Foreign Direct Investments: What the UAE Is Doing Right: Multinational companies have long used foreign direct investment as a supply chain management strategy.
For the longest time, the primary goal was cost-efficiency. Manufacturing costs were typically lower in developing countries because of the significantly lower wages. Another primary driver of company formation overseas was resource availability. In some economies, access to raw materials and resources are available only to locally domiciled companies.
But the pandemic, with the subsequent and resulting supply chain issues, has induced MNCs to reassess their sourcing strategies, making an initiative like the UAE foreign ownership initiative not only timely but extremely attractive.
The UAE Foreign Ownership Initiative
In the past, the UAE allowed 100% foreign ownership only in free trade zones. But the UAE’’s Foreign Direct Investment Law or Federal Decree-Law No. 19 of 2018 changed that by permitting 100% foreign ownership in the UAE mainland in specific activities in particular economic sectors.
Cabinet Resolution No. 16 of 2020 named 122 activities where foreign investors can establish companies in the UAE mainland with 100% foreign ownership.
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Then the UAE government followed it up with the Federal Decree-Law No. 26 of 2020. This particular legislation amended the Commercial Companies Law of 2015, which prohibited 100% foreign ownership in the UAE mainland.
The new law allows 100% foreign ownership in the UAE mainland, as long as the company does not engage in strategically critical economic activities. Foreign companies also no longer need to get a local agent before they can establish a local branch.
The Significance of 100% Foreign Ownership Initiatives
So, what does a 100% foreign ownership initiative like this matter to MNCs? In particular, what do similar foreign government initiatives have to do with MNCs looking to improve and manage their supply chains?
The short answer is the UAE 100% foreign ownership initiative and similar ones by other countries are definite proof of a government’s commitment and openness to foreign investments. It’s like saying, “Come in; we’re open.”
However, just because a door is open doesn’t mean MNCs would come in. However, an open market policy like 100% foreign ownership is a door many MNCs would love to enter, as long as other conditions are right, of course.
What Makes the UAE’’s “Open-Door Invitation” Effective?
Any law allowing persons and entities 100% ownership privileges in a foreign country is undoubtedly attractive. But it’s exponentially more appealing because i’’s the UAE.
It’s the UAE business ecosystem, as a whole, that invites investors in and induces them to take advantage of the economy’s “open-door invitation.”
- Strategic Location
The most crucial draw should be UAE’s strategic location. It is in Asia, but it is part of the Middle East and is thus conveniently close to Africa, Europe and the rest of Asia.
In fact, its strategic location ensures businesses trading from the UAE have access to more than three billion people just in the Middle East, Africa, and South Asia alone. Moreover, around five billion people globally are within eight hours’ reach of the UAE.
- Thriving Logistics Infrastructure
An established and efficient freight and logistics infrastructure is critically important to MNCs investing overseas. Even if a country has a strategic geographic location, it should still have modern and efficient airports, technologies, equipment, and supporting industries to make an excellent base for supply management purposes.
The UAE more than qualifies in this regard. The UAE has an exceptionally modern and well-established logistics infrastructure, making it a preferred supply and redistribution hub. Government initiatives like the Dubai “Silk Road” Strategy mean the UAE is likely to retain its preferred trade hub status.
The growth and future prospects of the UAE freight and logistics market confirm this. The logistics sector accounts for more than 14% of Dubai’s GDP. Additionally, a report from Mordor Intelligence estimates that the logistics sector’s compound annual growth rate from 2021 to 2026 is 10.21% for the UAE as a whole.
3. Robust Economic Infrastructures and Favourable Policies
Other economic initiatives and infrastructures in the UAE make the market attractive to foreign direct investors.
For instance, 100% foreign ownership has always been allowed in the UAE’s free trade zones. Aside from 100% foreign ownership, free zone companies also enjoy other regulatory and fiscal benefits.
For instance, free zone companies are exempt from corporate tax for 50 years, and this is a renewable exemption. They are also exempt from VAT, income tax, and customs duties.
Aside from these tax benefits, free zone companies can repatriate up to 100% of their capital and profits to their home country. They are also unhampered by currency and foreign hiring restrictions.
There are also various residence visa options available that make staying in the UAE easier for foreign expatriates. Investors investing at least AED 10 million can get approved for a 10-year residency visa. Purchase property worth at least AED 1 million or AED 5 million, and get a three-year or a five-year residency visa, respectively.
In line with this, the UAE allows foreigners to gain absolute ownership of property in numerous designated-freehold areas in the UAE.
The UAE economy is also in the pink of health with its substantial financial reserves. The UAE ranks 25th in the Global Competitiveness Report by the World Economic Forum.
While its oil resources initially fueled its wealth, the UAE has expanded its interests and continues to diversify its income sources to safeguard its economy and ensure its resiliency. Foreign Direct Investments: What the UAE Is Doing Right
4. Ease of Doing Business
The World Bank’s Doing Business Rankings, released in 2020 using data up to March 2019, indicate that the UAE is ranked 16th out of 190 economies regarding ease of doing business. Its other notable rankings include the following.
- First in ease of getting electricity
- Third in ease of dealing with construction permits
- Ninth in ease of enforcing contracts
- Tenth in ease of registering property
- Thirteenth in ease of protecting minority investors
Adding even more to the ease of doing business in the UAE is the ready availability of business consulting, company formation, and auditing firms in Dubai, Abu Dhabi, and the rest of the UAE. Such providers make complying with the UAE’s laws easy, so investors can avoid penalties and focus on realising positive business outcomes.
Follow the UAE Example
Any developing economy that wishes to attract foreign direct investments can follow the example set by the UAE.
The UAE has many investor-favourable policies and attractive incentives, including 100% foreign company ownership. It is one of the world’s top economies when it comes to ease of doing business, and it has a robust logistics infrastructure to support MNCs’ supply chain management requirements.
Foreign Direct Investments: What the UAE Is Doing Right