International Business in the UAE - Case Study Example

Running Head: International Business in the UAE Name: College: Course Title: Tutor: Date: Introduction United Arabs Emirates has over the time been a center for business opportunities. Oil is the main commodity which creates the international business opportunity while at the same time the one commodity used commercially therefore promoting growth in the region. The economy on the other hand has trade as a cornerstone; the exports from oil and gas are the most important components of trade when export trade is concerned. In figure released about the exports made from the UAE, crude oil to Japan and the gas counts for 62% of it total exports. This means that Japan is the main user of the commodities. (MOFI) UAE has a high per capita income with an annual surplus in trade despite oil and gas pre-dominantly playing the important role in the economy. The UAE has over the recent past had a reduced portion of GDP which is drawn on oil following the successful economic diversification process. The UAE has undergone a profound transformation since the time oil was discovered there at about thirty years ago. The transformation is from being a small desert principality to a modern state with high standards. Job creation in the UAE has been the core value of its government where it has increased its spending not forgetting the expansion of infrastructures and opening up utilities which welcome the private sector involvement. (MOFI) The UAE has in the past been involved in creating investment agreements for instance the Washington agreement where they agreed to negotiate a free trade agreement with the US. Moreover, UAE offers 100% foreign ownership while at the same time zero rating taxes, this comes in handy at attracting more foreign investors to their market. The prices in the shares and real estate experience a urge from the UAE’s high oil revenue, housing shortages, strong liquidity, and also cheap credit. The UAE is highly dependant on oil, this makes it exposed to long-term challenges. To counter this effect, the UAE has got a strategic plan which is aimed at creating and diversifying opportunities for it people through an increased involvement of the private sector and ensuring that there is an improvement on education. (MOFI) Export of the UAE UAE is the third of the most important re-exporter in the whole world; this is after Singapore and Hong Kong. The re-export trade is known to provide a significant one thirds of the entire trading which comes from the United Arab Emirates. Dubai for instance, has a high re-export trade forming the highest proportion of the total income of the UAE. The re-exports market feature across at least 35 countries all over the world despite India and Iran being the prominent destination for this trade. Some of the contributing factors to the UAE’s re-export strength are the bulk purchases; good infrastructure, low taxes, and the fact there are a high concentration of traders. The reduced delivery lead times can not be overlooked either; this is because they are also a major reason for the success of the trade. (MOFI) Iran is one of the dominant consumers of the goods take up the likes of machinery, textiles, and vehicles while another great consumer India buys the silver and the silver jewellery. The re-export trade has been affected by the economic downfall in most of the destination crises, but in the past it had been recording great growth. This is evident from that in the mid- 1990’s, the exports from the UAE had overrun the imports but in current times more than 25% of its imports are merely for the re-export purposes in comparison to the less than 17% which was recorded in the year 1994. (MOFI) Imports of the UAE Due to the fact that there has been growth in the population in the United Arab Emirates, there has been a resulting growth in the demand for the imports as well as to meet the re-export requirements. There has also been an increased level in the expenditure per individual hence increasing the imports to the UAE. The rise in both value and volume of the UAE’s imports has consequently been on the increase. The increase on volume has been affected by the low commodity prices which are as a result of the fierce competition within the Asian region which are ever eager to maintain the external markets. (MOFI) Asian countries had in the past been the greatest as far as the geographical distribution of the market share on the import values is concerned, European countries are also another market as they are placed second while the US comes in third biggest market of the UAE’s imports. As from the current market share on the imports, the US is the leading provider of the imports for the UAE. From the trade statistics with the United States, UAE is revealed to have a trade deficit with the American trade partner as in the year 2007 of $10 billion dollars. This was a 432% increase since 2003. (MOFI) UAE imports from the U.S. at $11.6 billion in 2007 were about the same as the prior year, but were up 331% from 2003. The following are categories of products that had the highest values as Imports from America to the UAE as at 2007 is concerned. 