Effects of Globalization on UAE Economy


Introduction

            The UAE is well known everywhere for its rich cultural heritage which has been influenced by both the Arab and Islamic traditions. The Emirates are protecting this cultural heritage in various ways. For example, The Dubai Shopping Festival, which is usually anchored in cultural values that are local and traditional, is a way of protecting the heritage. Globalization may be described as the progressive expansion of social and economic ties through the spread of corporate institutions. It usually affects a country in the social areas, cultural areas and the economical areas. Globalization has affected the economy of UAE in various ways. This country has benefited from this since it paved way for improvements, which can now be witnessed all over the place. There has been a constant increase in foreign investments, domestic investments and there has also been a promotion of free trade between UAE and other countries. This paper will analyze the effects of globalization on the economy of UAE on both the micro and macro aspects of the economy, which is vital in enhancing the economic prosperity of the country.

Increase in Foreign Investments

One of the effects of globalization is the investment laws and regulations of the UAE, which are evolving, and within the time, they are expected to become even more conducive to foreign investment. In 2011, the net inflows of foreign direct investment in United Arab Emirates were, 7,679,000,000.00 (Sbia, Shahbaz & Hamdi 2014, p. 195). This was a great increase when compared to the value indicated for the year 1999, which was $938,340,000.00. Between 2011 and 2012, there was yet another high increase of approximately $2,000,000,000.00.

 

Year 2009 2010 2011 2012
UAE Foreign direct investments 4,002,700,000 5,500,000,000 7,679,000,000 9,602,000,000

 

Table 1 ; UAE Foreign direct investment, net inflows (BoP, current US$)

The main reason for such a high increase in the percentage of foreign investments of UAE is that the country is politically stable. The major factor, which investors consider before anything else, is political security. A country that is not yet politically stable will feature a number of risks to the business investments since violence may erupt at any time. UAE has a government, which preserves the working rights of all businesspersons in the country without interfering. If the country was not politically stable, there would be much interference during trade since the government would impose unnecessary taxes on the sales they make. A good example is what happened back in 2006; 170 licenses to branches belonging to foreign firms were issued. This amount is 20% more than what happened in 2005. The maximum number of licenses was issued to British companies, which was 24. German businesses received 13 licenses followed by British Virgin Islands, Indian and American companies, which got 11, 10 and 8 respectively (Bennet 2007, para.3)

All these have come to be because of globalization. Globalization makes it easier for other countries to know exactly what is going on in another country. Investors from other parts of the world came to learn about the economic virtues of UAE because of this. In this situation, the Emirate society does not benefit from the foreign investment since the revenue goes back to the foreign owners. However, the UAE economy has benefited from an increased capital stock due to the big number of investments made in the country. Capital Stock is also very important to the economy of UAE as it entitles the country to more equipment and structures, which enables it to produce more goods and services to feed to its economic growth. In this case, productivity will be promoted and hence both the economic growth as well as the living standards will be improved.

Franchising is a form of licensing of intellectual property rights. It is also seen as a form of marketing anddistribution in which the franchisor (brand owner) grants an individual or organization, the franchise, the right to do business in a prescribed mannerover a certain period and in a specified area or place. The franchisor licenses the franchisees to carry out business under the nameowned by or associated with the franchisor; control by the franchisor over theway in which the franchisee carries on the business; provision of assistance tothe franchisee by the franchisor in running the business; and the franchisee provides as well as risks capital in the venture.

The relationship is a contractual one in accordance with a business format established by the franchisor. Factors contributing to the success of franchise arrangements include the quality of the business format system; the brand name associated with it; and the level of economic activity and business environment in the country where the proposed franchise is to operate. Moreover, a recent review of a global marketing textbook seems to suggest that exports and franchising offer a risk-free alternative to the more appealing direct investment. Extending this to the context of higher education, the idea of foreign universities entering an international market by whatever name or means – whether home grown or established from the ground up by a local private entrepreneur or government indicates two distinct modes of entry. This can be evident in the invitation by Abu Dhabi extended to well-established university brands such as NYU, Paris Sorbonne and INSEAD. Nonetheless, there are, and have been, debates around the risk versus rewards/returns in entry mode choice, which leads to the challenges we highlight herein.

