Companies relying heavily on low cost expat labour will be the most affected by the proposed reform policy. Currently, this segment only accounts for 10% of foreign direct investment flows into Bahrain and is composed of companies mostly from the textile and garment manufacturing industries. These industries are already under significant pressure and will find themselves, for the most part, uncompetitive with the expiration of the Multi-Fiber Arrangement (MFA) quotas in 2005.
In general, evidence suggests that relying on low cost labour as a competitive advantage is not a sustainable policy towards economic growth. Bahrain will not be able to successfully compete against countries with larger populations and lower costs, such as India and Pakistan, over the long term.
In turn, this economic reform policy could help Bahrain redirect its focus on becoming more competitive by reorienting it towards attracting more value-added, high skill investment.

• Only 14% of surveyed foreign investors in Bahrain cited low-cost labour as a major reason for investing here. (Exhibit 1)
•  Almost 90% of foreign direct investment flows into Bahrain is in sectors such as banking & finance, real estate, and communications & transportation that do not rely on low cost labour.
•  Experience in other parts of the world shows that low labour costs relative to neighbours is not the most significant factor in attracting large flows of foreign investments. In Southeast Asia, for example, The Philippines, Malaysia, and Hong Kong have labour costs 30-90% less than neighbouring Singapore and South Korea, yet still attract far less foreign investment. (Exhibit 2) Singapore and South Korea have moved from competing on cost to competing on quality, which leads to a more value-added, prosperous, and sustainable economy.

As other Gulf countries implement similar labour reforms, Bahrain’s SMEs will not find themselves at a disadvantage. But during the transformation stage, the Fund can be used to mitigate issues experienced by SMEs and to guide them towards alternative plans for competitiveness.