Doing Business in UAE: An Exploratory Study of the Market Setting, opportunities, Challenges and Best Ways of Entry for Multinational Companies

Авторы: Rushdi Karam Zaiter, Ahmad Ali Lakis

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Рубрика: Экономические науки

Страницы: 44-43

Объём: 0,64

Опубликовано в: «Наука без границ» № 4 (9), апрель 2017

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Библиографическое описание: Rushdi Karam Zaiter, Ahmad Ali Lakis. Doing Business in UAE. An Exploratory Study of the Market Setting, opportunities, Challenges and Best Ways of Entry for Multinational Companies // Наука без границ. - 2017. - № 4 (9). - С. 44-53.

Summary: Doing business in UAE is a very attractive subject for all multinational companies and foreign investors who are seeking to enter that part of the world through this interesting market. It is obvious how UAE and especially the two Emirates: Dubai and Abu Dhabi recently have played very important roles in global business. Different factor have led to attracting investors to UAE markets including the government laws and regulations, the emerging industries in UAE, demographic constitution of the population, regional business role of UAE, and political instability in the surrounding markets of UAE. The market overview of the UAE markets has shown different interesting elements that should be considered by any new comer. These elements cover the new emerging industries and especially services, exporting and importing, infrastructure, and petroleum that used to be and still one of the major industries in UAE. The author discussed two approaches to enter the market with each have some pros and cons depending on the type of business. Moreover, these forms could take advantage of recenet laws of renting that make them capable of having long term rents reaching 99 years. In addition to that, free zones are very important for those looking toward using UAE for reselling and exporting. On the organization inside part, management and leaders should take into consideration the big differences in cultural and social norms and values between UAE and other countries. Expatriates with professional experience in that area are very important case for international organizations in order to gain the necessary experience.

Abstract

UAE have recently played important roles in being a «hub» for different multinational firms that are seeking expansion into the UAE market and other neighbor markets in that part of the world. The UAE governments have invested in a lot of different sectors and gave many enhancements to be able to attract such companies to come and start their business there. This study explored the market of the UAE and discussed different factors that are essential for understanding by any international firm looking for a new experience in that part of the world. The paper discussed the possible opportunities, some of which already exist and others which are emerging. In addition, the paper comes over the challenges that can accompany any new entry there. Lastly, from research, the paper presented different solution and modes of entry in addition to internal organization considerations that should be essential and critical for any new comer.

1. UAE Overview

The United Arab Emirates (UAE) is a country located in the Arabian Gulf, bordered by Saudi Arabia and Oman. The UAE’s surface area is 83,600 km², with diverse geographical terrains ranging from plains to mountains and from deserts to beaches. Oil and natural gas are the primary natural resources in the UAE, and petroleum production is the most important industry. The economy of the United Arab Emirates is the second largest in the Arab world(after Saudi Arabia), with a gross domestic product (GDP) of $ 570 billion (AED 2,1 trillion) in 2014. The United Arab Emirates has been successfully diversifying its economy. Internationally, UAE is ranked among the top 20 for global service business, according to AT Kearney, the top 30 on the WEF «most-networked countries» and in the top quarter as a least corrupt country per the TI's corruption index [1].

2. Economic environment

Successful efforts at economic diversification in trade, logistics, banking, tourism, real estate and manufacturing have reduced the portion of GDP based on oil and gas output to 25 %. Since the discovery of oil in the UAE more than 31 years ago, the UAE has undergone a profound transformation from an impoverished region of small desert principalities to a modern state with a high standard of living. The government has increased spending on job creation and infrastructure expansion and is opening up utilities to greater private sector involvement.

Table 1

Statistics [2]

GDP

$340,8 billion (2015 est)

GDP growth

3,9 % (2015 est.)

Inflation (CPI)

1,4 % (2012 est.)

Population belowpoverty line

0 % (2014 est.)

Labour force

4,34 million (2010 est.)

Unemployment

4,6 % (2012)

The UAE has diversified its economy away from oil. Non-oil sectors now contribute about 70 % of Gross Domestic Product (GDP). It’s the second largest Arab economy after Saudi Arabia and 30th largest globally with the 18th highest GDP per capita (USD 44 200) rate.

