Business Development in an MNOs and Analysis of Business Risk - the UAE - Case Study Example

Business Development in a MNOs and Analysis of Business Risk Name Institution Course Tutor Date Country: UAE Introduction Many businesses are exposed to different business risks as they operate in particular countries. During the decision-making process of running a business in a certain country, it is necessary for the business management team to analyze the country risk that is likely to influence the business. Country risk refers to the risk related with foreign investment. The particular risks are common in influencing the value and profit ability of the assets involved in the investment. Prior to engagement into any investment, businesses should conduct a thorough analysis and understand the potential risks. The country risk is affected by factors, such as the political, economic, environmental, and financial factors. To understand the country risk, there has to be an analysis of these factors through studying of the economic sector, analyzing the financial position and political issues. This research analyzes the United Arab Emirates (UAE) and the above factors are thoroughly studied. There is also the discussing or the assessment of the risk and recommendations and conclusions of the whole paper. Country context: Country Profile: The United Arab Emirates (UAE) consists of seven emirates, which are; Abu Dhabi, Fujairah, Ummal-Quwain, Dubai, Ras Al-Khaimah, Ajman, and Sharjah. The capital if Abu Dhabi and every emirate is ruled by a detached Amir with the entire federation being governed by a common president (Morris, 2009, 364). The only concern of the UAE constitution is the interconnections among all emirates and the governmental structure is detached for every emirate with each emirate having a personal system. The country contains the sixth biggest oil reserve globally and is ranked as 35th in the global exchange rate market. According to IMF, it is a high-income industrializing nation. Abu Dhabi occupies 87% of the entire area of the UAE, thus being the largest emirate and the smallest one being Ajman. UAE coastal region occupies over 650 kilometers with the biggest harbor being located at Dubai and other ports in other emirates. The basic indicators; GDP-2009 264,294; Million current PPP US $ GDP- 2009: 230,252; Million current US$ Population -2010: 7,512,000 Trade per capita: 61,995; US$ -2008-2010 Trade to GDP ratio 172.6 2007-2009 Current account balance 22,278 -2008: Million US$ Political System A separate Emir (Sheikh) governs every emirate in UAE and the country is known because of the political stability within all the UAE emirates, thus the entire country being rated as stable in relation to the political risk. Abu Dhabi applied the financial assistance for Dubai to improve its political control against the small emirate (El Mallakh, 2014, 17). There are cooler relations with other nations like Iran. Dubai’s autonomy is reduced by increased centralization of the judiciary and administration in the federation. Legal System The country follows the rule of law where there is access to property rights and freedom from the corruption. In addition, UAE allows business freedom, monetary freedom, and labour freedom among all people. The legal system of UAE is politically dependent because of the efficiency deficiencies. There was passage of the companies’ law in 2013, which align with the international standards. UAE is rated at 58.8 in the ratings of security risks, thus being forth. There is minimal crime rate, efficient policing, and negligible costs in relation to organized crimes and property crime. Foreign workers are exposed to very few risks (Arab, & al Qaywayn, 2013, 454). There is also moderate risk associated with terrorism, but not core bombing cases. The country offers protective security concern to the businesses through the ‘centre for the protection of national infrastructure.’ The business law sees through the improvement of the listing, account ting, and corporate governance areas, but there is prevention of the foreigners from possessing a company’s majority holding (Al Shamsi, Aly, & El-Bassiouni, 2009, 3511). Economic System UAE has an open economic system with sizable yearly trade surplus and increased per capita income. The mixed free-market economy is based on the production of natural gas and oil, which take over 25% of the UAE’s GDP. The non-oil sector rise up as indicated below. There is low to moderate economic risk in the UAE since it is dominated by the oil sector with 90% of the entire oil reserves in UAE being accounted at Abu Dhabi. The increased prices of oil highly support the UAE’s economy. 