The United Arab Emirates has caused a stir in the Middle Eastern region due to increased attention from foreign investors based on its investment potential. It is critical to look at the reasons behind this tendency through theoretical lenses as well as specific case studies.
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Economic environment for FDI in UAE
Growth and direction of FDI in the UAE
Several recent reports show that FDI in the UAE is a force worth reckoning. One such report was the Kearney FDI confidence interval that was released this year i.e. 2010. It placed the UAE as the eleventh best country to invest in the world. In the North African and Middle Eastern region, this country was ranked as the most preferred destination.
Additionally, it was asserted that approximately 21 billion US dollars worth of Foreign Direct Investment entered this Gulf region (Razin & Sadka, 2007). This country is a stable hub for investment although it has a few flaws here that can be corrected given the right time.
Theoretical implications and government policy towards FDI in UAE
The government of the UAE is firmly committed to the development of infrastructure because it is aware that the backbone to investment. Consequently, continual infrastructure growth has promoted a higher number of FDI.
Furthermore, because the UAE is seen as a hub in the Middle Eastern and North African region, many investors can start with the UAE so as to gain access to other regional markets through this country. Furthermore, the geographical location of the country is what has attracted most investors there. It is considered as a gateway not just to the region but
to other international markets (Dubai Chamber, 2009). Consequently, a business person from a developing nation will first start with Dubai in order to gain entry to other traditional world markets such as New York or London. In order to do well in any foreign market, one must be assured of finding the right business partners through the efforts of local entrepreneurs.
It is therefore imperative for countries seeking foreign investment to develop the skills and capabilities of their local workers because these individuals will cooperate with foreign businessmen to make their ventures work (Dunning, 2002). Many analysts and businesspersons assert that there are capable and well qualified individuals in the UAE who can make solid business partners with these respective investors.
Government policy is such that it aims at encouraging as much foreign investment as possible. However, in order to avoid cases of exploitation, this country has created a policy where local agents must be involved (Abu Dhabi Chamber of commerce and industry, 2010). This means that any foreign investor must be willing to comply with their ownership laws.
All business activities initiated by foreigners must be such that not less than fifty one percent of ownership is ascribed to a UAE national. Only those expatriates who come from partner zones are allowed full ownership of businesses in the UAE. Furthermore, foreign companies that choose to open companies there must do so with the assistance of a local representative who will then act as a service agent.
Even those individuals who are interested in selling their services and goods to the UAE must do so through a commercial agent who is located in the UAE who works hand in hand with the foreigner.
Many economic specialists have argued that this is a major challenge because certain areas of the economy would benefit tremendously if this law of UAE part ownership was abolished such that one hundred percent foreign ownership was plausible.
Whey developing and developed countries have increased to the UAE
A high number of developing and developed nations are looking towards the UAE because of a number of reasons. Some of them enter because they are interested in pursing new and promising foreign markets (Alasaad, 2010).
The global economic downturn has not done much to improve conditions for businessmen in traditional world markets, consequently, investors have been looking for a place that was not as directly affected by this downturn as the traditional markets in western nations and the UAE has been one such area. Additionally, in order for people to start any investment then there should be ample business opportunities in target markets.
The UAE is rich in these business opportunities and has therefore witnessed the rise in the number of foreign investors visiting such a destination. Many people from developing nations with low level skills will approach the UAE in order to provide their labour. Even professionals from developed nations will do the same because they are aware of the opportunities present there.
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Lastly this nation has attracted so much FDI because of the provision of investment of information by the concerned ministries as well as the prevalence of capable administrators in these areas. Furthermore, it has been marketed as investor friendly.
FDI participants are often entitled to tax based incentives that make it quite favourable. In case of business start ups and disputes, matters are often resolved through a stable legal system. So generally speaking, Dubai and the UAE has a good business climate. Its growth prospects as well as the political and economic conditions make the country ideal for investment by interested parties.
Foreign company that has invested in the UAE
The company has several branches worldwide but was established in the UAE during the year 1975. It is a construction company that has become successful owing to increased building expertise and proper management of very complex projects within this nation.
It has a sound relationship with architects, contractors and sub contractors thus being in a position to deliver high quality buildings to their respective clientele (Turner Construction Company, 2010).
Problems and benefits faced by it
The UAE has benefitted from rapid growth owing to the rapid growth of their construction sector. Prior to 2008, this sector was experiencing a rapid boom. However, after the economic downturn, countries around the world began witnessing declines.
Since the UAE was highly dependent on foreigners for investment in construction, these potential clients could no longer afford making huge investments and construction projections went down. Turner Construction Company was a victim of this external factor because the construction boom it was enjoying no longer held true.
At this time, new projects from the government are scanty and the firm has had to look to other areas for business.
However, the country is still the biggest construction market in the Middle Eastern and North African region with seven hundred and fourteen billion US dollars worth of construction projects still in their planning phase. It is such figures that make the Turner Construction Company optimistic about prospects for the future (Turner Construction Company, 2010).
Turner Construction Company is still highly profitable because it has redefined its business model. In the past, the latter firm was relying on government sponsored projects. However, this has now changed dramatically. Now the company has forged new alliances with members of competitive environments.
