GDP, Global Competitiveness and Other Indicators - the United Arab Emirates - Case Study Example

United Arab Emirates: Country Report Table of Contents Executive Summary This is a country report on the United Arab Emirates (UAE). A member of the Gulf Cooperation Council, the country is a federation of seven distinct emirates. The president of the country is selected from the seven monarchs who represent the seven constituent emirates. The seven monarchs form the Federal Supreme Council, which is the highest institution in the country. The economy of United Arab Emirates is largely diversified. Following years of dependence on crude oil, the federal government sought to develop other sectors such as tourism, infrastructure, agriculture and financial services as a way of decreasing the extent to which the economy was dependent on oil. In general, the macroeconomic environment of the country can be described as stable. This is because of the relatively high rate at which the economy is growing as well as the existence of policies that seek to promote trade and investment in the country. However, the proportion of local Emiratis in the workforce is relatively low. To address this concern, the federal government has launched the Emiratisation programme. Currently, labour – skilled and unskilled – is largely provided by non-locals who have immigrated to the country. Islam is the dominant religion and Arabic is the dominant language. However, English is largely spoken by the locals as well as the large expatriate population. In general, companies which operate in the country approach corporate social responsibility as a way of giving back to the society as well as adhering to the established rules on environmental management and product safety. In conclusion, regardless of the existing challenges, the UAE is a suitable country for the multinational corporation to expand to. Introduction This assignment is about the business development process in a multinational company and how this process takes into consideration different risks that exist at the international level. It is a country report on the different risks and opportunities that exist in the UAE and how this can be used to determine whether or not an Australian-based multinational organisation should expand its manufacturing activities to the UAE. Three key issues about the country are analysed in this report. The first one is the overall profile of the country. A brief description of the demographic, political, legal and economic characteristics of the country is presented. The second one is the macro-economic environment of the country. Details about the country’s rate of growth of the economy, the level of openness to foreign direct investments and the overall consumer behaviour are discussed. Lastly, information about the cross-cultural aspects of the UAE is presented. Country Context Country Profile The UAE is a small country that is located close to the Persian Gulf. It is a federation of the following seven distinct emirates: Abu Dhabi, Sharjah, Dubai, Umm al-Quwain, Ras al-Khaimah, Ajman and Fujairah. Every emirate is governed by a supreme monarch. The seven monarchs of the seven emirates form the Federal Supreme Council, a body that is charged with the responsibility of governing the entire UAE. The leader of the Federal Supreme Council, who is usually selected from the seven monarchs, acts as the president of the United Arab Emirates. Currently, the population of the country is about 10 million individuals (Country Meters 2015). The majority of the population comprises expatriates while a minority is made up of local Emiratis (World Population Review 2015). With regard to language, Arabic is the official language of the country. However, English is widely spoken by the native Emiratis as well as the expatriate population in the country. Political System In general, the political system in the UAE remains authoritarian (BBC 2015). Political parties or political pressure groups are not allowed in the country. Similarly, universal suffrage is not practiced in the country (International Business Publications 2012, p. 12. The Federal National Council is the legislative body in the country. The body is made up of 40 seats – 20 of which are contested while the rest are filled by individuals who are directly appointed by the Federal Supreme Council. The 20 elected seats in the Federal National Council are distributed among the 7 emirates in the country. Abu Dhabi and Dubai are allocated 4 seats each. The emirates of Sharjah and Ras al-Khaimah are allocated 3 seats each. All the remaining emirates of Fujairah, Ajman and Umm al-Quwain share the remaining 6 seats equally. Legal System The Federal Supreme Council is the highest constitutional authority in the UAE. The body is responsible for establishing the policies that are used to govern the affairs of the country (International Business Publications 2012, p. 13). Also, the body has vetoing powers over all the federal legislation in the country. The highest court in the country is the Federal Supreme Court. The court, which is made up of the president and 4 judges, is charged with the responsibility of determining legal matters that have been referred to it by the subordinate courts. The president and the other four judges are usually appointed by the president of the UAE. The appointments have to