Bahrain may be the smallest country in the Middle East, yet the glittering towers that populate the Manama skyline — several of which are designed to resemble the famous dhows ships that once sailed the Gulf — are testament to its outsized ambitions. 

The country was the first Gulf state to seriously push diversifying its economy away from oil and gas. It began building an aluminium industry in the late 1960s and developed as a major regional finance centre in the 1970s and 1980s. Today, the non-oil sector accounts for 85% of gross domestic product (GDP).

“Bahrain’s economic policies and ethos has always been pro-business, pro-trade, pro-investment,” Abdulla bin Adel Fakhro, Bahrain’s minister of industry and commerce, told fDi Intelligence. “We’ve been at the crossroads of trade for millennia.”

Yet it is hard to avoid the suspicion that Bahrain, an island of little more than a million people, faces being eclipsed by its much larger neighbours. Its role as a regional transport hub, for example, has diminished in recent years. Gulf Air, the national carrier, was once the largest airline in the region; it is now dwarfed by the likes of Emirates, Etihad and Qatar Airways. 

And Bahrain has been left trailing in the race to be the Gulf’s leading financial centre. It is ranked as only the 80th most competitive finance centre worldwide in the latest edition of the Global Financial Centres Index, far behind Dubai in 16th position. 

Almost all international banks have moved their Middle East headquarters away from Bahrain, mostly to Dubai. BNP Paribas is one of the last to maintain its regional base in the country, but is planning to downsize its local office in the near future and manage its Middle Eastern operations from Paris.

Strength in smallness

Despite facing fierce competition from its larger and more glamorous neighbours, Bahrain has some trump cards in its efforts to remain a key player in the region.

Rishi Kapoor, vice chairman and chief investment officer at asset management firm Investcorp, says that Bahrain is able to benefit from the “small country advantage”.

He argues that Bahrain is able to “operate with great agility” in creating a favourable regulatory regime that allows investors to use the country as a “sandbox” to innovate and experiment.

The future for financial services in Bahrain is “quite rosy”, he insists. Investcorp, which has been operating in Bahrain for 42 years, is the “poster child” for how investment institutions can use the country as a launchpad for regional and global expansion, Mr Kapoor notes.

Outside of the financial services sector, Bahrain has continued to emphasise its generous fiscal terms and fast-moving bureaucracy as key to attracting investment. Last year, it launched a ‘golden licence’ for large-scale foreign direct investment (FDI) projects, offering investors streamlined approvals and land allocations. 

One company persuaded to make a big bet on Bahrain is Swiss-registered Interlink Metals & Chemicals, which announced Bahrain as the location for a new $200m titanium production plant last November. Igor Raykhelson, Interlink’s chairman, says that it considered other Gulf countries for the facility, but opted for Bahrain partly because of “huge government support”.

The company was able to secure its golden licence within around a year and is now “just about at a stage where [it] can start breaking the ground,” says Mr Raykhelson. “Everything is done on a fast track.”

Mr Raykhelson adds that Bahrain’s free trade agreement (FTA) with the US, which allows its produce duty-free access into the US market, was another “critical factor” in its investment decision. The US is the country’s main market for its titanium products, but it is far cheaper to manufacture in Bahrain because electricity costs are well below US levels. 

Omar Al-Ubaydli, director of research at the Bahrain Center for Strategic, International and Energy Studies, agrees that the free trade agreement with Washington, which entered into force is 2006, is Bahrain’s “biggest advantage”. 

“Since the US is unlikely to sign any new FTAs in the foreseeable future, Bahrain can attract capital from [countries in the region] that would like to export to the US tariff free.”

Integration 

Investment opportunities in Bahrain certainly cannot compete with the scale of those on offer across the King Fahd Causeway in Saudi Arabia, where Prince Mohammed bin Salman’s Vision 2030 programme is rapidly remaking the economy.

But rather than fighting against the tide, Bahrain’s government has opted to embrace regional integration. “All the region is moving in the direction of more diversification for the industrial sector,” says Mr Fakhro. “We will work on a joint industrial strategy for all [Gulf Cooperation Council (GCC)] countries so that we’re not competing and bumping heads when it comes to industrial sectors. We want to complete each other's supply chains.”

A proposed merger between Aluminium Bahrain (Alba) — which operates the world’s largest smelting operations outside China — and the aluminium operations of Saudi company Ma’aden is “a perfect example of integration with other GCC countries”, says Mr Fakhro. The deal would see Alba combine with Ma’aden’s bauxite mining, alumina refining and aluminium smelting assets. In a separate transaction, Ma’aden has agreed to acquire a 20.62% stake in Alba.

Speaking at the Gateway Gulf Investment Forum in November, Alba’s chairman Khalid Al Rumaihi said the merger, which he expects to be completed by mid-2025, would create the “critical mass” to enable the combined company to compete internationally. Noting that a combined company would become the world’s seventh largest aluminium manufacturer, Mr Al Ramaihi added that the deal would help Alba gain access to the “Saudi growth story”.

Mr Al-Ubaydli, meanwhile, argues that “Bahrain benefits greatly from being close to large, prosperous economies”, pointing out that there is “plenty of room” for regional economic growth without GCC countries encroaching on each other. 

“The FDI inflows realised in the past two years suggest that investors remain confident in the Bahraini economy,” he says. Bahrain secured a record $6.8bn in FDI in 2023, following a $1.95bn haul in 2022, bringing FDI stocks to almost 100% of GDP. Despite its smallness, Bahrain, it seems, remains well positioned to entice investors.