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PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS

BACHELOR THESIS

2021 Mark Vasilyev

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Prague University of Economics and Business International Business

Doing Business in the United Arab Emirates

Author: Mark Vasilyev

Thesis instructor: doc. Ing. Ludmila Štěrbová, CSc.

Scholar year: 2020/2021

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Declaration:

I hereby declare that I am the sole author of the thesis entitled “Doing Business in the United Arab Emirates”. I duly marked out all quotations. The used literature and sources are stated in the attached list of references.

In Prague on April 30, 2021 Signature

Mark Vasilyev

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Acknowledgment

I hereby wish to express my appreciation and gratitude to the supervisor of my thesis, doc.

Ing. Ludmila Štěrbová, CSc., for her support, valuable advice, and quick reply.

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List of Abbreviations

UAE United Arab Emirates

AED United Arab Emirates Dirham USD United States Dollar

GDP Gross Domestic Product CPI Consumer Price Index VAT Value Added Tax

MENA Middle East and North Africa RTA Regional Trade Agreement GCC Gulf Cooperation Council PAFTA Pan-Arab Free Trade Area

EFTA European Free Trade Associations WTO World Trade Organization

MFN Most Favoured Nation

GAFTA The Greater Arab Free Trade Area GSFTA GCC-Singapore Free Trade Agreement FDI Foreign Direct Investment

FSC Federal Supreme Council FNC Federal National Council

DIFC Dubai International Financial Centre ADGM Abu Dhabi Global Market

DWC Dubai World Central

LCC Limited Liability Company PJSC Public Joint Stock Company

FZC Free Zone Limited Liability Company FZE Free Zone Establishment

SME’s Small and Medium-sized Enterprises

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Introduction

United Arab Emirates is one of the most significant and influential countries in the Middle East, with the most diversified economy in the region and a gross domestic product of USD 421 billion, making it the third-largest economy in the Middle East & North Africa. In the annual rankings of “Doing Business”, it scores first place by region and is among the world’s most business-friendly countries. Particularly Dubai is named the “Business Hub” of the Middle East and North Africa since it is the most modern, and progressive Emirate in the UAE, which offers access to entrepreneurs and investors, to the Middle East and African markets. The country is well known globally for its luxurious lifestyle, tourism, and hospitality. Best hotels, the tallest building in the world - “Burj Khalifa”, biggest shopping malls, and more. It is therefore perceived by many as a tourist destination rather than the place to start the business in. The view of the United Arab Emirates, and especially of Dubai, as a tourist destination is partially correct since the travel & tourism sector’s total contribution accounts for about 12 percent of the country’s GDP. However, the business also plays a vital role in the country, and not many are aware of the business environment in the United Arab Emirates.

The goal of my thesis is to examine the business environment of the United Arab Emirates and identify the potential benefits as well as challenges of doing business in the country, and particularly in Dubai Emirate. By writing this thesis, I am willing to provide valuable information on the business environment of the UAE to the potential investors and entrepreneurs that would consider doing business in the country. The bachelor’s thesis methodology is based on a literature review and the analysis of secondary data.

The thesis is composed of three main chapters and each chapter is then further divided into multiple sub-chapters. The beginning of the first chapter of my thesis is devoted to the brief introduction to the basic facts about the United Arab Emirates. Furthermore, the second part of the first chapter will analyse the macroeconomic environment of the country with the focus on the main economic indicators, foreign trade, and foreign direct investment into the country.

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4 The second chapter, which is divided into four subchapters, is focused on the analysis of the business environment of the UAE using the PESTL analysis, which is an extended version of the PEST analysis. PESTL examines the country’s external environment on the five important factors – Political, Economic, Social, Technological, and Legal. However, in my analysis, I will not use an economic environment, as data on the country’s macroeconomic environment will be examined in the first chapter of the thesis. For the political environment, my focus lies on the political system, its stability and risks. To describe the social environment, I will analyse the country’s population demographics together with the six- dimensions model of national culture, developed by Geert Hofstede. During the analysis of the technological environment, I will look at the technological innovation, R&D expenditure, and transport infrastructure of a country. The last sub-chapter is dedicated to the country’s legal environment, where the regulations on foreign direct investment, forms of business entities in the UAE and taxation system will be examined. During the analysis of the business environment, I will also use the The Global Competitiveness Report 2019, provided by the World Economic Forum. The analysis of all four elements will give an insight on the current business environment in the country and will help potential entrepreneurs as well as investors in understanding whether the UAE market is interesting for doing business.

The third and last chapter of my thesis is dedicated to Dubai Emirate. Since it is the most modern and progressive emirate in the country, which maintains the position of the business hub in the UAE, and in the region. The last chapter of my thesis is divided into 3 subchapters, the first sub-chapter is devoted to familiarizing the reader with some specifics of this emirate along with analysis of Dubai’s economy, its foreign trade and foreign direct investment inflows to the emirates. Moreover, the particular advantages of Dubai in these areas over other emirates will be examined. In the second sub-chapter I will analyse the Emirate using the “Doing Business” report that is published by a World Bank Group on the yearly basis. The city covered in the report is Dubai, and therefore it would be a very useful tool in identification of potential benefits and challenges of doing business in the Emirate. At the end of the third chapter, I will define the EXPO 2020, that is hosted by Dubai, and examine the opportunities that it brings to the business environment in Dubai.

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1 Characteristics of the United Arab Emirates

The United Arab Emirates is a constitutional federation of seven emirates that was formed in 1971 by the merger of six states: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, and Fujairah. Later, in 1972, was joined by the seventh emirate - Ras Al Khaimah.

The political system of the UAE could be named as a federation of monarchies (The World Factbook, 2021), as each emirate has its own ruler, also called “Emir”, and can have different legislation. At the same time, UAE has an officially appointed president and the vice president. Abu Dhabi is the capital of the UAE Federation (The United Arab Emirates Government Portal, 2021)

The United Arab Emirates is situated in the Middle East. It overlooks the Arabian Gulf and borders Saudi Arabia and Oman. The country’s total area is approximately 83,600 square kilometers, where 74 percent of the land is covered in deserts. The area is split between seven emirates where Abu Dhabi accounts for almost 87 percent of the country’s total landmass, and Dubai, as the second-largest emirate, covers only 5 percent (National Media Council, 2018).