There are over 5 000 British companies operating in the UAE, including BP, Shell, Rolls Royce, BAE Systems, Mott McDonald, SERCO, Standard Chartered, HSBC and Fortnum and Mason. 779 commercial agencies and 4 762 British brands have invested in the UAE. The majority of the UAE population is made up of expatriates, with around 120 000 UK residents. In 2014 over 13 million people visited the UAE, of which 1 million were from the UK. The absence of direct business taxation (excluding banks, oil companies and telecommunications operators) and direct income taxation, of exchange controls and of any limitations on the repatriation of capital, as well as the existence of a strong and profitable banking sector, plus a large pool of expatriate labour are the country's undeniable assets. Its main weakness is the small size of its domestic market.

 Table 2

Foreign Direct Investment

2013

2014

2015

FDI Inward Flow (million USD)

9 491

10 823

10 976

FDI Stock (million USD)

89 340

100 164

111 139

Number of Greenfield Investments***

346

321

316

FDI Inwards (in % of GFCF****)

10,8

11,3

13,7

FDI Stock (in % of GDP)

23,1

25,1

32,2

Source: UNCTAD, 2015 [3]

3. SWOT Analysis

Strengths

The UAE has one of the most liberal trade regimes in the Gulf and attracts strong capital flows from across the region. In common with most Gulf states, there are a high number of expatriate workers at all levels of the economy. The UAE is progressively diversifying its economy, minimizing vulnerability to oil price movements. The UAE is very well connected to the rest of the world, mainly due to Ethihad, the UAE's national carrier and Emirates, Dubai's airline, rapidly expanding their fleet networks.

Weakness

The UAE’s currency is pegged to the dollar, giving it minimal control over monetary policy and reducing its ability to tackle inflationary pressure. The country’s location in a volatile region means that its risk profile is, to some extent, affected by events elsewhere. US concerns about regional militant groups and regional political instability could affect investor perceptions.

Opportunities

Oil prices are expected to stay high (by historical standards) over the near future. Economic diversification into gas, tourism, financial services and high-tech industries offers some protection against volatile oil prices. Despite the impact of the 2009 downturn, the tourism and financial services sectors still have good medium-term growth prospects, driven by domestic and foreign investment. The prevailing unrest in the Middle East Region and North Africa which erupted in the beginning of 2011 seems to have worked to the UAE's, and particularly Dubai's advantage, with businesses, financial institutions and people relocating to the UAE. Capital inflows and tourism also seem to have increased as a consequence of the regional unrest. UAE‘s real estate sector has benefited from the extension of visas by the UAE federal government in June 2011 from six months to three years, a reduction in mortgage rates as banks remain more liquid and increasing oil prices.

Threats

Heavy subsidies on utilities and agriculture, as well as an outdated tax system, have contributed to persistent fiscal deficits in the past, although rising oil revenues have addressed the problem in recent years. Several high-profile construction projects have been delayed and the property market crash could threaten future development. For the first time in its history, the credit rating of the United States of America was downgraded from AAA to AA plus by S&P which has had a significant negative impact on the USA's stock market and currency. Despite this, the UAE is committed to maintaining its peg with the US Dollar and, therefore, the prices of non-US Dollar imports are expected to witness volatility in line with the movements in the US Dollar exchange rate.

4. Investment Climate Statements

United Arab Emirates in the World Bank rating. A favorable investment climate is one of the main characteristics of any successful national economy. Emirates are no exception. The comfort and convenience of doing business with Arabs in this country was appreciated by many foreign companies. It is no coincidence that the UAE regularly tops the World Bank rating, which assesses the conditions of doing business in different countries of the world.

Each year, the World Bank examines 183 countries by various parameters to assess the convenience of opening, running and closing a business. Following the results of 2011, the emirates took the 4th place in such a parameter as property registration. In the UAE, this procedure takes no more than 2-days. Traditionally, the UAE took a high position in taxation – the 5th place. Emirates also managed to enter the top three countries, where the most favorable conditions for foreign trade were created. However, there are problems in the UAE economy. It concerns, for example, the protection of the rights of the investor. According to this indicator, the emirates occupied only 120 places. Such a low position is largely due to the requirement of local legislation to include the citizen of the UAE in the number of the founders of the company. At the same time, its share should not be less than 51 %. Of course, foreign business has long found the opportunity to legally bypass this requirement. However, the current situation, however, still negatively affects the investment image of the UAE. The leader of the World Bank's rating for the aggregate of all indicators is Singapore. Emirates occupy 40 place. However, as the rating shows, doing business with Arabs is comfortable and convenient. Other countries from this region - Saudi Arabia and Bahrain - took 11 and 28 places respectively. The emergence of Al Maryah Island is a major part of the capitals 2030 economic vision. The UAE could be an attractive hub for investors to locate their business interests for the following reasons:

  1. The UAE has one of the most liberal trade regimes in the Gulf region and attracts strong capital flows from across the region.UAE is focussed on economic diversification in trade, logistics, banking, tourism, real estate and manufacturing and provides opportunities in various industries;
  2. UAE has a well-established infrastructure, strong banking system and a stable political system. Although there are restrictions on company ownership by non-GCC nationals, the UAE also provides for a window of free trade zones that can allow 100 % foreign ownership and a nil taxation regime (subject to certain limitations);
  3. UAE provides a tax favorable environment for most industries. There are a high number of expatriate workers at all levels of the economy such that expatriates accounts for over 80 % of the work force;
  4. There are no exchange control restrictions and it is possible to have unrestricted repatriation of income and capital. UAE’s culture is driven by Islamic traditions, however, with over 150 nationalities, expatriates are able to practise their own cultures.

UAE ranked 2nd globally in attracting investment

The UAE ranked 2nd globally in attracting and receiving foreign investments, according to a 2014 report by the United Nations Conference on Trade and Development (UNCTAD). The report noted continued high inflows of foreign investments to the UAE for the fourth consecutive year. Overall, it said, the UAE had received in 2013 foreign investment of more than $10,5 billion dollars, pointing out that the rise in foreign investment has coincided with the economic recovery that the UAE has been witnessing since 2009, with the help of growth in the oil and non-oil sectors, expansion and sustainable development in the non-oil sector, especially in manufacturing, heavy industries such as aluminum and petrochemicals, and other sectors such as tourism, air transport and national airlines. The UNCTAD report ranked the UAE 13th globally and first in the Middle East among the most promising destinations for investors from 2013 to 2015. The World Forum for Foreign Direct Investment report for 2013 noted that the UAE attracted foreign direct investment of Dh36,7 billion ($10 bn) in 2012, compared to Dh28,14 billion ($7,67 bn) in 2013; a growth of 31,5 percent. The UAE ranked 2nd among Arab countries in terms of attracting foreign direct investment. It also ranked 3rd in West Asia, where foreign investment reached $47 bn. The UNCTAD foreign investment report for 2013 estimated total accumulated foreign direct investments in the UAE during the period from 2007 to 2012 at about Dh202,1 bn while total investments of the UAE abroad during the same period reached some Dh146 bn. The Arab Investment & Export Credit Guarantee Corporation (DHAMAN), based in Kuwait, confirmed that the UAE ranked first in the Arab world, in terms of attracting foreign direct investment in 2013. Citing UNCTAD statistics, it said that 92 Arab and foreign countries had had an annual flow of investments totalling more than US $ 300 billion during the period from 2002 to 2012. The most important, in descending order, are France, Kuwait, United States, the UAE, United Kingdom, Saudi Arabia, Japan, Netherlands, China, and Germany.

The UAE ranked first in inter-Arab investments during the period from 2002 to April 2014, with the total value of projects amounting to $ 217 bn. The UAE’s record in attracting investment reflects the policies of openness it has adopted since its establishment. It ranks 4th globally and first in the Middle East in the openness to the world index and in benefiting positively from globalisation, according to the International Institute for Management Development report for 2013. In this report, in which Ireland ranked first, the UAE surpassed many developed countries in the world. According to this index, Ireland ranked first by obtaining 8,15 points out of 10, followed by Hong Kong in 2nd place at about 8,08 points, and the UAE at 7,82 points, while Malaysia ranked 5th at 7,8 points.

Protection of Foreign Investment

Bilateral investment conventions signed by the United Arab Emirates UAE has signed 50 bilateral agreements on investment, though not all of them have entered into force. See the list of countries provided by the UNCTAD. International Controversies Registered By UNCTAD Some cases of disputes concerned with foreign investments. Organizations Offering Their Assistance in Case of Disagreement ICSID, International Centre for the Settlement of Investment Disputes Member of the Multilateral Investment Guarantee Agency Yes

Table 3

Country Comparison For the Protection of Investors [4]

United Arab Emirates

Middle East & North Africa

United States

Germany

Index of Transaction Transparency*

4,0

6,0

7,0

5,0

Index of Manager’s Responsibility**

7,0

5,0

9,0

5,0

Index of Shareholders’ Power***

2,0

4,0

9,0

5,0

Index of Investor Protection****

4,3

5,0

8,3

5,0

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action. **** The Greater the Index, the Higher the Level of Investor Protection.

