Introduction
Background and rationale for the study
The United Arabs Emirates (UAE) is one of the most prosperous countries in the Gulf Region. The country is characterised by a high level of political and social stability due to its monarchical system of governance. Furthermore, its leadership system has contributed greatly towards the country’s economic growth. The UAE is cognisant of the role of economic integration in promoting economic growth.
Subsequently, Abed (2001, p.30) notes that the country is a member of a number of economic zones such as ‘the Arab League, the United Nations, the Gulf Co-operation Council, and the Organisation of the Islamic Conference’. In addition, the UAE has also adopted the concept of ‘free zone’ as one of its strategies towards achieving its macroeconomic goals.
The Oxford Business Group (2008) defines the concept of ‘free zone’ as a perimeter within which businesses are accorded a unique trading environment such as an exemption from taxation and custom fields. However, businesses operating in the free zones are required to boost the country’s economic growth by creating jobs, increasing their volume of exports, and promoting diversification by investing in various economic activities.
Over 32 free zones have been established across the UAE, twenty-six of them are located within Dubai, and they mainly cover trade and service activities. The UAE government has nurtured an enabling environment for businesses to operate. For example, businesses operating in the free zones are not subjected to customs, foreign trade controls, and quotas. Furthermore, the government has implemented an unrestricted profit and capital repatriation policy. Foreign firms operating in the free zones have full ownership of their business (Balazadeh 2012).
Free zones have had remarkable contribution in the economic development of the UAE. For example, the zones have attracted quality Foreign Direct Investments (FDI) especially within the private sector, created employment opportunities for the Emiratis, enhanced technology transfer, and promoted the growth of exports.
The UAE’s free zones have provided the country with a perfect opportunity to display its development. Furthermore, the country has experienced quantum growth with regard to industrial development (Dubai Information Site 2010). Therefore, the contribution of free zones in the UAE’s economic development cannot be underestimated.
Statement of the research problem
The proliferation of free zones in the UAE emanates from the government’s effective planning and policy formulation. For example, the UAE government has nurtured an environment conducive for conducting business. Subsequently, numerous foreign companies have established their operations in the region.
The attractiveness of the UAE, especially amongst firms in the private sector, has also improved courtesy of the government’s commitment to create a knowledge-based economy. Approximately, 60% of the world’s biggest business organisations are located in the Dubai’s free zones (HSBC Global 2013).
However, emerging economies around the world are increasingly adopting the concept of free zones in an effort to stimulate economic growth. Some of the strategies that emerging economies are adopting include improving their infrastructure within the free zones in order to improve their competitiveness.
For example, governments are progressively implementing data centres, increasing the size of industrial land and improving logistics together with warehousing facilities in order to meet the needs of different investors (Farole 2006). Subsequently, the attractiveness of the UAE’s free zones faces major future challenges.
For these zones to maintain their competitive advantage, it is imperative for the government to recognise the importance of improving the zones’ structures and competitiveness. Furthermore, the UAE government should understand the challenges and opportunities presented by the prevailing macroeconomic and microeconomic factors. Gaining such understanding will remarkably improve the contribution of the free zones to the UAE’s economic development(HSBC Global 2013).
Research objectives
The aim of this study is to investigate the economic challenges and opportunities faced by the private sector and the UAE government in it pursuit to promote economic growth through the development of free zones.
Research questions
A number of research questions will be considered in an effort to attain the aforementioned objective. Some of these questions are illustrated herein.
- What structures should the UAE government institute in order to improve the competitiveness of the free zones?
- What opportunities can be derived from the UAE’s free zones?
- What are the challenges faced by firms in the private sector operating in the UAE’s free zones?
Limitations of the study
A number of limitations were experienced in the process of conducting this research. First, the researcher was limited by resource availability with regard to time and finances. Subsequently, the researcher was not able to conduct a study on all the 32 free zones established in the UAE. Consequently, the findings from the free zones considered are only representative of the prevailing conditions in the UAE.
Organisation of the paper
This report is organised into a number of sections, which include literature review, methodology, analysis, conclusion, and recommendations.
Literature review
Free economic zones have become a critical global phenomenon over the past few decades. The zones play an essential role in promoting structural reform and economic development in both developed and developing economies.
