UAE Private Sector Investing in Low-Income States Research Paper

Executive Summary

Investing in low and low-middle income countries is one of the most cost-effective ways to expand operations and go global in case of small and medium private sector companies due to high return on investment as well as the promising opportunities of expanding customer base, outperforming, competitors, improving economic outcomes, and increasing income. Due to low competition and industrialization in these states, it is an attractive option for enterprises’ growth.

However, not all companies are interested in injecting funds into low and low-middle income countries even though there are numerous success stories pointing to the benefits of this strategy. Therefore, the paper at hand will provide an outline of the most useful practices that might encourage UAE’s investment in low and low-middle income states as well as mention those that should be avoided in establishing international investment relations.

Introduction

Investing in low and low-middle income countries has long been known as a way to expand internationally for small and medium private sector enterprises. It can be explained by impressive investment returns¹, increased international demand for offered products and services, and opportunities for developing infrastructure². However, regardless of high success opportunities due to low levels of industrialization and competition, most states remain unwilling to inject funds into these states³. It can be explained by their desire to cooperate with economically developed and high-income states, although this strategy might be less beneficial.

For this reason, it is essential to point to strategies aimed at promoting investment in low and low-middle income countries. This objective will be achieved by applying the generally known effective strategies for encouraging investment to the UAE economic environment. Special attention will be paid to benefits of allocation capital in low and low-middle income countries as well as mitigating risks connected to potential failure of investment projects.

Studying Host Country

Paying special attention to studying features of legislation and business environment of host countries is a common strategy used for developing investment projects and allocating resources abroad. It stands for understanding demand in the host country as well as realizing risks and opportunities for making the designed project successful and cost-effective⁴. It is especially critical for the UAE. It can be proved by the very fact that the UAE is a highly developed country with high incomes.

Therefore, when investing in low and low-middle income countries, there is a significant gap in the operation of economic and business environments as well as the needs of particular economies. For instance, it is critical to be aware of the legal channels of decision-making, tax systems, and regulations of enterprise creation so that it is possible to avoid failure. In this case, it is as well critical to be confident that the legislation of the host country will protect the foreign company when needed and the government will support its operation⁵.

More than that, it is of extreme importance to be aware of the economic potential of the host country in order to achieve the desired economic outcomes. In addition, it is paramount to analyze human resources making the main focus on the average level of skills and knowledge in order to drive the investment project and maximize its economic benefits – putting it simply, to guarantee that there are people who will be able to cope with their job duties effectively.

This strategy is reviewed in detail due to the specificities of the UAE. To begin with, its main features are the high level of infrastructure development, the focus on the services industry, and the interest sustainable energy. In addition, the country is known for the striking economic potential. Finally, it has a peculiar legal system. Based on these specificities, it is critical to make sure that the host country is closely connected to the UAE – legally and economically – in order to create a cost-effective investment project.

It can be explained by the fact that no additional resources are needed for creating business operation systems, as the existing ones are applicable to the new environment. In addition, choosing a country with a favorable tax system is as well advisable because it maximizes chances of economic effectiveness of investments⁶.

Investigating Foreign Markets

Except for understanding the peculiarities of host countries, it is critical to be aware of the specificities of foreign markets. It is especially paramount in case of planning to operate in the foreign market instead of shipping finished products to the UAE or investing in outsourcing. In this way, it is of extreme importance to be familiar with the needs of target economies and preferences of potential customers. For instance, it is economically unsound to invest in the newest technologies if the host specializes in agriculture.

Another example is the ineffectiveness of allocating capital for launching engineering or financial consultation companies in countries where these segments are underdeveloped. The same is true for investing in manufacturing expensive products that will remain in the domestic market of the low or low-middle income country where customer will not have enough money to buy it.

For the UAE, this strategy may be beneficial in order to promote foreign investment in low and low-middle income countries because it is potentially connected to higher output and income rates of the domestic companies. Still, to deploy it, private enterprises should pay special attention to the audit of the external business environment and market specificities in order to calculate the risks appropriately and develop strategies for coping with the identified challenges⁷.

Fostering Internal Changes in the Enterprise

Setting up an appropriate system is a general recommendation for enhancing foreign investment. It is commonly associated with the increased chances of investment success and creating an economically productive enterprise⁸. For the UAE, this strategy may be applicable in case of establishing departments responsible for studying the peculiarities of host countries and foreign markets, as well as proposing interesting and creative investment projects.

This step may be supplemented with making these departments responsible for establishing contacts with both domestic and foreign governments, thus increasing chances of governmental support and operating in a legally favorable environment. In addition, this strategy is commonly connected to developing internal policies promoting the enhancement of employee involvement in designing investment projects as well as seeking ways to implement them. They may involve additional rewards for those offering best investment projects.

Strategies to Avoid

As mentioned above, the connection between the host state and the UAE (or any other country interested in allocating financial resources abroad) is of critical importance when it comes to launching investment projects.

