FDI in the UAE - Term Paper Example

The government reviewed and strengthened the legal framework through the Ministry of the Economy to facilitate foreign direct investment in the economy. The government also signed free trade agreements with partners in the global economy in a move to make the economy more competitive in the global market place. Multinational companies’ preference to invest in the United Arab Emirates can be attributed to its position as a global trade hub, with outstanding performance compared to the rest of the world.

The economy is one of the world’s preferred re-export destinations because of its desirable characteristics in hiring foreign labour, timeliness of shipments in reaching destination, effective cost of imports and exports, quality of air transport, port, and road infrastructure. The government facilitates foreign direct investment due to the benefits linked to it. FDI is proved to stimulate and maintain economic growth, promote technology transfer and encourage more efficient management skills (Inter-American Development Bank, Organization for Economic Co-operation and Development, pg 12) The pie chart below shows that United Arab Emirates is the third largest foreign direct investment economy after the United Kingdom and the United States. Table 1.0 Source: Salman A.

and Hui Xiao Feng (http://download-reports.blogspot.com/2011/02/gdp-growth-with-economic-stability-fdi_02.html) Forms of Foreign Direct Investment in U.A.E Foreign direct investment can basically be classified into two forms, that is, Greenfield investments and mergers investment. Greenfield investment refers to a situation where a wholly new operation is introduced in a foreign country while mergers investment involves a case where an investment seeks to merge its operation with those of an already existing investment in the foreign country.

The mergers can be acquisitions, strategic alliances, or joint ventures. Foreign direct investment can further be classified into market-expansion investments and resource-seeking investments. In market-expansion investments, investment abroad is done in the in the same industry as the parent company, while in resource-seeking investment, investment abroad is done to search for large profitable markets and source inputs for a firm's domestic production process (Gregoriou & Renneboog, pg 31). Green field investment is a form of foreign direct investment where a parent business starts a new operation in a foreign country.

The parent companies undertake to construct new facilities and hire new permanent employees in a foreign country. Foreign countries often offer incentives such as tax-breaks and subsidies to encourage Greenfield investments that benefit the developing countries through creation of jobs and technological advancement countries. However, Greenfield investment has a major setback to host countries in that, profits from operation are not reinvested or put back into the domestic economy. The profits gained from operations of Greenfield investors are taken back to multinational's home economy unlike local companies whose profits are re-invested into the domestic economy.

Therefore, host countries do not benefit much economically but gain long term benefits from job creation, technology and managerial skills transfer (Aswathappa, pg 29). Creation of employment, technology, and managerial skills transfer is viewed to be of more advantageous to the country than loses in offering tax breaks and subsidi