be ratified by the Federal Supreme Council (Price & Al Tamimi 2005, p. 8). The Court of Cassation is charged with the responsibility of determining the constitutionality of the laws that are passed at the federal as well as the local levels. Economic System In general, the economy of the UAE is diversified. The process of economic diversification was driven by the late Sheikh Zayed, who was the first president of the country. During his tenure, his administration sought to invest the proceeds from oil to other sectors such as education, healthcare and infrastructure (Oxford Business Group 2014, p. 264). Three key sectors play a distinct role in the economy of the UAE: agriculture, services and industry. Under industry, production of petrochemicals, construction materials, cement, fertilisers and textiles contributes about 60% of the country’s gross domestic product (GDP). Macro and Institutional Factors GDP, Global Competitiveness and Other Indicators The rate of growth of the GDP of the UAE has averaged 4.82% between 2000 and 2014 (Trading Economics 2015). In the year 2006, the rate of growth of the GDP reached an all time high of 9.8% while in the year 2009, the lowest rate of annual growth of the GDP of –5.2% was recorded (Trading Economics 2015). The economy of the UAE remains one of the strongest within the Gulf region. Although largely dependent on oil exports, which account for about 40% of the total exports, recent investments in other sectors such as tourism, real estate and financial services have led to a generally stable economic environment in the country over the recent past (Trading Economics 2015). In 2014, the country posted a GDP of USD 406.1 billion and a gross national income (GNI) per capita of USD 45,200 (The World Bank 2015). With regard to corruption, the country has been posting relatively low scores of corruption perception index (CPI) over the years (Find the Data 2015). In 2012, the country had a CPI score of 6.8 out of 10, ranking at position 149 out of 174 (Find the Data 2015). The low CPI scores indicate that compared to other countries, the UAE is a relatively low-corruption country. Country Openness The UAE is a country that is largely open for trade and investment (World Trade Organisation (WTO) 2015, p. 7). The existence of this policy environment has enabled the country to remain highly competitive in the region (IMD 2015, p. 2). This has been demonstrated by the high rate at which companies are opening branches in the country as well as the volume of trade between the country and its regional partners. For instance, the level of foreign direct investment (FDI) in the country has grown by 25% between 2010 and 2014 (IMD 2015, p. 1). However, it is noted that although the country has a liberal trade policy, there are several limitations and conditions that are set for foreign investors (WTO 2015, P. 8). For instance, it is a legal requirement in the country that all foreign investments must have at least 51% of their capital funded from local sources (WTO 2015, p. 8). Also, foreign companies are required to use local agents to conduct business in the country (WTO 2015, p. 9). Macro Level Political and Social Context The macro level political and social context of the UAE is defined by several attributes. The first one is the nature of private property rights protection. In general, the nature of private property rights protection in the country has remained relatively stable over the years, posting an average measure of 55.0 (The Heritage Foundation 2015). When this measure is interpreted together with the relatively high score of freedom from corruption, it can be deduced that the country is relatively favourable for individuals and corporations to own private property. The second one is the extent to which checks and balances are established in the regulatory environment of the country. Checks and balances are enforced in the form of the existing regulatory and legal environment. In general, the rule of law is maintained in the country, regardless of the judiciary not being fully independent (The Heritage Foundation 2015). Furthermore, the relatively significant involvement of the government in economic affairs of the country works to guarantee a degree of social and economic stability. The Labour Market The labour market in the UAE is characterised by the high presence of foreign nationals. The country has been an important destination for skilled labour from different regions of the world. Expatriates form over 80% of the labour force in the private sector. In addition to this, the country has attracted a large number of unskilled labourers who compete for employment positions and are usually subjected to poor working conditions (Malit Jr. & Al Youha 2013). What is important to note is that both skilled and unskilled foreign workers in the UAE are concentrated in the private sector. The government sector, represented by the Federal Government, has a relatively high number of local workers which was 21,400 out of 31,400 (U.S. Department of State 2013). To address the disparity, particularly in the private sector, the Federal Government formed the UAE Emiratisation Council (UEC) back in 2009. The body is responsible for the formulation of policies that can be used to increase the number of local Emiratis who work in the private sector of the country as well as the