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Chapter 1 Foreign Direct Investment
Chapter 1 Foreign Direct Investment
Discuss how laws and regulations regarding foreign direct investment (FDI)
have changed over the years.
Some of the changes were just bills, while others were only part of the national
vision or strategic documents. Significant progress has been made in these efforts
to liberalize foreign investment in recent years.
Since 2013, the UAE has been a leading destination for foreign direct investment.
However, things changed in 2017 and 2018: the Emirates attracted more foreign
direct investment each year than all of their other Gulf neighbors combined.
The UAE resident program can increase foreign direct investment by 10-15%.
These changes to the residency program became a reality in early 2019 and provide
additional reasons for current expats and foreigners to invest in the country and
provide direct routes to obtain a residence visa without the need for a local
sponsor:
There is now a 10-year visa for those investing AED 10 million in a new or
existing company or AED 10 million in a UAE fund. The visa can also be used to
sponsor the investor's spouse, children, advisor and CEO.
10-year visa for people with special talents such as accredited or awarded
scientists, artists, patent holders or world renowned leaders in their fields.
5-year visa for real estate investors over AED 5 million, entrepreneurs investing
AED 500,000 or more, and outstanding students.
Another set of reforms aims to open up more sectors to 100% foreign ownership.
The UAE has created the basis for weakening 51% of the Emirates with its Foreign
Direct Investment Law (No. 19 of 2018). In July 2019, the Cabinet of Ministers
announced a decision to allow up to 100% foreign ownership in 122 types of
economic activities in 13 sectors. The activation of this “positive list” of sectors
depends on how the individual Emirates decide to liberalize these sectors. We are
already seeing movement in this direction in Dubai when food manufacturer Mars
increased its stake in its Dubai LLC from 49% to 100%.
At the local level, Abu Dhabi has also allowed foreigners to own private land and
real estate in investment zones5. This departure from previously authorized leases
is intended to increase legal certainty and stimulate additional investment.
Saudi Arabia
As part of the Kingdom's efforts to cement its inclusion in the MSCI Emerging
Markets Index, the Capital Markets Authority announced in June 2019 a 49%
weakening of strategic foreign ownership in publicly traded companies. “Strategic”
ownership is intended to facilitate long-term investment in Saudi companies, in
which a foreign investor cannot dispose of his shares for at least 2 years and the
shareholder must participate in “promoting the financial or operating results of the
company”. "
Saudi Arabia has also joined the UAE in reforming some of its residency laws. The
new Premium Resident, announced in June 2019, allows foreigners to apply online
for either a Swiss Rings 800,000 Unlimited Residence Visa or a Swiss Rings
100,000 One Year Extended Visa. The program allows visa holders to buy real
estate, sponsor families, change jobs, and hire cleaners. The program aims to raise
$ 10 billion a year, which is a high target for the payout scheme.
2. What are some of the major factors companies consider when investing in
the countries discussed in the case? Do these companies consider one set of
factors more important than others? Why?
What to consider if invest in the United Arab Emirates
Strong Points
Strengths of the country in the field of foreign direct investment:
• No direct taxation of corporations (other than the oil, banking and insurance
sectors) or individuals.
• No foreign exchange controls or restrictions on repatriation of funds.
• High-quality business climate
• Long-term political stability
• Dynamic and diversified economy
• Very rich hydrocarbon resources
• A strong and profitable banking sector with a strong sovereign wealth fund
and favorable standards for foreign investment.
• Geographical location of the country, which makes it a potential platform for
influence in the Persian Gulf, Iran, Asia and the Middle East.
• Inexpensive foreign labor.
• Good transport and production infrastructure (financed from hydrocarbon
revenues)
• Access to affordable energyWeak Points
Some of the disadvantages of FDI include:
• Strong dependence on hydrocarbons
• dependence on imports of consignments of industrial goods
• Lack of flexibility in monetary policy.
• Inconsistency of the national statistical system.
• Degradation of the regional geopolitical environment.
• Legal barriers to foreign investment.What to consider if investing in Saudi
Arabia
• Strong Points
Since Saudi Arabia became a member of the WTO in 2005, the climate for foreign
investment in the Kingdom has improved significantly. From the investor's point of
view, the strengths of the country are:
• Economic stability
• The world's largest oil reserves, an important position in OPEC.
