28 Pages The State As Institutional Entrepreneur. 49206385

1042-2587
© 2009 Baylor University
Institutional
E T&P Arrangements and
International
Entrepreneurship: The
State as Institutional
Entrepreneur
Rasha Nasra
M. Tina Dacin
We examine the role of the state as entrepreneur and institutional entrepreneur in the Middle
East. Using historical event sequencing methodology we seek to understand the rise of
Dubai and the United Arab Emirates as a context for international entrepreneurship. We build
on ideas at the intersection of international entrepreneurship and institutional theory to
develop a set of propositions that enhance our understanding of international entrepreneur-
ship. We provide implications for the management of both global and local legitimacy,
resource mobilization, and agency as well as the strategic deployment of an institutional
infrastructure to create and enable entrepreneurship.
I
n an age of increased globalization and international economic activity, the different
strategies that countries (Lenway & Murtha, 1994; Murtha & Lenway, 1994), firms
(Buckley & Casson, 1998; Peng, 2003), and entrepreneurs (McDougall, 1989) exercise
in response to these economic changes have made the boundary between government
and business (Hillman & Keim, 1995) an important and critical area for scholarship. The
“interface between businesses and governments . . . is characterized by different institu-
tional arrangements in different countries” (Hillman & Keim, p. 194). This institutional
variation is likely to be even more pronounced in international entrepreneurship, espe-
cially when firms from developed economies attempt to expand and venture into emerging
economies or vice versa. While state/firm relationships have generated a significant body
of literature in the areas of strategy and political science, surprisingly they have not
received as much attention within the field of international entrepreneurship. Research
that has explored these phenomena in emerging economies has also been lacking (Bruton,
Ahlstrom, & Obloj, 2008). Furthermore, the emerging economies of the Middle East
have been completely absent from the literature (Bruton et al.). In their review of
entrepreneurship articles in top management journals between 1990 and 2006, Bruton
Please send correspondence to: Rasha Nasra, tel: +1 613 533 2330; e-mail: rnasra@business.queensu.ca.
May, 2010 583

DOI: 10.1111/j.1540-6520.2009.00354.x
etap_354 583..609
et al. found not a single article dedicated to examining entrepreneurship in the Middle
East. Several countries in the Middle East, especially in the Arabian Gulf region, have
experienced significant economic growth, owing mostly to their vast oil wealth. Some
countries however have also developed flourishing economies that are reliant on interna-
tional trade and entrepreneurship. Given the nondemocratic nature of the regimes that rule
most Middle Eastern countries, we contend that state-business relations within these
contexts are highly contingent on the nature of the institutional environments and frame-
works that exist in each country.
In this paper, we suggest that the state can actively engage in entrepreneurial behavior,
identifying and discovering opportunities that emerge within their environments (Shane &
Venkataraman, 2000). Once opportunities have been identified, we contend that the state
can also act as an institutional entrepreneur, shaping and crafting the necessary institu-
tional infrastructure in order to capitalize on and exploit these opportunities (Djelic &
Quack, 2003; Strang & Sine, 2002). If institutional contexts are engineered such that they
create enabling conditions for economic exchange (through the elimination of operational
constraints or by offering incentives), they can themselves create further opportunity sets
for entrepreneurship (Alvarez & Barney, 2007).
We situate our arguments within the context of the United Arab Emirates (U.A.E.) and
more specifically in the case of Dubai and its transformation from a small fishing village
into a hub of international trade and entrepreneurship. We use a historical event sequenc-
ing approach (Thornton, Jones, & Kury, 2005) to examine the institutional evolution of
Dubai over time. We chose Dubai as the subject of our analysis for several reasons. First,
Dubai has recently emerged as an internationally renowned center of economic activity
and international entrepreneurship. Dubai boasts an economy that for the past few years
has been growing faster than the economies of India and China as well as the United States
(Dubai Statistics Center, 2007). Second, and contrary to popular belief, Dubai did not
possess any of the tangible resources that would have predicted its success. Dubai’s
current wealth, unlike other states in the Gulf region, is not the result of an oil-dependent
economy. Dubai’s major revenue is derived from international foreign trade and a highly
active service industry, with oil revenue currently contributing only 5% to its Gross
Domestic Product (GDP) (Dubai Strategic Plan [DSP], 2007). By tracking Dubai’s devel-
opment and evolution over time and contrasting it with some of its neighboring emirates,
we aim to demonstrate that Dubai’s current prosperity and attractiveness for international
entrepreneurs are the outcomes of key decisions that its rulers took during important
historical events and junctures. We contend that these decisions and outcomes are the
result of the “institutional work” conducted by Dubai’s rulers over several decades
(Lawrence & Suddaby, 2006). By institutional work we refer to their purposive actions
that resulted in the creation of new institutional frameworks in the form of specialized free
zones.
We believe that our paper contributes to the literature on international entrepreneur-
ship and institutional theory in several ways. First, our analysis focuses on one of the least
studied contexts in the field of international entrepreneurship, the U.A.E in the Middle
East. Furthermore, the U.A.E.’s unique context allows us to examine intra-region varia-
tion while holding constant some critical contextual forces such as history, culture, and
religion.
Second, we demonstrate that the state not only exploits opportunities for entrepre-
neurial action but also acts as an institutional entrepreneur by building the necessary
institutional infrastructure to attract international entrepreneurs. Building on the idea of
institutional work (Lawrence & Suddaby, 2006) we regard the state as a “culturally
competent actor” possessing the skills to strategically create and capture its institutional
584 ENTREPRENEURSHIP THEORY and PRACTICE

context locally as well as internationally. In the case of Dubai, we demonstrate that this
occurs by managing legitimacy through the strategic creation and decoupling of its
emergent economic infrastructure (free zones) from its traditional national institutions.
We suggest that Dubai’s unique institutional context has enabled it to establish and
manage two critical forms of legitimacy: international (external) and national (internal).
These two legitimacies contribute greatly to Dubai’s attractiveness for international entre-
preneurship as well its political stability within the Middle East.
Third, our paper focuses on the important temporal dimension of institutional change
and evolution. While we know that “the differential performance of economies over time
is fundamentally influenced by the way institutions evolve” (North, 1990, p. 3), few
studies within the international entrepreneurship literature have examined the institutional
evolution of emerging economies. Most studies have typically focused on institutional
change within a single industry, not taking into account state-level institutional transfor-
mation (Peng, 2003). Owing to its well-documented history, we were able to explore the
evolution of Dubai’s institutional frameworks over time. From our examination, we
suggest that due to context-specific factors such as type of ruling regime as well as the
unique cultural and national environment, institution building across different geographi-
cal regions does not always follow the same path of de-institutionalization and
re-institutionalization that we have observed in Western settings (Barley & Tolbert, 1997;
Greenwood & Suddaby, 2006; Seo & Creed, 2002).
We begin with a brief review of the relevant literature followed by some method-
ological considerations that are pertinent to the field of international entrepreneurship
and a description of our data collection methods. Next, we present the historical case and
summarize the historical sequence of pivotal events over time. We then proceed with a
theoretical discussion of our findings and put forth several theoretical propositions.
Finally, we conclude by discussing our study’s implications for international entrepre-
neurship and institutional theory.
International Entrepreneurship and Institutions
Wright and Ricks (1994) were amongst the first scholars to emphasize the importance
of the international setting or the environment in which the entrepreneurial activity occurs.
To date, a limited number of studies, mostly in the area of strategic management (e.g.,
Peng, 2000) have explored the influence of external environmental factors on international
entrepreneurship (Zahra & George, 2002) and even fewer studies have examined the
impact of institutional environments (some exceptions include George & Prabhu, 2000;
McDougall, 1989). Institutional theory has, however, recently contributed several con-
cepts that can be useful to the study of international entrepreneurship such as country
institutional profiles for entrepreneurship (Busenitz, Gómez, & Spencer, 2000; Kostova,
1997, 1999) and the concept of “institutional distance” between different countries (Gaur
& Lu, 2007; Kostova, 1999). Institutional theory has also provided insights into emerging
economies, demonstrating for example that some emerging countries rely on economic
liberalization to promote growth (Hoskisson, Eden, Lau, & Wright, 2000).
Theorizing in the field of international entrepreneurship, and entrepreneurship in
general, has been riddled with several challenges. For example, it has been noted that
research findings from developed economies may not be applicable to emerging econo-
mies and that our theories need to be adjusted and re-examined within these new contexts
(Peng, 2000; Young, Peng, Ahlstrom, & Bruton, 2002). It is not difficult to accept that
different regions of the world have carved distinctive pathways to development. The great
May, 2010 585