From this perspective, there are as well strategies that should be avoided when investing abroad. For instance, it is highly unadvisable to select countries with a significant economic development gap as the host, especially when ignoring the criticality of auditing markets. For instance, when any UAE enterprise – one commonly used to highly developed infrastructure – chooses to invest in a low or low-middle income state with poor infrastructure, it should recognize the need for allocating additional resources that will be connected to poor infrastructure, such as developing new systems for enterprise operation or transportation and delivery of the finished goods⁹.

Still, the concept of infrastructure goes beyond transportation, as it as well involves education – the ability to hire people with relevant skills and knowledge in order to achieve desirable economic outcomes. That being said, ignoring the role of audit and investing in the countries with significant developing gaps are strategies to avoid.

Another undesirable strategy is investing into a country with significant security concerns. It stands for ignoring vandalism risks as well as the imperfections of host legal systems¹⁰. Just like for any other country planning to invest into low and low-middle income states, for the UAE, deploying this strategy may be associated with unforeseen costs as well as the increased risks of failure. One more issue to focus on is the legal procedure of setting up a foreign company.

In this case, ignoring such issues as corruption, bureaucracy, political, interferences, and unclear legal provisions may be synonymous with failure¹¹. For the UAE, as well as any other state, unsuccessful operation in one state with similar challenges may be associated with the future unwillingness to cooperate with low and low-middle income countries. Therefore, it is always critical to pay special attention to the most significant political and legal developments in the target country.

Conclusion

Summing up, the best way to encourage private enterprise investment into low and low-middle income countries is to pay specific attention to making the UAE government more supportive. It stands for offering necessary legal consultations and initiating educational programs pointing to the criticality of investigating the background of a country of interest.

This strategy is connected to laying the stress on the strategies mentioned above and teaching private enterprises to deploy them efficiently, thus maximizing the chances of success and making investment projects more cost-efficient. Speaking of the strategies to avoid, there are as well counterstrategies that may be applied to overcoming the potential challenges. For instance, infrastructure-related issues may be overcome by selecting an appropriate location for the new enterprise – that close to docks, airports, railway stations, and big cities¹².

Security concerns can be addressed in the same way – by selecting the safest locations to invest into or avoid such countries in case of failing to find a secure location¹³. As for corruption issues, they may be addressed by avoiding corruption-based schemes and strictly following legal provisions of the host state¹⁴. Still, it is essential to point to the fact that even though all challenges are not complicated to avoid or, at least, address properly, it is critical to assure that senior management of private enterprises is aware of the ways to cope with them in order to encourage investment¹⁵. Otherwise, it will be impossible to achieve this objective.

Recommendations

All in all, based on all the facts and details that were mentioned in the paper, it is possible to develop the list of recommendations for encouraging private sector investment in low and low-middle income countries. This list can be used by both the UAE government to promote investment at the national level and private enterprises to have a comprehensive plan of action. That being said, the recommendations are the following:

1. Foster the creation of departments specializing in international relations that will be responsible for studying the specificities of domestic legislation of host countries with a major focus on foreign investment and operation of business environment;
2. Cooperate with the UAE and foreign governments in order to develop beneficial investment projects that both comply with the national legislation and satisfy the needs of the domestic economy;
3. In cooperating with governments, go beyond consultations and ask for financial and legal support when necessary by pointing to potential benefits of the enterprise’s foreign expansion;
4. Develop internal policies aimed at enhancing employee interest in offering creative investment projects and new economic areas for allocating capital;
5. Choose host countries and enterprises that are closely connected from the perspective of legislation, specificities of business environment, and company operation as well as those that comply with economic needs of the UAE – operate in promising and potentially cost-effective sectors of the economy and may be helpful for making up the deficit in the domestic economy;
6. Pay special attention to studying the specificities of the host countries – provisions for setting up foreign enterprises, common challenges (for instance, corruption, political interferences, and bureaucracy), and the overall trends in cooperation with foreign investors;
7. Avoid countries with unfavorable business environments when there is an alternative or the objective of the investment project is to maximize income instead of addressing humanitarian needs.

Bibliography

“Private Sector Perspective to Invest in Low/Low-Middle Income Countries.” Capstone Research Paper, 2016-2017.

Footnotes

1. “Private Sector Perspective to Invest in Low/Low-Middle Income Countries” (Capstone Research Paper, 2016-2017), 17.
2. Ibid., 18.
3. Ibid., 2-3.
4. Ibid., 4.
5. Ibid., 6.
6. Ibid., 7.
7. Ibid., 6.
8. Ibid., 8.
9. Ibid., 8-9.
10. Ibid., 10.
11. Ibid., 11-12.
12. Ibid., 14.
13. Ibid., 15.
14. Ibid., 15.
15. Ibid., 20.