Foreign Direct Investment in UAE- Carrefour

TABLE OF CONTENTS
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Particulars
INTRODUCTION

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ECONOMIC ENVIRONMENT

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FOREIGN DIRECT INVESTMENT IN UAE

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FORMS OF FDI IN UAE

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GOVERNMENT POLICIES TOWARDS FDI

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WHY COUNTRIES INCREASED FDI TO UAE?

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ABOUT CARREFOUR MODE OF ENTRY & ITS BENEFITS BENEFITS & PROBLEMS FACED IN UAE

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REFERENCES

1|P a ge

Now. In 1995.Foreign Direct Investment in UAE. The first objective of Carrefour was to select the right mode of entry which suits the economy and legal systems in UAE. legal systems. Carrefour expanded its hypermarket chain into the United Arab Emirates. a pan-regional conglomerate with retail experience in the UAE.Carrefour EXECUTIVE SUMMARY The United Arab Emirate is one of the most business friendly economies in the world. booming economy. The superior infrastructure. after their success in the UAE Carrefour expanded to other potential markets in the Middle East. This helped them to locate their stores in prime locations and to adapt to the socio-cultural differences. They selected Dubai to enter the market by understanding the potential to grow in the region. 2|P a ge . low crime rate and foreign policies earned a huge amount of foreign direct investment in the country. By properly analyzing the market they formed joint venture with Majid Al Futtaim (MAF).

UAE exports consist of 47% oil & gas. manufacturing. Since 1962 UAE exports oil across the world. in order to reduce the dependency on oil exports. The discovery of oil in 1950s exponentially increased the pace of economic growth in UAE. UAE diversified its economy into tourism.Foreign Direct Investment in UAE. retail. It is one of the most important economic centres in the Middle East. Now it is the third largest oil exporter in the world (US energy information administration). Ras Al Khaimah. The supreme council of rulers forms the UAE govt. 34% Re-exports. Total GDP (PPP) 2010 estimate is US $ 294.Carrefour INTRODUCTION United Arab Emirates is federation of seven states formed in 1971. Dubai. Sharjah And Umm Al Qaiwain ± is ruled by separate rulers. ECONOMIC ENVIRONMENT Economy of UAE was dependent on fishing & pearling industry in the earlier times. Sheikh Mohammed bin Rashid Al Maktoum is the prime minister of UAE and ruler of Dubai. Each state ± Abu Dhabi.175 billion and nominal per capita estimate is US $ 49995 (UAE International Monetary Fund 2010). Ajman. 3|P a ge . 13% Free trade zones and others form 6% (Dubai chamber of commerce and Ministry of Finance 2009) Successful economic diversification reduced the portion of GDP based on oil and gas output to around 25%. Fujairah. Sheikh Khalifa bin Zayed Al Nahyan is the president of the United Arab Emirates and ruler of Abu dhabi emirate. construction & real estate.

UAE falls under high income category.Carrefour Components of UAE GDP Investment 13% Exports 56% Consumption 31% Source: Dubai chamber of commerce and Ministry of Finance (Uppal 2009) In March 2006 UAE government allowed foreign ownership in the real estate sector. The well established transport network also provides a better environment for many industries to grow. automobiles and food.9 Million population being foreigners representing 185 countries (CIA-The World Fact Book). UAE imports machinery. 4|P a ge . It imports around 80% of the food items (RNCOS Report 2008) The economic transformation increased the standard of living.Foreign Direct Investment in UAE. Indians form the major single expatriate group. spends a lion share of its revenue for job creation & infrastructure expansion (BBC News). One third of the world population is accessible from UAE within a four hours flight (UAE interact 2008) UAE is One of the most globalized economy with 80% of its 4. Govt. This resulted in a huge investment in the real estate sector. electronics.

Establishing a new company or service in a country from scratch is a riskier 5|P a ge . FDI inflow into UAE is rising and growing. Total foreign direct investment inflow into the UAE is expected to increase to $108bn in 2011 (Barclays Wealth). the number of companies in Jafza increased by 600%. even during the time of downturn.Carrefour UAE is one of the most liberal countries in the Gulf. The country allows private sector involvement in many utilities. The free trade zones in the country are offering 100% foreign ownership and zero taxes. FOREIGN DIRECT INVESTMENT IN UAE FDI into the United Arab Emirates amounts to $69bn (UAE ministry of Economy June 2010). FORMS OF FDI IN UAE Green field investments: Liberalization of real estate & creation of economic zones resulted in a large amount of FDI inflow in the form of green field investments (WTO 2006). The Jebel Ali Free Zone (Jafza) has played a key role in attracting FDI into UAE (AMEinfo. About 5% of the total trade through free trade zones are handled by Jafza (Malhotra et al 2008). Sterling performance has enabled Jafza to play a central role in the flow of foreign investments into the country. A total of 65120 companies invested in Jafza as it offers excellent investment atmosphere. UAE does not publish official data on FDI figures. These economic zones attract a lot of foreign investors.Foreign Direct Investment in UAE.com). Within the last 10 years. According to Barclays Group.