5. Laws / Regulations on Foreign Direct Investment

There are four major federal laws affecting foreign investment in the UAE: the Companies Law, the Commercial Agencies Law, the Industry Law, and the Government Tenders Law. In 2011, the Ministry of Economy announced that 19 federal laws were in draft status to address a number of concerns historically discouraging foreign investment in the UAE. Today, the laws include an updated commercial agencies law, an insolvency law, an arbitration law, and a draft foreign investment law under review. The Federal Commercial Companies Law (Law No. 02, 2015) was issued in April 2015 and applies to commercial companies operating in the UAE. The new law, with which all companies must come into compliance by July 1, 2016, provides a stronger, more up to date basis for corporate regulation. Companies established in the UAE are currently required to have a minimum of 51 percent UAE national ownership. Profits and management control may be apportioned differently and often are negotiated at fixed amounts. Branch offices of foreign companies are required to have a national agent with 100 percent UAE national ownership, unless the foreign company has established its office pursuant to an agreement with the federal or an emirate-level government. The new commercial law allows companies to offer between 30 and 70 percent of shares upon undertaking an initial public offering (IPO) and eliminates the requirement to issue new shares at the time of IPO.

The law also eases the process for forming a limited liability company by requiring between 1 to 75 shareholders (the prior requirement was between 2 to 50 shareholders). Under the new law, when a public joint stock company lists, there is a 51 percent GCC ownership requirement. UAE nationals must chair and be the majority of board members of any public joint stock company. Provisions in the commercial law that would have relaxed the foreign ownership limit were rejected by the UAE Federal National Council (FNC), but might be addressed in a separate investment law that is currently still in draft form, according to a statement made in 2015 by the FNC spokesperson. A provision to allow 100 percent foreign ownership outside of free zones would reportedly be restricted to certain sectors, such as high technology projects, and would require Cabinet approval on a case-by-case basis. For example, in 2015, a prominent American technology company secured permission to open stores outside free zones without any local partners, having secured permission to do so on an exceptional basis via a decree from the Dubai Ruler. The Commercial Agencies Law’s provisions are collectively set out in Federal Law No. 18 of 1981 on the Organization of Commercial Agencies as amended by Federal Law No. 14 of 1988 (the Agency Law), and apply to all registered commercial agents. Federal Law No. 18 of 1993 (Commercial) and Federal Law No. 5 of 1985 (Civil Code) govern unregistered commercial agencies. The Commercial Agencies Law requires that foreign principals distribute their products in the UAE only through exclusive commercial agents who are either UAE nationals or companies wholly owned by UAE nationals. The foreign principal can appoint one agent for the entire UAE or for a particular emirate or group of emirates. The Ministry of Economy handles registration of commercial agents. It remains difficult, if not impossible, to sell in UAE markets without a local agent. Only UAE nationals or companies wholly owned by UAE nationals can register with the Ministry of Economy as local agents. The Federal Industry Law stipulates that industrial projects must have 51 percent UAE national ownership. The law also requires that projects either be managed by a UAE national or have a board of directors with a majority of UAE nationals. Exemptions from the law are provided for projects related to extraction and refining of oil, natural gas, and other raw materials. Additionally, projects with a small capital investment or projects governed by special laws or agreements are exempt from the industry law.

Foreign trade

With reference to foreign trade, the UAE marker is one of the world's most dynamic worldwide, placed among the 16 largest exporters and 20 largest importers of commodities. The top five of the Main Partner Countries of the UAE in 2014 are Iran (3,0 %), India (2,9 %), Saudi Arabia (1,5 %), Oman (1,4 %) and Switzerland (1,2 %). As for the top five of UAE suppliers are China (7,4 %), United States (6,4 %), India (5,8 %), Germany (3,9 %) and Japan (3,5 %).