variability of the world’s countries and their differing environments, resources, institu-
tions, and polities makes it especially challenging to export our knowledge and theories
in a pre-packaged form and to accurately account for the disparities that exist between the
established Western and international models of economic and social development. Tra-
ditionally, as noted by Bruton et al. (2008), differences in entrepreneurship that have been
found between international contexts have been attributed to cultural and institutional
factors; typically without offering insights into how these differences came to be or what
those factors were. While we do concur that cultural and institutional factors may indeed
account for some of the variability between international settings, we believe that the more
intriguing and potentially rewarding answers lie in examining how they accomplish that.
We argue that one useful way to examine these international differences is by considering
the role that states play in the shaping of the institutions that impact international
entrepreneurship.
Role of the State

While some definitions of international entrepreneurship have explicitly excluded the
international activities of governments (e.g., McDougall & Oviatt, 2000), the role that
governments and their institutions play in enabling or inhibiting international entrepre-
neurship has been examined by some scholars. For example, McDougall (1989) explored
the effect of restrictiveness of governmental policies as they are perceived by international
new ventures. Governments and states can encourage or impede economic activity
through regulation (North, 1991; Scott, 2008). Within the context of emerging economies,
entrepreneurial activity entails liabilities and uncertainties that typically stem from poten-
tial economic (e.g., high taxation), social (e.g., lack of adequate workforce), and political
(e.g., wars) instabilities that entrepreneurs may encounter in these markets (Ireland &
Webb, 2006). While governments and states play a crucial function in mediating these
factors, their role can also extend beyond the regulatory management of economic trans-
actions (Evans, 1995). Governments and states can encourage and foster industry creation
as well as entrepreneurship by putting enabling institutional structures in place (Busenitz
et al., 2000; Spencer, Murtha, & Lenway, 2005).
One means that many emerging economies have used to attract foreign investment
has been the establishment of free zones (Johansson, 1994). The concept of free ports or
free zones is ancient, and can be traced as far back as 400 B.C. when a treaty was forged
between Athens and Leucon I of Bosporus to provide duty freedom (Burstein, 1993). For
example, the city of Hamburg has been a free trade area since 1835. Once part of the
Hanseatic League of Cities, Hamburg was part of an extensive trading zone that existed
throughout the Baltic region (Braudel, 1984). The role of free ports in promoting inter-
national entrepreneurship and trade has been immense (Da Ponte, 1997). Free ports and
trade zones have long been used as an incentive for foreign investment, particularly in
developing economies (Johansson, 1994). Contemporary literature on free zones has
focused on topics such as whether free zones enhance the host country’s economy (Young
& Miyagiwa, 1987) and their contribution to unemployment (e.g., Chaudhuri & Adhikari,
1993). Surprisingly, free zones, to the best of our knowledge, have not been featured in the
international entrepreneurship literature. We will revisit the role of free zones, their unique
application in Dubai, and the role they played in promoting international entrepreneurship
and trade in a later section.
The notion of state agency is not novel; it has been previously addressed by econo-
mists and sociologists, particularly those studying developing economies. For example,
Evans (1995) noted that while the classical role of state was that of enforcer of internal

order, regulation, and protection, during modern times, a third more critical role has come
to the forefront, ensuring the state’s economic growth and development. This trans-
formative role involves “eliciting entrepreneurship and facilitating the creation of new
productive capacities” (Evans, p. 6). The role of the state as an instigator of economic
growth implicitly entails greater involvement and interaction with economic actors such
as entrepreneurs and corporations.
Organizational scholars have also explored the role of states as change agents or
institutional entrepreneurs. For example, Baron, Dobbin, and Jennings (1986) studied the
role of the state in shaping and bureaucratizing employment practices during World War
II. Much work has also been done on the role that state policies and regulations have had
on human resource practices, such as the growth of due process rights in the workplace
(Edelman, 1990) and the role of organizations in the interpretation and application of civil
rights laws (Edelman, 1992). Some studies also revealed that states have been involved in
the creation of new organizational forms, such as the health medical organization system
(Fligstein, 1990; Strang & Bradburn, 2001).
Methodological Considerations
One criticism of the international entrepreneurship literature has been that it has, for
the most part, focused on cross-sectional studies that do not take temporal effects into
consideration (Coviello & Jones, 2004). Additionally, we believe that a significant part of
the challenge facing international entrepreneurship scholars lies in the methodological
difficulties that the field inherently poses. One of these challenges is disentangling
national or cultural factors from the other variables (such as institutional environments)
under study. Peng (2001) asserts that in order to test institutional perspectives, we need to
show that institutions matter across different national cultures. This statement comple-
ments Scott’s (2008) call for varying the contexts of our studies, as he points out that it
would be impossible to discern the effects that institutions have on social structures if all
of our studies are conducted across similar settings and contexts. The varied contexts and
settings in the field of international entrepreneurship make controlling for cross-cultural
and cross-national differences between these settings even more important. It is difficult
to tease out the effects that are rooted in national or cultural divergence from those that are
caused by other factors, such as government policies (e.g., Edelman, 1990, 1992) or
personal entrepreneurial orientation (e.g., Tan, 2002). Some recent strides have been made
in addressing these methodological concerns such as the development and validation of
a measure of country institutional profiles for entrepreneurship (Busenitz et al., 2000;
Kostova, 1997, 1999; Manolova, Eunni, & Gyoshev, 2008). A recent study creatively
utilized a quasi-experimental design that was able to better isolate cultural from national
effects on individuals’ entrepreneurial orientations and highlighted “the importance of
institution-building efforts that foster a more entrepreneurial friendly environment” at the
national level (Tan, p. 95). The setting of our present analysis provides natural controls for
both national and cultural differences. Since we are examining the differentiation of Dubai
from the other emirates that make up the U.A.E., in terms of international entrepreneur-
ship activity, we are assured that any differences that exist between these emirates cannot
be ascribed to cultural or national differences.1
1. In the Appendix, we observe the vast contrast between Dubai and the other emirates on several inter-
national trade measures over time.
May, 2010 587

