International Economic Environment of Business - Essay Example

1 OF WOLLONGONG in DUBAI College of Business UAE as an International Economic Center In Partial Fulfillment of Requirement of the Subject: TBS983 International Economic Environment of Business For the MIB/MQM Program Summer-2’ 2010 By (student’s name) Submitted to: Date: 2 Table of Contents Title Page……………………………………………………………….1 Table of Contents……………………………………………………….2 Executive Summary……………………………………………………..3 Introduction……….…………………………………………………….4 Historical Development of UAE as an Economic Center………………5 Institutions of Social Control in UAE…………………………………6-7 Trade and Investment Reforms in UAE………………………………8-9 UAE Economic Strategies from 1960 to the Present………………….9-10 Conclusion………………………………………………………..10 References…………………………………………………………..11-13 Graph 1: Dubai’s Relative Compounded Annual Growth Rate……….7 Table 1: Real GDP Growth Rates by Sector in Dubai 2000-2005………11.. Appendix ……………………………………………………………15 3 Executive Summary This paper discusses the transformation of United Arab Emirates from a local Middle East trading outpost to becoming a center for international business. Analyses of the recent trade and investment reforms in the country reveal that international businesspeople continue to flock into UAE because of the prevailing comfortable business environment. These reforms have broken previous barriers that used to hinder smooth transfer of Foreign Direct Investments into UAE. Also, it is explained in this paper how the establishment of institutions of social control has been able to position UAE as the best environment for international business activities. The successes recorded in United Arab Emirates would not have been possible if some economic strategies have not been adopted for the past decades; hence, some of these strategies employed from 60s to this day are properly explained in this paper. 4 Introduction As the world continues to become a global village through international engagements among many nations, it is then imperative that good business environment should be created to facilitate smooth business activities (Dunning, 1971). Some of the ways a country could become a hub for all various kinds of business operations, be it trading, manufacturing, banking or even hospitality is to set up modalities that will encourage effective trade and investment reforms (Caves, 1982). United Arab Emirates has taken steps to reform its business practices through the establishment of social controls and implementation of modern business strategies (Betriebswirt and Noack, 2007). The United Arab Emirates has evolved through series of business strategic developments which have seen it survived many economic crises during the last four decades. The country has adopted proactive measures to make sure that the activities of the foreign investors are not hindered by any internal economic hurdles that could destroy the plan of UAE government to create an international business haven for businesspeople of different kinds (International Business Publications, 2007). Globalization has also energized the desire to keep an open-door policy in United Arab Emirates, where international business operations are being carried out year in year out with the intention of turning UAE into the major environment for international economic business (Bhagwati, 2004). 5 Overview This section of the paper deals with the main features of a liberalized economy which allow foreign or international business players to operate within its jurisdiction. Emphasis is laid on the transformation of the United Arab Emirates from a localized economy to the one that opens its doors to many foreign enterprises through the process of reformation of its trade and investment policies. More explanations are given on the qualities that establish UAE as an International center or environment for foreign businesses. Literature Review Below is the presentation of relevant literature on the issue of international economic environment of business as pertaining to the United Arab Emirates. Some of the points raised in this review point to the fact that UAE is growing and becoming more receptive to Foreign Direct Investments (FDIs) (Bora, 2002). Historical Development of UAE as an Economic Center The economic relevance of United Arab Emirates began somewhere in mid-nineteenth century according to the evidence obtained from economic historian. Before this period, most of Arab States were segmented and enmeshed in bloody religious strife and clashes that would not have made it possible for commercial activities to thrive. However, economic activities began to flourish in the mid-nineteenth century when the people of 6 United Arab Emirates came together to engage in pearl fishing, fishing, trade, agriculture, grazing and the production of handcrafts (Noack, 2009). Both Dubai and Abu Dhabi had become centers of pearl trading by 1930s, bringing buyers across the region and beyond (Noack, 2009). During this period, United Arab Emirates’ markets were small depending on the population of people in areas scattered across the desert. But something strategic happened in 1962 when oil was first discovered in Abu Dhabi: this changed the business landscape of UAE for good as many foreign investors came into the country in large number looking for investment (Noack, 2009). This incident has singularly opened the United Arab Emirates for international businesses to flock into the region as Britain, which has been wielding some form of political power in the region, was forced out. In decades after this discovery, more and more foreign investors have moved to UAE, investing in oil, banking, hospitality industry and other lucrative business adventures like construction and tourism (Noack, 2009). The graph below shows Dubai’s Relative Compounded Annual Growth Rate from 2000 to 2005. 