• Large local market with high paying capacity (and population over 35
million people)
• Strategy for Economic Diversification (with Saudi Vision 2030)
• Reliable infrastructure
• Consolidated finance
• Well-regulated banking system.Weak Points
While the country is undergoing reforms to encourage foreign investment, some of
the legal framework for resolving commercial disputes is considered by some to be
inadequate. There is a lack of transparency in the enforcement of intellectual
property laws, and the government is imposing quotas for Saudi workers in
companies. There have been reports of late payments on some government
contracts. A traditionally conservative cultural environment, including forced
gender segregation in most businesses and social media, may alienate some
investors who are not used to such practices.
Other disadvantages:
• High dependence on the hydrocarbon sector.
• High unemployment among indigenous people and underemployment of
women.
• The economy depends on government spending
• Weak political governance
• Weak economic transparency
• Deterioration of the geopolitical situation in the region.
In my opinion, when companies conduct such an analysis, all these factors are
equally important. Because without one, many problems begin to appear for the
other, in a word, they are interrelated, and they are all very important.
3. What are some of the major challenges facing multinationals as they invest
in countries such as Dubai or Saudi Arabia?
1. Human Resources
Human resources are always complex, but in Saudi Arabia this is a different level
of problem. Saudi Arabia is a program that was introduced to attract more Saudis
to the workforce. Simply put, Saudi Arabia means that in various business sectors
or departments, the minimum percentage of employees in that department must be
Saudis. In some industries, 100% of the workers must be Saudis. Difficulties faced
by companies in finding, training and retaining Saudi talent. Certain positions,
such as personnel management or government relations, must be performed
exclusively by Saudi Arabians. In some cases, this goes even further, requiring
Saudi women to work. For example, Saudi women are required to be cosmetics
sales consultants or lingerie sales partners.
2. Arabization
3. Geography
Saudi Arabia is vast and is often referred to as the size of Western Europe. Most
companies divide the country into regions. For most businesses, you will need a
presence in all of these regions. This means you will need up to 3. You will need 3
sales structures, HR, accounting and more. If staffing and managing one office is a
difficult task, imagine 3 or 4 offices. Further coverage of Saudi Arabia from a
neighboring country will not suit most companies. You cannot beat the local
presence and experience. Another problem, which is also a consequence of the
country's large size, is logistics.
4. Legal
Saudi Arabia's legal system is based on Sharia (Islam) law. This is a unique
phenomenon in the region and should be taken into account. Commercial law is
vast and you need to know the system for it to work. Almost everything legal is
done by the Saudis and Arabs. This includes things like rent and employment
contracts.
5. Finance
The banking sector in Saudi Arabia is global, but not every company has a global
treasury or accounting department. Cash flow is often a problem. One is to get
sales and the other is to pay.
3) Application of VAT
The UAE adheres to the value added tax (VAT) system introduced by the Gulf
Cooperation Council in January 2018. VAT is an indirect tax that applies to all
goods and services with the exception of basic food, education, and health care.
The tax rate is 5%, which also simplifies the taxation of businesses. However, one
of the biggest challenges when doing business in the UAE is getting used to VAT.
In addition, companies that fail to comply with the tax system or delay
registrations can face significant fines.
There are several reasons why an organization does not want to leave the joint
venture, it all starts with regulation. Although my industry has changed,
regulations often prevented companies from completely owning themselves in the
Middle East and North Africa. They also entered into service contracts and most of
the profits went wrong and they often ended up in the hands of foreign investors.
When this happens, foreign countries are not in the game, but they benefit from the
success of your business. The investigation revealed that many respondents
identified many problems and feared to establish a joint venture in the Middle East
and North Africa. In many cases, joint ventures will have to share some of the
risks. However, in the eyes of investors, there are concerns about regulatory
requirements and other mitigating factors listed in the table below.
Strategic Considerations: The most important general factor that every company
should think about when seeking to invest in every country.
Location: Market size, population, customer base size, potential future location.
Aspects of the rules: constantly changing environment, unknown future problems,
political changes.
Quality of life: good school, social life, safety
Physical Infrastructure: Do you need communication, is there room for growth or
room for business?
Total cost: An important factor, but most companies said it was not a major
decision.
Political risk: Factor risk assessment should be carried out through the licensee and
not in a 100% subsidiary.
Transport factors: its location, how easy it is to travel, and how easy it is to fly
from other countries instead.
Ownership: licensing and joint ventures or 100% of the company.