70% of the UAE’s economy is accounted to Dubai’s trade, real estate, and finance, thus making the economy to be stable (Khan, 2009, 10). There is also creation of the free zones to enhance the industrial growth and technology sector, for example, the Internet City Dubai with attraction to firms of high profile like the HP, IBM, and Microsoft among others. Due to much reliance on the gas and oil, the entire UAE’s economy continue fluctuating because the government revenue depends highly on the oil production and applied to allow growth in construction, tourism, and trade sectors. Finance and insurance 6.4% Transportation 7.3% Construction 8.6% Real Estate 9.1% Government services 115 Commerce and hotels 11.4% Manufacturing 12.6% Oil and Gas above 30% Economy: UAE has a stable economy with some expected fall in growth because of the weakness of the oil sector to be at 4% of the annual GDP. The lower prices of oil weaken the nation’s growth, which is an offset of the growth found in the non-oil sector. UAE experience development through becoming a transport hub, for instance, the Dubai International Airport being the busiest airport because of overlooking the London Heathrow with around 70 million passengers and busiest for usage of the Airbus A380, as well as global busiest goods airport (Reiche, 2010, 380). The oils prices are prospected to be around USD 60-70 per barrel but due to uncertainties, there are some downward and upward risks. There is great benefit of the increased world trade in UAE because of the opportunity to host 2020 World Expo and expectation of +3.55 and +4.5% growth in 2015 and 2016 respectively. The per capita (purchasing power parity) of UAE is 29, 900US$ and it has a global competiveness index of 5.24 points. The GDP per capita is 43,774 USD. GDP -2013- USD 402.34 billion making the UAE to be ranked at 29 across the world by the World Bank. The GDP growth was over 4.2% in 2014 with positive contribution from the oil, as well as non-oil sectors, such as tourism, transport, and the trade (Diamond, 2010, 97). The Eurozone weakness influences the substitution effect of the country. There are strong government spending in the form of subsidy and social support provision and the investment because of compensation of the weaker outside demand. There was current account surplus in 2014 of more than 9% of the GDP. Country Openness: The UAE FDI is associated with openness and free travel within the emirates. It is easy to acquire the local firms and there is acceptability of foreign intermediaries in the UAE business sector (Forstenlechner, & Mellahi, 2011, 458). Macro level political and social context: There is high protection of the private property rights, media freedom, improved accountability of politicians, and availability of check and balances because of free-trade market system (Hussein, 2009, 364). Product Market: UAE HAS data availability in relation to consumer tastes and purchasing behavior, which is acquired through the media. There are emirate cultural and institutional barriers to the conduct of market research, but due to availability of unbiased information for consumers and accessibility of quality raw materials and intermediaries, it is possible for a foreign business to prosper (Khanagha, 2011, 37). The labour Market: The UAE embrace education infrastructure and have an education system that offers quality education and training for all to shape their future career (Wilkins, 2010, 392). The business language in UAE considers the diversity of people in the nation and there is free movement of workers within companies. The UAE government adopted the Emiratisation policy allowing the job market to offer favours to the nationals and not the expatriate workers. Capital Market: The UAE credit rating is based on the condition of the poor and the standards where businesses experience short-term and long-term credit ratings from the UAE banks. According to Moody, Fitch, and standard and poor (S&P) credit ratings, UAE has Aa2/ stable, Abu Dhabi having AA/ stable and AA/ stable credit ratings respectively and all are long-term; http://www.pinoymoneytalk.com/meaning-of-credit-ratings/. In addition, there is opportunity for local and foreign investment for the UAE companies. There is experienced growth in the venture capital investment by the UAE firms. Auditing of the UAE business is conducted internally through the registered auditing and accounting bodies under the ‘Accountants and Auditors Association (AAA) (Arouri, Youssef, M'henni, & Rault, 2012, 346). The foreign exchange rate in UAE is associated with price pressures. There is expectation of end of the consumer price related inflation in 2015, which will be around 3.3% and 3% by 2016. Due to the fixed peg of the AED 3.67, there is no much expectation of change in the exchange rate. The banking services are influences by the Dubai World debt, which interfere with the lending system of the banks. The UAE banks book only for the non-performing loans, but the Central Bank introduced new regulations for rise of the lending level to 35.5%, which became operational from 201, thus making the risk associated with the banking sector to be stable (Schwab, 2010, 32). The major banks located at Abu Dhabi are distinct because of proportions of their loans, thus reduction of the lending ratios and improvement of