A study conducted by the Organisation for Economic Cooperation and Development (2002) shows that it is easy to establish a free zone if the necessary government approval is obtained. Goods and services provided by businesses in the free zones are exempted from customs duties. Economies can adopt different types of free zones. Some of these zones include
- Free trade zones (FTZs) – these are the most prevalent types of the FEZs. Different trade activities including re-exportation, transhipment, and distribution of goods are undertaken in the FEZs. Subsequently, the FTZs can be defined as centres of international trade. Most free trade zones are located in major distribution centres and routes such as seaports, airports, railways, roads, and maritime routes. There strategic location provides import-export companies with a perfect opportunity to improve their operational efficiency (Mankiw 2009).
- Export processing zones (EPZs) – these zones are also referred to as service and industrial free zones. The zones are specifically designed in order to promote specialised manufacturing activities such as production of different consumer goods like clothing, consumer electronics, textile, and industrial components (Jenkins 2000).
FEZs are an important vehicle in countries’ pursuit for various micro-economic objectives such as stabilising the foreign exchange rate and promoting employment. FEZs are also essential in promoting attainment of political and macro-economic objectives. Furthermore, FEZs are characterised by preferential application of economic policies defined by a particular geographical zone (Organisation for Economic Cooperation and Development 2002).
The geographical coverage of the FEZs varies from a few hectares to thousands of square kilometres. The zone can also be located within the borders of a country. Malhotra and Papadopoulos (2009) argue that FEZs do not only serve the purpose of promoting free trade.
However, FEZs are also designed in order to protect domestic economy from the adverse effects of the global economy (Guangwen 2003). Corporations, which are established in the FTZs, are motivated by the need to position their businesses in a beneficial location. The FTZs are usually low cost structures.
IBPUSA (2007) asserts that free zones have undergone remarkable growth due to the high rate of trade liberalisation. Most economies, which had previously adopted a closed economic system, are relinquishing their closed trade policies and inclining towards open economic policies.
China is among the emerging economies that have adopted open economic systems by integrating free zones. By 2008, China had established over 213 free zones in over 9 regimes. By the end of 2008, the free zones established accounted for over 47% of China’s total exports (Carter & Harding 2011).
Free zones explain the spiral economic growth in most Eastern European countries. A number of Sub-Saharan African countries have also derived their economic growth from free zones. In 2009, the region had 101 free zones in which Kenya led with 33 FEZs (International Energy Agency 2005). Free zones are considered to a strong pillar in promoting the UAE’s economic performance.
Free zones in the UAE
Free zones have played a fundamental role in enhancing the level of foreign direct investment in the UAE. Most free zones in the UAE provide investors with similar incentives, which include
- Extended leases
- Inexpensive and abundant energy
- 100 percent foreign ownership
- 100 percent tax exemption
- Quick approval procedures
The zones function under the Free Zone Authority [FZA]. The body is charged with the responsibility of issuing licenses to firms, which intend to establish their operations within the FTZ. Furthermore, the body has to provide businesses with the necessary support.
Investors intending to establish businesses in the zone can adopt different business structures. Some of these formats include Free Zone Companies (FZCO), Free Zone Establishment [FZE], or subsidiaries of foreign companies.
The FZCO are limited liability companies, which must be owned by more than one shareholder. The FZCOs and FZEs are required to adhere to the rules and regulations set by the free zones. Furthermore, the FZEs and FZCOs must have an average financial capital base ranging between AED 50,000 and AED 1million (Terterov 2006).
Upon gaining legal presence in the UAE’s free zone, a particular business entity is required to obtain a license from the FZA and lease land or premises in which it will conduct its operations. Firms operating in the zones are restricted from selling their merchandise within the country. However, they can only engage in domestic trade through a local and registered official agent (Zaman 2011).
Methodology
Research design
The study has adopted both qualitative and quantitative research design. The decision to adopt qualitative research design was informed by the need to gather substantial data from the field. Qualitative research design was considered due to the explanatory nature of the study. Adopting qualitative research design also gave the researcher a chance to carryout an in-depth study of the various issues associated with free zones.
Quantitative research design was also incorporated in order to condense the diverse data collected from the field. Integrating qualitative research design was also informed by the need to ensure that the target stakeholders such as the UAE government and other non-governmental entities understand the study’s findings.
Population and sample
In order to develop a comprehensive understanding of the structure, challenges, competitiveness, and opportunities associated with free zones in the UAE, researcher decided to collect data from government representatives and private firms operating in the free zones. Random sampling technique was used in selecting the sample study.
The sampling technique was selected for it is easier and manageable to evaluate a sample when compared to the total population. Simple random sampling technique enabled the researcher to eliminate the element of bias in selecting the respondents. A sample of 200 respondents was selected from the free zones in the UAE. The researcher ensured that the selected respondents were conversant with the operations of the free zones in the UAE.