Historical Case Studies and Event Sequencing
North (1991) asserts that “history is largely a story of institutional evolution in which
the historical performance of economies can only be understood as a part of a sequential
story” (p. 97). Historical case studies present us with the opportunity to examine the story
behind the institutional evolution of many different phenomena such as the cultural
transformation of industries (e.g., Thornton et al., 2005), the emergence of innovations
(e.g., Hargadon & Douglas, 2001), as well as the creation of entrepreneurial opportunities
(e.g., Sine & David, 2003).
Regardless of the theoretical framework that scholars adopt, several parallel concepts
emerge in research that employs historical cases. For example, historical institutionalists
emphasize the concept of “path dependency” (Hall & Taylor, 1996; Sewell, 1996). A
historical institutionalist view holds that social causation is path dependent in the sense
that an event that occurred at an earlier point in time will determine consequent events and
outcomes (Hall & Taylor; Sewell). Political scientists also emphasize the importance of
taking into account the temporal effect and sequencing of actions (Pierson, 2000, 2004).
They stress the importance of the self-reinforcing and positive feedback processes
involved in path-dependence. According to this view, once a state or political actor
proceeds along a certain path, the costs of switching to alternative choices or changing
paths progressively increases (Levi, 1997; Pierson, 2000).
Another shared characteristic of work that employs historical case studies is the
tendency to organize historical events into periods of stability separated by important
events or “critical junctures” (Hall & Taylor, 1996). Sewell (1996) used the term “rupture”
to describe these historical events and notes that they “set off a chain of events that durably
transforms previous structures and practices” (p. 843). Similarly, Meyer (1982) spoke of
environmental jolts as “transient perturbations whose occurrences are difficult to foresee
and whose impact on organizations is disruptive and often inimical” (p. 515). The pro-
gressive accumulation of these events is greatly emphasized in understanding path depen-
dency (Thornton et al., 2005). Actions that occur during and immediately following these
junctures tend to be of significant importance. Regardless of the term that is employed,
these historical events, ruptures, critical junctures, and environmental jolts have been
associated with institutional change (e.g., Thornton et al.) as well as with the creation of
entrepreneurial opportunities (Sine & David, 2003). In the present study, through histori-
cal analysis, we uncovered important junctures that have shaped the history of the U.A.E.
and Dubai in particular. These events are not just important because of their historical
significance, but also because they represent landmarks where much action and institu-
tional work took place (Lawrence & Suddaby, 2006).
Data Collection
For our analysis, we relied on data from a wide range of sources. The U.A.E.’s infancy
coupled with the British colonization of the region has left us with numerous detailed
accounts of the events that took place during that historical period. Much of the historical
work on the U.A.E. and the Arabian Gulf region has been greatly influenced by the
opening up of the Bombay Archives in 1954. These archives contained the complete
records and correspondences of the British East India Company, the most dominant
economic and political actor in the Gulf and Indian subcontinent regions during the
eighteenth and nineteenth centuries. Over the last three decades, several important
volumes have been published on the history and the formation of the U.A.E., the most
notable of which have been the work of Zahlan (1978) and Abdullah (1978). Recent work
has for the most part built upon these earlier studies (e.g., Davidson, 2005; Heard-Bey,

1996; Kazim, 2000; Taryam, 1987). While these studies differ in their purpose and
temporal scope, all of them reveal and provide identical historical facts and accounts of
the events that took place in the region and that led to the formation of the U.A.E. As
such, for historical data, we relied on the above-mentioned volumes as well as on more
recent biographical work that has been published on Dubai’s rulers (Al-Maktoum, 2006;
Graeme, 1999). For statistical and economic data, we relied on official U.A.E. and Dubai
government publications (e.g., National Abstracts and Surveys), as well as media reports,
press releases, and data provided by the Dubai Statistics Centre, and publications pro-
duced by the Dubai and Abu Dhabi Chambers of Commerce and Industry and the U.A.E.
Ministry of Economy and Commerce.
While some studies of the region go as far back as 600 A.D. (e.g., Kazim, 2000), given
the scope of this paper, the crux of our examination begins in the nineteenth century,
around the time inland tribes moved to the coastal area that is the U.A.E. today and began
their mercantile activities. To conveniently illustrate the evolution of the U.A.E., in the
following sections we segment the key historical events over three broad time frames:
(1) the formation of the Trucial States, (2) the Rentier Era and the discovery of oil, and
(3) the Federation and the U.A.E. today.
The Formation of the Trucial States. Up until December 1971, the U.A.E. was previ-
ously a part of a region formerly known as the Trucial States. The Trucial States were so
called because of the several treaties that were signed with Britain during the period from
1820 to 1853 (Zahlan, 1978). Prior to that era, the region had consisted of several states,
governed by tribal rule. The majority of the inhabitants of the region descended from two
major tribes, the Qawasim and the Bani Yas. The Qawasim were located in Sharjah and
Ras al-Khaimah, and reigned over the smaller sheikhdoms of Ajman, Umm al-Quwain,
and Fujeirah while the Bani Yas ruled Abu Dhabi and Dubai (Abdullah, 1978; Zahlan).
The two tribes and their smaller off-shoots were in a constant state of feuding and power
struggles over land and sea.
During the period leading up to the formation of the Trucial States, the Qawasim (the
forefathers of the current al-Qasimi ruling family of Sharjah) dominated the waters of the
Gulf Coast and even controlled the important port city of Lingah on the Persian coastline
(Abdullah, 1978; Heard-Bey, 1996). While they did engage in trading activities, it was
their piracy that brought them notoriety; their activities giving the Gulf Coast the title of
the “Pirate Coast.”2 The significance of the Qawasim’s hegemony during this period was
further underscored by the fact that the main economic activities on the Gulf Coast were
pearl-diving and fishing and as such were greatly threatened and stifled by the Qawasim’s
piracy. Moreover, the strategic location of the Gulf had established it as an important
trading route between the East and the West and its control was sought after by several
Western powers (Davidson, 2005; Heard-Bey).
Beginning in the sixteenth century, and for nearly a century and a half, the Portuguese
dominated the Arabian Gulf. Their hegemony, however, was not unchallenged; the Otto-
mans unsuccessfully attempted to conquer and gain control of parts of the Arabian
Peninsula (Boxer, 1969; Kazim, 2000). Their failure was primarily due to the rivalry
2. Sheikh Sultan bin Muhammad al-Qasimi, the current ruler of Sharjah and a direct descendent of the
Qawasim, published a book in 1986 called “The Myth of Arab Piracy in the Gulf.” In his book, he refutes the
claims of Western historians that the Qawasim were pirates and looters. Instead, he argues that the Qawasim
were superior maritime traders who were able to undercut many of their rivals, including the British Indian
merchants.
May, 2010 589

between the Ottomans and the Safavids of Persia,3 with whom the Portuguese had formed
an alliance to deter the Ottoman expansion and as such the Ottoman rule did not extend
to the region that is the U.A.E. today (Matthee, 1999). Over time, however, Portuguese
control grew progressively weaker (Boxer). Several reasons contributed to this decline,
the most important of which was the Portuguese annexation by Spain and the increased
British and Dutch interest in the region due to its economic and strategic importance
(Boxer; Kazim). The decline of the Portuguese ushered in a new era of European colo-
nialism and by the beginning of the nineteenth century, the British emerged as the greatest
Western power in the Gulf (Kazim).
The first critical juncture or jolt (Hall & Taylor, 1996; Sine & David, 2003) occurred in
1820 when the General Treaty of Peace (also known as the General Maritime Treaty) was
forged between the British Government and the rulers of nine states and villages on the Gulf
Coast. After the Qawasim launched repeated attacks on ships belonging to the British East
India Company, the British Government instigated a number of ineffective retaliatory
attacks in 1805, 1809, and 1811 (Davidson, 2005; Zahlan, 1978). In 1819, the British
dispatched a large fleet from the Royal Navy and successfully destroyed many of the
Qawasim’s vessels. The General Maritime Treaty was followed by a 1-year truce between
the sheikhs of Dubai, Abu Dhabi, Sharjah, and Ajman to end attacks on land and at sea. This
truce was renewed at different intervals until 1853 when a final treaty, the Perpetual
Maritime Truce, was signed, effectively ending all hostilities at sea. These small states and
the region came to be known as the Trucial States or Trucial Oman for the next 120 years.
The impact of British interventionism and the ensuing treaties represented a key
historical turning point that set off a chain of events that transformed the political and
economic landscape of the region. For the Qawasim, the treaties required them to surren-
der all vessels and weapons, greatly curbing their maritime activities and signaling the
beginning of the end of their prosperous and hegemonic era. Further North, Abu Dhabi
and its ruling Bani Yas tribe continued to grow in strength, and with the Gulf’s waters now
secure, the pearling and fishing industries boomed and with them the state’s economy.
Even prior to the discovery of oil, Abu Dhabi was amongst the richest of the Trucial
States; it owned the largest pearl fishing fleet as well as the most important pearl diving
location, the island of Dalma. It also controlled the richest agricultural areas, the Buraimi
and Liwa Oases. Abu Dhabi also politically capitalized on its prosperity, by financially
subsidizing and protecting, and thereby securing the loyalty of the surrounding tribes
(Davidson, 2005; Zahlan, 1978).
Dubai was also significantly affected by the treaties and the Qawasim’s progressive
decline. In 1833, a faction of the Al Bu Falasah of the Bani Yas tribe, headed by Sheikh
Maktoum bin Buti (after whom today’s Maktoum family is named) resettled from Abu
Dhabi to Dubai. Over a short period of time, around 800 tribesmen relocated to Dubai
where the reign of the Maktoum family remains to this day (Davidson, 2005; Graeme,
1999; Zahlan, 1978). This initial influx is believed to have transformed Dubai from a
dormant village to a major bazaar and marketplace by the standards of the day. Dubai
possessed a small creek which enabled it to serve as a safe and efficient port for this small
but rapidly growing town. Historians have documented that from its early days, Dubai’s
rulers had ensured that their small town was a safe and welcoming haven for tradesmen
and merchants (Abdullah, 1978; Zahlan). Taxes were almost nonexistent and the ruling
family held an open and tolerant policy towards foreigners during the second half of the
3. Under the Safavid dynasty, Persia became a Shi’i society, which is the root of their rivalry with the
Ottomans who followed the Sunni school of Islam. For more on this, see Boxer (1969).