the general liquidity. There is growth of lending practice to the government owned companies. The UAE has some moderate international reserves with some enormous assets and surpluses in the current account. The debts in UAE especially the Dubai debts were eased because of exhibition of a solid growth. There are minimal economic stability threats because of the advanced asset bubbles (Nyarko, 2010, 11). There are relatively low debt ratios with the debt stock being 48% of the export earnings and 44% of the GDP and below 4.5% debt service ratio in relation to the export receipts. Cultural Context: The UAE has seven emirates, which share their cultural aspects with the Arab cultural groups. The UAE culture allows opportunities to feature historical tours, archaeological sites, heritage, and art exhibitions (Hvidt, 2011, 92). Employees face challenges in the UAE businesses because there is full of cultural diversity. Ethics and CSR: There ethical culture of the UAE business conduct allows transparency and protection of the intellectual property rights because of elimination of corruption (al‐Suwaidi, 2011, 48). International Trade Picture: There is high exportation of oil from UAE with around 50% of the export receipts of UAE resulting from crude oil and other related products. There is a stable sovereign risk in UAE though the nation has some obligations and debts to meet. Much support result from the increased oil reserves located at Abu Dhabi (Hvidt, 2011, 92). Between 1995 and 2004, there was increase in exports by 98% and import rise of 133%. UAE has a positive export partnership with India and this developed because of strict following of the export and import rules. In 2014, the imported goods from U. S. amounted to $24.6 billion. There are UAE import regulations followed by companies and free trade agreements (Knight, 2011, 230). Dubai is known to handle around 80% of the UAE’s imports and exports. Foreign Direct Investment: The UAE engage into foreign direct investment with outflows of $10.4 billion in 2012. The trends of foreign investment are associated with the economic sectors in UAE, for example the oil and non-oil sectors. In 2013, UAE was leading the GCC in the flow of foreign direct investment because of the increased FDI flows to $10.5 billion (Harder, & Gibson, 2011, 792). In 2014, the outflows of UAE FDI were around $67 billion. In 2011, there was attraction of around 5.5 billion increment in the foreign direct investment. In general, the UAE FDI outflows and inflows have been peaking with time. Foreign Exchange: There is stable currency risk because of the authority’s commitment to retain the price and stability of the UAE’s currency (Mellahi, Demirbag, & Riddle, 2011, 409). However, UAE’s currency is not allowed to take part in the GCC’s single currency proposal. There is also a moderate financial risk because of Dubai having the ‘Dubai International Financial Center (DIFC)’ operating as a liberated trade monetary zone through regulations from the ‘Dubai Financial Services Authority’, which is known through the federal UAE government. The financial risks are kept moderate by the government regulations (Yount, & Sibai, 2009, 283). Analysis and Discussion UAE is a stable country associated with a succession method of establishment. The country has abundance of oil and gas, as well as other natural resources like the hydrocarbons. The country has a net creditor identity with opportunities of holding investment overseas and huge asset holding. The economy of UAE is actively diverse and the country has GCC based regional co-operation. In the MSCI, the country is classified with the status of the emerging market and has sound current and fiscal accounts even if the country is affected by weak oil prices. The weaknesses or challenges associated with UAE are regional uncertainties, increased dependence on the regional and global market, and speculative flow of the real estate and the stock market. There is poor data provision in relation to the income economy. The UAE economy is affected by vagaries of the international gas and oil markets. Conclusion and Recommendation As discussed in the research, UAE depends highly on oil production. UAE is at the top rank of the developed countries in West Asia and lies within the wealthiest countries across the world. The non-oil sectors are developed but not comparable to the oil sector. Dependency on one resource leads to increased exposure of UAE to risk, for instance the Dubai financial crisis. The project of oil resources was associated with overconfidence and there was no consideration of the recession risk. There are positive trade agreements with the countries that engage in trading activities with UAE, thus making the international trading image of UAE to be positive. In addition, the economy system is stable and other factors influencing the country risk are stable, thus recommendable for the company to undertake the business intended in the UAE. 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