In UAE, conducting business as an investor will not be as complicated as the process is clear and straightforward. Although there have been debates about the mode of conducting business, the investors do not have to worry about extra taxes or other activities, which will eat into their revenue. This is because people who understandplanning for a future by saving what they have in the present govern this country.

Increase in Domestic Investments

Globalization has encouraged domestic investments in UAE through a number of ways. The country in itself is an important participant in the overall capital markets. This is possible since it has several institutions such as Abu Dhabi Investment Council, The Dubai Port, Abu Dhabi’s International Petroleum Investment Co. and Dubai Holding. Globalization led to effects, which entitled UAE to deal closely with developed countries such as the United States of America and the United Kingdom. This close relationship enabled this country to learn tips for success such as savings and investments are the shortest ways towards a faster growth rate. This is what has triggered the increase in UAE domestic investment.

An uninformed country would easily think that savings and investment only lead to limited resources, which should be used for the production of goods to benefit a country. Hence, if this strategy is pursued, the UAE economy is what will benefit at the expense of the citizens of the country. This is indeed not the case as is witnessed in the UAE economy. More savings and investments will only lead to an increase in the production of goods. However, this will be noted in the future and not with immediate effect. Therefore, this can be looked at from a different perspective as a trade-off between the present and the future consumption. Hence, in the near future, UAE will be enjoying these benefits in the form of higher living standards only if it invests and saves more today (Sbia, Shahbaz & Hamdi 2014, p. 194). For instance, “Abu Dhabi alone plans to invest over Dh555 billion in the coming five year; Dh320 billion will go to the construction sector, Dh 120 billion for development and expansion of the tourism sector, and Dh80 billion will be spent on expanding the oil and gas sector (Kunnanatt 2013, p. 148). The UAE economy has also invested greatly in hydrocarbon industries so as to use this revenues to create other income sources that will reduce their dependence on gas and oil.” (‘Country Intelligence: Report: United Arab Emirates’ 2013, p.4). Basing on these results, it is clear that investment is the best road to take toward a comfortable future although it consists of various effects in the present.

The UAE stock market has the capacity of growing by around 15-20 per cent while the short- to medium-term outlook is not quite satisfying. Real estate shares are recovering due to the sudden recovery in real estate market, particularly Dubai. Abu Dhabi realty sector still has room for growth in 2014. “The recovery in Abu Dhabi real estate market has not reached the same level as in Dubai, Emirates NBD, Emaar, Waha Capital, DIB and Dubai Investments performed fairly in 2013. The best performers on Dubai bourse for the year are Union Properties with 206.33 per cent, DIC with 187.56 per cent, Deyaar with 183.24, and DIB with 164.68 per cent and GGICO by 150.86 per cent.The bellwether Emaar rose 100.53 per cent year to date while Emirates NBD by 117 per cent.In Abu Dhabi, Waha Capital rose 296.36 per cent year to date, followed by GCIC by 237.50 per cent, ADSB by 215.38 per cent, Bildco by 184.21 per cent and RAK Ceramics by 180.73 per cent.Aldar rose 113.39 per cent year to date while ADCB by 111.76 per cent.” (‘Country Intelligence: Report: United Arab Emirates’ 2013, p. 11).

A study carried out by Dubai Chamber of Commerce and Industry indicates that the country’s strong economic growth goes hand in hand with growth in value of stocks, which were traded on UAE stock exchanges. This is because the stock value traded on the Dubai Financial Market (DFM) in the year 2000 was approximately Dh437 million while, in the first three quarters of 2013, it increased drastically to Dh107.863 billion (‘Country Intelligence: Report: United Arab Emirates’ 2013, p. 11). In the short and medium terms, the important reasons for this increase in DFM index value include the improved investor expectations about future earnings of the company invested in and increased equity indices of major economies. It has been forcasted that the capital appreciations of stocks registered in 2014 will simply be the reflection of the better spending adapted and the economic growth of the country, which will also provide benefits to shareholders in terms of returns. The next few months of 2014 are expected to be very strong as investments and savings made in the past will eventually start to yield fruits. Banking shares will be at the top in benefiting followed by shares from construction and real estate.