The total population of the country in 2020 is estimated to be 9.9 million, with most of the population located in Dubai, Abu Dhabi, and Sharjah (The World Factbook, 2021)

The official language of the UAE is Arabic, but English is considered to be a second language of the country, and therefore, is equally used as Arabic. The official religion in the UAE is Islam, but the practice of other religions is allowed. The United Arab Emirates Dirham (AED) is the official currency of the country, which abbreviated as AED, and since 2002 is pegged to the US dollar, with the exchange rate of 3.6725 AED/USD (The United Arab Emirates Government Portal, 2021)

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1.1 Macroeconomic Environment

1.1.1 Main Economic Factors

Gross Domestic Product

Gross Domestic Product (GDP) stands for the market value of all final goods and services produced in the country during a specific period of time (usually one year) (Trading Economics, 2021). GDP growth rate measures how fast the economy is growing by comparing the country’s GDP in the selected year with the GDP in the previous year.

The below graph represents the GDP growth of the United Arab Emirates for the period between 2008 and 2019.

Graph 1 GDP Growth (annual %) (2008-2019)

Source: The World Bank (2021), own construction

From Graph 1, it can be observed that UAE has experienced a fall in its GDP between the year 2008 and 2009, when the GDP growth declined from 3.2% in 2008 to a negative 5.2%

in 2009. The reason for the decline in the GDP growth was the global financial crisis of 2007- 2008, which spread across the globe and hit the UAE a year after the start of the crisis. At that time, UAE’s GDP fell from its highs of USD 300.99 billion in 2008 to USD 285.21 billion in 2009 (The World Bank, 2021). During the crisis, the major economic sectors of the UAE,

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7 which are hydrocarbon (oil), manufacturing, wholesale, retail, and business, were significantly harmed. Especially it is important to highlight the hydrocarbon sector, as it accounted for 30%

of the total GDP of the United Arab Emirates and has seen a decline by almost 8.5% between the years of 2008 and 2009 (Federal Competitiveness and Statistics Authority, 2018). Decline in the hydrocarbons sector of the UAE was linked to the plunge in the price of crude oil, that has dropped from the average annual price of USD 94.1 per barrel, in 2008, to an average of USD 60.86 per barrel in 2009 (Statista, 2021).

After the year 2009, the GDP of the UAE has seen a strong recovery, and in 2010 the GDP was back to positive growth and has fully recovered in 2011, when the GDP growth has reached almost 7% and valued at USD 309 billion. A strong recovery of the UAE’s economy could again be attributed to the hydrocarbon (oil) sector, which has grown by 28.56% between the years of 2009 and 2011 (Federal Competitiveness and Statistics Authority, 2017). The growth in the sector was directly linked to the recovery in the global price of oil – from USD 60.86 per barrel in 2009, to USD 107.46 per barrel in 2011 (Statista, 2021).

Since 2011, the growth in the UAE’s GDP has constantly been slowing, but throughout the years remained positive, equaling to 1.7% growth in 2019, with a total value of GDP amounting to USD 404.7 billion (The World Bank, 2021).

A sustainably growing economy could be regarded as a positive indicator when considering doing business in the country. That is because an increase in the production of the goods and services or increase in the value of produced products in the economy, has positive impact on the population's living standards, which is represented in the increasing GDP per capita. Consequently, with higher standards of living, or more specifically higher incomes, population of the country can afford to purchase more goods and services, and hence the demand for companies’ products is likely to increase. Moreover, a sustainably growing economy, without major fluctuations, can be attractive for investors, as they can be more confident in terms of the future performance of the country.

To analyze the main sectors of the UAE’s economy, Table 1 will be used, that represents GDP distribution by the main economic sectors of the UAE, for the period 2017- 2019. The information is provided by the (Federal Competitiveness and Statistics Authority of the UAE, 2019).

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8 Table 1: GDP distribution by the main economic sectors of the UAE, at constant 2010 prices (USD Millions) (2017-2019)

Economic Sectors 2017 2018 2019

Mining and quarrying (includes crude oil and natural gas) 113,962 116,754 120,759 Wholesale and retail trade; repair of motor vehicles and

motorcycles 49,503 50,200 50,780

Manufacturing 33,596 33,310 34,036

Construction 33,844 34,656 33,752

Financial and insurance activities 33,258 32,417 32,321 Transportation and storage 21,797 22,245 23,113

Real estate activities 22,332 21,599 21,828

Source: Federal Competitiveness and Statistics Authority of the UAE (2019), own construction

As can be seen on the above table, the largest single economic sector is mining and quarrying (oil and gas). In the last three years, the sector has grown by 6%, representing almost 30% of the country’s total GDP in 2019 (USD 404.7 billion). Despite the government efforts in diversification of the productive structure of the state (Ministry of Economy of the UAE, 2019). A high dependence of the UAE on the oil sector can explain why volatility in the price of oil has a major impact on the economy of the country. The largest non-oil sector of the economy is wholesale and retail trade, which, in 2019, accounted for 12.5% of country’s total GDP, and for 18% of the total non-oil GDP (USD 283.9 billion). Other major sectors of the UAE economy are manufacturing, construction, financial and insurance activities, transportation and storage and real estate activities sectors (Federal Competitiveness and Statistics Authority of the UAE, 2019).

Apart from the sectors mentioned above, it is also important to highlight separately the travel and tourism sector of the UAE, which in 2019 contributed to 11.9% of the total GDP (WTTC, 2019). In 2019, there were 21,5 million tourists visiting UAE, which is an increase of 33% from 2014 number (World Bank, 2021). A constantly growing number of visitors to the UAE, represents an opportunity for the businesses, as with more customers it is likely that demand on the products and services provided will go up.

In 2020, it is projected that the real GDP of the UAE will contract by 6.3% due to the COVID-19 pandemic, which had a severe negative impact on global oil demand, and oil

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9 prices, as per publication by (The World Bank, 2020). Furthermore, the global restrictions on traveling could also put pressure on the tourism sector and consequently impact the wholesale and retail sector, which represents the largest non-oil sector of the UAE. That is because with less tourists, there is less demand on goods and services offered in the UAE. For the future years, the GDP growth of the United Arab Emirates is projected to reach 1.2% in 2021 and 2.5% in 2022.

