Table Of Contents
. Executive Summary……………………………………………………………………….3
1. Globalization
And International Business…….……………………………….……….3
a) Formation Of Uae Impacting Glabalization
…...............……………………………...3
b) Globalization
And International Business……………………
……………………...3
c) The Forces Driving Globalization
In UAE……………………………………………4
2. Cultural Environment……………………………………………………………….….4
a) Key Cultural Concepts And Values……………………………………………….….4
3. Political
And Legal Environment………………………………………………….…..5
a) Political
Environment…………………………………………………………….….5
b) Legal
Environment……………………………………………………………….….5
4. Economic Environment…………………………………………………………….….6
5. International Trade And
Factor-Mobility Theory………………………………….….7
a) Free-Trade Agreements………………………………………………………….….7
b) Products UAE Trade
With Different Countries………………………………….…7
c) Competitive
Advantage………………………………………………………….….7
d) Comparative
Advantage………………………………………………………….…8
6. International Trade And Factor-Mobility
Theory………………………………….….8
a) Government
Intervention……………………………………………………………8
b) Government Policies………………………………………………………………...8
c) Environmental
Protection Policies…………………………………………………..8
d) Tariff………………………………………………………………………………...9
e)
Restrictions………………………………………………………………………….9
7. Cross-National Cooperation And
Agreements……...………………………………..9
a) Greater Arab Free Trade Area………………………………………………………9
b) Duty Free Country………………………………………………………………...10
c) Gulf Cooperation Council…………………………………………………………10
8. The
Determination Of Exchange Rate………………………………………………10
a) GDP And Exchange
Rate…………………………………………………………..10
b) Fisher
Effect………………………………………………………………………..10
c) Major Trading
Partner……………………………………………………………...11
d) Big Mac
Index……………………………………………………………………...11
e) Membership With Opec
And World Bank………………………………………....11
9.
References……………………………………………………………………………12
10.
Appendix……………………………………………………………………………..14
Executive Summary:
UAE
is holding the second the position in Middle East and North African region
after the formation and it has become one of strongest country economically
last couple of years around the globe. To have a thorough analysis on the
progress of the country its recent major steps, infrastructure, rules and
regulation, demography are the key issues to be jotted down. At first was
influenced by globalization and international business and its cultural
environment and political environment were also favorable also to add advantage
of its expansion in trade. Economic environment of UAE was flexible enough to
face businesses and its international trade & factor mobility theory is
discussed in depth. As UAE is enriched with natural resources their trade is
influenced by government as they take multi-dimensional strategy for continual
development through cross national cooperation and agreement with major trading
partners. Finally the determination of exchange rate is discussed with sub
points in this report.
I. Globalization
and International business
a) Formation of UAE impacting
Globalization
UAE is a major
part of the Middle East and North Africa (MENA) which is a diversified region
including countries with similar heritage, abundantly enriched with natural
resources and with a booming economic
progress since its formation. This federation of states joined
together and became the United Arab Emirates (UAE) forming a milestone in
1971-72 with seven states: Abu Dhabi, Dubai, Sharjah, Ajman, Umm al-Quwain, Ras
al-Khaimah and Fujairah and each state is ruled by an Emir (Ruler or Governor).
b) Globalization and International business
Dubai is
located on the Persian Gulf, in the north east of the United Arab Emirates. Due
to its strategic geographical position it allows to connect with all the Gulf
States, south Asia and east Africa. Total population of UAE is 1.5 million,
only 10 percent are local Emirati, the rest are people from all over the world.
People from over 160 different nationalities are working and living peacefully.
The national language is Arabic but English is understood and spoken by most of
the people. During summers the weather in UAE is hot and humid, temperatures
are around mid-40 C with humidity mean at 90 percent.
Dubai is
the most cosmopolitan and westernized place in the Middle East. UAE is
politically and socially stables society, which makes it one of the ideal
tourist spots in the world. It is positioned as an economic center of the Gulf
States and business negotiation hub for many deals. Most of the Chinese
business uses Dubai as a hub for Africa and many Indian traders are using Dubai
to access the world markets, more than half of the global biggest conglomerates are operating in Dubai.
