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Chapter 47

United Arab Emirates

Dr Mervyn J Morris

[Link]@[Link]

Introduction to the United Arab Emirates

The United Arab Emirates (UAE) is part of the geographic region known as the

Middle East. With a land mass of 82,000 square kilometres, predominantly desert

and mountains it is bordered by Oman, Saudi Arabia and the Arabian Gulf. 1 The UAE

is strategically located due to its proximity to other oil rich Middle Eastern countries

such as Kuwait, Iraq, Iran, and Saudi Arabia. The UAE was formed from a federation

of seven emirates2 (Abu Dhabi, Dubai, Sharjah, Ras Al Khaimah, Ajman, Fujuriah,

and Um Al Quain) in December 1971 (Ras Al Khaimah did not join the federation until

1972) (Heard-bey, 2004, 370). Abu Dhabi is the political capital, and the richest

emirate; while Dubai is the commercial centre. The majority of the population of the

various Emirates live along the coast line as sources of fresh water often heavily

influenced the site of different settlements. Unlike some near neighbours (Iran and

Iraq) the UAE has not undergone any significant political instability since it was

formed in 1971. Due to this early British influences the UAE has had very strong

political and economic ties with first Britain, and, more recently, the United States of

America (Rugh, 2007). Until the economic production of oil in the early 1960’s the

different Emirates had survived on a mixture of primary industry (dates), farming

(goats and camels), pearling and subsidies from Britain (Davidson 2005, 3; Hvit,

2007, 565) Along with near neighbours Kuwait, Bahrain, Oman, Qatar and Saudi
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Arabia, the UAE is part of the Gulf Cooperation Council (GCC), a trading bloc.

(Hellyer, 2001, 166-168).

While the country is a Federation, and the Federal government has control of

such issues as national issues as defence, foreign policy, immigration, labour and

social affairs, education, health, a great deal of power remains with the governments

of each emirate (United Arab Emirates Yearbook, 2007, 39). Each Emirate enacts its

own regulations in relation to business issues. At each Emirate level the ruler of the

Emirate (either the Sheik or the Crown Prince) oversees a variety of Emirate specific

government bodies with significant autonomy from the Federal level. (Davidson,

2005, 188-200) The country is a moderate, and probably the most liberal, Islamic

country in the Middle East (Davidson, 2007). The country has never been subjected

to any terrorist or terrorist related attacks, although some members of 9/11 group

came from one of the northern emirates (Davidson 2007, 83). Until the commercial

production of oil in the early 1960’s economic and social development was sporadic.

The oil price hikes of the 1970’s added further impetus to the overall

development of the country. Oil prices in 1973 increased from US$5 per barrel to

US$41 per barrel, then dropped back to US$32 in 1978 before it rose to US$67 per

barrel. The final price increase was in 1982, to US$68 per barrel. Prices fell rapidly

until it reached US$20 per barrel in 1986, and prices have fluctuated ever since

(WTRG Economics, 2006)3 With the increasing revenue being gained from oil

production, the Federation was transformed, and continues to be transformed, albeit

somewhat unevenly between the different Emirates. However, the dependence upon
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oil revenues has been lessened, particularly in Dubai where oil revenues have been

replaced with a variety of other commercial activities concentrating on non oil

manufacturing and service sectors.

More recently economic growth in the UAE has seen real GDP growth rates of

11.8 percent in 2003 and 7.4 percent in 2004, with a GDP per capita of $US25,000

(UAE Yearbook, 2007, 79)4. GDP has been projected to continue growing, with an

estimated growth rate of 9.7 per cent for 2006; and projected growth rates of 8 per

cent and 6.9 per cent for 2007 and 2008 respectively (Gulf News, 7/8/07). While

much of this growth can be attributed to rising oil prices the governments of Abu

Dhabi and Dubai have been working to lessen the reliance on oil revenues (UAE

Yearbook 2007, 79) although each emirate has been pursuing differing strategies

(Davidson, 2007). Currently, oil revenues consist of 36 percent of GDP (UAE

Yearbook, 2007, 71), with by far the greatest proportion going to the Federal

Government in Abu Dhabi.

