Country Analysis
The United Arab Emirates is a federal republic consisting of seven states referred to as emirates. Geographically, the United Arab Emirates is located on the south eastern part of the greater Arabian Peninsula which is itself found in the South Western part of the Asian continent (the gulf of Persia).
UAE neighbors the Islamic republic of Oman and Saudi Arabia. The seven emirates making up the entire state are Dubai, Ajman, Umm al-Quwain, Abu Dhabi, Sharjah, Fujairah and Ras al Khaimah. The largest of the emirate cities is Dubai; the second largest city Abu Dhabi, however is the one that doubles up as the capital of the UAE because it is the nerve centre of all industrial, political as well as cultural activities.
Political System
The constitution that was enacted in the year 1971 provides the basis by which the political affairs of the UAE are run. This document contains a number of inter twinned bodies of government.. The form of politics in practice can be said to be a compromise of the various aspects seen in a federal system, a monarchy and a presidential system.
This is because all the seven emirates are absolute monarchies and partially independent from the central federal government, the president however is the head of state and the prime minister the head of government with authority over the country’s foreign policy, Emirates security and national defense.
The central government is made up of the traditional arms of government that is, the executive arm consisting of the president his deputy and the prime minister with the entire cabinet; the legislative arm that makes laws as well as the judicial arm that interprets the laws.
The federal supreme council, which is made up of emirs (representatives) from each of the seven emirates is tasked with the responsibility of electing the president and the entire cabinet including judges of the Supreme Court. The representative (emir) elected from Abu Dhabi the state capital, automatically holds the position of president whereas the emir elected from Dubai the largest city becomes the official premier.
The degree of influence of all the emirates conclusively can be seen in the particular position they hold within the federal government and in as much as each of them is fairly autonomous from the rest, they are each allocated a proportion of revenue from the national budget.
The Economy
Being a member of the United Nations Organization (UN), World Trade Organization WTO), the Arab League and the Organization of Petroleum Exporting Countries (OPEC); The United Arab Emirates has the seventh largest reserves of petroleum globally. Its economy is arguably the most comprehensively developed in the entire Middle East.
According to latest rankings provided by the International Monetary Fund (IMF), UAE has an impressive Gross Domestic Product (per capita) with its nominal GDP per capita standing at $ 46, 584. Its Human Development index is 35th internationally and is part of the reason as to why it has been classified as a high income economy (Ball et al 2008, p 150)
The CIA’s world fact book places the country’s per capita GDP at number 3 in the Middle East coming next to Qatar and Kuwait; and number 14 universally. Petroleum products export (oil and natural gas) are a significant contributor to its national GDP. Other factors that have however made the economy to boom are its expansive manufacturing industry, an established tourism and service sector and most of all, its building and construction prowess in real estate business.
Infrastructure
The development in the country’s infrastructure has witnessed a tremendous revolution with the setting up of magnificent structures the world has ever known. The Burj Khalifa (standing at 0.8Km) is now the tallest building on earth and it is found in the UAE, the Dubai World Central International Airport shall also become the most expensive airport ever constructed in the universe when its construction finally concludes.
Other magnificent real estate properties in the country include the Palm Island which is a man made island (the largest ever artificial island) in the world, the artificial archipelago and the world’s largest shopping mall (The Dubai Mall). Such lucrative infrastructure makes the country appealing for investments in real estate.
As part of its uniform economic foreign policy, local influence has to be felt in all businesses enterprises in the UAE and this explains the existence of a common standard requiring that all businesses except for the ones classified in the free trade zones in the country have no less than 51% shareholding being local. This is a clear strategy that is aimed at ensuring the locals (Emiratis) are in the lead towards economic empowerment (Balasubramanyam 1985, p. 159 ).
Cultural Practices
UAE has largely become multi cultural in recent years. Its cultural mix has however been gradually domineered and centered around the Islamic faith. In this cosmopolitan set up, Muslim culture is largely seen in the way the residents have to assemble everyday five times to pray from the mosques that are visible in the entire country. The country’s music, attire, cuisine and architecture are purely Arabic with the Eid al Fitr and Ramadan being the common Islamic holidays.
The non interference stance and the liberalism seen in the United Arab Emirates has contributed to economic progress, it is common to see Hindu temples as well as churches constructed alongside mosques to demonstrate the level of religious tolerance in this country. This has further increased the number of visits by tourists and thus enhanced the hotel industry.
Investment in Real Estate
An investment in Hotel Real Estate would be the most strategic in the United Arab Emirates, this is because the country’s infrastructure is extra-ordinarily established. The infrastructural development alone is responsible for close to thirty seven percent of all project value constructions.
The seven Emirates have simultaneously realized that there is a future in the real estate sector with such big investments in the entertainment, leisure and generally tourism. The central government therefore provides incentives to both local and international commercial developers to bring in their investments in this sector.