1800s (Davidson). Dubai, however, remained a small town overshadowed by its neighbors
Abu Dhabi and Sharjah.
The Rentier4 Era and the Discovery of Oil. Dubai’s entrepreneurial spirit and its leaders’
vision of transforming it into a center for international trade can be traced as far back as
1887. The continued decline of the Qawasim coupled with Persia’s need for tax revenue
resulted in the latter’s control of the critical and bustling city of Lingah in 1887. Lingah
was a major trading port between the East and the West, as well as the center of the
pearling trade (Abdullah, 1978; Davidson, 2005; Heard-Bey, 1996; Zahlan, 1978). When
the Persians regained control of the city, they immediately started increasing taxes and
levying new charges for port services. Due to these costly changes, an important oppor-
tunity presented itself to the Trucial States as tradesmen and merchants began searching
for another suitable port on the Gulf coast through which to conduct their business
(Abdullah; Davidson; Zahlan). Dubai’s ruler took several measures that would eventually
tip the traders’ choice in favor of his little town. In 1901, Dubai’s ruler declared the creek
a free trade port and abolished all taxation (Al-Maktoum, 2006; Hvidt, 2007). He began
offering generous incentives to Lingah’s traders and merchants, such as free land and
protection, if they relocated to Dubai (Davidson; Zahlan). These concessions and guar-
antees, coupled with the continued rising taxation in Lingah, resulted in the permanent
relocation and settling of major Persian and Indian merchants in Dubai over the following
years. As mentioned earlier, the establishment of free ports in cities in order to increase
their attractiveness to foreign capital and trade was not a novel concept from an interna-
tional perspective (Johansson, 1994). However, one has to appreciate the significance of
such a decision enacted by the tribal leader of a small village especially given that the
Dubai Creek and port facilities at the time were primitive and dwarfed by those of Sharjah
and Ras al-Khaimah (Hvidt, 2007). Dubai, over the decades, capitalized on the free port
or free zone concept and it featured greatly in the transformation of its modern day
institutional framework as we will demonstrate in a later section.
At the turn of the century Dubai and Abu Dhabi’s economies were thriving, mostly
due to the boom the pearling industry was experiencing (Zahlan, 1978). Soon however,
the Great Depression hit and coupled with the development of Japanese cultured pearls
(further decreasing the demand for natural pearls), these events caused the Gulf pearl
market to crash (Davidson, 2005). The negative economic effects precipitated by these
events however did not last for too long. Around 1939, most of the Trucial States’ rulers
granted oil exploration concessions to the British, an event which heralded the beginning
of the Trucial States’ rentier era. Over the following years, in the shadow of World Word
II, British influence in the region continued to grow, and several military aircraft refueling
and civilian landing facilities were established in Abu Dhabi, Sharjah, and Dubai (Abdul-
lah, 1978). Rents retained from oil exploration and from landing rights helped ease off the
effects of the depression. The first oil reservoirs were discovered in 1958 in Abu Dhabi and
shortly thereafter, oil drilling began. New concessions for these activities translated into
an even greater income for the rulers and further solidified the elaborate British rentier
structures in the region (Abdullah; Davidson; Zahlan). Of all the states, Abu Dhabi was the
most fortunate, as massive oil reservoirs were discovered within its borders. The other
sheikhdoms, including Sharjah and Dubai did not fare as well. Oil reserves were not
4. In this paper, we utilize the concept of “rentier states” as proposed by Mahdavy (1970). Mahdavy defined
the rentier state as a state that receives substantial rents and income from “foreign individuals, concerns, or
governments.” Beblawi (1987) later refined this definition by specifying that the rents are paid by foreign
actors directly to the state, and that only a few are involved in the generation of this wealth.
May, 2010 591

discovered in Dubai until 1966 and were scant and very costly to extract (Davidson). In
fact, it is estimated that Dubai’s oil reserves will be exhausted over the next two decades
(Government of U.A.E., n.d.). The demise of the natural pearl industry and the unsuc-
cessful oil exploration greatly strained Dubai’s economy.
It is noted that one of the factors that significantly aided Dubai’s ruler in weathering
these turbulent events were his close relationships and ties with the city’s merchant
community (Al-Maktoum, 2006; Davidson, 2005). By continuously consulting with the
merchants and traders, the sheikh was closing the gap between ruler and follower. This
type of co-optation and cooperation was an unusual form of governance during those
times when the traditional forms of tribal and Islamic rule involved overseeing the state’s
affairs through communication and consultation with tribal leaders and not with the
common people. So radical was Dubai’s ruler’s governance that he included in his majlis
(a group of councilmen traditionally constituted from the highest ranking members of the
tribal families) foreign entrepreneurs and merchants that had relocated to Dubai from
Persia and India (Al-Maktoum; Graeme, 1999). By the early 1950s, Dubai’s economy
started regaining its strength, and more commercial ships started calling at Dubai’s creek.
The need for further expansion of the port facilities became necessary to accommodate the
city’s growing economy and was further exacerbated by the heavy silting of the creek that
had occurred over the past decades, which made navigation hazardous and difficult. The
creek dredging and expansion project was impossible to finance, given Dubai’s relatively
modest revenues. However, by consulting with the city’s trading community, and taking
a personal loan from the oil-wealthy Emir of Kuwait, Dubai’s ruler was able to complete
the project. The undertaking proved to be a major milestone in Dubai’s history as
increasing numbers of shipping companies started using the improved creek port facilities
(Al-Maktoum; Davidson; Taryam, 1987).
The Federation and the U.A.E. Today. In the aftermath of World War II and the global
decline of British rule, Britain announced its intentions to withdraw from the Arabian Gulf
in 1968 (Abdullah, 1978). Immediately, the rulers of Abu Dhabi and Dubai, by then the
most populous and wealthy of the Trucial States, started mediation efforts and in 1969
formed a bilateral union (Abdullah; Zahlan, 1978). By 1971, when the U.A.E. officially
declared itself an independent federation, Abu Dhabi was the natural choice for capital of
the new country due to its wealth, its undisputed political clout as well as the strength of
its leaders’ local and foreign alliances. Dubai’s growing prosperity and its status as a
major port city in the Gulf ensured its ruler’s election to the role of vice-president. Given
its ascendance as a major regional force, Sharjah did not play a big role in the brokerage
of the federation but joined it along with the smaller states of Ras al-Khaimah, Ajman,
Fujeirah, and Umm al-Quwein.
Up until the federation, all of the seven emirates (from here on, we will be referring
to the states as emirates), especially Dubai, despite close ties with Abu Dhabi, had
managed their own internal affairs and operated autonomously. The less prosperous
emirates benefited from the new federal arrangement, as they started receiving financial
support and subsidies from the oil-wealthy capital. Dubai however faced critical chal-
lenges in terms of integrating its already established economy and governance structures
with the rest of the emirates as its thriving economy was highly dependent on maintaining
its international trade and more liberal policies. Prior to the announcement of the official
federation, Dubai’s Sheikh Rashid bin Said passed legislation that established Dubai’s
own independent judicial system in 1970 (Carballo, 2007). This action paved the way for
a legal arrangement that would later ensure Dubai’s continued autonomy and that would
enable it to maintain its open trade policies. The federation of the U.A.E. in 1971 was