7 Graph 1: Dubai’s Relative Compounded Annual Growth Rate Source: IMF World Economic Outlook: Econstats; Ministry of Economy Institutions of Social Control in UAE The United Arab Emirates is made up of seven federating states that are governed by a President and constitutional monarchies. The country has interconnected series of governing bodies that manage the affairs of both the public and the business sector (Noack, 2009). Even though the Islamic ideology is the modus operandi, the institutions of social control in United Arab Emirates have been modernized in recent times, and they are quite similar to those obtainable in Western countries. The President appoints ministers who will manage the affairs of their respective ministries. As far as international business is concerned, the following ministries provide 8 the appropriate protection for the foreign businesses operating in UAE: ministries of Foreign Trade, Economy, Social Affairs, and so on (El Mallakh, 1981). There are some business regulatory agencies which regulate the business environment to guarantee that standards are not compromised; there are law-enforcement agents like police, immigration and customs officials that make sure that the properties of foreign businesses are duly protected (Hill et al., 1990). In case there are trade disputes and disagreement, UAE is also subjected to the International Arbitration Laws that could help international partners resolve their trade contentions (Harrigan, 1988). This is one of the reasons why United Arab Emirates has been recognized as the emerging environment for all kinds of international businesses because of its capability to offer productive business environment similar to that in the West (Hofstede, 1980). Trade and Investment Reforms in UAE Since the United Arab Emirates joined the World Trade Organization, WTO, in 1996, the country has maintained a growth-oriented policy which necessitate that the economy is liberalized and diversified to welcome even non-oil investment in the country (WTO, 2006). This economic goal has seen UAE gone through some strategic trade and investment reforms in recent years. These reforms can be classified under the following categories: 9 (i) Relax Trade Laws: The United Arab Emirates has taken serious steps to relax some trade laws that were traditional difficult for foreign business to thrive in. This action has made UAE economy to be one of the most liberalized in the world (WTO, 2006). Now, foreign businesses could operate competitively with the local companies in the country, most especially in the oil, banking and construction industries. Although, more actions are still needed in the services industry, which is still mainly controlled by the domestic businesses (WTO, 2006). (ii) Trade Agreements: To place itself as a competitive country, the United Arab Emirates has signed several trade agreements with some countries. These countries include but not restricted to Morocco, Iraq, the United States, Australia etc (WTO, 2006). The purpose of doing this is to create a great environment for smooth transfer of business activities and technology from those countries to UAE (Lecraw, 1983). Trade agreements have also motivated foreign investors to believe in UAE as there is no reason they should entertain any fear about the future of their investment when going into alliances or partnership with the local companies (Reynolds, 1984). Some of these trade agreements are meant to help the United Arab Emirates acquire the latest technologies in the field of oil—its mainstay—and 9 other business activities. Similarly, trade agreements with countries like the United States and Australia provide the market for UAE oil for the purpose of earning huge foreign exchange from the agreements (Kogut, 1989). This action has been 10 perceived as positive, and the one that supports the principles of globalization on which international business practices are based. (iii) Regional Trade Negotiations: In other to expand its business activities across the Middle-East region, the United Arab Emirates has formed alliances with the other countries in the region. UAE is an active member of the following organizations: Gulf Cooperation Council (GCC) and Great Arab Free-Trade Area (GAFTA), the economic arm of the Arab League. These regional trade alliances or free-trade agreements have the power to help UAE revolutionize its economic activities for greater economic prosperity. More so, it allows foreign business players to be part of the growth in UAE local economy, while expanding their own businesses (Emanuael, 2002). UAE Economic Strategies from 1960 to the Present UAE has adopted different strategies as it developed from a quite local economy to an international center for business activities. In the 60s, most of the businesses in the United Arab Emirates were nationalized (Noack, 2009: Emerson, 2003). This signifies that the major business—oil companies—were controlled by the federal government. This attempt was to dissuade the foreign powers like Britain