Government investor friendly policies, tax breaks and developed infrastructure
is a driving force in attracting investor around the globe. Dubai city has
integrated and extensively developed foreign trade network, which positions
them world’s third largest export and transshipment center after Singapore and
Hong Kong.
c) The Forces driving globalization in
UAE:
·
Having
the second largest economy in the MENA region UAE struggles with its demography
comprising a diversified population as native UAE citizen account for only 10%
of the population and foreign nationals made up rest.
·
UAE’s
location between major markets in Europe and Asia served as an increased
opportunity for globalization and making it a major trade area strengthening
the fact of its role in history as a hub for trade in this zone since medieval
time.
·
Average per capita GDP in UAE from 1973 to 2012 is
being counted at 49730.58 USD which reached at an all-time high of 81974.24 USD
in 1980 and a drastic low of 23795.86 USD in 2011.
Countries with
higher income tends to be more globalized than countries with lower per capita
income and this fact is implied to UAE as it has more buying capacity of
foreign products compared to some other countries making it a global village.
II.
CULTURAL ENVIRONMENT
a) Key Cultural Concepts and Values
To
understand culture and people in Gulf States it is important to have some
understanding of religion Islam. Islam is the official religion in UAE and it
is embedded in every aspect of life from conducting business to social
interaction in the society. Islamic belief emphasizes on modesty, respect and
generosity. One of the most important thing for an individual is their honor,
therefore indirect style of communication accommodates culture desire to
safeguard honor e.g. (business discussion rarely results in a direct no). Arabs places high value on courtesy and
etiquettes, it is considered rude to step back while talking because in Arab
culture they leave less personal space while having a conversation. Arab women
usually do not shake hands with Arab or non-Arab men. They are mostly greeted
with good face gestures and body language symbols such as placing hand over
heart when greeting them. Most of the people use first or the last name when
greeting each other or any status title given to them. In Arab culture status
of the individual is important and senior people in the group are greeted
first. In business deals or meetings people do not directly come to the agenda,
to show courtesy and interest towards each other and not just in business
matters to be conducted, individuals will starts conversation with light
moments like asking about each other family members few times. Arab culture
inserts high value on relationship and this explains the reason they have
several breaks in office hours for purpose of lunch, prayers and socializing.
Citizens
of UAE have their own way which is guided by the deep rooted Arab culture but
citizens of Dubai are a minority in their own land, people from different
nationalities and ethnic group constitute large population. UAE dress code is
liberal but it is supposed to be modest and respectful considering the culture
of Arabs. Islam prohibits alcohol therefore it is illegal to have alcohol is
Dubai without a license and any display of drunkenness in public is punishable.
Power
distance: UAE is a high power distance
society which means that people accept hierarchical order with no further
explanation or justifications. Subordinates are directed and told what to do,
the ideal leaders and boss are benevolent autocrat.
Individualism:
UAE is considered to be a collective culture. The collective culture is
embedded to the close long term commitment of the member groups e.g. family and
extended relationships. Most important aspect of collective culture is loyalty
and sometimes it even over rides society regulations. In collective culture
employer and employee relationship is like a family link, most of the hiring
and promotions decisions are partially made on the basis of loyalty and in
group membership.
Masculinity:
UAE is regarded as a masculinity society. Males are dominant and leaders in the
society and expect to take care of the finances and other major issues, while
female are restricted to specific roles.
Uncertainty
avoidance: UAE score high on uncertainty avoidance dimension and therefore they
have high tolerance for avoiding uncertainty. They dislike unstructured and
unknown situations and as a society they follow their beliefs and behaviors and
are intolerant of unorthodox ideas. The society does not accept change readily.