overall level of labour mobility in the country (U.S. Department of State 2013). Capital Markets and the Banking Sector In 2012, the value of capitalisation of publicly listed companies in the UAE was 18.3% of the GDP of the country for the same year (Knoema 2015). The relative efficiency of the capital market in the country has been a result of regulatory and legal changes that have been instituted over the recent years. Currently, the Securities and Commodities Authority (SCA) is charged with the responsibility of regulating and overseeing the investment funds that are initiated by the Central Bank of the country (U.S. Department of State 2013). With regard to the banking sector, the UAE Central Bank started issuing licences to foreign banks to operate in the country starting from 2003 (U.S. Department of State 2013). This approach has opened the UAE to different foreign banks that have opened branches in the country and now offer full banking services to individual and corporate clients. Although this is the current trend in the banking sector in the country, the manner in which foreign banks operate is generally subject to a number of restrictions. For instance, the foreign banks in the country are not allowed to calculate loans as a percentage that is based on their global capital (U.S. Department of State 2013). This approach is meant to ensure that the banking sector remains stable and favourable to the economic growth of the country. Cross-Cultural Aspects Ethics and Corporate Social Responsibility In general, the practice of corporate social responsibility in the UAE has its foundations on two factors: the prevailing cultural practices and the current regulatory environment. One of the values of Islam, which is the dominant religion in the country, is the need to give donations for overall social welfare. Adherence to this teaching has led many organisations operating in the United Arab Emirates to engage in the most basic form of corporate social responsibility which involves giving donations for community projects. At the national level, the government also seeks to enhance social welfare in the country by ensuring that it provides a wide range of public services for free (Government of Dubai 2015). At the corporate level, corporate social responsibility practices have arisen not only from the need for corporations to meet the existing social and cultural expectations, but also from the need to adhere to regulations. The federal government of the UAE has established strict regulations with regard to management of the environment as well as safety of the products that are marketed in the country (Suliman & Thomas 2014, p. 255). This regulatory environment has made it necessary for organisations that are operating in the country to initiate environmental management programmes as well as ensure that the products that are made available to consumers have been subjected to rigorous safety tests (Suliman & Thomas 2015, p. 255). International Trade The UAE has a relatively open and vibrant economy. This is reflected in the high level of international trade that takes place in the country. Apart from being a member of the WTO since 1996, the country has established important trading agreements with different countries within the Gulf Cooperation Council (International Trade Centre 2015). This has enabled the country to develop as an important trading hub in the region. In general, the volume of imports and exports has been rising over the years. For instance, in 2013, the country imported goods worth USD 215.035 million and exported goods worth USD 208.157 million (International Trade Centre 2015). The UAE imports a large percentage of its goods from India, China, the United States of America, Germany and Japan (Embassy of the United Arab Emirates 2015). On the other hand, the country exports its primary products such as oil, precious stones and chemicals to the following countries: Japan, India, Iran, South Korea and Thailand (Embassy of the United Arab Emirates 2015). Foreign Exchange Trends Currently, the inflation rate of the UAE is 2.3% (XE 2015). The Emirati dirham has a current exchange rate of about 0.28 against the United States Dollar (XE 2015). The UAE Central Bank issues monetary reports on a monthly basis. The report covers trends in the exchange rates of the currency as well as important changes in the general fiscal environment of the country. For instance, in the month of August, 2015, it is noted that the country had a relatively stable fiscal environment (Central Bank of the UAE 2015, p. 1). This was demonstrated by several indicators. First, it was noted that the total amount of money held by banks, also referred to as gross bank assets, increased by 1% during the month of August (Central Bank of the UAE 2015, p. 2). Similarly, gross credit that is offered by banks in the country increased by 0.9% during the month of August (Central Bank of the UAE 2015, p. 3). Therefore, the relatively low level of inflation rates, coupled with a robust fiscal environment means that the economy of the UAE is generally stable. Analysis and Discussion Opportunities First, the prevailing macroeconomic environment in the country is conducive for investment. Indicators such as the GDP, GNI per capita and rate of inflation indicate that the UAE is set to continue experiencing a relatively high rate of