quickly followed by the establishment of the U.A.E. Constitution, which enabled the
transformation of the local courts into a federal judiciary system. Two emirates, Dubai and
Ras al-Khaimah, opted not to transfer their courts over to the federal system (Carballo).
This important decision allowed Dubai to retain control over its civil and commercial
affairs, thus maintaining its legal autonomy. The impact of this decision continues to play
a significant role to this day in Dubai’s economic transformation.
After the Dubai Creek dredging project, and while Port Rashid was still undergoing
expansion, Sheikh Rashid began the construction of the Jebel Ali Port and Free Zone
(Al-Maktoum, 2006; Davidson, 2005).The Jebel Ali Free Zone was completed in 1983
and with it began the rapid influx of foreign workers, international entrepreneurs, and
merchants who were attracted by Dubai’s low customs and taxation structure. Today,
Dubai houses more than 15 active free zones and several more are in the pipeline. While
the number and specialization of many of these zones may seem extreme, they all serve
one purpose: to encourage international ventures and entrepreneurs to set up shops in
Dubai. Under Federal and Dubai Government legislation, firms that want to operate within
the emirates have to abide by strict regulations such as a maximum allowance of 49%
private ownership. Further restrictions include limits on employee permits and work visas,
lengthy and expensive licensing procedures, as well as the more recent movement for
preferential employment of U.A.E. nationals, officially called emiratisation (Government
of U.A.E., 2006). Emiratisation was primarily spurred by the fact that today, U.A.E.
nationals constitute only about 20% of the entire population (U.A.E. Ministry of
Economy, 2007). Dubai’s rulers, and most notably the current ruler Sheikh Mohammed,
established multiple and specialized free zones. Moreover, Dubai’s ruling family heavily
invested in all of the free zones primarily through the establishment of private organiza-
tions that operate out of them (e.g., Dubai Holding). Today, all of Dubai’s free zones offer
100% private ownership as well as a number of other attractive incentives such as
long-term renewable tax holidays, full exemption from import and export duties, as well
as the ability to repatriate all capital and profits (Government of Dubai, n.d.). By heavily
relying on these multiple specialized free zones, Dubai is able to maintain the traditional
federal-like government regulations outside of these areas, while simultaneously continu-
ing to expand its international business from within them.
The impact of Sheikh Rashid’s decision not to transfer the local courts over to the
federal judicial system was critical to the establishment of what is today one of the most
unique specialized zones in the world, the Dubai International Financial Centre (DIFC).
When in 2004, the ruler of Dubai enacted a law creating the DIFC, he created a legally
autonomous institution operating within the borders of the emirate. The vision for DIFC
was to establish Dubai as the most prominent financial trading hub in the Middle East and
to set up the Dubai Financial Exchange (Al-Maktoum, 2006; DIFC, 2006). An obvious
challenge for this project was the incompatibility of Dubai’s laws (that are based on
Islamic Shari’a much like U.A.E.’s federal laws) with the international legal standards and
institutions under which other financial exchanges operate. Because Dubai had main-
tained control over its own judicial system, the DIFC laws were able to establish a free
zone with special jurisdiction independent from both Dubai and the U.A.E.’s legal
systems. The DIFC applies the English common law and maintains its own court systems
and independently appointed judges (DIFC), a legal institutional arrangement unlike any
other that was facilitated by a decision made over three decades ago.
Abu Dhabi today continues to experience great oil-wealth and its major industries
are mostly petroleum related. Capitalizing on its cheap energy and major industrial oil
and natural gas reserves, industrial plants quickly emerged. Abu Dhabi represents the
prototypical oil-wealthy city, with modern infrastructure and a relatively high standard
May, 2010 593

of living. Its rich resources have also enabled it to achieve a high level of industrializa-
tion. Abu Dhabi, as the capital of the new federation, continues to financially subsidize
the other emirates. Sharjah has not been able to achieve the success or the level of
development that its neighbors to the north and the south have. Sharjah is the most
conservative of all the seven emirates. The sale, possession, and consumption of alcohol
is illegal and banned throughout the emirate; a fact that has undeniably limited the city’s
appeal as a tourist destination.5 Its scarce oil and gas resources have not resulted in any
major industrial projects. Sharjah’s international airport, despite several expansion
efforts, has been unable to compete with the enormous facilities offered by Dubai.
In fact, it is probably the stark and glaring differences between the two neighboring
emirates that have further suppressed Sharjah’s appeal for international business and
entrepreneurship.
International Entrepreneurship in Dubai—Some Examples

From the year 2000 to 2005, Dubai’s GDP had been growing at an annual rate of
13%, a rate higher than the emerging economies of China and India, and even the
developed economies of Singapore and the United States (DSP, 2007). However, what is
truly remarkable is that over 95% of Dubai’s GDP comes from non-oil industries, with
over 75% coming from the service industry and over 13% from Foreign Direct Invest-
ment (FDI) (Dubai Statistics Center, 2007). Non-oil foreign trade is dominated by
Dubai; in 2006, Dubai’s foreign trade accounted for 75% of total imports, 62% of
non-oil exports, and 82% of re-exports in the U.A.E. (U.A.E. Ministry of Economy,
2007). To further illustrate the dramatic growth that Dubai has been experiencing, we
refer to a plan that Dubai’s ruler set forth in the year 2000 called Vision 2010. Vision
2010 set major economic objectives (e.g., GDP, reliance on oil-income) that the ruler had
envisaged for Dubai over the course of a decade (DSP). Vision 2010’s objectives were
surpassed in 2005; half the time that it was projected for. In 2007, it was replaced by the
Dubai Strategic Plan 2015, with even loftier economic and social development targets
(DSP).
To provide an example of the international presence in Dubai, we refer to the
constitution of one of its free zones, Dubai Internet City (DIC). Today, DIC is made up of
835 firms with the following international firm-origins: Europe, 33%; Middle East, 27%;
East Subcontinent, 19%; Americas, 15%; Asia Pacific, 4%; and Africa, 2% (DIC, 2008).
DIC is also home to major corporations like Microsoft, Cisco Systems, IBM, HP, and Sun
Microsystems (DIC). Dubai is also engaging in the internationalization of some of its own
private organizations. DP World, which is one of the largest port operators in the world,
owns port terminals across 29 countries (DP World, 2008).
Discussion
Institution Creating and Enabling International Entrepreneurship

The recent surge in scholarly work on institutional entrepreneurship (Hardy &
Maguire, 2008) has been mainly fueled by criticisms of the deterministic nature of
5. Sharjah’s conservatism is the result of Wahhabi influence during 1800s. Wahhabism was a powerful and
expansionist movement that preached a more radical practice of Islam (Davidson, 2005; Risso, 2001). In fact,
it is believed that the Wahhabis were the force behind the Qawasim’s piracy and were the recipients of a
substantive share of their wealth (Onley & Khalaf, 2006; Risso).

