Globalization, Fiscal Policy, and Economic Diversification in Saudi Arabia: An ARDL Approach

Economic diversification has become a central policy objective for resource-dependent economies seeking to reduce vulnerability to external shocks. In the case of Saudi Arabia, diversification has gained particular importance within the framework of Vision 2030, which aims to broaden the productive base beyond the oil sector. This study examines the long-run relationship among globalization, economic globalization, government consumption spending, and economic diversification in Saudi Arabia from 1970 to 2022, utilizing the Herfindahl–Hirschman Index (HHI) as a measure of sectoral concentration. The analysis employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to examine both short-run and long-run relationships among the variables. To ensure robustness, the long-run ARDL estimates are cross-validated using Fully Modified Ordinary Least Squares (FMOLS), Dynamic Ordinary Least Squares (DOLS), and Canonical Cointegrating Regression (CCR). The results indicate that government spending is significantly associated with greater economic diversification, as reflected by its negative and significant association with the HHI. Domestic credit to the private sector is also positively associated with economic diversification, while foreign direct investment exhibits a weak positive association with diversification. In contrast, both overall globalization and economic globalization are associated with higher sectoral concentration, suggesting that the benefits of global integration for diversification are not automatic. These findings highlight the importance of complementary domestic policies, including support for SMEs, expanded private-sector financing, and innovation-driven investment, to strengthen the relationship between globalization and sustainable economic diversification in Saudi Arabia.