The Arab world

Because of its rapidly rising economies, the Arab world has drawn more attention from the rest of the world. The discovery and exploitation of petroleum in the mid-twentieth century fueled the Arab world's initial boom. The United Arab Emirates has been reliant on petroleum for nearly a century. Petroleum prices began to become volatile in the 1970s, portending doom for countries that relied solely on oil. Many Arab nations began diversifying their economies by establishing strong manufacturing and service sectors. In addition, foreign investors saw the developed economies as a markets for demands and wanted to utilize other factors within them for interests on their loans. Dubai is one key city in the Arab world and the UAE that has experienced tremendous growth in the past few decades. Both local and foreign investors are taking advantage of the improved economic conditions and local and international linkages to invest. In 2016 alone, Dubai attracted over $ 25 billion as foreign direct investments. Development of the service sector is a key factor behind Dubai’s FDI growth. The sector has attracted foreign direct investments from all parts of the world. This paper will examine various key factors that have driven foreign direct investments in the city. It is important to note that these factors are tied to both local and international trends and conditions in the business world.

One of the key factors behind the growth of Dubai has been the need for diversification. Countries in Arab world have been adversely affected by the plunges in oil prices in the recent past. These countries chiefly rely on oil while other economic sectors are poorly developed (Holtbrügge and Heidi 8). On the other hand, some of the most developed countries such as the US and Germany have had diversified economies for a long time. Germany, for instance, was able to experience growth despite the great 2007-2008 recession that left many countries’’ economies unstable. The United Arab Emirates, just like the rest of the countries in the GCC, has been keen to diversify its economy (Deloitte, 2016).

Dubai’s oil reserves are limited unlike those of UAE’s capital, Abu Dhabi. During the great financial recession of 2007-2008, oil prices went down. The prices of a barrel of crude oil in the new millennium had been very low ($25). These prices started rising and they seemed relatively stable by 2005. By this year, oil prices had hit $60 per barrel. The prices continued rising and peaked at 147 towards the middle of 2008. After this rise, they fell rapidly and had hit $32 before the end of November 2008. The crisis heavily affected Dubai. The city had to bailed out by Abu Dhabi. Despite the grave effects on the economy of the city, the volatile oil prices and the financial crisis served as a key lesson to Dubai and the UAE government in general. It became necessary that the economy of UAE, especially Dubai, be diversified. The government started focusing on creating an enabling environment for both local and foreign investors in Dubai. The service sector was of major interest in these initiatives.

The local economy has developed growth and resilience in order to create new opportunities for new investors. The government and other key stakeholders have been coming up with proposals on various strategic projects that have formed the basis of new investment initiatives and FDI inflows. The government and major stakeholders have implemented policies and strategies aimed at improving economic and political stability, infrastructure and access to technology (Shirazi et al. n.p). This has seen growth in productivity and competitiveness. Individuals who choose to invest in Dubai are supported by the government to ensure that they also take advantage of globalization and regional integration of the UAE to expand their business prospects (Moran 2).

The initial growth of Dubai in the 20th century was due to its proximity to Iran, which was a major trading centre. The city established itself as a port and acted as a pearl export and import centre for traders across the continent. This was even before the discovery of oil that came later in 1966 (Shirazi et al. n.p). The establishment of the city as the link with the outside world played a key role in showcasing its potential to foreign investors. Many people were eager to learn about the potential of the city. At this time, there were no resources and infrastructure to support massive developments.

Prior to the 1960s, Dubai’s main significance was tied to the port. The major infrastructural facilities in the city were meant to support the movement of goods in and out of the mainland UAE, Iran and other nations within the middle east. The city discovered its oil in 1966. In 1969, oil revenue started coming in. The administrators later realised that the oil deposits in the town were not as much as those of the others in the Middle East. The city had to plan on how to mitigate on the potential problems that would come up in the future. Therefore, oil revenue had to be utilized for preparing the city for other industries.

The realization that oil revenue was limited made authorities come up with infrastructure that has been key in attracting and supporting the inflow of FDI into Dubai. The city authorities developed roads, medical facilities, business centres, ports and educational institutes. The major aim of these developments was the need to diversify the economy and reduce reliance on oil (Davidson 3). The forecast by these authorities was accurate. In addition, their efforts to diversify the economy have borne fruit. The contribution of oil towards Dubai’s revenue has declined from 25% of its annual GDP in the 1990s to less than 5%, especially with the volatile global oil prices.

Dubai has maintained its growth higher than that of the rest of UAE. For the Year 2016, Dubai registered a growth of 6.1% in GDP compared to the 4.4% for the rest of the country (Dubai Statistics Centre n.p). This consistent growth has acted as a key factor that attracts the inflow of FDI into the city. The official figures quoted by research groups, government agencies and international monetary bodies have been utilized to project a robust growth for the city in the nearby future. Foreign investors want to be part of this growth. They also want to avoid being locked out of the robust growth in future. For instance, the price of landed property in Dubai has increased tremendously since the advent of the new millennium. Deloitte (2016) notes that the average price of both residential and business premises has been growing by approximately 9.5% each year since 1998. Malls and offices are coming up at almost the same rate as the demand. The fear by investors that they may be locked out of this growth with time has acted as a motivator for them to bring in capital and identify the most appropriate industry for investment.