Figure 1
Historical Event Sequence: Key Historical Events and the Actions Undertaken
by Dubai’s Rulers
Great Depression/ Low Oil

Pearling Crash/ Reserves in
British leave
Fall of Lingah Silting of Creek Dubai UAE Federation
region
Event/
Juncture
(1887) (1929-1939) (1968) (late 1960s) (1971)
(1887-1901) (1950-1960s) (1969) (1970) (1972) (1983 -) (2004)

Actions
taken
by
Dubai Creek Creek Bilateral Dubai Dubai forms Dubai doesn’t Multiple Free DIFC
Dubai’s Free Port/ Offer Dredging/ Port – Abu Dhabi independent transfer to Zones
rulers Incentives for Rashid Union judicial system federal judicial
relocation Construction system
institutional theory (DiMaggio & Powell, 1983; DiMaggio, 1988) and the calls to
re-introduce the notions of agency and power to the study of institutions (DiMaggio &
Powell, 1991; Greenwood & Hinings, 1996). Institutional entrepreneurs are agents who
utilize their available resources to create and empower institutions (Dacin, Goodstein, &
Scott, 2002; DiMaggio). Recent studies have explored institutional entrepreneurship from
the perspective of individuals (e.g., Fligstein, 2001; Lawrence & Phillips, 2004), profes-
sions (e.g., Greenwood & Suddaby, 2006), as well as social movements (e.g., Rao, 1998).
A few studies have also examined the role of the state in the creation of new organizational
forms and instigating institutional change (e.g., Baron et al., 1986). We begin our analysis
by examining the temporal sequencing of events over time, understanding the resources
mobilized to craft new institutions as well as the role of agency in the evolution of the
institutional context in light of Scott’s (2008) pillars. Finally, we examine the literature on
embeddedness and legitimacy to gain insights into the ability of the state to simulta-
neously create and manage multiple institutional frameworks.
Figure 1 represents the timeline of the key historical events and junctures, as well as
the actions and decisions taken by Dubai’s rulers in response to them. We suggest that
Dubai’s rulers over the course of several decades acted as entrepreneurs; recognizing and
exploiting opportunities (Shane & Venkataraman, 2000) that were presented during his-
torical critical junctures (Hall & Taylor, 1996; Sewell, 1996) or through exogenous
environmental jolts (Meyer, 1982; Sine & David, 2003). We also argue that they act as
institutional entrepreneurs; crafting, over time, a unique legal institutional framework that
has created and elicited (Evans, 1995) significant international entrepreneurial opportu-
nities (Alvarez & Barney, 2007). Additionally, we contend that the decisions and actions
of Dubai’s ruler during the earlier stages of Dubai’s evolution greatly affected events and
outcomes that followed (Levi, 1997; Pierson, 2000) and invariably changed Dubai’s
developmental course eventually leading to its status today as a center for international
entrepreneurship and business.
We illustrate this by tracking the conditions and events that have enabled the creation
of the DIFC. We believe that this unique free zone, with its own legal jurisdiction, could
not have been established without the decision to not integrate Dubai’s judicial and legal
system with the U.A.E.’s post-federation in 1971. Following the same logic, when the port
of Lingah fell under Persian rule, we noted that the merchants and traders had the option
May, 2010 595

of moving their businesses to several more established ports located along the Gulf coast,
especially the then-much-larger ports of Sharjah and Ras al-Khaimah. During that junc-
ture, Dubai’s ruler offered unparalleled incentives as well as decreed Dubai’s creek the
first free port in the region, easing the way for Dubai to rise in stature relative to the other
emirates. Following the arguments of Thornton et al. (2005), we believe that the temporal
sequencing of these events and actions is essential in understanding and explaining
Dubai’s transformation, which is in line with theories of path-dependence (Hall & Taylor,
1996; Pierson, 2000, 2004; Sewell, 1996).
Resources
Central to the role of institutional entrepreneurship is the concept of resource mobi-
lization (DiMaggio, 1988; Hardy & Maguire, 2008). As we noted throughout the case
study, Dubai did not possess any tangible resources besides its creek that was dwarfed by
the larger and more established ports of Sharjah and Ras al-Khaimah. What Dubai’s rulers
managed to accumulate and mobilize were a set of intangible resources and assets in the
form of networks and alliances built with the merchant and trading community (Hitt,
Dacin, Levitas, Arregle, & Borza, 2000; Peng, 2001). De Carolis, Litzky, and Eddleston
(2009) recently demonstrated the importance of social capital and network relationships
in new venture creation. In Dubai’s case, these networks were greatly influential during
several key events, such as gaining local and financial support for the creek dredging
project. Dubai’s rulers surrounded themselves with the key stakeholders in the community
by including them in their majlis or councils. This is in line with the view that institutional
entrepreneurs engage in negotiation with other actors who may possess critical resources
as well as the role that exchange mechanisms play in the change and building process of
institutions (Colomy, 1998; DiMaggio; Hardy & Maguire). Institutional entrepreneurs are
believed to possess important social and political skills (Hardy & Maguire; Perkmann &
Spicer, 2007) that “induce cooperation among others” (Fligstein, 2001, p. 112). Further-
more, these social ties and networks facilitated the formation of political capital that
further increased the legitimacy of the rulers’ actions and enabled their success (Au, Peng,
& Wang, 2000; Peng & Luo, 2000).
Agency and Institutional Pillars

We noted earlier that states can be a source of agency and creation (e.g., Baron et al.,
1986; Scott, 2008). However, the traditional view of the state, similar to early views of
institutions has been one of constraining change (Clemens & Cook, 1999). Research has
demonstrated that institutional structures and frameworks can enable or inhibit entrepre-
neurship. For example, Peng and Heath (1996) argued that firm growth in emerging
economies was greatly limited by institutional constraints. Casson (1990) stated that a
country’s infrastructure can enhance cooperation between entrepreneurs and can greatly
impact entrepreneurial activity. Spencer et al. (2005) posit that industry creation is
affected by state-level institutional structures. Djelic and Quack (2003) also believe that in
the context of states, the creation of new institutions is likely to be influenced by existing
institutional arrangements. In order to further explore the role that institutions had within
our context, we proceed by examining the normative, cultural-cognitive, and the regula-
tive structures or pillars that constituted the institutional frameworks (Scott) in Dubai and
their evolution over time.
Examining these institutional structures or pillars is popular in organizational litera-
ture, especially in studies of institutional change and institution building (e.g., Sine,

Haveman, & Tolbert, 2005), as well as in the entrepreneurship literature (e.g., Busenitz
et al., 2000; Manolova et al., 2008; Yamakawa, Peng, & Deeds, 2008). Within the Middle
East, the institutional make-up of countries is substantially different than that of Western
countries. Middle Eastern countries (with the exception of Israel and Lebanon) are also
Muslim countries. Islam is unique amongst other religions because its teachings involve
among other things explicit cultural, cognitive, normative, as well as regulative elements.
Islam dictates not only individual behavior, but also societal relationships. It also regulates
trade and commercial exchanges and provides specific scripture on civic law matters such
as inheritance law. As such, Islam represents one of the most socially entrenched and highly
immutable institutions in the Middle East. As testament to this argument, we need only to
note the adoption of Islamic Shari’a laws across Arabic and Muslim countries, as well as the
recent attempts of Muslim groups in Western society to allow for the application of Shari’a
within their communities. Because Islamic teachings encompass so many facets of social
life and as such represent a critical resource for sensemaking in society, we argue that it
is especially difficult to delineate the normative, cultural-cognitive, and regulative institu-
tional elements in settings such as the U.A.E. and other Muslim countries.
Scholars have argued that some of the theoretical concepts and research findings from
Western economic models may not be adequate in other international settings (Peng,
2000). To elaborate on this argument we turn to the concept of “institutional country
profile for entrepreneurship” and explore it within the context of our research setting
(Busenitz et al., 2000; Kostova, 1997, 1999). A quick examination of the U.A.E.’s and
Dubai’s institutional profiles provides a grim outlook for international entrepreneurship as
all of the regulatory dimensions (e.g., government sponsoring and providing support for
new businesses) are absent. In fact, some regulative elements that we identified earlier
such as the preferential hiring of U.A.E. nationals should further inhibit international
entrepreneurship. However, and as we illustrated earlier, Dubai today is considered a
major center of international entrepreneurship and foreign trade; a status we believe it
achieved through the creation and the establishment of numerous and specialized free
zones in Dubai. This prevalence of free zones and in particular the case of the DIFC has
resulted in the emergence of a special institutional constitution in Dubai. Table 1 tracks
the evolution and change of the institutional make-up of Dubai across the different time
Table 1
Dubai Institutional Frameworks Over Time
Period Normative Cultural-Cognitive Regulative
Trucial States Tribal Tribal Islamic Shari’a Tribal rule