III. POLITICAL
AND LEGAL ENVIRONMENT
a) Political Environment
United Arab
Emirates (UAE) consists of the following seven Emirates or Provinces: Dubai, Abu
Dhabi, Ras al- Khaimah, Sharjah, Ajman, Umm al-Qaiwain, and Fujairah. Abu Dhabi
is the capital of the country, but each of these seven emirates has its own
ruler. The form of government in UAE is referred to as ‘Federal presidential
elected monarchy’, because the president is elected from amongst the rulers of
the seven emirates. According to convention, the ruler of Abu Dhabi is the President
of UAE and also the head of state, whereas the ruler of Dubai is the Prime
Minister and the head of government. Currently, the President is Khalifa bin
Zayed Al Nahyan since November 2004 and the Prime Minister is Mohammed bin
Rashid Al Maktoum since January 2006.
The
president appoints the cabinet. There is also a special council called the
Federal Supreme Council (FSC), which consists of all the seven rulers. The FSC
is the highest constitutional body in the country, and it forms general
policies and sanctions federal legislations.
b) Legal Environment
UAE’s legal
system is based on civil laws principles and Islamic Shariah law, where Shariah
law is the main source of legislation. The federal constitution allows each
emirate to have its own judicial authority, however, all emirates except Dubai
and Ras Al Khaimah have their own judicial system put into practice. It is
important to mention here that the President still has the power to overrule
any judgment passed by any judicial authority in UAE. The country is considered
one of the least corrupt in the Middle East. All property in Abu Dhabi, is
government owned. Non-nationals are allowed to own land in only certain areas.
An extract
from the article by ‘Andrew Tarbuck &
Chris Lester’ on Dubai’s legal system
briefly and accurately highlights enforcement of laws in the country. It
states that law enforcement in the UAE is very strictly enforced with zero
tolerance policy against buying, consuming or even holding drugs of any sort.
The punishments can vary from immediate deportation to life imprisonment or
even in some cases, death sentence. Though alcohol is available in some
specially listed stores, it cannot be consumed in the open public. Also,
driving under the influence can land somebody in big trouble.
IV. ECONOMIC
ENVIRONMENT
UAE, namely
Dubai, has become a massive financial hub and the most sought after tourist
destination in the Middle East after the economic meltdown of 2008. UAE has the
second largest economy in the Arab World and the most diversified in the Middle
East. Winning the 2020 Expo has further brought Dubai in the global lime light
for economic progress.
The
discovery of oil or ‘Black Gold, as it is commonly referred to, in the 1950s
spear headed UAEs economy into a positive direction, turning this barren piece
of desert into a big cosmopolitan city. The tax-free policy of the government
is one of the major reasons why many MNEs have opened and, in some cases,
shifted their head offices to Dubai. The local currency of UAE is Arab Emirati
Dirham (AED) or just Dirham. Since November 1997, the exchange rate between the
AED and USD has been fixed at 1USD=3.67 AED. Another very interesting law that
the government has passed is that of starting up a business by foreigners. The
UAE Commercial Company Law (CCL) requires company to have at least 51% of the
capital being controlled by a UAE national, making sure that the money stays in
the country.
A 2014
Index of Economic Freedom placed UAE at the 28th position globally
and the 2nd position regionally as the freest economy with a score
of 71.4. A brief summary of the statistics from the Index is given below and
the full two-page report can be found in the attached Appendix.
GDP
(PPP):
·
$271.3 billion
·
3.9% growth
·
2.1% 5-year compound annual growth
·
$49,012 per capita
Unemployment:
·
2.4%
Inflation
(CPI):
·
0.7%
FDI
Inflow:
·
$9.6 billion
As
mentioned above, Tourism is one of the major sources of income for UAE. With a
mixture of sun, sand, beaches, world class hotels, malls and theme parks, UAE
opened its arms to more than 9.1 million visitors in 2013 generating revenues
of AED15.33bn ($4.16bn). Few of the major attractions include the Burj Khlifa,
world’s tallest building, Burj Al-Arab, the world’s only seven star hotel and
the Dubai Mall, world’s biggest mall, Ferrari world, Abu Dhabi, which boasts
the world’s fastest roller coaster ride.
Emirates
Airlines and Etihad Airlines are not only UAEs biggest airlines, but are also
ranked amongst the top ten in the world. Emirates Airlines boasts itself as the
only airline in the world to have only wide body aircrafts and the largest user
of the Airbus A380, the biggest commercial passenger jet in the world. Emirates
flies to more than 134 destinations worldwide whereas Etihad flies to more than
96 destinations. Both these airlines contribute significantly to the country’s
economy.