which had ruled the region for sometime from taking over the oil business. The 70s and the 80s saw a rapid transformation in the economic strategies in UAE: more private owners began to emerge and forming partnerships with local or international businesses (Noack, 2009: Tayeb, 2001). However, 11 in the 90s and 2000s, UAE is drastically transforming itself into a competitive environment for international business practices as it embraces globalization, reforming its trade and investment laws, providing incentives for foreign investors through relaxed taxation systems and promulgating laws that would liberalized most of the business activities in the country (Noack, 2009; Mahajan, 2006). The characteristics described above contribute to the current level of economic development recorded in the modern-day UAE. Some of the challenges UAE faces as result of this open-door strategy include massive immigration of foreigners into the country, housing shortage, huge cost of social services and health concerns. This also increases the cost of living in the country: many middle-class citizens are forced to work hard in order to feed and house their families. However, the corresponding growth rates per each sector of production in the country support the assertion that UAE has one of the most dynamic economies in the world. Table 1: Real GDP Growth Rates by Sector in Dubai, 2000-2005 Real Growth (%) 2000 2001 2002 2003 2004 2005 Agriculture 8 5 2 4 44 7 Manufacturing 13 4 8 15 19 6 Electricity, Water 6 4 29 0 13 9 Construction 5 1 64 28 13 12 Trade 4 1 32 32 32 15 Restaurants & Hotels 5 5 3 8 17 16 Transport, Storage & Communication 21 18 11 11 9 11 Real Estate 7 2 29 12 23 24 Social & Personal Services 10 5 29 18 10 6 The Financial Corporation Sectors 7 20 4 14 23 23 Domestic Services of Households 3 17 4 -1 2 1 Source: Rettab and Kwaak (2005) and the UAE Ministry of Labour Conclusion The facts presented in the foregoing strongly support the proposition that good economic strategies, well-planned trade and investment reforms and practical incentives could turn any country from a localized economy to the one that can establish great international environment for business activities as shown of United Arab Emirates. References Betriebswirt, D., and Noack, M.S., 2007. Doing business in Dubai and the United Arab Emirates. Munich: GRIN Verlag. Bhagwati, J.N., 2004. In defense of globalization. New York: Oxford University Press US. Bora, B., 2002. Foreign direct investment: research issues. London: Routledge. Caves, Richard E., 1982. Multinational enterprise and economic analysis. Cambridge, UK: Cambridge University Press. Dunning, J. ed., 1971. The multinational enterprise. London: George Allen and Unwin. El Mallakh, R., 1981. The economic development of the United Arab Emirates. London: Taylor & Francis. Emanuael, O., 2002. Free trade agreements: political viability and effects on the world trading system. Madison: University of Wisconsin-Madison. Emerson, R.W., 2003. Business law. New York: Barron’s Educational Series. Harrigan, K.R., 1988. Joint ventures and competitive strategy. Strategic Management Journal, 9(2), pp.141-58. Hill, C., Peter, H., and Wi, C.K., 1990. An eclectic theory of the choice of international entry mode. Strategic Management Journal, 11, pp. 117-28. 12 Hofstede, G.H., 1980. Motivation, leadership and organization: Do American theories apply abroad? Organizational Dynamics, 9(1), pp.42-63. International Business Publications., 2007. Doing business and investing in United Arab Emirates Guide. Washington, D.C.: International Business Publications. Kogut, B., 1989. The stability of joint ventures: reciprocity and competitive rivalry. Journal of Industrial Economics, 38(2), pp.183-98. Lecraw, D.J., 1983. Performance of transnational corporations in less developed countries. Journal of International Business Studies, 14(1), pp.15-33. Mahajan, S., 2006. Globalization and social change. New Delhi: Lotus Press. Noack, S., 2009. Business guide: doing business in Dubai and the United Arab Emirates. Norderstedt, Germany: Books on Demand. Reynolds, J.I., 1984. The “pinched shoe” effect of international joint ventures. Columbia Journal of World Business, 19(2), pp.23-29. Tayeb, M.H., 2001. International business partnership: issues and concerns. London: Palgrave. World Trade Organization. 2006. Trade Policy Review: United Arab Emirates. [Online]. WTO. Available at http://www.wto.org/english/tratop_e/tpr_e/tp263_e.htm [Accessed 6 June 2010] Appendix UAE Balance of Payments: Key Indicators percent FY01 FY02 FY03 FY04 Trade Exports/GDP 12.5 12.8 13.2 13.1 Imports/GDP 14.3 13.2 13.8 14.4 Trade openness 26.9 25.9 27.0 27.4 Services account Services (net)/GDP -4.4 -3.7 -2.6 -3.8 Interest payment to EE ratio 17.3 16.1 10.2 7.0 Interest payment to FEE ratio 10.8 9.5 5.6 4.1 Transfers Net transfers to GDP 6.6 8.0 8.2 7.1 Remittances/GDP 1.5 3.3 5.1 4.1 Current account Current receipts / GDP 21.3 23.7 25.1 23.3 Current receipts growth 17.6 11.7 22.1 6.7 FEE (US$ mlns) 14,337 15,456 19,652 21,481 Growth of FEE 12.4 7.8 27.1 9.3 Non-interest CAB (US$ mlns) 1,874 4,303 5,310 2,757 NICAB/GDP 2.6 6.0 6.4 2.9 CAB/GDP 0.5 4.0 5.1 2.0 Capital account FDI/GDP 0.5 0.7 0.9 1.0 FDI/exports 3.6 5.3 7.3 7.7 Others Reserves in weeks of imports 10.1 24.3 45.4 39.4 Note: EE: Export Earnings; FEE: Foreign Exchange Earnings; NICAB: Non-Interest Current Account Balance; FDI: Foreign Direct Investment Read More