Islamic Islamic
Rentier Stage Tribal Tribal Islamic Shari’a Tribal rule
Islamic Islamic
Entrepreneurial
Federation Islamic Islamic Islamic Shari’a Monarchy
Entrepreneurial
Modern Day—Dubai City Islamic Islamic Islamic Shari’a Monarchy
Entrepreneurial
Modern Day—Dubai Free Zones Free Market Entrepreneurial International (decoupled from
International both Federal and Dubai regulation)
Global
May, 2010 597

frames that we covered. By examining the evolution of these institutional elements, we
can make two distinct observations. First, we note that little change has occurred over time
in all of institutional structures outside of Dubai’s free zones (i.e., we do not consider the
last row of the table at this point). As discussed earlier, we attribute this institutional
stability over time to the nature of Islamic religious doctrines. We formulate this first
observation in the form of the following theoretical proposition:
Proposition 1: In countries with deeply rooted and pervasive religious identities
(such as Islamic countries), normative, cultural-cognitive, and regulative institutional
frameworks are highly resistant to change.
The second and more striking observation is the existence of a dual or parallel
institutional framework in Dubai today. We believe that it is this unique institutional
duality that has enabled Dubai to thrive and foster international entrepreneurship. In the
following section, we elaborate and theorize on how Dubai has been able to maintain this
unique institutional arrangement.
Embedded Autonomy, Legitimacy and Crafting Institutional Change

In order to explore how Dubai has managed these two parallel institutional frame-
works, we turn to the literature on embeddedness and legitimacy. This discussion can be
further facilitated if we consider the following question: Why hasn’t Dubai declared itself
an independent state? Doing so would mean that it wouldn’t have to deal with the
restrictions of the federal government. Another question to consider is: Given that Dubai
has the constitutional capability to create its own legal system, why has it maintained a
system based on Islamic Shari’a much like the federal legal system? While these choices
and this arrangement may appear puzzling at first, we attempt to offer possible answers
from two separate perspectives, the first of which is grounded in our own empirical
observations and common knowledge about the U.A.E. and the Middle East in general.
The second perspective is grounded in the theoretical assumptions and concepts of
institutional embeddedness and legitimacy.
As outlined earlier, Dubai is a very small emirate, surrounded by highly conservative
Islamic emirates (e.g., Sharjah) and countries (e.g., Iran and Saudi Arabia). Moreover, it
is located in one of the most politically volatile regions in the world—the Middle East.
Declaring itself an independent state or trying to eliminate the federal-like institutional
framework that exists outside its free zones would invariably make it a vulnerable target
for extremist attacks. Independence can also lead to isolation from the huge market
opportunities that Arab and Muslim regions represent. Furthermore, Dubai and Abu
Dhabi’s ruling families descend from the same faction of the Bani Yas tribe, and the two
ruling families maintain close and intimate personal ties. Additionally, while Dubai does
possess considerable wealth and contributes greatly to the U.A.E.’s GDP, the scarcity of
its natural resources makes it dependant on Abu Dhabi for its energy needs. To this day,
Abu Dhabi continues to donate thousands of oil barrels to Dubai (Davidson, 2005).6 Last
but not least, Dubai’s ruling family, despite displaying a great entrepreneurial spirit and
having global ambitions for their emirate, are staunchly rooted in their heritage, nation-
alism, and Islamic identities (Al-Maktoum, 2006).
6. The most recent example of Abu Dhabi’s continued support was the purchase of $10 billion worth of bonds
issued by the Government of Dubai by the Central Bank of the U.A.E., in order to help the emirate meet its
financial obligations during the recent economic crisis (Kerr, 2009; The Economist, 2009).

Considering Dubai’s unique institutional arrangement from an institutional theory
perspective can also provide plausible explanations for this paradox. Embeddedness at its
most basic level is typically considered in terms of the ties and relationships between
different actors within a field. Studies have emphasized that embeddedness encompasses
not only economic activity, but also the wider cognitive, cultural, and political mecha-
nisms through which these exchanges take place (Dacin, Ventresca, & Beal, 1999; Gra-
novetter, 1985). Embeddedness is also closely related to the concept of legitimacy (Scott,
2008). Suchman (1995) defines legitimacy as the “generalized perception or assumption
that the actions of an entity are desirable, proper, or appropriate within some socially
constructed system of norms, values, beliefs, and definitions” (p. 574). Scott elaborates
that the three institutional pillars elicit different platforms for legitimacy—normative,
cultural-cognitive, and regulative. Within the context of Dubai’s historical evolution, we
argue that as international entrepreneurship within the state started gaining momentum,
two different types of legitimacy pressures were also building up, an internal (national)
legitimacy pressure to remain within the confines of traditional Islamic rule, and an
external (international) legitimacy pressure to comply with Western trade models. The
importance of establishing legitimacy within the context of international trade is critical as
foreign investors tend to view legitimacy as a source of stability (Henisz & Zelner, 2005).
Within an organizational context, organizations faced with external legitimacy pressures
typically comply (Glynn & Abzug, 2002), or acquiesce (Oliver, 1991), to their external
institutional context.
Initially, when the creek was declared a free port, Dubai was still an independent
monarchy, and could act with autonomy. The concept of free trade did not clash with the
extant institutional environment; and so establishing this new organizational form was
relatively easy. After the federation, Dubai’s global ambitions, the need to maintain and
increase international trade due to disappointing oil exploration, coupled with the influx of
foreign entrepreneurs and workers, meant that Dubai had to accommodate for and start
to actively participate in the “international rules of the game” (Djelic & Quack, 2003;
North, 1990). Growing national/international interactions have been associated with
conflict and challenge as the disparate institutional frameworks of the local and the
international environment start to clash (Djelic & Quack). Institutional contradictions have
been known to be generated by growing tensions among multiple institutions (Sewell,
1992). We believe that Dubai’s rulers managed these conflicts and the pressures that
resulted from them by establishing free zones. By creating independent zones where
national regulations do not apply, Dubai’s rulers were able to accommodate and manage the
international external pressures, since the free zones operated under the logics of free
markets and Western trade models. As such, they were able to maintain active participation
in the growing global and international economy. At the same time, Dubai was also able to
maintain the traditional Islamic institutional framework outside the borders of these free
zones.
We relate the use of free zones with the concept of “the international arena” or “free
spaces,” which are devoid of political forces and depend entirely on market and financial
logics (Djelic & Quack, 2003). Scholars argue that it is within these “free spaces” that
globalization occurs (Djelic & Quack). In essence, these free zones served as instruments
for buffering and decoupling (Meyer & Rowan, 1977) the two clashing institutional
frameworks, and easing the internal/external pressures. It is interesting to note that with the
temporal incremental growth in international trade and entrepreneurship, there was a
parallel evolution in the types of “free spaces” that were being established in Dubai; moving
from the simple free port concept, to free exporting zones and free trade zones (such as
the Jebel Ali Free Zone), and finally to highly specialized free zones with the DIFC being
May, 2010 599