However, it is still keeping its focus on some infrastructural projects that have been sponsored by the government in order to stimulate the economy. In this regard, the latter organisation has been responsible for the growth of certain public facilities including some in the health sector and others in the education sector.
Usually, this company may engage in a number of projects that differ in their design and their purposes. Sometimes, constructions may be done in order to create development properties designed to support certain economic centres such as airports. Conversely, the company may engage in construction of buildings for entertainment purposes. These include hotels, casinos and the like.
Most of the clients in the latter category normally focus on the coastline and tourist attractions. Although, these have not been the main area of focus, they have still played a small part in maintaining profitability for the latter organisation.
The company has also been challenged by the fact that most government attention is now being directed to road, rail, power and the like. This means that the amount of money allocated to projects that are the speciality of Turner Construction have been reduced and this may lead to subsequent changes in the manner in which businesses are being managed.
No serious construction company can lay claim to the management or design of properties without involvement of sustainability concepts. The company has been involved in green building construction. It has also played a part in the creation of infrastructure in plants designed to offer green energy to the population.
Turner Construction Company has had some strong points in 2009 and 2010 as well. First, this organisation has benefited from lower material costs. Between the period of 2009 and 2010, construction based materials have been dropping dramatically in the UAE more than any other country in the Middle Eastern region. Furthermore, the economic downturn has contributed towards lower labour costs in this country.
This may be a problem for individuals who came to look for work in the UAE but it has benefited construction companies such as the one under analysis (Bende Nabende, 2002). In fact, the latter company has been able to save a lot on its operating costs because these expenditures normally take up a huge portion of costs.
Currently, this company is benefiting from the ambitious plans that the UAE’s government has cut out for its respective individuals. Here, areas such as Abu Dhabi have dispensed a plan known as Plan 2030. The intension is for the creation of a new capital city, sporting and cultural centre development as well as development of about 200 islands linked to Abu Dhabi.
These targets represent huge opportunities for the company under analysis because Abu Dhabi administrators are now inviting tenders for some of these projects from the private sector (Abhu Dhabi government, 2010). In this respect, it is likely that the organization will grow well into the future.
On top of this, the government frequently makes announcements on commitments to infrastructure so it will then be possible to achieve that through the help of construction companies. Even though private developers may be tumultuous and hesitant towards the development of new projects, it is likely that the government plans will be adequate to sustain the construction companies like Turner.
Another benefit enjoyed by the latter company is the fact that it has a strong local presence. Since it has been in operation from 1975, the firm uses this strong presence and relationship in order to market their services and get some business (Moran, 2006). Normally, most construction projects in Dubai and other parts of the UAE will invite bids.
Assignment or selection of the right candidates to carry out the project will depend on a number of factors. However, the most crucial one is prevalence of a strong reputation in construction. This is even more of an advantage if the respective firm happens to have carried out those projects in the UAE. Turner enjoys such qualities and rarely has problems securing contracts.
In terms of the kinds of services offered, this company has been having it easy because it has diversified into a range of provisions. It sometimes does construction consultancy. In certain situations, it may participate in contracting for its clients while in other scenarios it may actually be in charge of actual constructions.
As stated earlier, the sound relationship or network created between several architects and contractors in the UAE market has made provision of these services quite smooth. In the end, the company has enjoyed and keeps enjoying a strong position in the sector.
Normally, building materials are imported into the country. Therefore, construction companies must be in a position to access these markets in places like China. This may sometimes prove to be a challenge to the said company because imports are subjected to a range of tariffs and barriers (Dubai Chamber, 2009). In fact the need to have relationships and partners is what has made Turner what it is today.
On the downside, government policy in the UAE has contributed towards some losses in this organisation because local construction companies are normally given a ten percent cut off on price over their foreign owned experts when importing products into the country. This acts as a serious disincentive for companies like Turner Construction Company.
The UAE is an ideal investment location because of its strong infrastructural base as well as the strong political and economic back up. On the other hand, there are certain barriers that companies witness and this has especially been revealed through the case study. This firm is hampered by the advantages offered to locals on imported construction materials as well as the vulnerability to international economic markets.
Alasaad, N. (2010). Investors looking to Dubai as the preferred FDI destination in MENA. Web.
Abu Dhabi Chamber of commerce and industry (2010). For new investors. Web.
Abhu Dhabi government (2010). Opening a branch of a foreign company in Abu Dhabi. Web.
Turner Construction Company. (2010). Turner UAE. Web.
Dubai Chamber (2009). Foreign Direct Investment in Dubai. Chamber Economist, May 2009, 1-3.
Moran, T. (2006). Harnessing foreign direct investment for development. Center for global development.
Razin, A. & Sadka, E. (2007). Foreign direct investment: analysis of aggregate flows. Princeton: Princeton university press.
Bende Nabende, A. (2002). Globalisation, FDI, regional integration and sustainable development: theory, evidence and policy. NY: Routledge.
Dunning, J. (2002). Global capitalism, FDI and competitiveness. Oxford: OUP.