V. INTERNATIONAL TRADE AND
FACTOR-MOBILITY THEORY:
To attract more
foreign direct investment and enter into new markets the foreign ministry of
UAE is targeting to strengthen their continuing relationship with trade
partners. UAE has maintained its position of leading trade Centre globally and
the next market they are looking forward to is Tourism Industry by constructing
World Tallest Building named Burj Khalifa.
a) Free-trade agreements
UAE has firm belief in liberalization of
trade, open system of economy and facilitation of trade. The trade ministry
believes in free trade agreements that are proven successful by present global
trader position that is enjoyed by the economy of UAE. The mission is to pursue
more and more free trade negotiations and agreements with different countries.
The UAE has already penned customs union with Gulf Cooperation Council countries,
which allows them to have a free trade with Singapore and (EFTA) European Free
Trade Association Countries. UAE has also agreed upon and signed different
bilateral agreements with many countries and numerous trade blocks.
b) Products
UAE trade with different Countries
In the world UAE was ranked 4th largest
re exporting hub in year 2012. If you compare the land size and the population
to their trade activities it is very small, but if you look at their commodity
trading achievements they were ranked 4th according to the W.T.O.
(World Trade Organization).The exports are expected to rise to 9.4% every year.
But due to huge influx of tourism demand for foreign goods will increase the
demand of international goods as well which will raise the imports in the
coming 5 years as more than 10% by each year. The UAE will be ranked 22 in the
world largest importer as well. In 2017, UAE top three exporting and importing
countries would be USA, India and China. Whereas Taiwan, Indonesia and Vietnam
are exhibiting gradual increase of importing and exporting with UAE as well.
Following are the major export/import of UAE:
Exports: Fuel, Other
manufacturing goods finished unfinished. Metals such as gold etc.
Imports: Telecommunication
and electrical devices for office, vehicles, textiles and food products
c) Competitive
Advantage: UAE best competitive advantages of shopping
tourism destination, the highlights are The Dubai Mall, Mall of Emirates etc.
d) Comparative
Advantage: One
of the UAE comparative advantage is its Oil and gas sector which was the back
bone of the Dubai economy, which now is goods and services.
One of the major factors of labor migration
to UAE is very low taxes which attract more businesses and labor around the
world which makes UAE heavens for business and service orientated labors.
VI. INTERNATIONAL TRADE AND
FACTOR-MOBILITY THEORY:
a) Government
Intervention: The government of UAE is pro-business
for which they continuously encourage and actively participate in business in
UAE. By the means of training there people, sending students on government
scholarships to foreign countries, development of infrastructure government is
dedicated to some growth. The government officials routinely meet with the
representative of multinational corporations for new businesses and maintaining
the good relationship with already working mnc’s in UAE and providing support
to them.
b) Government Policies:
Doing business in
UAE requires businesses to adhere to some government policies that are somewhat
different from other countries.one of the policy is that the national of
Emirates would be the 51% owner of the company and he will be the sponsor as
well. But the foreign business representing branch offices are excluded from
this government policy.
Free Zones:
However
there are places called free zones by UAE government that allows foreign
investors or mnc’s to wholly own and operate their businesses. E.g. Dubai
Airport, Knowledge Village and Dubai Internet City.
Legal Policies and Taxes:
Companies
that are working in free zones are taken as offshore for all the legal
purposes. Free zones are also given the benefit of exclusion from corporate
taxes and import duties.
Unemployment
Policies: The UAE government has imposed a set job
quota for hiring UAE nationals in multinational corporations working in
construction and oil sector.
c) Environmental Protection Policies: There are huge reforms
in policy of waste management and environmental protection by UAE government,
which included empowering Ministry of Environment and Water against convicted
industries, or business that are polluting above the allowed level and
introducing essential recycling policies. The empowerment will allow ministry
to punish the offenders bypassing the courts.
d) Tariff
Being a member of GCC, UAE government applies the GCC common
tariff that is Harmonized Rate of 5 % applied to import. Some of the UAE tariff
detail is following:
·
Cigarettes: 100 percent
·
Alcohol: 50 percent
·
Tobacco and Cigars: 200 AED/kg
·
Duty Free: Some Food Products and Medicines
e) Restrictions:
In
accordance to religious, cultural and moral values some of the products are
banned such as:
·
Israel
manufactured goods
·
Pornography
Special
Certificates:
Halal certificate is required for meat products. Livestock importing or
business in UAE requires special sanitary certificates from approved
authorities of the exporting country.
