Once known for its strategic location along lucrative Persian Gulf trade routes, Bahrain is making a bid to regain the spotlight as a commercial gateway to Gulf countries after decades of almost exclusive dependence on oil exports.

The country already boasts a diversified and business-friendly economy, yet the global financial crisis and social unrest cast a shadow over its economic ambitions. A few years on and after a $10bn aid package from the Gulf Co-operation Council (GCC), investment inflows are on the rise again. 

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“Bahrain has been doing well in terms of generating FDI into the country,” says Vivian Jamal, head of business development at Bahrain’s Economic Development Board. 

FDI into Bahrain grew to $989m in 2013 from $891m a year earlier, according to the UN Conference on Trade and Development's 2014 World Investment Report, marking a further improvement from the lows touched in 2009 and 2010, when investment inflows plummeted due to the global financial crisis.

Quality of investments

“We see Bahrain as a platform for companies willing to do business with the region,” says Ms Jamal. “We don't look at the total amount of investments per se, but rather at the quality of investments. Since Bahrain is a small island, we rarely support resource-intensive companies with high energy or land requirements; instead we try to focus on specific sectors that are able to add value to the economy and create jobs, such as the health and education, financial services, [technology, media and telecommunications], food processing, downstream petrochemicals and the logistics sectors.”

With its small economy – the GDP in 2013 was $32.8bn – Bahrain is not a major FDI recipient in the Gulf region, at least in absolute terms. On the other hand, the country's FDI inflows-to-GDP ratio is more than 3%, almost double the average of GCC countries (see chart).

Jamal Fakhro, managing partner of KPMG Bahrain and Qatar, says: “In terms of business environment, Bahrain is one of the easiest place to work in, it's a tax-free country, it's easy to obtain licences and hire foreigners, it offers 100% foreign ownership in most sectors and it's very close to Saudi Arabia, which is the largest market in the Gulf [the two countries are linked through a 25-kilometre bridge].”

Dozens of international companies doing business in the region have set up in Bahrain. The state Bahrain International Investment Park alone hosts the manufacturing facilities of, among others, Mondelez International (food and beverage), BASF (chemicals) and Siemens Metallurgical Services. 

Hydrocarbon dependence

Yet the country's tax-free and liberal environment comes at price. The budget's almost exclusive dependence on hydrocarbon revenues, which accounted for 88% of total state revenues in 2013, makes the country “highly vulnerable to a fall in hydrocarbon prices or production”, as highlighted by credit rating agency Standard & Poor's.

At the same time, political tensions remain in the spotlight as October 2014's parliamentary and municipal elections approach. The ruling Sunni community and the Shia community still appear polarised after social unrest broke out in 2011.

“The ongoing discussions about whether or not opposition groups will participate indicate that political consensus remains elusive and the process of reconciliation is uncertain,” Standard & Poor's wrote in a June report.

Nonetheless, the business community seems to be betting on growing internal stability. KPMG's Mr Fakhro says: “We see lots of calls from existing clients and new clients for new business and expanding business. Today, the mood is much more in business mode compared with 2012 and 2011.”