Data collection
The researcher relied on both secondary and primary sources of data. This decision was informed by the need to improve the reliability of the study. Interviews and questionnaires were used as the main primary data collection tools. Considering the resource limitation in conducting the study, the researcher conducted interviews over the phone. One the other hand, the questionnaires were mailed to the respondents. The questionnaires were semi-structured in nature by integrating both closed and open-ended questions.
Data analysis and presentation
The research questions considered in the study were evaluated and analyzed individually. The analysis was conducted by taking into account the responses from the various respondents considered in the study. Tables and graphs were used in presenting the data collected from the field. Therefore, the researcher was in a position to condense the voluminous data collected.
Analysis
The study considered respondents of different gender and age as illustrated below.
The chart below illustrates the respondents’ age group.
The core objective of this study is to highlight the economic challenges and opportunities facing the UAE government and firms operating in the region’s free zones. The researcher considered a number of aspects, which include
- Main structures that the UAE government has implemented in its quest to guide business operations within the free zones.
- Opportunities presented by the UAE free zones
- Challenges experienced in the UAE free zones
In a bid to understand the competitiveness of the UAE free zones, the researcher sought to the opinion of the respondents on whether the structures implemented by the government promote the free zones’ competitiveness. The respondents had varied opinions. Ninety five percent (95%) of the respondents said that structures implemented by the UAE government promote FDI within the free zones. Only 5% of the respondents faulted the attractiveness of the free zone structures implemented by the UAE government.
When asked why, the respondents cited a number of issues. First, the respondents cited the absence of taxes, custom privileges, and 100% foreign ownership as some of the core factors that make the UAE free zones most competitive foreign investment destination within the Middle East. The respondents cited the Jebel Ali Free Zone Authority, the Sharjah Airport International Free Zone, Ajman Free Zone Authority, and Hamariyah Free Zone Authority as some of the most attractive.
On the other hand, the respondents who faulted the UAE free zones cited a number of reasons. First, they asserted that companies operating in the free zones are forced to confine their business activities within the zone. Subsequently, their market reach in the UAE is limited. Failure to comply with the set regulations may lead to a fine of more than US$35,000.
When asked the main legal considerations that firm’s must have in order to establish businesses in the UAE free zones, three main forms were identified. They include FZ Establishment, Branch, and FZ Company. The table below illustrates the core elements that must be adhered to in order to establish a business in the FTZs as suggested by the respondents.
From the above results, it is evident that the UAE limits the type of business structures that can be established within its free zones. Furthermore, the restriction for businesses established in the free zones to sell their merchandise within the stipulated areas hinders businesses’ ability to achieve diversification.
Free zone businesses are only allowed to rent premises outside the designated areas. The UAE government recently announced its intentions to allow businesses in the Dubai free zone to undertake activities outside the Dubai Free Zone. However, the government is yet to define the parameters within which the business activities will be undertaken.
When asked about the opportunities that can be derived from the free zones, the respondents cited various benefits. 97% of the respondents identified increased foreign earnings, 93% cited Free zones to be a major employment creator and income generator, while 86% asserted that free zones is a major factor in attracting FDI.
On the other hand, 78% of the respondents interviewed were of the opinion that free zones are vital in enhancing knowledge spillover and technological transfer, which in turn promote economic development. The chart below illustrates a summary of the respondents’ opinion on the opportunities associated with nurturing free zones in the UAE.
Conclusion and recommendations
The study shows that free zones have played a remarkable role in promoting the UAE’s economic development. The establishment of free zones has enhanced the attractiveness of the UAE amongst foreign investors. Subsequently, the country has experienced significant growth in the size of FDI. Furthermore, free zones have created employment opportunities amongst the Emiratis, hence increasing their purchasing power.
Fostering knowledge spill over and technology transfer is another major benefit that the UAE can gain from the free zones. However, the study shows that the UAE government has implemented a number of structures, which may hinder the contribution of the zones to the country’s economic growth.
In order to achieve economic sustainability, it is imperative for the UAE government to consider improving the country’s competitiveness. This move will play a fundamental role in attracting foreign and local investment. The government should consider the following.
- The UAE government should ensure that optimal laws and policies are formulated in order to promote the operations of business within and without the free zones.
- The government should establish different free zones in order to attract investors from different economic sectors, such as production, manufacturing, and services sectors.
- The government should also nurture an enabling legal and economic environment in the free zones. Some of the aspects that the business should focus relates to the nature of business structures that can be established in the zones to promote the establishment of different types of businesses.
Reference List
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