VII. CROSS-NATIONAL
COOPERATION AND AGREEMENTS
a) Greater Arab Free Trade Area
The Greater Arab
Free Trade Area (GAFTA) was founded with the aim to form an Arab economic block
that can efficiently contest with other nations while safeguarding that each
nation enlarged commerce with each other. The best significant feature of the
1997 pact was that over the next 10 years of period each participant state
would pursue to bring a 10% decrease in customs duties and tariff per year in
addition to this there will be also continual eradication of trade hurdles. On
1 January 2005 the abolition of duties between the GAFTA member countries was
imposed. UAE is a member country of Greater Arab
Free-Trade Area Agreement; all the member countries of Gulf Cooperation Council
(GCC) are actively taking part in the business. This empowers UAE to do business
with all member countries of GATFTA with lowest tariff and obstacles.
UAE
is considered as hub for the intra-regional trade. After Saudi Arabia, UAE is
second largest in terms of exports to GAFTA member countries. Mainly 60%
exports of UAE comprises of non-hydrocarbon in the global markets. It tries to
imports more from the Arab territory countries in comparison to any other
country outside of the territory, and these countries are Saudi Arabia, Sudan
and Oman. Nevertheless, about 38% exports of UAE are re-exports, mostly
countries outside the bound of GAFTA region. This means that at least 8 billion
dollar of intra-territorial trade is initially obtained from outside the bounds
of GAFTA, and it only passes through the UAE. UAE is having strong ties for the
bilateral trade connections in the Arab territory, conducting 12 billion dollar
trade with the Oman, which account about 6% of the total intra territorial
trade and with Saudi Arabia it is conducting about 7.2 billion dollars, which
also accounts about 3% of the intra territorial trade.
b) Duty Free Country
In
UAE, tax for corporations and private individuals are approximately close to
zeros. Businesses operating in the UAE are paying fewer taxes in comparison to
whole world. Only companies operating in Oil, gas and petrochemical are suppose
to pay the taxes and foreign banks operating in the country. Fewer tax for
corporations in UAE was underlined in a report conducted for paying taxes in
2013 by the International Financial Corporation and World Bank.
Import
tariff in UAE are low, almost 5% for most of the products sold in the country.
There is no import tariff on goods imported from the Arab countries. There is
one more important thing about UAE is that; it has made settlements and signed
pacts for the prevention of double taxation with 50 countries. Theses
agreements are signed with its major trade partners.
c) Gulf Cooperation Council
UAE
is also member with Gulf Cooperation Council (GCC); therefore businesses
operating in free zone region for tax in the UAE are enjoying free trade with
all member countries of GCC. Countries Qatar, Oman, Saudi Arabia, Bahrain and
Kuwait are members of GCC. Presently GCC member countries are having
negotiation with Latin American countries; Brazil, Uruguay, Paraguay and
Argentina and also EU, India, China, Japan, Korea, Turkey, Australia and
Pakistan to form a trade free agreements. A
FTA is a treaty among two or more nations to speedup the movement of business
and services in order to carry out large economic incorporation among
them. FTAs pursue to boost and promote
trade between the cosigner states through the requisite that their businesses
have special entrance to each other’s arcades. All FTAs have three components,
explicitly the liberalization in the trade of goods, services and investment. UAE was also taking effective part in the General
Agreement on Tariffs and Trade (GATT) 1994, know currently serving an active
member in World Trade Organization since 1996.
VIII.
