pressure for companies to innovate and upgrade. However, there are some businesses that still enjoy a monopoly in the countries such as fixed line telecommunication.
Policies of Competitiveness That Kuwait Should Adopt To Attract and Retain Foreign Direct Investments (FDIs)
Kuwait is ranked in position 102 out of 188 countries in ease of doing business. The country performs poorly on trade issues such as processing business permits, trading across borders, and getting credit. Foreigners wishing to start up companies in the country are required to cede 51% of their shareholding to Kuwaiti nationals, a requirement that many foreigners are not ready to accept. The country through Kuwait Direct Investment Promotion Authority (KDIPA) is trying to improve on this barrier. Today KDIPA can give authority to a firm to have a 100% foreign ownership in some sectors. This section of the paper proposes some of the policies Kuwait can adopt to attract and retain FDI.
The biggest challenge to FDI in the view of this paper is the requirement that foreign companies must have a 51% local ownership. This policy when implemented means that foreigners have no control of their firms in Kuwait. A company, like Microsoft, may find it very difficult to cede decision-making function to locals who may not be knowledgeable about how the company operates and its research and development needs. Moreover, getting local shareholders can also difficult especially if a substantial amount of capital is required to set up the firm. The Kuwaiti government should adopt a company shareholding policy that grants foreigners a controlling stake in their companies without having to seek approval from KDIPA
Kuwait does not allow foreign investors to invest in sectors such as oil and real estate (The United States Department of State, 2015). The State of Kuwait wholly owns and manages oil through agencies such as Kuwait Petroleum Corporation and Petrochemical Industries Companies. According to the International Business Publications (2015) argues that these companies were historically owned by the government and private sector before the current constitution. Oil is the lifeline of the country’s economy. Given that the country holds about 10% of world oil reserves, it may be very attractive to foreign investors. The government should liberalize the energy sector to make it possible for foreign companies to invest in, for example, the exploitation of oil as it happens in other countries such as Iraq and Saudi Arabia.
There is a need for Kuwait to adopt a policy that is intended to make it easy for foreign firms to establish a business in Kuwait. Today, an international company cannot open a branch in Kuwait unless it is incorporated in the country. Such company is compelled to operate through Kuwaiti firm according to Price Waters Coopers (2015). The process of starting a business and obtaining permits is also tedious according to Word Bank. Again, only foreign companies are the only ones required to pay corporate income tax on their profits. The tariff and non-tariff barriers hinder the flow of FDI. Besides, the country should improve its competition law to cover government owned entities who may be rivals of foreign firms.
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