Inflation

Inflation stands for the increase in the general level of prices in the economy. To measure inflation, a consumer price index (CPI) can be used, which compares the change in the price of a basket of goods and services (OECD, 2021). Inflation is an important factor to take into consideration when planning to do business in the country. That is because when inflation is unstable, too high (hyperinflation), or negative (deflation), consumers may decide to postpone their purchases in the hope of a better price in the future (Bank of England, 2019).

That in turn can harm the current demand for business’s goods and services.

Graph 2: Inflation rate in consumer prices (annual %) (2010-2019)

By looking at Graph 2, it can be observed that from 2010 to 2013, the inflation rate in the UAE was stable, with an average annual inflation rate of 0.88%. Although, since 2013, UAE has seen a rapid rise in its inflation, which increased from 1.10% in 2013 to 4.07% in

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10 2015. The rise in the annual inflation rate of the UAE was primarily attributed to the rising housing costs, which increased by 9.95% year on year and contributed to 34% of the total CPI, as well as due to the increase in the price levels of other major contributors to CPI -

“education”, “restaurants and hotels”, and “food and soft drinks”, which increased by 3.93%, 3.26%, and 3.4%, respectively (Central Bank of the UAE, 2015).

In 2016, the annual inflation rate has decreased from its highs in 2015, back to below 2% growth rate, and has stayed so for two years, until 2018. When it increased up to 3.1%, due to the introduction of Value Added Tax (VAT) (Ministry of Economy of the UAE, 2019).

Since that time, the UAE’s inflation rate has dropped by 5% and reached negative 2% in 2019, which meant that the general price level in the economy has decreased. Deflation in 2019 was mainly driven by fall in the housing costs, by 5.20%, together with the fall in the transportation costs (4.02%) and costs of food and beverages (1.39%) (Federal Competitiveness and Statistics Authority, 2019). A fall in housing prices is partially explained by the oversupply of property in the housing market (PWC, 2019). Deflation continued in 2020, majorly due to the COVID-19, which caused a fall in demand on the transport services and recreation and culture services (Federal Competitiveness and Statistics Authority, 2021).

Deflation is also expected to remain in 2021 (Trading Economics, 2021).

In recent years, the inflation rate in the UAE is highly volatile, with the housing market being the primary driver of fluctuations in the general level of prices. Unstable change in the price levels of the economy can discourage consumers from purchasing goods and services, which in turn can affect the profitability of the businesses. However, with real estate being a popular sector in the UAE, the fall in the cost of housing can be attractive for investors interested in purchasing a property in the UAE.

Labor Market

Analysis of the labor market in the country provides an overview of the workforce size in the economy. Furthermore, it can also help in determining the skills level of the labor in the country.

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11 To analyze the workforce size in the UAE, the indicators of the total labor force and the unemployment rate will be used. The unemployment rate measures the total number of unemployed, those who are able, willing, and seeking for a job but cannot find it (ILOSTAT, 2021); it is expressed as a percentage of the total labor force – sum of all employed and unemployed population of working age in the economy. In addition to that, to examine the skills level of the workforce in the UAE, the Global Competitiveness Report 2019 will be used, provided by the (World Economic Forum, 2019).

Graph 3 Total labor force (in millions) (2010-2020)

By looking at the Graph 3, it can be noticed that the total labor force in the UAE has constantly been growing throughout the years. With the highest growth observed during the period between 2010 and 2012, when the total number of labor force of working age had grown by 5.6%. Since then, the growth has slowed but remained positive, and in 2020 the total labor force amounted to 6.92 million people (The World Bank, 2021).

The unemployment rate in the UAE could be considered as one of the lowest in the world according to the data on the unemployment rates of individual countries around the world, where UAE was ranked 22^nd (Trading Economics, 2021).

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12 Graph 4: Unemployment rate (% of the total labor force) (2010-2020)

By looking at Graph 4, it is seen that the unemployment rate in the UAE has constantly stayed at around 2.5%, with the only exception being in the years between 2014 and 2017, when it decreased to 1.91% in 2015 and bottomed at 1.64% in 2016. However, in 2017, the unemployment rate was back to its 2.5% level, after a sharp rise (by 0.83%) from its bottom in 2016. Since then, there were no major fluctuations, and in 2020 the unemployment rate in the UAE represented 2.45% of the total labor force.

Low unemployment can sometimes be a negative aspect for the business, as the amount of available workforce that is searching and willing to work is less than with high unemployment rates. Consequently, that could lead to higher time required to find the right candidate and possibly even higher costs from advertising of the position. However, the advantage of low unemployment for the businesses could be in that majority of the labor force is employed and hence earns money, which can then be spent on the products and services offered by the companies.

In regard to the skills level of the workforce, UAE was ranked 15^th globally in terms of the current workforce skills. With robust results in individual areas like ease of finding skilled employees (8^th), the skill set of graduates (14^th), and in digital skills of the population of working age (14^th) (World Economic Forum, 2019). Availability of a skilled workforce in the country could be of special benefit to the companies working in the industries requiring highly skilled employees (like the technological industry).

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13 1.1.2 Trade - Export and Import

The United Arab Emirates is the leading trade nation in the Middle East and North Africa (MENA) region and is among the 20 biggest globally by the total exports and imports in 2019 (Santander, 2021).

Analysis of the country's foreign trade can be important for entrepreneurs and investors interested in the UAE market. It provides an overview of the country's main importing and exporting partners and the main products that are traded. This data can then be useful for entrepreneurs in many ways. First, it can provide an overview of the potential competition in the UAE market. Second, it can help identify the import markets from which it would be better to supply raw materials or finished goods into the UAE. Third, for the investors who are willing to trade from the UAE, it can help select a suitable market for their exports.

In 2019, the total value of UAE’s foreign trade, in goods and services, was equal to USD 731.4 billion, of which USD 389 billion was attributed to exports and re-exports and USD 342 billion to imports (Trade Map, 2021). In comparison to 2018, UAE has experienced a slight decrease in the total value of exports by 0.87% and an increase in the total value of imports by 2.45%. These changes led to a contraction in the country's trade surplus from USD +59 billion to USD +47 billion.