The UAE economy has been ‘inspected’ by international economic institutions

on a regular basis, generally receiving good reports on economic developments. For

example the International Monetary Fund (IMF) found that ‘economic growth has

been impressive…’(2006, 1) and has resulted in the UAE being ranked 32 out of 125

world economies, making it the highest among the Gulf Cooperation Council (Khaleeji

Times, 27/9/06). The government of the UAE has concentrated on a number of other

key economic areas – aviation, port facilities, tourism, finance and

telecommunications (Al Abed et al, 2006, 37). The IMF, during visits in 2005 and
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2006, were overall satisfied with the directions and development of the UAE

economy. A number of areas were of concern to the IMF (reducing the size of the

public sector, tightening up financial regulations for stock exchanges and banks) but

generally there were no major economic problems highlighted. The accelerated rate

of economic growth has placed significant pressure on the supply of human

resources needed to meet the expansionary demands of the public and private

sectors.

Historically the UAE has not had a labour force in sufficient numbers, or with

the necessary skills, to meet the needs of the public and private sectors. The UAE

solved these shortages by using imported labour (expatriate labour). As recently as

1968 when the total population was estimated at 180,226; of this figure 68,485 were

expatriates5. By 1975, after the first significant oil price rises, when the first census

was carried out, this total had increased to 558,000, of which nationals represented

202,000 and expatriates 356,000 (Davidson, 2005, 145; Human Resources Report,

2005, 9). As the UAE economy has grown so to has the demand for labour

increased. These circumstances of economic development and labour shortages

combined to lead to expatriate labour becoming a key component of the overall

economic development of the UAE. As the most recent census reveals, the total

population of the UAE is 3.8 million; of this number 824,921 (20 percent) are

nationals, with the balance being made up of expatriates from a variety of developed

and developing countries (Ministry of Economy, 2006). While the UAE has always

used a certain number of expatriates to bolster their workforce the current social and

economic dependence on expatriates has become very significant. Expatriates now

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dominate many areas of the economy of the UAE and can be found in managerial,

professional, technical and unskilled positions. The Federal government has had to

attempt to balance the needs of the national workforce, with the needs of the

employers. One way the government does this is through controlling the issuing of

work visas.6 While at the same time controlling the supply of expatriate labour, the

government has introduced a policy of Emiratisation in an attempt to stimulate the

demand for national labour. A number of areas have been targeted by the Federal

Government (financial services sector and trade); through the use of limited quotas;

or reserving specific occupations for nationals – for example, public relations officers;

human resource managers, and some secretarial positions. These attempts at

increasing the numbers of nationals in the private sector workforce have had a limited

degree of success but nationals seem to still display overwhelming preference for

work in the public sector (88 percent, 2007 UAE Yearbook, 217). While there are

significant numbers of jobs created every year, paradoxically there are Emirati who

are unable to find employment. The most recent data for Emirati unemployment is 15

per cent (Hanouz and Yousef, 2007, 34). Despite the best efforts of the Federal

Government and its attempts to Emiratise7 the workforce, success has been limited.

One of the reasons attributed for this by Davidson (2005) and Preiss (2007) has been

an oil dependency culture which has meant Emirati males do not necessarily have to

work.

Prior to the discovery of oil and commercial exploitation in 1960’s the country

was basically a subsistence economy. Although oil exploration was first started in

1930s it was not until 1963 that oil began to be exploited in commercial quantities
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(UAE Yearbook, 2007, 16). With the initial oil revenues, economic progress was

steady rather than spectacular, and very uneven throughout the emirates. With the

oil price hikes of the 1970’s, the rulers of Dubai and Abu Dhabi had access to

significant sources of revenue to undertake more rapid social and economic

development. Fortunately for the remaining members of the Federation, the

significant oil price rises took place after Federation in 1971 and instead of oil

revenues being ‘hoarded’ by Abu Dhabi, the riches were shared with the other

Emirates, either by direct subsidy or used for the funding of local projects. It is

currently estimated that the UAE has 9.6 percent of the world’s total oil reserves; this

ranks the UAE with the fifth largest reserves in size in the world (UAE Yearbook,

2007, 117). While the figures refer to the UAE, the oil reserves are actually in, and

controlled, by the emirate of Abu Dhabi.

Government Policy on SMEs and Entrepreneurship in the United Arab Emirates

“Economic development is considered one of the most urgent priorities and goals for

the United Arab Emirates” (Ministry of Economy, 2006, 3). In pursuing these goals,

Government policy has had to balance the need for economic development with the

need for ensuring such development does not disadvantage the national population.