Promotion of Free Trade

Globalization is the key to the promotion of free trade between the UAE and other countries. This free trade has greatly benefited this country because it is the door to the importation of goods at a lower cost as compared to producing them expensively domestically. In fact, this action may be viewed as a way of hurting domestic producers since it lowers the demand on their own goods. Consequently, it will lead to an increase in the number of jobless individuals so as to gain a balance for that reduced demand. Therefore, the rate of unemployment within the country will increase. This is not healthy for the economic development of the country since it will lead to a decreased spending among the citizens.

Fortunately, the act of importing some goods has also resulted in the creation of more working opportunities in other UAE industries. The economy is rather focused on the production of goods which will bring in more profits once traded. These include goods such as oil, gas, and petrochemicals. The UAE economy can only produce on its production possibilities frontier (PPF). This is basically the combination of outputs that the UAE can produce at a fixed technology and resources level, while still benefiting from a consumption beyond its PPF (Kunnanatt 2013, p. 148).Therefore, the employees who have been laid-off can easily be employed to other new firms that will need workers to function. In addition to that, it makes more sense for the country to buy goods at a lower cost than produce them at expensive costs domestically. This has helped the government to save some money and use it for other important issues such as in improving infrastructure, protecting the environment, helping the poor and increasing employee wages (Madichie & Kolo 2013, p. 85). As a matter of fact, the UAE has dealt with the implementation of this concept of free trade in a very reasonable manner as it does not feature the imposition of tax on exported goods. It only charges five percent tariff on imported goods, and as if that is not enough, it has also signed several free trade agreements and embarked on negotiations either individually or through the GCC (‘Country Intelligence: Report: United Arab Emirates’ 2013, p.5). Therefore, if the UAE is assured of such a constant trading rate, it will not be in dire need to trade with more countries in the future since the current situation has already begun to produce many goods at a lower cost than was the case before.

Conclusion

Judging from these data from previous records, globalization has had a positive influence on the economy of UAE. This is mainly because it has increased the percentage of total foreign investments, has encouraged the level of domestic investments, and has also promoted free trade between United Arabs Emirates and other countries. According to the 2013 report, the UAE improved economic performance during the year paved way for a GDP growth rate of 26.3 percent at current prices while real GDP growth is approximated to be at 8.2 percent (‘Country Intelligence: Report: United Arab Emirates’ 2013, p.7). Other than that, it is also essential to recognize that globalization has also played a great role in improving other sectors of the UAE such as infrastructure, media, education, and social relations. To sum it all up, globalization has turned UAE into a more developed country when compared to many others. If the country sticks to the economic strategies it has adapted, it will only take a short time for it to secure a prominent position in the competitive world. 

Bibliography

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‘Country Intelligence: Report: United Arab Emirates’ 2013, United Arab Emirates Country Monitor, pp. 1-18, Business Source Complete, EBSCOhost, viewed 2 February 2014.

Kunnanatt, J 2013, ‘Doing Business In The United Arab Emirates – The Strategic Business Environment’, Journal Of The Academy Of Business & Economics, 13, 4, pp. 145-152, Business Source Complete, EBSCOhost, viewed 2 February 2014.

Madichie, N, & Kolo, J 2013, ‘An exploratory enquiry into the internationalisation of higher education in the United Arab Emirates’, Marketing Review, 13, 1, pp. 83-99, Business Source Complete, EBSCOhost, viewed 2 February 2014.

Sbia, R, Shahbaz, M, & Hamdi, H 2014, ‘A contribution of foreign direct investment, clean energy, trade openness, carbon emissions and economic growth to energy demand in UAE’, Economic Modelling, 36, pp. 191-197, Business Source Complete, EBSCOhost, viewed 2 February 2014.

 

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