Export

Table 2: Main export partners of the UAE in 2019

Country Billion USD Share of total exports

1. Saudi Arabia 23.99 7.59%

2. India 14.66 4.64%

3. Iraq 13.73 4.35%

4. Switzerland 13.65 4.32%

5. Oman 10.89 3.45%

6. China 9.37 2.97%

7. Kuwait 8.54 2.70%

8. Iran 7.08 2.24%

9. USA 6.39 2.02%

10. Hong Kong, China 5.63 1.78%

Source: Trade Map – International Trade Centre (2021), own construction

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14 From the above table, it can be observed that the top three export partners of the UAE in 2019 were Saudi Arabia, India, and Iraq. They were followed by Switzerland, Oman, China, Kuwait, Iran, the USA, and Hong Kong (China). During the last two years, Saudi Arabia, which represents 7.59% of the total UAE’s exports (USD 389 billion), and India (4.64%), remained the two main export partners of the UAE, but the positions of other export partners have constantly been changing (Trade Map, 2021). As can be noticed, five of the ten main exporting markets of the UAE - are Arab countries (Saudi Arabia, Iraq, Oman, Kuwait, and Iran). That can be explained by the fact that these countries are members of the same Regional Trade Agreements (RTA’s) as the UAE – GCC, and PAFTA, which are discussed in more detail at the end of this subchapter. It is also possible to highlight the Switzerland which also has an RTA with the UAE, in the form of EFTA-GCC Free Trade Agreement.

Graph 5: Product exports of the UAE by category in 2019

The total value of all merchandise exports in 2019 was equal to USD 315.9 billion, a fall of 1.6% from 2018. The most significant export category by share was mineral fuels, mineral oils and products of their distillation, consisting mainly of crude and refined oil, which accounted for 29.7% of the total exported goods in 2019. Other important export product categories included jewelry, precious metals, and precious stones (15.4%), electrical machinery and equipment (9.65%), machinery and mechanical appliances (5.9%), and vehicles (3.85%) (Trade Map, 2021).

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15 The large share of total export being taken by oil, is explained by the fact that the UAE is one of the largest oil-producing countries with the world’s sixth-largest proven crude oil reserves (OPEC, 2019), and with the world’s sixth-largest oil production per day; almost 4 million barrels (Statista, 2019). The top three markets for the export of crude and refined oil in 2019 were Iraq, Pakistan, and Kenya (Trade Map, 2021). High dependence on oil export can justify why the changes in the prices of oil have a significant impact on the UAE's economy, as seen from the analysis of the country's GDP growth.

The biggest category of UAE’s non-oil exports is jewelry, precious metals and stones, consisting mainly of exports of gold, jewelry and diamonds. UAE is counted as one of the main hubs for gold and diamond trading and has specialized markets dedicated to that. The gold market is called Gold Souk. For diamonds, this market is called Dubai Diamond Exchange, which is the world’s third-largest diamond trading center (DMCC, 2021). UAE was ranked 4^th globally by the dollar value of gold exports during 2019 (Workman, 2020) and 6^th globally by the dollar value of diamond exports during 2019, according to (Workman, 2020).

The major destinations for the export of jewelry, precious metals and stones, in 2019, were Switzerland, India, and Hong Kong (Trade Map, 2021).

The export of electrical machinery and equipment was the third-largest export category of the United Arab Emirates in 2019. This category mainly consists of exports of telephone sets, including telephones for cellular networks or other wireless networks (Trade Map, 2021).

The main destinations for the telephone sets exports were Saudi Arabia, Iraq, and China.

Graph 6: Service exports of the UAE by category in 2019

Source:Trade Map – International Trade Centre (2021), own construction

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16 The value of all services that the UAE exported, in 2019, accounted for USD 73.5 billion (Trade Map, 2021). A significant part of these exports is represented by the travel and transport services, which combined account for 69% of all exported services—followed by exports of telecommunications, computer, and information services (9.4%), charges for the use of the intellectual property (5.2%) and construction services (3.7%).

According to the World Trade Statistical Review, “Qatar and the United Arab Emirates rose the most in world rankings for services trade from 2009 to 2019” (World Trade Organization, 2020, pg. 14). UAE has climbed from 34^th position in 2009 up to 22^nd in 2019, with a total growth in service exports amounting to 623%. Such increase in exports of services could largely be attributed to the increase in the number of tourists traveling into the country, as it was mentioned in the economic part of the thesis, and to the favorable geographic position of the country, which facilitates the export of transport services (World Trade Organization, 2020).

Import

Table 3: Main import partners of the UAE in 2019

Country Billion USD Share of total imports

1. China 40.77 15.22%

2. India 26.73 9.98%

3. USA 20.01 7.47%

4. Japan 12.61 4.71%

5. Germany 10.07 3.76%

6. United Kingdom 7.28 2.72%

7. Viet Nam 7.19 2.68%

8. Saudi Arabia 6.85 2.55%

9. France 6.76 2.52%

10. Italy 6.56 2.45%

In 2019, the three biggest import partners in terms of imported value were China, India, and the USA. Followed by Japan, Germany, United Kingdom, Viet Nam, Saudi Arabia, France, and Italy. For the last two years, the main importing partners have not changed and consist of the same countries. Out of the total volume of imports - USD 342 billion, 15.22%

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17 was importer by China, which is by far greater than the imports from other countries (Trade Map, 2021). Out of the top 10 countries, only Saudi Arabia has a regional trade agreement with the UAE – GCC and PAFTA. While on other countries from the list, the MFN tariff is applied.

Graph 7: Product imports of the UAE by category in 2019

The total value of all imported goods, in 2019, into the UAE has summed up to USD 267 billion. Of which, 21.86% accounted for the imports of jewelry, precious metals, and precious stones (Trade Map, 2021). Similar to exports, the main contributors towards this category were gold, jewelry, and diamonds. The gold and diamonds are not extracted in the UAE. As a hub for gold and diamond trading, the goods are imported to the UAE and then resold to other markets (countries) in the form of an export, often with an added value. The leading importer of jewelry, precious stones, and metals is primarily India, which contributed to around 20% of the total value of the imported category in 2019 (Trade Map, 2021).