The Governments at both the Federal and Emirates levels have attempted to strike

this balance by using two strategies. First, the Federal Companies Law requires that

any business (irrespective of the nature of the business) be 51 per cent owned by a

local (Federal Companies Law, Article 22)8. While there is little solid evidence, strong

anecdotal evidence would suggest that the national owners often simply collect a ‘fee’

from the manager of the business and have no involvement whatsoever in the
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running of the business. The second strategy is possible as the Federal Companies

Law (Article 2) does not apply to Free Trade Zones (FTZ) set up in and by the

individual Emirates. This Federal legislative provision allows the Emirates

governments to circumvent the ownership issue by designating Trade Free Zones

within the Emirate which then allows the establishment and development of one

hundred percent foreign ownership companies. In 2007 there was approximately 36

FTZ and Special Economic Zones already in operation or planned (World Economic

Forum Report, 2007, 200). Of all the Emirates, Dubai especially has made significant

use of this facility, establishing its first free trade zone in 1975, the Port of Jebel Ali

(Davidson, 2007, 39). One of the consequences of this approach is that many of the

more dynamic entrepreneurial businesses tend to be found in the Free Trade Zones,

while the majority of very small businesses (less than ten employees) and the

different types of service industries, can be found outside the Zones 9.

Taken together, the Federal government, and the governments of the various

Emirates tend to not differentiate between SMEs and multinationals. While there are

some concessions available to SMEs established by nationals, generally all

businesses, irrespective of size, face a level playing field. One policy which has

demonstrated a clear measure of support for the establishment of entrepreneurial

activities is the willingness of the governments of the different Emirates to assist the

development and establishment of business activities. At the current point in time,

there are no Federal corporate or income taxes and no sales taxes (Ministry of

Economy, 2006, 3). Companies established in FTZs are free to repatriate capital and

profits, and there are no currency restrictions (UAE Yearbook, 2007, 77). The only
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Federal law which imposes taxes on businesses is a 5 percent import duty. This

does not mean there is a laissez faire approach to businesses in the UAE. There are

provisions and regulations enacted by the different emirates which restrict the

behaviour of businesses which, according to Preiss, (2007, 69) have not been

supportive of entrepreneurial activity. Governments at all levels are taking steps to

reduce the regulations and time taken to establish a business in the UAE.

There is no federal government policy in relation to assistance schemes for

entrepreneurs and small business enterprises generally. Rather there is a smattering

of assistance schemes at the Emirates level designed to assist nationals in

establishing and developing their own businesses.

Overall there is no unified federal government policy in relation to

entrepreneurs and small business enterprises. There are regulations that govern

what businesses can do at both a Federal and emirate level. The major policy of the

UAE governments at all levels has been to actively encourage the establishment and

development of most kinds of businesses. The individual emirates will enact their

policies in different ways. Any decisions in this regard are left to the governments of

individual emirates (UAE Yearbook, 2007, 92)

The economic and socio-cultural environment for entrepreneurship and the

state of small business in the United Arab Emirates

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“The UAE Government is focused on creating an environment that is investor friendly,

limited in its bureaucracy, and fast in the processing of licences and other

requirements.” (UAE Ministry of Economy, 24/6/2007).

Hvidt (2007, 573) supports this general statement in relation to Dubai, arguing

that the “…strong pro-business environment upheld by the ruler…facilitates policy

formulation…in an atmosphere of consent between both parties [ie government and

business].”

If one were to examine the results of the 2006 Global Entrepreneurship

Monitor (GEM) (Bosma and Harding, 2007) one could come to the conclusion that the

environment within the UAE does not encourage the formation and development of

SME’s and an entrepreneurial culture within the country. The GEM survey indicates

that in terms of GDP per capita 2006, in Purchasing Price Parities (PPP), the early

stage entrepreneurial activity rate was around 4 per cent (Bosma and Harding, 2007,

13). In terms of rankings, this placed the UAE with the forth lowest level of early

stage entrepreneurial activity by country, with only Belgium, Japan, Sweden, and Italy

having lower rates. Wilson (2007, 200) agrees, pointing out that while the UAE has

“…very good public institutions, infrastructure, and technological readiness” there is a

distinct lack of innovation and entrepreneurship. That GDP growth rates seem to

indicate that there is a significant level of economic activity, but not within

entrepreneurial and small business sectors.

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As was demonstrated in the previous section, the overall environment is

certainly conducive to business in general. Infrastructure projects are constantly

being developed (e.g. every emirate has a port facility; all emirates have at least one

international airport (Dubai is currently building a second)); and with the absence of

any railways, road transport networks are extensive and well maintained. For

example, Abu Dhabi plans to invest over Dh555 billion in the coming five years in the

construction sector (Dh320 billion); development and expansion of tourism (Dh120

billion), power and water (Dh35 billion) and oil (Dh80 billion)(UAE Yearbook, 2007,

77).