The current president of the UAE Sheikh Khalifa bin Zayed has moved in to entice development in real estate in especially the northern emirates by apportioning an amount of 16 Billion Dirham (about 4 Billion Dollars) for the expansion of infrastructure in these regions. This money is expected to among other things open up the road network and establish new housing schemes both residential and commercial premises in these areas considered to be having a deficit of such facilities.
The federal (local) governments have also been adequately funded and provided with sufficient logistical inputs to help them provide the necessary public utilities that will attract real estate investment in their respective regions. Electricity and water has been provided as part of the infrastructure by the local Emirates to attract investments in these regions.
The United Arab Emirates being basically a desert country utilizes 100% thermal energy as opposed to hydro electricity which is unheard of and generally unreliable depending on surface run off. Plans have also been instituted by the central government to augment this energy source with nuclear sources seen as most efficient and highly effective.
Communication has also been greatly enhanced in not only the major emirates, but also other upcoming centers to make the areas attractive to invest. Real estate investment in the UAE has therefore been increasingly enhanced by the foregoing factors and shows tremendous ability to grow and multiply its market value. The long run results are not only desirable but also possess an enormous avenue for resale due to the appreciation in the value of land and buildings occasioned by adequate infrastructure.
External investors in real estate in the UAE are able to obtain financing from the developed network of banks in the country. Real estate departments are also available in the various emirates.
Land reclamation is key because the entire country is in the Arabian Desert and therefore specific strategies must be put up to reclaim desert land and make it attractive for settlement and commercialization. This has however been made easier by the federal electricity and water authorities that are tasked with ensuring that these resources are readily available using the cheapest means possible.
Entry Strategy
Since every country in the world is currently striving to be a regional force and play an important role in international business activities, particular legislations have to be put in place in order to control and accurately measure the degree of foreign direct investments as well as local investments.
The established rules regarding the transfer of foreign capital in the United Arab Emirates is meant to enhance the ease of capital flight and ensure a much more free flow of ideas and money while at the same time ensuring the protection of the property owned by foreign investors. Investors thus feel safer and secure under this frame work as it prescribes a number of legally accepted forms of property ownership and outlines the various courses of action that may be available in law for an aggrieved investor.
The laws that deal with a number of business activities including the formation and ownership of business organizations may vary slightly from one Emirate to another because of the initial point mentioned about their autonomy. Every individual Emirate has its own established standard of creating wealth and revenues.
The central government has however tried to formulate a blanket law that shall act as a common standard. In the establishment of this law, a compromise position has been struck between the sovereignty and autonomy of the individual Emirates and the demands of progress and economic well being advanced by the central government.
In the creation of this foreign investments law however, it was a unanimous agreement by all the federal Emirates that the welfare and economic well being of each and every individual Emirati is the bottom line. While they all realized the central need to make the UAE a one stop shop and a global reference point for any form of international investment, they upheld the significance of welfare and the progress of the nation.
UAE has an investment legislation that makes it mandatory for any form of direct foreign investment in the country to be having a 50 plus 1 majority stake under the control of the indigenous Emiratis (David 1992, p 175.However in the recent past UAE has launched a new system to attract foreign investors in the emirates, by introducing free zones that offer incentives to foreign investors such as exemptions from import and export tax corporate tax and income tax among others.
The zones comprise of various businesses including; manufacturing, banking, assets and estates management, logistics, information and technology etc. They also have all the amenities, infrastructure communication systems and all other essential facilities for operation. Jebel Ali Free Trade Zone is one of them and is involved in the production and selling of manufactured goods, domestically and for the international market there are over 950 different activities in the zone.
The zones regulations allow companies to have full ownership of the assets for the entity. Nasouh, (2009) says “Other major benefits are: exemption from the many normal requirements for foreign investors such as: a company must have local ownership, pay taxes and duties, and restricted transfer of capital, profits and salaries”.
Companies do not require local sponsorships to create other branches of their business. The zones authorities keep a register for all companies in existence, register new businesses and set the rules and regulations for them.
From the above information about Dubai’s investment policies, the high control strategy would be the best to way of entry. The strategy enables companies to have maximum control hence creating a physical presence in the foreign market. A major feature of the strategy is the foreign direct investment option which entails direct ownership and control of assets.
Direct investment is the most advanced, complicated system which also has a high risk. It is best suited for well developed economies like that of the emirates, and all types of business can use the strategy including the service industry. The major benefits of using the system are: there is rapid growth of the markets, reduced costs, increase sales and revenues and it also protects both the domestic and foreign markets.
The system also has two different ownership structures which are the; wholly owned direct investment and in this structure the company owns its foreign assets and equity fully, the second is the equity joint ventures in which two companies form a new entity and share control of the business. The best structure for an investor operating in the free zones is the wholly owned direct investment because it is allowed and will yield more benefits.
Another feature of the system is the vertical integration which comprises of the activities an entity chooses to engage in; any of the three stages which are, production, selling or distribution of products can be fully applicable in the zones depending on a company’s objective.