1. Civilian aircraft … US$2.9 billion (24.8% of UAE imports from America, down 32.1% from 2006) 2. New and used passenger cars … 1.4 billion (11.6%, up 59.4%) 3. Drilling and oilfield equipment … $569 million (5.5%, up 21.4%) 4. Non-monetary gold … $431.5 million (3.7%, up 114.5%) 5. Telecommunications equipment … $431.2 million (3.7%, up 156.2%) 6. Other industrial machines … $351.6 million (3%, up 60.2%) 7. Industrial engines … $262 million (2.3%, up 37.8%) 8. Parts for military-type goods … $241.3 million (2.1%, up 97.3%) 9. Gem diamonds … $227.3 million (2%, down 1.6%) 10. Excavating machinery … $211.9 million (1.8%, up 68.6%). Foreign Direct Investment in UAE’s Free Zones Foreign investors have over the time been attracted by the UAE’s Free Trade Zones (FTZ’s). These business entities have been found to grow fast in number, for instance at the moment there are more and more investors who have been getting involved in this form of business. Many of the FTZ’s in the UAE have been attracting many foreign investors, large number of companies as well as foreign direct investment. On the other had, there have been much expansion in the net non-oil exports. Setting up of these free zones has proven to be of great significance. Here are some of the advantages of the Free Trade Zones: (eupdate, 2009) a. There is no personal income taxes b. There is an exemption on the corporate taxes for a period of 15 years which is renewable for 15 years in addition c. Acquiring a 100% foreign ownership d. They come with an exemption of 100% on the imports and export tax e. The foreign investor gets assistance which comes with additional support services like the housing and sponsorship With the creation of the first Free zone, there was a full fledged legal setting which contained fiscal and non fiscal-incentives which were aimed at attracting foreign investors. The free zones serve the purpose of being a link between the Unite Arab Emirates and the outside word. The free trade zones attract investors through encouraging the business environment with the exemption on taxes as well as the custom duties all of these offer support to the foreign direct investment. Some of the Free zones in the United Arab Emirates are; (eupdate, 2009) Dubai International Financial Centre Jebel Ali Free Zone Industrial City of Abu Dhabi Ajman Free Zone  RAK Free Zone  Dubai Silicon Oasis Techno Park Dubai Media City These free zones attract investment through positioning or what is known as unique incentives. They have also benefited from the UAE’s reputation of being the regions trade and logistics hub. This reputation is know to have been created and made large by the involvement of Dubai in the sector. (The Financial Times Limited, 2007) Dubai is believed to excel in the economic zones development due to its ports and airports having the state of the art while at the same time having world class facilities and connectivity with the rest of the world. Other Emirates are also working round the clock to upgrade their facilities to the Dubai status to be able to reap the benefits that come with the free zones. (eupdate, 2009) Franchising activities The United Arab Emirates is known for being very receptive to franchising. Having a high per capita income, the tax free earnings, the receptivity to new products and the ever growing mobile population create a growth potentiality for the UAE market. Most of the franchises are currently operational in the food and restaurants, apparel, auto leasing, soft drink bottling, office supplies, natural health products and personal services. But of all these franchising segments, fast food is the largest. The major player in the fast food being the US with most of its fast food companies having being established already. (ICON Group International, 2007, P. 384) There are agreements that apply to the franchise agreements these being the general contact and commercial law. In the agreements, an individual company gets a 100% ownership of the franchise operation rights. In other cases, a franchisee can enter into a joint venture with a franchiser to operate several outlets as a case of company owned where it employs local managers. Licensing in the United Arab Emirates is done in order to have a fabrication or as a way of marketing the trademarks. One of the notable growing markets is the licensing of the manufacturing processes. This is due to the UAE’s desire to improve the quality as well as diversify its local production. The market stands small though due to the limited manufacturing done in the United Arab Emirates. (ICON Group International, 2007) Bibliography eupdate. (2009, October). Free Zones in UAE. Retrieved November 9, 2009, from Emirate Update: http://emiratesupdate.wordpress.com/2009/10/09/free-zones-in-uae/ ICON Group International. (2007, June ). Strategies in the United Arab Emirates. Retrieved November 9, 2009, from http://www.researchandmarkets.com/reportinfo.asp?report_id=603078 MOFI. (n.d.). Trade in UAE. Retrieved November 9, 2009, from http://www.uae.gov.ae/Government/trade.htm The Financial Times Limited. (2007, June 06). Secrets of success. Retrieved November 9, 2009, from The business of Globolization: http://www.fdimagazine.com/news/fullstory.php/aid/2050/Secrets_of_success.html Read More