THE DETERMINATION OF EXCHANGE RATE:
a) GDP and Exchange Rate:
United
Arab Emirates is a Middle Eastern country which has GDP of USD 412.35$ billion
which grew at 4.36% compared to the previous year (according to IMF in 2014)
making it 27th largest GDP
in the world. The economy of UAE is manufacturing based. The United Arab Emirate’s currency is the UAE Dirham
(AED). The exchange rate is 3.6697 AED per 1
USD from 1st of January 2014 until now. Exchange rate for other currently used
currency for foreign transaction are 1 GBP = 6.29776 AED, 1 AUD = 3.51079 AED,
I CAD = 3.52738 AED, I EURO=5.0897, 1 AED-.6233 CNY until 5th July 2014 with
closely no fluctuation. It is apprehended that AED is quite stable in terms of
exchange rate with most of the well-known currencies.
b) Fisher Effect:
As reported by the ministry of
economy of United Arab Emirates, inflation rate was 2% in May 2014. The average
inflation rate from 1990 to 2014 recorded at 2.04% with some fluctuation
reaching at the highest of 12.30% in December 2008 during the worldwide
economic crisis dropping down at 1.60% in January 2011 which was the lowest.
Real interest rate in UAE as of 17 May, 2014 is 10.65%. With this information nominal
interest rate can be determined by the real interest rate and the inflation
rate according to the theory of fisher effect:
(1+r)=(1+R)(1+i), or r= (1+R)(1+i)-1, r=(1+10.65%)(1+2%)-1=0.12863 or 12.863% as
the nominal interest is high and inflation rate is moderate in the short run it
can be assumed that investors specially the major trading partners of UAE may
find it is reasonable to invest to get a higher rate of return if their
inflation rate is higher than UAE .
c) Major Trading Partner:
The UAE is the top exporter of
iron ingots, lime stones and lead bars and Its major export is oil and gas
output which comprises 40% of country`s GDP.
Its major trading partners are USA, Japan, India, China, South Korea,
Germany, Iran and Thailand.
d) Big Mac Index:
Big Mac Index can be used to
estimate the exchange rate of currencies because McDonald’s has operations in
118 countries around the globe serving more than 69 million people per day in
more than 34000 outlets, that’s why prices between different countries can be
compared. In the following chart shows the comparison of big mac combo meal
price in USA and UAE and the implied PPP (3.66-3.67/3.67) indicates an under
valuation of dollar of about 0.27% in UAE:
|
Country
|
Big Mac Price in Local Currency
|
Big Mac Price in USD
|
Implied PPP
|
Actual dollar exchange rate
|
Under or over valuation against USD,%
|
|
USA
|
$4.20
|
$4.20
|
-
|
-
|
-
|
|
UAE
|
12
|
$3.27
|
2.86
|
3.67
|
-22
|
e) Membership with OPEC and World Bank:
UAE joined OPEC (Organization of
petroleum exporting countries) in 1967 after the excavation of commercial oil
first in 1958 – onshore in the Bab- 2 well and offshore at Umm Shaif.
United Arab Emirates joined the World Bank
in 1972 and during their 30 years of partnership they vested their interest in
Technical Cooperation program, supporting the rapid development of this closely
linked group of distinctively characterized countries, which ranged from the
infrastructural development such as interstate Saudi –Bahrain Causeway to
industrial economic planning. UAE advanced further by investing public fund in
high quality infrastructure and in the creation of multi-annual development
plans with integrated objectives and goals.
REFERENCES:
‘DUBAI’S LEGAL SYSTEM CREATING A
LEGAL AND REGULATORY FRAMEWORKFOR A MODERN SOCIETY’
http://atlas.media.mit.edu/profile/country/are/
http://worldtracker.org/media/library/College%20Books/International%20Business/Chapter04.pdf
http://reflectivedisequilibrium.blogspot.ca/2014/05/what-does-migration-to-united-arab.html
http://dubai.ae/en/aboutdubai/Pages/DubaiEconomy.aspx
http://www.uaeinteract.com/uaeint_misc/pdf/perspectives/14.pdf
http://www.thenational.ae/uae/environment/sweeping-changes-to-environmental-protection-in-the-uae
Ftab F0.05, (3-74)
15
tcalc = β
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0.0006
0.3127
(