economic growth. The current and predicted expansion of the economy makes the country an ideal destination for investment by a multinational corporation. Secondly, the political environment of the UAE is relatively stable. The manner in which the country is governed has so far ensured that there is political stability. This is good for business organisations since it creates an environment in which the organisations can operate with a degree of certainty. Thirdly, the policies that have been instituted by the Central Bank of the UAE have led to the existence of a relatively stable macroeconomic environment in the country. In general, the country has a relatively low level of inflation and a healthy fiscal environment. This low level of inflation, coupled with a favourable trend in exchange rates over the last few years, means that the UAE is a suitable destination for investment. The fourth positive attribute of the economy of the United Arab Emirates arises from the level of openness of the country and a growing population. The projected increase in population usually translates to growing markets for products and services. Therefore, the projected increase in the population of the country in the next few years makes it a suitable country for investment. Furthermore, the country has remained largely open to international trade and investment. Openness to international trade is beneficial in several ways; however, the most important one is that it has made the country a regional trading hub. This means that the organisations that do business in the UAE will easily link with regional and international markets. Challenges The first challenge is that the Emiratisation programme may interfere with the manner in which private corporations are able to access and make use of labour in the country. As well, although corporate social responsibility practices are carried out as a way of adhering to government regulations on one hand and meeting social expectations on the other hand, there is need for organisations to craft social responsibility policies that are suitable and more effective. Additionally, although the country is relatively open for international trade, investments are carefully regulated. Multinational corporations are still required to adhere to different regulations as a way of ensuring that their activities do not produce a negative impact on local businesses. The need to adhere to some of the regulations is a challenge to corporations seeking to expand into the country. Conclusion In conclusion, the UAE is an ideal country for investment. The prevailing political, economic and legal environment makes the country conducive for a multinational corporation to expand into it. Furthermore, the country has been experiencing a good macroeconomic environment characterised by a relatively high rate of economic growth and macroeconomic stability. However, lack of independence of the judiciary, issues to do with the need to increase the proportion of locals in the labour force and lack of a comprehensive corporate social responsibility framework by organisations operating in the country are some of the issues that need to be addressed. References BBC 2015, United Arab Emirates profile – overview, viewed 7 October 2015, . Central Bank of the UAE 2015, UAE monthly monetary survey August 2015, viewed 6 October 2015, . Country Meters 2015, United Arab Emirates population, viewed 7 October 2015, . Embassy of the United Arab Emirates 2015, Trade & export, viewed 7 October 2015, . Find the Data 2015, United Arab Emirates, viewed 7 October 2015, . Government of Dubai 2015, CSR in Dubai, viewed 7 October 2015, . IMD 2015, United Arab Emirates: can it achieve diverse and sustainable growth?, viewed 7 October 2015, . International Business Publications 2012, United Arab Emirates business law handbook: strategic information and laws, International Business Publications (USA), New York. International Trade Centre 2015, United Arab Emirates, viewed 6 October 2015, . Knoema 2015, United Arab Emirates-Financial sector-capital markets-market capitalization of listed companies, viewed 7 October 2015, . Malit Jr., FT & Al Youha, A 2013, ‘Labour migration in the United Arab Emirates: challenges and responses’, Migration Information Source, viewed 7 October 2015, . Oxford Business Group 2014, The report: Dubai 2014, Oxford University Press, Oxford. Price, R & Al Tamimi, E 2005, United Arab Emirates Court of Cassation judgements: 1998-2003, BRILL, New York. Suliman, AM & Thomas, S 2014, ‘Leadership and CSR in developing countries: the case of the UAE’, in M, Karatas-Ozkan, K Nicolopoulou & MF Ozbilgin (eds), Corporate social responsibility and human resource management: a diversity perspective, Edward Elgar Publishing, Cheltenham, pp. 250-266. The Heritage Foundation 2015, 2015 index of economic freedom: United Arab Emirates, viewed 7 October 2015, . The World Bank 2015, United Arab Emirates, viewed 6 October 2015, . Trading Economics 2015, United Arab Emirates GDP growth rate, viewed 7 October 2015, . U.S. Department of State 2013, 2013 Investment climate statement – United Arab Emirates, viewed 7 October 2015, . World Population Review 2015, United Arab Emirates population 2015, viewed 7 October 2015, . WTO 2015, United Arab Emirates, viewed 7 October 2015, . XE 2015, AED-Emirati dirham, viewed 7 October 2015, . Read More