Keeping options open: The government is keen on increasing foreign investment and securing new partners

Foreign direct investment (FDI) forms a key plank of Bahrain’s development strategy. On its own, the size of the country means that both the internal market and its ability to provide capital are limited. At the same time, Bahrain has less oil and gas reserves than many of its neighbours, and as such, is looking to diversify its economy away from hydrocarbons and develop export-oriented industries. Thus, by drawing foreign investment, Bahrain can position itself as a base from which to access regional markets in the neighbouring Gulf countries and beyond, and in the process, increase productivity and develop a more varied skills base.

LIBERAL REGIME: Bahrain currently levies no corporate income taxes, withholding taxes or value-added taxes, and operates a liberal regime for domestic and foreign businesses alike. Business regulations are stable and work on a “light touch” basis, while Bahrain Customs is regarded within the region as both efficient and courteous. The country has a skilled and multi-lingual workforce, composed of both Bahraini nationals and expatriate workers, who comprise roughly two-thirds of all workers, and are concentrated at the both lower end and the higher echelons of the private sector.

Moreover, Bahrain is a member of the Greater Arab Free Trade Area and is one of just four countries in the region to have a free trade agreement with the US, meaning that manufacturers that set up shop in Bahrain benefit from tariff-free access to both the biggest economy in the world and almost the whole of the MENA region. The country has successfully promoted inward investment, with FDI inflows of around $781m in 2011, according to the United Nations Conference on Trade and Development (UNCTAD). UNCTAD data show Bahrain’s total stock of inward foreign investment stood at $12bn in 2010, compared to $1bn in 1990. Although these numbers refer to total investment, rather than investment into industry, if the country can keep inward investment flowing at the same rate in the next 20 years, the industrial base is likely to deepen and diversify considerably.

ATTRACTING FDI: The Economic Development Board (EDB) is charged with helping attract FDI to the country, and drawing up and implementing Bahrain’s development strategy, known as Vision 2030. The National Economic Strategy, drawn up by the EDB, consists of a series of initiatives designed to improve the country’s performance across a range of indicators, such as skills, education and so forth, and specifically aims to use foreign investment to increase productivity and enhance the country’s skills base. FDI can play a particularly useful role in transferring new technology to the Bahraini economy and raising productivity and skills to the level required for the country to move towards producing higher-value goods and services rather than commodities and basic manufactured products.

According to EDB figures, in 2012 some 40 firms chose to locate in Bahrain, and FDI into industry alone amounted to around $200m in 2011. Although international confidence in Bahrain’s economy may have wobbled in 2011, industry has perhaps been the least-affected segment in Bahrain over the past couple of years. While the events of 2011 had a negative impact on the tourism and banking sectors, and in tandem with that, on the real estate segment, Bahrain’s factories, being mostly export-oriented, continued to operate relatively smoothly, underpinned by strong demand from markets within the region. The sustained investment volumes witnessed over 2012 demonstrate that by and large foreign investors continue to regard the country as a good place to do business.

NEW SPACE: Much of this investment has been targeted at a series of new business parks located between the country’s main seaport and airport. The Bahrain International Investment Park (BIIP) states it has seen $1.3bn in investment since opening in 2006, of which 70% came from overseas, while the neighbouring Bahrain Investment Wharf (BIW) estimates total investment to date at around $1.2bn and its occupancy rate at 96%. Both BIIP and the BIW feature a mixture of industrial land, pre-manufactured units and workshops geared to the needs of small businesses and logistics firms. The main difference between the two is that BIIP is aimed at larger manufacturing firms and offers space for rent, while the BIW sells its space on a 50-year leasehold arrangement and is aimed at smaller firms. Both aspire to meet the needs of manufacturing businesses targeting export markets within the GCC.

NEW PARTNERS: Among the large FDI projects, one of the biggest is German chemicals group BASF’s plant producing tailor-made resins for the regional plastics industry. The company’s 16,000-tonnes-per-annum (tpa) plant opened in late 2012 at the BIIP. BASF selected Bahrain due to its good infrastructure and trading links with the region and because unlike many of its competitors, it permits 100% foreign ownership of onshore firms, allowing the German company to maintain more effective control over its intellectual property. Another German investor to come to Bahrain in 2012 is RMA Pipeline Equipment, an engineering and industrial services group. Since 2012, the company has operated a facility for the manufacture of pipes serving the oil and gas industry. The 6000-sq-metre plant employs 100 people, and over 95% of production goes to export. Thus far, RMA’s investment totals €13m.

However, perhaps the biggest metallurgy project in Bahrain in 2012 was the opening of SULB, a joint venture between Kuwait’s Foulath and Japan’s Yamato Kogyo to produce steel for the regional market. The SULB complex at the BIIP features a direct iron redux plant, with a capacity of 1.5m tpa, two rolling mills with a combined capacity of 1.2m tpa and a 1m-tpa melt shop. Total investment at the site is $1.4bn. SULB’s investment represents a milestone in Bahraini industry, since for the first time the country will have the capacity to produce a broader range of downstream steel products, not just rebar steel for the construction industry.

Other large FDI projects in manufacturing that opened in Bahrain in 2012 include: BFG International, a manufacturer of composite products, which set up a $9m plant producing fibre reinforced composites; SMS Meer, a German group specialising in plant construction for the non-ferrous metal sector, which opened a repair centre and workshop; and AeroThrust Gulf Aviation Services, a joint venture between Bahraini investors and US-based AeroThrust Holdings, which built a $20m maintenance, repair and overhaul facility. In March 2013 JBF, an Indian polyester fibre firm, was due to open a $200m, 90,000-tpa factory producing polyester fibres, which plans to export to the US and EU markets.

Traditionally, the main sources of FDI have been other Gulf countries (particularly Saudi Arabia), Britain and the US, and increasingly, the countries of the Indian subcontinent, with which Bahrain enjoys close trade links. Bahrain is looking to target fellow emerging markets, partly in response to greater caution in OECD countries and to develop new potential markets. In particular, the kingdom has increased its trade ties with China over the past several years.