Production & Marketing Strategies
As earlier mentioned in this discussion, the religion and culture that is predominant in this region is Islam. This culture has percolated through the society and in as much as it is a liberal and tolerant (cosmopolitan) setting, the Arabic language, dress, food and particularly architecture are domineering. For an establishment in real estate to be successful therefore, it must be aligned to the available infrastructure and architecture which borrows heavily from the Islamic faith (Poynter & Rugman 1982, p 54).
A marketing strategy that may also double up as an entry strategy in the industry may be to identify and cling on real estate probate leads. Such probate leads are generally available because of the existence of property left behind by a deceased person.
Such may be left to their immediate beneficiaries being available as their next of kin, these heirs may quickly want to sell off the property, and thus it may be worthwhile to establish these heirs. These can be easily located from offices of probate attorneys. In cases where the property was owned by a renowned realtor, its acquisition will have the benefit of goodwill and reputation already created by the proceeding owner.
Another rather effortless method of marketing real estate products is through the construction of quality assets with spectacularly unique designs. Magnificent designs will market themselves and quality products shall attract the appropriate levels of clientele in the market.
The construction of the Burj Khalifa, for instance by Emaar (one of the most renown property developers in the UAE) cost 1 Billion US Dollars but since it is the world’s largest sky crapper it has attracted international attention from the media and architects, a factor that has marketed it not only locally but also abroad.
The use of the internet and local media may also be a helpful and powerful marketing medium for advertising. Advertisements may be placed on either local or online newspapers or through the use of other realtors and agencies. The use of the internet as a marketing medium is greatly boosted by the developed telecommunications infrastructure in the United Arab Emirates.
The level of internet spread is now 2.4 users per subscription and this extensiveness in use makes it a strategic source of marketing and publicity. The internet contention is also largely considered safe because it is usually filtered and regulated by requisite authorities to discourage sexual materials and religious profaning sentiments, views or ideas.
International Business Risks
The economy of particularly Dubai was hugely affected by the events in Wall Street in the global economic downturn that was witnessed from the year 2007 to 2010. These resulted in the average economy decreasing slightly to up to about 4%.
Since majority of the world’s economic crisis may be difficult to control, the only reasonable way that seems practically reasonable to apply in the mitigation of enterprise risk is diversification. Since such forms of financial risks have far reaching effects, investors are expected to diversify their portfolios to avoid subsequent losses in their investments in the country.
In real estate for instance, diversity may take the form of constructing not only commercial premises but also residential and religious or public properties so that when the market business is low for private home owners (like the situation was in the United States with home mortgages) revenues can be obtained from other market sectors like hotel and tourism.
Political risk may be minimized by ensuring that the entity conforms to the political philosophies of the country where it operates. The politics of the UAE are fairly stable and thus upheavals and major revolutions are uncommon, however with the advent of religious fundamentalism and terror movement killings in the name of religion, the entity must be positioned in a way that it will not contravene any religious or political doctrines that are largely viewed as being against the prevailing faith (Nausoh 2009, p. 25).
A potential risk of property investment in the UAE may also be associated with the oversupply of properties in the form of houses, commercial buildings and other rental premises. The available infrastructure is being exceedingly attractive to many investors and with barriers to cross border foreign direct investments lessening, this may cause many players to saturate the industry.
The result of this could be the witnessing of decreasing yields or stagnating prices of properties. This is however only a long run possibility because in the current assessment, no such saturation is visible especially in the minor Emirates (Roth & Morrison 1992, p 751)
The economy of the country and indeed of many neighbors in the region has been built around petroleum exports, without any immediate plans to diversify the economy, a petroleum glut or a decrease in the cost of petrol products including gas worldwide may cause a massive indention of the country’s economy.
The Emirate of Dubai has foreseen this potential risk and thus tried to augment the petroleum input in its GDP with a developed banking and commercial sector as well as improved tourism. The opinion of many analysts on this subject however is that as long as the oil prices remain at $ 35 per barrel and above, this risk may be ignored, but the future is always uncertain (Salisu 1991, p. 191).
Therefore, the United Arab Emirates provides good and diversified opportunities for any foreign investor to invest in. in addition the rules, policies and regulations have made it easier for both the investor and the Emirates serve their interests without any conflict either economically, politically or socially.
Works Cited
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Balasubramanyam, V, 1985, Foreign direct investment and the International transfer of technology, Current Issues in International Trade, Macmillan, London.
David, G 1992, Economic integration and foreign Direct investment in the EC, Journal of Common Market Studies, vol. 5(2), pp. 10-50).
Nasouh, N 2009, Heavy snowfall on Ras Al Khaimah’s Jebel Jais Mountain cluster, Gulf News, <https://gulfnews.com/>.
Poynter, T & Rugman, A 1982, World product mandates: how will multinationals respond? Business Quarterly, vol 47, no.3, pp. 54-61.
Roth, K & Morrison, A 1992, Implementing global strategy: Characteristics of global subsidiary mandates, Journal of International Business Studies, vol 23, no. 4, pp. 715-735.
Salisu, M 1991, EP, IS and direct foreign investment in LDCs, International Trade and Global Development, Routledge, London.