Aviation and water transport sectors have played a major role in the inflow of FDI into Dubai. Businesses are tending towards strategic decisions aimed at utilizing the global market. They therefore look for opportunities in places that have contact with the rest of the world. Dubai has given much attention to ports and aviation. Emirates Airline that is run by the state has remained competitive and has been able to expand its operations beyond the continent (Shirazi et al. n.p). Unlike other state-run airlines, the company does not rely on protectionism but instead strategizes on how to compete with public entities on a fair ground. The government has also opened up the city to other airlines. Over 85 global airlines link the city to various parts of the world. Unlike regions such as the US, the city allows direct flights from many locations that are blacklisted in Europe, Africa and the Eastern world. Therefore, it acts as a connecter of all these regions. The city has direct links to about 150 destinations scattered across the world through the 85 global airlines. The city’s port plays host to more than 100 shipping lines. This means that all forms of cargo, including bulky ones can easily leave and access the city.

Dubai has been politically stable for a very long time. Unlike other cities in the middle east, it has remained committed to maintaining this political, social and economic stability. Both the government and the people of Dubai have shown a pro-business attitude. Policies have been made to ensure that the city remains business-friendly (Holtbrügge and Heidi 8). These policies are meant to ensure that the interests of investors, both foreign and local, are balanced with those of the government and the local people in regard to investment, employment provision and revenue. Dubai has tended towards a liberal economy that promotes the creativity of the investors. If one identifies a gap in the business sector or the market, they can easily convince other stakeholders to offer their support towards sealing the gap through investment. Regulations in place are only meant to ensure that a fair playing ground is established and the interests of all stakeholders are well-catered for. HSBC (n.p) notes that Dubai has one of the most resilient economies in the Middle East. The city has established a strong private sector economy whose purchasing manager’s index data in the past has shown stability in the ability of investors and households to spend.

There are also external factors that have made Dubai the centre of attraction when it comes to investment. One of them is unrest in the region. Despite the vast natural resource endowments, the Arab world has been embroiled in conflict for some decades now. Iraq has had a long period of instability since the ouster of Saddam Hussein. Iran has faced various sanctions from international bodies and powerful nations due to various political issues. The Gulf War and the Shia Uprising has scared international investors from UAE’s neighbours. Despite the instability, it is evident that the region has experienced tremendous growth and has great economic potential. In order to be part of this growth, many foreign investors from other parts of the world have to find a conducive location to invest within this region. Dubai has always been the best alternative for these individuals. Therefore, the unrest in countries like Yemen, Iran, Kuwait, Bahrain, Oman and Iraq has had an indirect positive effect on Dubai’s growth by drawing the attention of the rest of the world to the city.

The service sector has a high demand for highly skilled professions. This means that an economy must develop the capacity to attract this human capital and/or develop its own. Dubai has experienced robust growth in its human resource, both in terms of capabilities and diversity. The initial growth experienced by the city as a port when Iran was the major economy in the region attracted many high-skilled workers to Dubai. After the discovery of oil and improvement of infrastructure and social amenities, the city developed capabilities to develop its own semi-skilled and skilled labour (Davidson 2). Money drawn from oil was invested in the education sector. Currently, the city has a diversified human capital and continues to develop more. Dubai has also relaxed its rules on immigration and highly-skilled individuals have little barriers to joining the city’s workforce. The city has enough human capital to meet demand in major service sectors such as finance, business and logistics. According to HSBC (n.p), Dubai has continued to attract expatriate workers despite the global economic downturns. The manufacturing sector has also enjoyed this development since it has enough human capital to meet its labor needs. Foreign direct investment can only be channelled to places where there is enough support to generate profits for the investors. Labor is a key factor and the fact that Dubai can supply this resource has made investors more willing to channel their capital to the city.

The real estate market in Dubai has been experiencing a boom alongside other sectors in the manufacturing and service categories. Due to this growth and stability, many investors have been able to convince financiers into funding major real estate projects in Dubai. According to HSBC (n.p), one of the key global financiers of the real estate industry, UAE is one of the economies that have shown resilience even during major turndowns. Such reports have boosted the confidence that the general population and foreign investors have in Dubai. The city experienced the global bust in the real estate sector during the 2003-2008 period. Despite being affected by the great recession; Dubai was able to recover fast with the help of the authorities.

Foreign direct investment is usually directed to economies that have established ways of mitigating against risks posed by various factors. Dubai has diversified its partners, giving the world an impression of a resilient economy that is well protected against various risks (Holtbrügge and Heidi 8). The city has alienated itself from global differences and established links with even countries that are considered as political rivals. Some of Dubai’s key global trade partners include India, USA, China, Saudi Arabia, Iran and Switzerland. The diversification of this group has acted as a way of mitigating the risks associated with specific countries or regions. Trade between Dubai and most of these partners has been growing constantly even if that of one is affected.

References

Davidson, Christopher M. Dubai: The vulnerability of success. New York: Columbia University Press, 2008.

Deloitte. Middle East Real Estate Predictions: Dubai 2016. Deloitte, 2016. Web. April 8, 2017.

Dubai Statistics Centre. Dubai in Figures 2016. Government of Dubai, Dubai Statistics Centre, 2016. Web. April 8, 2017.

Holtbrügge, Dirk, and Heidi Kreppel. "Determinants of outward foreign direct investment from BRIC countries: an explorative study." International Journal of Emerging Markets 7.1 (2012): 4-30.

HSBC. UAE shows resilience in a time of downturn. HSBC, 19 October 2016. Web. April 8, 2017.

Moran, Theodore H. "Foreign Direct Investment." The Wiley-Blackwell Encyclopedia of Globalization (2012).

Shirazi, Asima, Gwendolyn Rodrigues, and Ajit Karnik. "Determinants of Foreign Direct Investment in MENA countries: an empirical analysis." (2008).