The second-largest imported category in 2019 was electrical machinery and equipment and parts thereof, with a share of 13.1% of the total imported goods (Trade Map, 2021). This category mainly consists of imports of telephone sets, incl. telephones for cellular networks or other wireless networks (Trade Map, 2021). The largest importer of this product category was China, representing 48% of the total import value, followed by Viet Nam and India.

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18 Other substantial categories of goods that are imported into UAE include machinery, mechanical appliances, nuclear reactors, boilers (10.5%), vehicles (7.18%), mineral fuels, mineral oils, and products of their distillation, which also includes oil and gas (6.15%) (Trade Map, 2021).

Graph 8: Service imports of the UAE by category in 2019

The total value of services imported into the UAE in 2019 reached USD 74 billion (Trade Map, 2021). The top 3 primary services imported into UAE were insurance and pension services (36.2%), travel services (24.8%), and transport services (20.6%). Other major services were telecommunications, computer, and information services (4.9%), charges for the use of intellectual property (3.9%) and, construction services (3.6%) (Trade Map, 2021).

As was mentioned in the export part, UAE has seen a strong rise in the total service trade between 2009 and 2019. In ten years, the total value of service imports into the UAE increased by 98%, from USD 37.4 billion in 2009 (Trade Map, 2021)

Trade Policy

When analyzing the foreign trade of the UAE, it is important to consider the tariff and non-tariff barriers, as these factors have a direct impact on the costs of trading with the UAE or from. Apart from examining the trade barriers, it is also important to consider the regional

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19 trade agreements that the UAE has with other countries, since it can influence the competitiveness of the product or service in the market.

In terms of the Regional Trade Agreements (RTA’s), United Arab Emirates is a member of the Gulf Cooperation Council (GCC), a member of the Pan-Arab Free Trade Area (PAFTA), and as a member of the GCC has a RTA with the European Free Trade Associations (EFTA) and with Republic of Singapore. Apart from the above RTA’s UAE is also a member of World Trade Organization (WTO) and treats all its trade partners (that are not members of any preferential agreements) in accordance with the Most Favoured Nation (MFN) clause (World Trade Organization, 2016).

As a GCC member, UAE shares a common market with the other five members of the GCC, which are: Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait. That means that all goods, services, capital, and people can move without barriers between the member states. Apart from having a common market, members also apply a common external tariff on goods that are not of GCC origin. Most of the goods, that enter the UAE from outside of the GCC (as well as not coming from one of the countries with whom the UAE has a RTA) and destined to mainland, are subject to MFN tariff of 5% (ad valorem – items are taxed according to their value). A higher tariff of 50% is applied on the beverages (carbonated and sweetened) and on the alcohol products. Furthermore, there is also a 100% tariff applied on all tobacco products.

Besides custom duty, goods that enter the UAE market should also comply with the GCC technical, and sanitary and phytosanitary standards. However, it is essential to highlight that goods destined to the Free Trade Zones, and not for sale to the mainland or other GCC countries, are not subject to any custom duty (World Trade Organization, 2016). A more detailed analysis of the UAE Free Trade Zones is done in the Legal Environment part of the thesis.

Besides GCC, UAE is also a member of PAFTA, also known as The Greater Arab Free Trade Area (GAFTA). The agreement is signed between 17 Arab states, including UAE and other members of the GCC. This agreement eliminates all tariff barriers between the member countries, and significantly reduces non-tariff barriers (World Trade Organization, 2016).

The free trade agreement between the GCC and EFTA, and GCC-Singapore Free Trade Agreement (GSFTA), eliminates trade barriers between the UAE and EFTA states

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20 (Switzerland, Norway, Iceland, and Liechtenstein) and Singapore. These trade agreements cover trade in goods, services, and government procurement (World Trade Organization, 2016).

1.1.3 Foreign Direct Investment

Foreign direct investment (FDI) is defined as an “investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)”

(World Investment Report, 2007, pg. 1). The increase in the FDI inflows into the country, can result in the positive spillover effects, such as decrease in unemployment, or inflow of modern technology. That in turn can positively impact the businesses that operate in the country’s market. However, increasing FDI inflows can result in spin-off effect too, which are negative.

FDI Inflow

Graph 9: Foreign Direct Investment Inflow and Inward Foreign Direct Investment Stock (in USD billion)

Source: UNCTAD (2020) and MOE Annual Economic Report (2019), own construction

In 2019, the UAE was ranked as the largest FDI recipient in West Asia, according to World Investment Report 2020, with an FDI inflow of almost USD 14 billion, which accounts

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21 for half of the total attracted investments into the region (UNCTAD, 2020). The FDI inflows to the UAE have grown by 33% from the previous year, largely due to major investment projects in oil and gas, in Abu Dhabi Emirate (UNCTAD, 2020). Prior to 2019, the FDI inflow for the last seven years have stayed relatively stable, with an average inflow of around USD 9.9 billion (Statista, 2019). However, due to COVID-19 pandemic, the total FDI inflows to the region are expected to fall by 30 – 45 percent in 2020 (UNCTAD, 2020). Therefore, it can be expected that the FDI inflows to the UAE will see a decline in 2020 and possibly in 2021.

Along with growth in the inflows, the inward FDI stock has also increased from USD 129.9 billion in 2017 to USD 154.1 billion in 2019. The inward foreign direct investment stocks measure the total amount of direct investment made by foreign investors into the host country, according to the definition provided by (OECD, 2021).

Besides being the largest FDI recipient in West Asia, the UAE is also the 2^nd largest recipient in the MENA region, after Israel (The World Bank, 2021). The attractiveness of the UAE in terms of foreign direct investment could be explained by the country’s strategically important geographical location, which provides access to the regional markets; the stable political climate in comparison to other countries in the region; no corporate taxes; and highly developed transport infrastructure. The above-mentioned factors are analyzed in more detail in the second chapter of the Thesis. Furthermore, UAE also can be an attractive location for FDI because of its large labor pool of skilled workforce, as it was examined previously.