Another aspect to the environment is that some of the most significant and

most prominent entrepreneurs are actually the governments of the Emirates (UAE

Yearbook, 2007, 41; Davidson, 2007, 41; and Hvidt, 2007, 571). Companies are

owned, either directly or indirectly by the governments of the different emirates (UAE

Yearbook, 2007, 103-104). For example, more than 90 percent of the lucrative oil

production is owned by the Abu Dhabi government (UAE Yearbook, 2007, 117);

Emirates Airlines are owned by the Dubai Government; one of the largest property

development companies in Dubai Emaar very close connections to the Dubai

government (Davidson, 2007, 41).

Another feature of entrepreneurial activity in the Emirates is, as Hvidt (2007)

demonstrates in relation to Dubai, the line dividing the public and private sectors is

continually blurred – the government and business leaders are often the same

people, or at least from the same kinship group (Hvidt, 2007, 571). Governments
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facilitate economic activity which is taken advantage of by companies owned by

government leaders and their intimates (in relation to Dubai, see Hvidt, 2007, 570).

The World Economic Forum Survey (2007, 198) examined the “…most

problematic factors for doing business” in the UAE and what was notable was that

there was not any single outstanding dominant factor. Instead there were a number

of factors, the majority of which averaged around 16 percent of responses. For

example, at 16.5 percent was restrictive labour regulations; an inadequately educated

workforce 15.9 percent; poor work ethic among Emiratis 13.7per cent and inflation

13.6 percent were the main areas for concern.10 Inflation appears to becoming a

major concern generally for the Emirates. According to the IMF, inflation grew from

an annual average of 3 percent in 2001/2003 to over 10 percent in 2005 (UAE

Yearbook, 2007, 79). The Abu Dhabi government is considering what actions to take

as inflation is adding to the growing cost of doing business (Gulf News, 6/08/07).

Internationalisation of Entrepreneurs and SMEs from the United Arab Emirates:

Drivers and roadblocks

There is little evidence that entrepreneurs or SMEs have internationalized to any

extent, even within the limited geographic area of the Middle East. Certainly, there

are UAE companies which compete with other larger companies on the international

stage (for example, RAK Cermanics is one of the largest providers of tiles and

porcelain in the world; Emirates Airlines is a major international airline (UAE

Yearbook, 2007, 144)); and there are some signs that other investment companies

are expanding their horizons (UAE Yearbook, 2007, 76 and136), but there is little

direct evidence of entrepreneurs doing so. There is anecdotal evidence again that
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would suggest that a number (how many is pure speculation) are increasingly doing

business with China, particular in the areas of home furnishings, but this is on the

import side, rather than the export side. There is a thriving re-export economy and

aluminum and cement are important export products but these are generally owned

by either large trading companies, or are a part of government owned companies.

Not surprisingly, the petroleum sector accounts for 75 percent of total UAE exports

(UAEInteract, 8/7/07) with 69 percent of 2005 exports going to Asia (Japan 28

percent; Korea 15 percent)(World Economic Forum Report, 2007, 200).

Conclusion

The UAE continues to change at a significant rate. The rate and quality of economic

and social growth that has occurred since the significant rises in the price of oil has

propelled the UAE into a position of prominence in the Middle East area. Much of

this growth can be attributed to the pro business attitudes at all levels of government.

There is certainly every reason to believe that the UAE governments will continue to

encourage, and support, the development of entrepreneurs (both nationals and

expatriates) in this most dynamic of countries. There is, however, one area in need

of much closer examination and of direct interest to entrepreneurship researchers.

Early entrepreneurial activity is extremely low (ranking the forth worst in the 2006

GEM study) yet economic growth has been consistently strong. How and why this

growth is occurring due to the absence of strong entrepreneurial activity is certainly

worth pursuing.
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References:

Al Abed, Ibrahim, Paula Vine, Peter Hellyer and Peter Vine (Eds)(2006), UAE at a

glance, Trident Press, London.

Bosma, Niels and Rebecca Harding, (2007), Global Entrepreneurship Monitor:

GEM 2006 results, Babson and London Business School.

Centre for Labour Market Research and Information (2005), Human resources

report 2005, UAE Ministry of Information and Culture, Dubai.

Davidson, Christopher M., (2005), The United Arab Emirates: A study in survival,

Rienner, Boulder, Co.

Davidson, Chistopher, (2007), The Emirates of Abu Dhabi and Dubai: contrasting

roles in the international system, Asian Affairs, XXXVII/1, 33-48.

Gulf News (2007), SMEs exempt from Companies Law change, 21/03/07,

[Link] accessed 22/03/07.

Gulf News (2007), Gulf Economies, [Link]/images/07/08/09, accessed

8/8/07.