as they encourage corporate governance and provide local knowledge. a company merges with a MNC. Even though. Joint Ventures: There are many companies forming alliances with UAE based company. companies are doing direct FDI overseeing the increasing economic integration of GCC countries (World Investment Report 2008). 45% of the total SMEs in UAE are located in Dubai (Dun & Bradstreet Maceda 2009) SMEs in UAE Manufacturing 11% Services 16% Trade & retail 73% Source: Dun & Bradstreet (Maceda 2009) 6|P a ge .Carrefour investment. Mergers & acquisitions: In M&A. It is a beneficial mode of entry. UAE¶s national telecom Etisalat plans to buy 46% stake in Zain. SMEs form the backbone of Dubai¶s economy. a Kuwaiti telecom firm. Majority of JVs are happening with small and medium sized industries.Foreign Direct Investment in UAE.

This helped many SMEs to partner with MNCs utilizing their market expertise. Later the country liberalized its policies and allowed 100% ownership in free trade zones in the country. UAE is known as the Hong Kong of the Middle East or hot franchise market. The UAE Franchise Association was launched by the UAE government in 2004 (franchise. UAE is a member of WTO as of 10 April 1996 and a contracting party to GATT since March 8 1994 (WTO 2006) and also the founder member of Gulf Cooperation Council (GCC). Since 1983 the GCC member states decided to exempt customs tariff on goods produced from the free trade zones. Free trade zones offer duty-free imports. government is promoting franchising.Foreign Direct Investment in UAE. UAE has been actively trying to gain FDI through its foreign policy. In UAE only UAE citizens or corporations wholly owned by UAE citizens or those with a UAE partner or sponsor are allowed to enter into franchising agreements. reduced bureaucracy. Foreign ownership is capped at 49%. This policy acts as primary motive for investments in Jafza (Malhotra et al 2008). Sponsorship system still exists in a majority of places outside the free trade zones. Since 2003 a common 5% tariff has been 7|P a ge . 2008). This system is known as sponsorship system.com). In the earlier times investment in the UAE demanded a 51% native ownership. To develop the SMEs in UAE. GOVERNMENT POLICIES TOWARDS FDI The UAE is one of the most liberal countries in the Gulf. improved logistics and good access to markets.Carrefour Franchising: Many global companies entered UAE market through franchising. innovation expertise and customer expertise (Prashantham and Birkinshaw.

fifth in paying tax and third in trading across borders (Doing Business 2011 UAE). Custom duties on imports are low. Recently the United Arab Emirates and the United States Sign Bilateral Agreement for Peaceful Nuclear Energy Cooperation (UAE Embassy) WHY COUNTRIES INCREASED FDI TO UAE? UAE¶s economy is very business-friendly. 8|P a ge . UAE is ranked 40th in terms of Ease of doing business.Carrefour introduced. ranked 46th in starting a business. The United Arab Emirates developed systems which help in rapidly establishing a company. The UAE offers no taxes on corporate and individual profits (excluding the oil sector and financial sector). This also helps in FDI inflow into UAE. UAE formed bilateral agreements with many developed and developing countries. Out of 183 economies surveyed. This eased the trade between these countries.Foreign Direct Investment in UAE.

Carrefour UAE allows 100% repatriation of profits and capital back to the home country. There exists high security for women in the country. Government did not put any requirement on minimum capital investment. Legal system is strong and speedy. 9|P a ge . UAE has very low rate of crime and violence.Foreign Direct Investment in UAE. UAE has one of the best infrastructure facilities in the world. Transportation networks are well established and are connected to all parts of the world through air and water.

Carrefour followed country by country expansion strategy into emerging markets. 10 | P a g e . Extremely low prices were the strategy used by them to compete and buy other chains. The idea to create lower prices at the market made them a brand and fasten its expansion worldwide. In 1963 they opened their first hypermarket which led to the success of Carrefour.Carrefour ABOUT CARREFOUR Carrefour was founded as a supermarket retailer by the French Fournier and Defforey families in 1959.Foreign Direct Investment in UAE. They introduced unbranded products as a substitute for popular products without compromising quality. Its international expansion started by opening its first hypermarket in Belgium in 1977.