Table 4: Foreign Direct Investment inflow by country, in 2016

Rank Country Share of total FDI inflow

1 United Kingdom 16.53%

2 India 5.52%

3 United States of America 4.33%

4 France 4.06%

5 Saudi Arabia 3.69%

6 Austria 3.49%

7 Japan 3.30%

8 British Virgin Islands 3.11%

9 Switzerland 3.00%

10 Kuwait 2.92%

Source: Federal Competitiveness and Statistics Authority (2016), own construction

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22 The latest data that is available on the foreign direct investment inflow by country is 2016.

As can be seen from the Table 5, in 2016, the top three main investors into the UAE’s economy were the United Kingdom, India, and the United States of America. By far, the largest UAE’s investing partner was the United Kingdom, with the share of 16.53% of the total inward FDI stock in 2016, and the total value of FDI inflow summing to AED 72.5 billion, which using the pegged exchange rate of 3.6725 AED/USD is equal to USD 19.7 billion. For India and USA, the total value of FDI in dollar terms was equal to USD 6.6 billion and USD 5.2 billion, respectively (Federal Competitiveness and Statistics Authority, 2016).

Table 5: Foreign Direct Investment inflow by the Economic Activity in 2016

Rank Economic Activity Share of total FDI inflow 1 Wholesale and retail trade; repair of

motor vehicles and motorcycles 24.95%

2 Real estate activities 23.76%

3 Financial and insurance 19.28%

4 Manufacturing 9.16%

5 Mining and quarrying 8.78%

6 Construction 3.89%

Source: Federal Competitiveness and Statistics Authority (2016), own construction

The latest data that is available on foreign direct investment by the economic activity is 2016.

Of all UAE’s economic sectors, the wholesale and retail trade has attracted the most investment. It accounted for 24.95% of the total inward FDI stock in 2016. The other important sectors for investments were real estate with the share of 23.76%, followed by financial and insurance (19.28%), Manufacturing (9.16%), Mining and quarrying (8.78%) and construction (3.89%) sectors (Federal Competitiveness and Statistics Authority, 2016).

A detailed analysis of the FDI legislation in the UAE will be done in the 2nd chapter of the thesis, under the assessment of the legal environment.

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2 Business Environment

2.1 Political Environment

To analyze the political system of the UAE, the translated version of the constitution will be used as a reference, which is provided by the (Constitute, 2009). That is because the original version is in the Arabic language.

The United Arab Emirates is a constitutional federation where the political system is based on the UAE’s constitution, which was established in 1971. The form of the government in the UAE can be referred to as constitutional monarchy, as the UAE President is elected by the seven rulers (Sheikhs) of the emirates, from amongst them. The political system of the UAE consists of five federal authorities: The Federal Supreme Council; the UAE President and the Vice President; the Federal Council of Ministers; the Federal National Council; and the Federal Judiciary. The head of state is the President of the UAE, who represents the state internally and in all international relations, and signs and declares the federal laws. The President and the Vice President are elected for a five-year term, after which they can be re- elected. Since 2004, the President of the UAE is Sheikh Khalifa bin Zayed Al Nahyan, who is also the ruler of Abu Dhabi. The president was elected after the death of his father, previous President, and the Sheikh of the Abu Dhabi. Since 2006, the Vice President of the UAE is Sheikh Mohammed bin Rashid Al Maktoum, who is also the ruler of Dubai. Sheikh Mohammed also serves as Prime Minister (The Official Portal of the UAE Government, 2021). It is important to note that the President and the Vice President have not changed since their election.

The highest constitutional, executive, and legislative authority is in the hands of The Federal Supreme Council (FSC), which comprises of seven rulers (Sheikhs) of the emirates.

As was mentioned before, the FSC elects the President and the Vice President from among its members. Besides that, FSC is also responsible for establishing the general policies and approval of federal legislation in the country. The Council of Ministers is another executive branch of the UAE, which is headed by the Prime Minister. The Council is responsible for the

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24 execution of the internal and external affairs related to the federation. The Federal National Council (FNC) is the consultative council to the FSC. The Council is made up of 40 members.

The FNC examines the legislative and recommends amendments to it. Although, it does not propose legislation on its own.

The judicial system in the UAE consists of two systems. The Federal Judiciary and the system of local judicial departments at Emirate Level. Each Emirate has a choice to have its own judiciary system or to participate in the Federal Judiciary. Abu Dhabi, Dubai, and Ras Al Khaimah have their own independent judiciary systems, while other Emirates follow the Federal Judiciary system (The Official Portal of the UAE Government, 2021). Both systems have the courts of first instance and court of appeal. The difference between both systems lies in the court of cassation. In the Federal Judiciary, it is the Federal Supreme Court, while in the local judiciary systems it is the local courts of cassation, which are separate from the Federal Supreme Court (The Official Portal of the UAE Government, 2021). Because some emirates follow their own judicial system, the laws among the seven emirates may slightly differ.

The UAE has a dual legal system, that consist of civil and Sharia Laws (Islamic law).

When there is no provision in the civil law, the judgement is passed according to the Islamic Sharia. Besides the dual legal system that is applied on the mainland, there are also two financial free trade zones in the UAE with a separate court within them that apply a British- based system of common law, which can be perceived as more appealing to foreign businesses. These free zones are the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) (U.S. Department of State, 2020).

Political Stability

When analysing the political environment of the country, one of the key factors that need to be considered is the political stability in the country. That is because unstable political environment, like for example risk of war or risk of government change, can place uncertainty on the future of running of the businesses in the country or on the investment in the country.

Besides political stability, it is also important for the businesses to consider the level of corruption in the country, as high levels of corruption may result in unfair competitive

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25 advantage of some enterprises in the market. Furthermore, it is important to consider how well the laws are applied and at the general effectiveness of the government and institutions in the country.

To analyse the political stability and other factors linked to it, the Worldwide Governance Indicators report will be used, which is provided by (The Worldwide Governance Indicators, 2021). The report measures the governance (traditions and institutions by which the authority is exercised) performance in the countries around the world on six dimensions:

Control of Corruption, Rule of Law, Regulatory Quality, Government Effectiveness, Political Stability and Absence of Violence/Terrorism, and Voice and Accountability. Each dimension is ranked from 0 (as the lowest) to 100 (as the highest). The percentile rank on each of the six dimensions is estimated based on the governance performance score from -2.5 (weak) to 2.5 (strong). The rankings and performance of each country on all six dimensions is measured using 30 different data sources that collect the views and experiences of citizens, entrepreneurs, and experts in the public, private and NGO sectors.

