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As countries and companies rush to get their hands on critical raw materials to bolster supply chains and deal with a rocky energy transition, Saudi Arabia is staking its claim. It stands a real chance, especially with growing discomfort around reliance on China. But are investors willing to trust it yet? Its sovereign wealth fund and state miner are ploughing $3.2 billion into a fund that will invest across the world in resources like copper, nickel and lithium, as a non-operating partner with a minority stake. The company’s formation was announced at Saudi Arabia’s annual Future Minerals Forum, where giants like BHP, Rio Tinto, Ivanhoe Mines and US and UK officials convened last week.

The new entity will invest up to $15 billion in companies and assets to secure supply for local use. Riyadh has been pushing non-oil businesses like manufacturing and its focus on raw materials is well-timed and targeted, especially with supply chains in disarray and climate regulatory pressures rising. China’s vital yet tenuous role in the global economy has forced companies to look for alternatives, even as shortages of critical minerals loom. Big industrial undertakings that are key for the energy transition, like solar plants, electrolytic hydrogen facilities, EV batteries and carbon capture and storage, require heaps of metals. Despite the US Inflation Reduction Act that tries to boost American manufacturing, resource links haven’t attracted actual hard dollars yet.

While Saudi Crown Prince Mohammed bin Salman (MBS) is on to an opportunity, it won’t be easy to execute. This isn’t the usual scepticism around a lofty vision; it’s more about jaded corporate executives and their risk-taking ability. And here’s the rub: No matter how deep-pocketed or well-endowed the kingdom is, it will need foreign investors and capital to help with technology transfers, business strategy and productivity. While they’re watching, no one has hit the ground in a big way yet.

Bringing in foreign direct investment (FDI) could be the biggest challenge. MBS’s Vision 2030 economic blueprint hopes to up the FDI contribution to gross domestic product from 0.7% to 5.7%. Foreign capital into Saudi Arabia grew sharply in 2021, largely because of a $12.4 billion pipeline deal by the state-run Saudi Arabian Oil Co, or Aramco. But big undertakings remain missing. Multinational firms are hovering, signing memorandums of understanding and visiting, but that’s all.

Companies must mull the risks of piling into a region flush with wealth, but sitting at the crossroads of geopolitical and economic tensions. In emerging markets, capital intensive FDI comes with years of contractual cash commitments and borrowings, adding layers of costs and complexities. Can the returns on investment in Saudi Arabia make up for the risks businesses are taking? And could the rules change before they reap the upside? Multi-billion-dollar mining projects require stakeholder approvals and are harder to commit to; public shareholders don’t necessarily want to wait for long-term returns and are less enthusiastic about big spending. At its peak over a decade ago, expenditure in the sector totalled almost $150 billion, but it’s expected to fall by $11 billion this year globally.

Attracting FDI eventually becomes a self-fulfilling cycle: once a country or province hits a critical mass, it’s easier to bring in more. Preferential policies like tax incentives and free trade zones help—for both domestic and foreign firms. Economies of scale kick in and efficiencies rise. Getting to that level of investment, though, is a must.

Even as the world’s top miners and companies flocked to Riyadh, few talked about breaking ground on huge projects that mining requires. Barrick Gold Corp and Saudi Arabian Mining— nown as Maaden— announced they were setting up two exploration joint ventures. Maaden will initially contribute $7.6 million. The Saudi miner also announced a $126 million deal with Ivanhoe Electric. Meanwhile, the UK didn’t go much beyond a loose commitment; its secretary for business, energy and industrial strategy, Grant Shapps, noted that it can never be too reliant on any one nation and why it needs partners like Saudi Arabia.

China’s experience with attracting FDI shows that domestic-focused investment is largely driven by the size and growth of the economy. Other factors like labour costs and infrastructure are also crucial determinants. The country remains one of the biggest recipients despite questions around governance structures and legal frameworks. However, it had built itself out as the factory floor of the world and had its deep manufacturing prowess on offer.

For Saudi Arabia, opening up is a big step as are welcoming invitations to foreign businesses, but it will have to figure out whether it can give foreign investors a large enough opportunity. That math is worth doing. 

Anjani Trivedi is a Bloomberg Opinion columnist covering industrials including policies and firms in the machinery, automobile, electric vehicle and battery sectors across Asia Pacific.

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