Carrefour enjoyed low or no trade barriers on most of its goods. legal system. having large population with highest standard of living and income in the world. Laws in UAE were favorable towards Joint Ventures.Carrefour In 1995. one of the emirates of UAE. companies would have to be partnered with UAE nationals or commercial firms owned by UAE nationals.Foreign Direct Investment in UAE. low political risks & positive retail conditions provides a favorable ground for its operation. Dubai offered a lot of advantages for their market entry. Selling food in a culture with important religious and cultural restrictions was a challenging part. the UAE¶s Federal Commercial Agencies Law protected foreign companies in a joint venture from contract termination and exclusive presence in the region. To form a Joint Venture. MODE OF ENTRY & ITS BENEFITS Carrefour determined that a joint venture would be best for entering UAE market. This was a benefit to Carrefour as the sponsor taking the liability of ownership. Second. Carrefour expanded their market into Dubai. risk in a joint venture was less. by forming a joint venture with Majid Al Futtaim (MAF). Company allowed to rent and not to own the property. 11 | P a g e . Carrefour saw the potential in Dubai emirate. Joint Venture with a local sponsor made it easier for Carrefour to obtain Food Health Certificates like Halal slaughter certificate to import food. the flourishing retail industry and economy. First. Well established transportation network.

Thirdly Carrefour preferred Dubai as a first market because of its high population.S. Jordan. Another problem was the costs of operating. who owned the high-traffic malls and properties helped Carrefour to get perfect location. Fridays and Saturdays constituted the weekend in the UAE and Carrefour required to adapt to local customs to conduct daily business.Foreign Direct Investment in UAE.A. Syria and Egypt. and this potentially allowed Carrefour to expand to other countries like Qatar. Local partner should ensure that the local municipal lab has access to product samples to test that the products being sold meet their standards.The local partner should accept the burden of clearing complex import statutes and regulations such as product licensing. It stated that at the time of entrance all food products imported into the UAE must have half or more of its shelf life remaining. MAF had operations throughout the entire Middle East. It developed a first mover advantage and thoroughly adapted to the local cultures. (SIS International Research) 12 | P a g e . MAF had experience in venturing with foreign retailers. Major problems faced by Carrefour include the difficulty in finding a suitable local partner . K. This limited direct competition. Regulation passed by the Gulf Cooperation Council acted as barrier to entry. This prevented other large hypermarket chains from entering the same malls. Some minor problems faced by Carrefour include the weekends in UAE. Lastly. Carrefour would have to endure high costs of rent and listing fees. Choosing to open large hypermarkets rather than smaller supermarkets in a prime location. Kuwait. under the same partnership. Secondly.Carrefour BENEFITS & PROBLEMS FACED BY CARREFOUR IN UAE By partnering with MAF. Oman.

The World Bank and the International Finance Corporation. (2009). Available: http://www.cfm.eia.ameinfo.Carrefour References BBC. 13 | P a g e . HOT FRANCHISE MARKETS .org/media/press-releases/15-Jan-2009.com. Franchise. Last accessed 16th Nov 2010. Last accessed 15th Nov 2010. UAE.stm#leaders.com/franchise-news/International_UAE_Dubai. FDI in UAE to hit $108bn in 2011. Country Energy Profiles.uaeembassy. 2009. Available: https://www. Jafza plays a key role in drawing multinationals to the country .bbc.Foreign Direct Investment in UAE. UAE continues to attract foreign direct investment.cfm. Last accessed 15th Nov 2010.cia.com/156015. US Energy Information Administration. Jeff Florian.co. (2009). DC: Central Intelligence Agency. (2005). (2010). Available: http://news.pdf. UAE Embassy. (2008). The United Arab Emirates and the United States Sign Bilateral Agreement for Peaceful Nuclear Energy Cooperation. Last accessed 17th Nov 2010. The World Factbook 2009. Available: http://www.com/238046.ameinfo.franchise.marketintelligences.org/~/media/fpdkm/doing%20business/documents/profiles/coun try/db11/are.html. Last accessed 11th Nov 2010.gov/country/index. (2008). Last accessed 19th Nov 2010. Last accessed 19th Nov 2010 SIS International Research. Available: http://www. Analysis of Carrefour's Dubai Market Entry .html. Last accessed 18th November 2010. Available: http://www. Available: http://www. Available: http://www.com/middle-east-journal/2009/2/2/analysis-of-carrefoursdubai-market-entry.html#.html.doingbusiness. Last accessed 13th Nov 2010.DUBAI.uk/2/hi/middle_east/country_profiles/737620. United Arab Emirates country profile.doe. Washington. (2010). Husam Odiabat. Doing Business 2011United Arab Emirates. Available: http://www. (2010).gov/library/publications/the-world-factbook/geos/ae.

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