Graph 10: Percentile rank of the UAE and the Middle East and North African region on the six dimensions (from 0% to 100%), in 2019

Source: The Worldwide Governance Indicators (2020), own construction

As could be seen from the above graph, the percentile rank of the UAE in five out of six dimensions is significantly higher than the average percentile rank for the Middle East and

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26 North African region. On average, the governance performance in the UAE in all aspects is 83% higher than the regional average, and only in voice and accountability it is lower.

In terms of control of corruption, UAE has achieved a percentile rank of 83.65%, which means that UAE performed better than 83.65% of all countries, with a performance score of 1.1, which could be considered as strong. The control of corruption aspect looks at the extent to which the government and institutions use their power for private gain (Kaufmann et al., 2010). High score indicates that UAE’s corruption level in the UAE is low. That could be the result of continues strengthening of the anti-corruption and bribery laws in the country, which apply on the private and public sectors (Tyne, 2021). As the corruption levels in the country are low, that means that there is a lower chance that some companies will have an unfair competitive advantage in the market.

The next dimension – Rule of Law, measures how well the rules are followed in the country, together with the quality of contract enforcement, property rights, and at the possibility of crime and violence in the country (Kaufmann et al, 2010). The UAE received a percentile rating of 77.88% for this parameter, with a performance score of 0.84. This suggests that overall rules are well followed in the country, and that the property rights of the businesses are well protected. Furthermore, UAE is perceived as a safe country, and is ranked as the 3^rd lowest crime rate country in the World (Numbeo, 2021). Based on this result, it could be said that it is safe to run the business in the country.

The 3^rd dimension – Regulatory Quality, measures how well the government formulates and implement policies and regulations that contribute towards the development of the private sector (Kaufmann et al., 2010). With a percentile rank of 78.37% and a relatively strong governance performance score of 0.98, it could be said that the government of the UAE is efficient at the implementation of the policies and regulations that help private sectors grow and develop. An example of such could be the recent amendment on the regulation of the FDI, which is discussed in more detail in the analysis of the legal environment.

The Government effectiveness looks at how the overall quality of public services, civil services is perceived and at the way policies are formulated and implemented in the country (Kaufmann et al, 2010). This aspect is considered as the strongest for the UAE, where it has achieved a percentile rank of 88.94%, and a governance performance score of 1.38. An

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27 effective government should in turn simplify the process of running the business in the country, with respect to the costs and time it takes to, for example, solve the dispute.

When analyzing the political stability in the country, one of the main factors that is to be looked at is how likely the government is to be destabilized by violent means, as well as at the likelihood of the terrorists’ attacks in the country, or risk of war. Since, unstable political situation in the country can disturb the business operations in the country. For the UAE, the percentile rank for this aspect is equal to 66.29%, with a score of 0.7. A not very strong performance in this dimension could be possibly explained by the political instability in the whole MENA region (percentile rank for the region is only 27.98%), which is ranked as the least peaceful region by the (The Institute for Economics & Peace, 2020) in Global Peace Index 2020. Despite of not very strong result in this dimension, United Arab Emirates is ranked as the 3^rd most peaceful country in the region (after Qatar and Kuwait), and is among the top 50 most peaceful countries in the world.

The last dimension, where the UAE has scored the lowest and below the average for the region is Voice and Accountability. The UAE’s percentile rank here is 17.73% and the governance performance score is -1.12, which is considered as weak. The voice and accountability represent the freedom of media, freedom of expression, and whether the citizens can participate in selection of the government in the country (Kaufmann et al, 2010).

The UAE is ranked low in this dimension because the citizens do not take part in the election of the government, as it is a constitutional monarchy. Furthermore, it is forbidden to publicly criticise the country, its government, official religion of the country (Islam), and any members of the ruling families. Therefore, investors willing to do business in the country, should be cautious in terms of commenting anything about the above-mentioned factors.

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2.2 Social Environment

Analysis of the social environment can be a critical factor to consider when planning to do business in the country, as it can provide an overview on the market size of the economy and its specifics – population distribution by age/gender/city, and on the living standards of the country’s population.

The total population of the UAE in 2019 was 9.5 million people. On average, the total population of the country has been growing by 1.6% since 2010. Out of 9.5 million inhabitants, 6.3 million are male, and 3.2 million are females. That makes a gender split at 66% male and 34% female (Federal Competitiveness and Statistics Center, 2021). By the age group, in 2019, the biggest share of the population was between the age of 15 to 64, with the total share of 84.13%, the second-largest age group was of an age between 0 to 14 (14.71%), and the smallest age group from the whole population was of people of age above 65, whose share was only 1.62% (Statista, 2020).

Most of the UAE’s population is distributed among the three biggest cities – Abu Dhabi, Dubai, and Sharjah. With Dubai being the most populated emirate of all seven emirates. In 2018 the total population size of Dubai was equal to 3.32 million people, according to (Global Media Insight, 2021); in Abu Dhabi, it was 3.23 million; and in Sharjah, 1.51 million. The total population for other emirates combined is only 1.26 million.

Predominantly, UAE’s population consists of expats, whose share in 2018 accounted for 88.52% of the total UAE’s population, and the remaining 11.48% are nationals – Emiratis (Global Media Insight, 2021). The largest share of all expatriates and immigrants comes from India, with a total population size of around 2.6 million in 2018, followed by expatriates from Pakistan - around 1.21 million people, and from Bangladesh - around 0.71 million people (Statista, 2018). Combined, they take up 54% of the whole expatriate population in the UAE.

When measuring the standards of living of the country’s population, the GDP per capita could be used, which divides the GDP of the country by population. In 2019, the total GDP per capita of the UAE was equal to USD 43,103, placing the country on the 30^th place globally in terms of GDP per capita (The World Bank, 2021).

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29 Given the above points, it can be said that the majority of the UAE’s population is of working age, which, combined with the low unemployment rate in the country, indicates that most of UAE’s population is employed, and consequently earns wages. Together with high GDP per capita, this suggests that the standards of living in the country are high and that people can afford to purchase more goods and services and pay a premium price for some products. However, the weakness of the UAE could be in its low population size compared to the total population of other countries in the MENA region (The World Bank, 2021).