Table 4

UAE's Foreign Trade Indicators [5]

Indicator

2010

2011

2012

2013

2014

Exports of Goods (million USD)

214 000

302 000

349 000

379 000

360 000

Imports of Goods (million USD)

165 000

203 000

226 000

251 000

262 000

Imports of Services (million USD)

41 337

55 702

62 301

66 413

70 279

Exports of Services (million USD)

11 028

12 063

15 276

17 345

19 769

Exports of Goods and Services (in % of GDP)

78,8

90,3

100,6

101,3

98,0

Imports of Goods and Services (in % of GDP)

72,2

72,3

75,3

76,8

77,9

Exports of Goods and Services (Annual % Change)

2,5

20,7

17,0

4,5

8,2

Imports of Goods and Services (Annual % Change)

2,1

18,8

5,2

6,5

6,1

 

In 2014, the United Arab Emirates managd to export 380,4 bn dominated by four products which are Petroleum oils and oils obtained from bituminous... (19,8 %) Diamonds, whether or not worked, but not mounted... (3,4 %) Gold, incl. gold plated with platinum, unwrought... (3,2 %) Articles of jewellery and parts thereof, of...(2,8 %). In the same year, the United Arab Emirates imported 298,6 bn dominated by five countries which are China (7,4 %), United States (6,4 %), India (5,8 %), Germany (3,9 %), Japan (3,5 %). On one hand, the United Arab Emirates managed in 2013 to export 17 bn USD services exported in 2013 dominated by travel (67,13 %), transportation (28,13 %), Government services (4,74 %). On the other hand, it imported 63,9 bn USD of services imported services dominated by transportation (70,68 %), travel (27,70 %) and government services (1,62 %).

6. Challenges

In the past two section of this study, the author represented a complete analysis of the market in UAE in addition to other cultural, social, political, and economy elements which are all important considerations for multinational companies. The analysis represented different opportunities in different sector some already exist and others are emerging. These opportunities present good chances for those who are seeking for expansion especially in the whole area of that part of the world. Add to that, the opportunities seem very interesting at the first glance and any investor should think of going there. For instance, take the diversity in population example with more 80 % foreigners constituting the UAE population. This looks great for a multinational firm and it is really a very good indicator for international business. However, doing business in UAE is not as easy as one could look. One major challenge for doing business in UAE is the 51 percent ownership by an Emirate. In such way, a great deal of control and revenue is given to the local UAE citizen. Moreover, such rule or policy helps the Emiratis maintain their values and traditions. Two main approaches are usually used by multinational companies to cope with such policy. The first approach by find a sponsor and give them 51 percent of the revenues. The sponsor is usually an existing local company where merging or alliance could take place. The second approach, the mostly used, is finding a UAE citizen who is willing to sponsor them. In return, the foreign organization provides the sponsor with a bulk of money upfront or just a percent of the revenues. Furthermore, the UAE citizen could be profession and become a part of such organization such as a CEO. This kind of solution is very practical especially that there are no limits on how many companies a citizen could sponsor (Damyanova& Singer, n.d). Other main challenges for multinational organizations and expatriates on UAE are related to the culture and society of the UAE. As already mentioned, the culture and society is is based on the Arabic culture and Islamic religion. Such traditions and religion are more conservative and put certain limits and borders for a lot of behaviors and life activities.

Overcoming Challenges

From the above discussed challenges, the multinational company, seeking expansion in the UAE market or using such market for entering regional markets, should consider finding the right path for entering. There were two different approaches to overcome the ownership policy in UAE: either alliance or mergence with a local sponsor company or get a personal sponsor(Damyanova& Singer, n.d).. Finding the right approach is very critical for a specific company since this company will take into consideration their business model and strategy to see which approach better fits it. For instance, if a company chose a sponsor to be a CEO, this Emirati citizen could have different personal characteristics that may not fit within the organizational culture. As already presented, the Emirati is subjected to traditional and religious background.

References

  1. «UAE Economy» [Electronic source]. – Access mode: https://en.wikipedia.org. Retrieved 4 July 2016.
  2. Economy of the United Arab Emirates [Electronic source]. – Access mode: https://en.wikipedia.org/wiki/Economy_of_the_United_Arab_Emirates.
  3. United nations conference on trade and development [Electronic source]. – Access mode: http://unctad.org/en/Pages/Home.aspx.
  4. Doing Business with the Arab World: their Top Economies (2013). Arab Business Etiquette. Retrieved August 5, 2013 [Electronic source]. – Access mode: http://arab-business-etiquette.com/.
  5. WTO - Statistics - Trade and tariff indicators [Electronic source]. – Access mode: https://www.wto.org/index.htm. Retrieved 2016-06-30.

 

Материал поступил в редакцию 11.04.2017
© Rushdi Zaiter Karam, Lakis Ahmad Ali, 2017