Gulf News (2007) Abu Dhabi plans policy actions to contain inflation, 6/8/07,

[Link] accessed 7/8/07.

Gulf News (2007), Real GDP growth of Gulf countries to slow down, 7/08/07,

[Link] accessed 8/08/07.

Hanouz, Margareta D., and Tarick Yousef (2007), Accessing competitiveness in the

Arab World: strategies for sustaining the growth momentum,

[Link] accessed

12/4/07.
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Heard-Bey, Frauke, (2004), From Trucial States to United Arab Emirates, Motivate

Publishing, Dubai.

Hellyer, Peter (2001), The evolution of UAE foreign policy, in Al Abed, Ibrahim and

Peter Hellyer, United Arab Emirates: a new perspective, Trident Press, London,

161-178.

Hvit, Martin, (2007), Public-private ties and their contribution to development: the

case of Dubai, Middle Eastern Studies, 43/4, 557-577

International Monetary Fund Executive Board, (2006), Article IV – Consultation with

the United Arab Emirates, 12/7, Public Information No. 06/76.

Khaleej Times (2006), “UAE’s economy is most competitive among Gulf states”,

27/9/06, [Link] accessed 28/9/06.

Ministry of Economy, Companies Law, [Link]

accessed 27/7/07.

Ministry of Economy, (2006), The Annual Economic and Social Report 2005,

October, [Link] accessed 27/7/07

Minister of Economy (2007) quoted in Gulf News SMEs exempt from Companies

Law change, 21/3, [Link]

accessed 22/3/07.

Mohammed Bin Rashid Establishment, (nd), Because the entrepreneurial spirit is

the basis of success, Mohammed Bin Rashid Establishment, Dubai.

Preiss, Kenneth, (2007), GEM Global Summary 2006: United Arab Emirates, in

Bosma, Niels and Rebecca Harding, (2007), Global Entrepreneurship Monitor:

GEM 2006 results, Babson and London Business School, 69.

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Rugh, Andrea B., (2005), The political culture of leadership in the United Arab

Emirates, Palgrave Macmillan, New York.

UAE Interact (2007), Dh300 million fund set up by Abu Dhabi to support SMEs,

12/3/07, [Link] accessed 26/07/07.

UAE Interact (2007), United Arab Yearbook, [Link] accessed

26/07/07.

Wilson, Kenneth, (2006), Reforms need to continue to sustain growth

momentum, in World Economic Forum (2006), Global competitiveness reports.

World Economic Forum (2006), Global competitiveness reports,

[Link] accessed

12/4/07.

WTRG Economics (2006), Crude oil prices – 1947 – Sept 2006,

[Link] [Link], accessed 23/0/07.

1
Outside the Middle East, this body of water is know as the Persian Gulf. However, since the overthrow of the

Shah of Persia in 1979 it is generally referred to in the Middle East as the Arabian Gulf.
2
It should be noted that the name of the largest city in an emirate is also the name of the emirate. For example,

Abu Dhabi is the political capital of the UAE and also the name of the emirate. This can, at times, create some

confusion but usually context provides the differentiation.

3
The prices are expressed in 2006 dollars.
4
The accuracy of data generally for the Middle East is an issue continually raised by such bodies as the

International Monetary Fund; the World Bank; and, most recently the World Economic Forum – see Hanouz and

Yousef (2007, 4).

5
Nationals, also known as locals or Emiratis, are those who hold citizenship of the UAE and thus have a ‘special’

status vis-à-vis expatriates.

6
No expatriate can legally work in the UAE without a the employing organization obtaining a work visa for the

prospective employee.
7
As a matter of policy, the Federal Government is attempting to reduce the level of unemployment among

nationals by following a path towards Emiratisation, with nationals replacing expatriates in the workforce.
8
This law is currently under review as UAE’s commitments to the World Trade Organisation. However, it is

proposed that the revised law exclude SME’s – thus allowing nationals maintain their 51 percent equity capital

for companies outside FTZs. Minister of Economy, 21/3/07.

9
By necessity, this oversimplifies the situation. As a general rule it holds, but there are many larger businesses

that have been established outside FTZ. Often these much larger businesses will take the form of trading

companies, and have agency agreements with multinational companies for example, all the major car

manufacturers have agency agreements with trading companies registered in the UAE and headed by a

national.
10
It is difficult to understand the reasons for the first two comments in relation to labour market issues, given the

liberal government attitude towards labour market issues. And when one takes into account that 88 percent of

nationals work in the public sector (UAE Yearbook, 2007, 217) the responses are even more difficult to

understand.