Religion and Culture

The official religion in the UAE is Islam, with the majority of the population being Muslims - 76% (Fanack.Com, 2021). Religion plays a significant role in UAE citizens' lives and takes up a major part of the UAE’s culture. Therefore, it is a crucial factor to consider when doing business in the United Arab Emirates.

Since Islam is the official religion of the state, companies must be aware of all significant religious events and holidays. For example, Ramadan, a holy month when Muslims fast and working hours are reduced, and EID, when there are official public holidays in the UAE (Dubai Online, 2021). Furthermore, the working week in the country starts on Sunday, instead of Monday, and ends on Thursday. That is because Friday is considered a holy day in Islam. Hence, the weekends are on Friday and Saturday. However, some companies and employees also work on Saturday, which is allowed by the law (Dubai Online, 2021).

To assess the business culture of the United Arab Emirates, the six-dimensions model of national culture will be used, developed by Geert Hofstede. The model helps in understanding how people from different countries act in the business environment. The data is provided by the (Hofstede Insights, 2021).

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30 Graph 11: Geert Hofstede 4-dimension, country comparison: United Arab Emirates

Source: Hofstede Insights (2021), own construction.

It is important to notice that for the analysis of the UAE, there are only four factors available, out of the total six. These factors are: Power Distance; Individualism; Masculinity;

and Uncertainty Avoidance.

The first cultural dimension from four is called Power Distance. It measures how likely people, with low power, are to accept the inequality and power differences in the society. UAE scores high on this dimension (90), suggesting that Emiratis, that do not pose power, are more likely to follow the leader and expect that the power is distributed unevenly (Hofstede Insights, 2021). For the businesses that means that subordinates expect to be told what to do and more willingly accept an autocratic leadership.

The second dimension is Individualism/Collectivism. In Individualist culture’s, people view themselves as “I” and place a higher importance on the attainment of their personal goals and tend to take care only of themselves and close relatives. On the contrary, collectivist cultures, those that score low on individualism, view themselves as part of the larger group

“we” and place a higher importance on the well-being of the whole group. United Arab Emirates, with a score of 25 is considered as collectivist society, where people within the in- groups tend to be very closely connected and take care of each other. The goals of the group come first, and emphasis is placed on the loyalty (Hofstede Insights, 2021). In business that means that for example promotion at work, or a business contract on some sort of activity, will more likely be given to the person who has some association with the social group. This could

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31 be a family member, a friend or even a neighbor. Furthermore, loyal employees are more likely to protect the interests of the company, which can be good for the companies.

The next dimension is Masculinity. Country with a high score on Masculinity implies that the society is motivated by competition, where everyone aims at having the material achievements. Countries with a low score on Masculinity have a more “Feminine” society, where people try not to stand out, spend more time caring for others, prefer cooperation over competition, and are concerned with the quality of their life. UAE’s culture can not be considered as a “Masculine” or a “Feminine” culture, as it has a neutral score of 50 (Hofstede Insights, 2021). A high score on Feminine could mean that doing business with an Emirati would result in less conflicts, as there would be more cooperation rather than competition.

The last dimension, but not least important, is Uncertainty avoidance. In cultures with high uncertainty avoidance people tend to avoid uncertainty and taking risks and do not like changes. People tend to follow strict rules and regulations. United Arab Emirates scores 80 on the uncertainty avoidance, meaning that Emiratis are less willing to accept changes and are guided by the rules and regulations (Hofstede Insights, 2021). This could mean that the business environment in the country is stricter in terms of the rules and regulations but provides more certainty and stability, and at work that means that subordinates are more likely to follow rules.

2.3 Technological Environment

One of the major goals of the UAE is to become one of the most innovative countries in the world, and to diversify its economy from a carbon sector. To achieve this goal, UAE has adopted many strategies, of which some of the key ones are: National Innovation Strategy, UAE Strategy for Artificial Intelligence, and Emirates Blockchain Strategy 2021 (The Official Portal of the UAE Government, 2021).

The National Innovation Strategy aims to achieve innovation in 7 key national sectors:

renewable and clean energy, transportation, space, technology, education, health, and water.

By focusing on the development of innovative individuals, companies, institutions, and

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32 government. Together with creating the right environment for innovation by developing the right regulatory framework and improving technological infrastructure (UAE Ministry of Cabinet Affairs, 2015). The particular benefit of this strategy for the entrepreneurs is seen in the government's incentives in the form of entrepreneurship incubators, which can provide entrepreneurs with needed funding for the projects in one of the key national sectors, provide training, administrative support, and more. The example of such are Area 2071 in Dubai and a Hub 71 in Abu Dhabi.

The UAE Strategy for Artificial Intelligence (AI), which was launched in 2017, is the first of its kind. The primary focus of the strategy is to improve and increase efficiency of the government and of critical economic sectors, some of which are: health, education, renewable energy, and technology sectors (The Official Portal of the UAE Government, 2021). Meaning that businesses that operate, or willing to do business, in one of the above sectors can clearly benefit from the efficiency that AI brings.

Emirates Blockchain Strategy 2021 was launched in 2018 to benefit from blockchain technology. The goal of the strategy is to use blockchain technology for digital transactions to reduce the time, effort, and resources needed to process people’s transactions. Additionally, the usage of blockchain technology for digital transactions ensures digital security (The Official Portal of the UAE Government, 2021), which can positively impact all businesses in the UAE.

One factor that plays a vital role in fostering technological development and innovation in the country is an investment into research and development (R&D) (Savrul and Incekara, 2015). According to the data provided by the World Bank, the total spending of the UAE towards research and development, as percentage of GDP, amounted to 1.3%. Through the years the investment has gradually been growing and in comparison, to 2016 levels, has increased by 35%. Which moved UAE from the 35^th place to 25^th place in the world by the expenditure on the R&D as percentage of the GDP. Despite a constant increase of the UAE towards research and development, the country still lacks behind the World’s average, which in 2018 was equal to 2.27% of GDP (The World Bank, 2021).

In terms of the global rankings, UAE has achieved a 9^th place in the future orientation of the government, in the Global Competitiveness Report 2019. With particular high rank in