the most extreme example of this shift. Based on the above-mentioned observations, we
put forth two propositions, and further elaborate on them below:
Proposition 2a: Through the establishment of free zones, states are able to decouple
and distance their international economic activities from their national institutional
frameworks.
Proposition 2b: By decoupling from national institutional frameworks, states are
able to gain external (international) legitimacy.
Proposition 3: By remaining embedded within the supra-institutional framework
and maintaining similar normative, cultural-cognitive, and regulative institutional
frameworks, outside of the free zones, states are able to maintain internal (national)
legitimacy.
Dubai’s current institutional arrangement can also be described as being in a state of
“embedded autonomy” (Evans, 1995). The term “embedded autonomy” was first intro-
duced by Peter Evans in his studies of developing countries. Evans emphasized that
markets only work if they are embedded in other forms of social relations. Given the
importance of the economic transformative role of developing states, the more “embed-
ded” they were within society, the more likely it is that they were effective. Put in other
words, “the idea that states operate most effectively when their connections to society are
minimized is no more plausible than the idea that markets operate in isolation from other
social ties” (Evans, p. 41).
While retaining the essence of Evans’s (1995) emphasis on society-market ties, our
use of the term embedded autonomy in Dubai’s case represents a more “literal” appli-
cation. Through the institutional work (Lawrence & Suddaby, 2006) of its rulers over
the decades, Dubai has maintained itself as an autonomous self-governing entity within
the U.A.E. It is also, however, truly embedded within the two institutional frameworks
that it has crafted. On the national level, Dubai’s institutions mimic those of the federal
government. Dubai’s rulers have always held the office of vice-president of the U.A.E.
as well as other key positions within the federal government. At a more local level,
Dubai’s ruler has maintained the long-held custom of keeping members of the com-
munity, both local and foreign, within his majlis. He is known for not traveling with an
entourage, and does not have a security detail. In fact, it is rather common to see him
driving his car around the city and stopping occasionally to chat with random Dubai
residents (Kroft, 2008).
In the international arena, and as we elaborated in an earlier section, Dubai’s govern-
ment did not only create its many free zones, it has also heavily invested in private projects
within them. When it engages its international partners, Dubai plays by the international
rules of the game (North, 1990). This dual-embeddedness, we believe, imbues an addi-
tional layer of legitimacy for Dubai’s economy, especially from the perspective of inter-
national investors and entrepreneurs, who view the state as an active stakeholder in these
free zones. The active economic involvement and personal investment on the part of the
government lowers the perceived risks for potential new international entrants who rec-
ognize that their own economic goals are aligned with those of the state.
Proposition 4: By being embedded in both the national and international fields, and
by investing in the free zones that they have established (i.e., by being active stake-
holders), states can increase their international legitimacy. This increased legitimacy
also serves to promote international entrepreneurship.
In summary, we examined the process of institution building at the state level in
the U.A.E. and particularly in Dubai. We argued that while the state can engage in

institutional entrepreneurship, the processes of institution building do vary across national
and regional contexts and that as scholars, we need to appreciate the heterogeneity of
institutional arrangements across borders. For example, while the pace of institutional
change at the state level has been typically found to lag behind industrial changes (Spencer
et al., 2005), it seems that in Dubai’s case, institutional change was occurring simulta-
neously and keeping up with global industrial changes. This may be due in part to the fact
that institutional change and institution building were occurring through the processes that
we typically see in Western contexts. Institutional change has been typically examined
from the processes of de-institutionalization and re-institutionalization (Greenwood &
Suddaby, 2006; Jepperson, 1991; Tolbert & Zucker, 1996). In the case of Dubai, there
wasn’t any de-institutionalization; instead, we witnessed the maintenance of extant insti-
tutions and the creation of a parallel institutional environment.
Conclusion
In this paper, we sought to demonstrate the role that states and governments can play
in shaping the institutional frameworks in a way that attracts and elicits international
entrepreneurship and engages their economies in the global community. We argued that
the states can act as both entrepreneurs, recognizing opportunities in their environment, as
well as institutional entrepreneurs, crafting the institutions required to capitalize on these
opportunities. While we recognize that in our case, the state was represented by individual
actors due to the monarchical system that exists in the U.A.E., and that within such
regimes actors have greater latitude to act and create change, we feel that, rather than
representing a limitation, this fact further accentuates the need to look beyond the surface
of governments and states and analyze the structures and patterns of relationships among
the actors within these fields (Ring, Bigley, D’Aunno, & Khanna, 2005). If we wish to
truly understand the impact of institutions on international entrepreneurship, it is essential
to explore the evolution of state-society relations, and the formation of institutions over
time, since these seldom occur through identical processes across settings and contexts.
Haveman and Rao (1997) remarked that the essence of institutional entrepreneurship is
the skillful alignment of organizational forms and the specific institutions they embody
with the master rules of society (Haveman & Rao).
Djelic and Quack (2003) argue that globalization involves a double process of insti-
tutional change (at the national level) and institution building (at the transnational level).
They further suggest that globalization entails economic activity that occurs “in the spaces
between nations,” and does not necessitate eroding national borders. In order to maintain
competitive advantage (Porter, 1990), states need to accommodate global expectations
(Peng, 2003). Within this context, unique institutional arrangements, such as the one that
exists in Dubai can enable, rather than constrain, economic activity. We feel that this
enabling and empowering nature of institutions has not received its due attention in the
literature (Barley & Tolbert, 1997; Scott, 2008). Finally, we hope that by highlighting the
heterogeneity of institutional arrangements (Clemens & Cook, 1999) across international
contexts we have underscored that clashes and conflict between institutions do not always
result in negative economic outcomes, but can also represent promising prospects for
agency.
Note: Dubai and the U.A.E. are constantly undergoing fast-paced changes and transfor-
mations both in growth as well as in legislature. The authors wish to point out that the laws
and regulations (with regard to Dubai’s Free Zones as well as the Federal corporate laws)
May, 2010 601

that are presented in this paper are those that were in effect during the time of writing this
paper (2008) and may have changed by time of publication.
Appendix
Imports, Non-Oil Exports, and Re-Exports of Dubai compared with the other Emirates for
the Period 2002–2006 (U.A.E. Ministry of Economy, 2003, 2004, 2005, 2006, 2007).

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Rasha Nasra is a PhD Candidate at Queen’s School of Business at Queen’s University, Kingston, ON, Canada
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M. Tina Dacin is a Professor at Queen’s School of Business at Queen’s University, Kingston, ON, Canada,
K7L 3N6.
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International Entrepreneurship and Institutions

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Role of the State

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International Entrepreneurship in Dubai—Some Examples

Institution Creating and Enabling International Entrepreneurship

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Great Depression/ Low Oil

(1887) (1929-1939) (1968) (late 1960s) (1971)

(1887-1901) (1950-1960s) (1969) (1970) (1972) (1983 -) (2004)

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Agency and Institutional Pillars

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Dubai Institutional Frameworks Over Time

Period Normative Cultural-Cognitive Regulative

Trucial States Tribal Tribal Islamic Shari’a Tribal rule

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Embedded Autonomy, Legitimacy and Crafting Institutional Change

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DP World. (2008). Overview. Available at http://portal.pohub.com/portal/page?_pageid=761,248330&_

Dubai Internet City. (2008). Corporate presentation. Available at http://www.dubaiinternetcity.com/

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Government of U.A.E. (2006). Emiratisation. Available at http://www.government.ae/gov/en/res/citizen/emp/

Government of U.A.E. (n.d.). Dubai oil and gas. Available at http://www.uae.gov.ae/Government/oil_gas.htm,

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Kostova, T. (1999). Transnational transfer of strategic organizational practices: A contextual perspective.

Kroft, S. (2008). A visit to Dubai Inc. Available at http://www.cbsnews.com/stories/2007/10/12/60minutes/

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U.A.E. Ministry of Economy. (2003). UAE in numbers 2003. Available at http://www.economy.ae/English/

U.A.E. Ministry of Economy. (2004). UAE in numbers 2004. Available at http://www.economy.ae/English/

U.A.E. Ministry of Economy. (2005). UAE in numbers 2005. Available at http://www.economy.ae/English/

U.A.E. Ministry of Economy. (2006). UAE in numbers 2006. Available at http://www.economy.ae/English/

U.A.E. Ministry of Economy. (2007). UAE in numbers 2007. Available at http://www.economy.ae/English/

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