Malaysia Campus

Nottingham University Business School

MBA Programme

International Business Strategy (N1DM39)

Convenor: Professor Bala Ramasamy

Title :

United Arab Emirates Country Analysis

Zhijing, Eu (UNIMKL 004151)

Date: 18.07.2008
Copy I
ABSTRACT

The following report provides an analysis of the general business

conditions in the United Arab Emirates (UAE) in the particular context
of potential business opportunities for a Malaysian retailer and the
associated risks and challenges.

From a governance and administrative view, the government is stable

and strongly encourages pro-foreign investment policies. From an
economic perspective, the UAE has a large potential retail market and
the high GDP per capita that is coupled with a growing metropolitan
population.

From a socio-cultural aspect the UAE, much like other Gulf countries,
has a culture shaped strongly by the Muslim religion. In terms of the
UAE’s regional and international standing, it is an important regional
trading centre and widely held as one of the more progressive
countries within the Gulf region and also has a history of good bilateral
ties with Malaysia.

The most prominent risks and challenges within the UAE are the
competitive retail environment, the high level of demographic
segmentation and escalating inflation. However, in conclusion, the
potential rewards from a well-planned and properly executed business
venture into the UAE strongly outweigh the potential risks.
Table Of Contents

1.Introduction................................................................................................................ 4

2.General Country Background .............................................................................. 4

3.Governance................................................................................................................. 5

4.Economy ...................................................................................................................... 7

5.Socio-Cultural .......................................................................................................... 10

6.Regional ..................................................................................................................... 12

7.Conclusion ................................................................................................................. 14
UNITED ARAB EMIRATES

1. Introduction
The following report outlines the general business landscape of the
United Arab Emirates (UAE) that seeks to address two key questions:

Is there an opportunity for a Malaysian department store in the
UAE

What are the parameters, risks and challenges in pursuing that
opportunity?

2.General Country Background

The United Arab Emirates consists of a federation of seven states
(emirates) formed in 1971 after Britain withdrew from the Gulf.
Geographically, UAE has a land area of 83,600 sq km. The capital city
is Abu Dhabi but Dubai has the highest population of approximately
1.6 million people.
Figure 1. Map Of United Arab Emirates ( WorldAtlas.com, 2008 )

3.Governance
The most recent Governance Matters (Kaufmann et al., 2008) report
has benchmarked the UAE as being in a top quartile position for the
Rule of Law, Government Effectiveness and Control of Corruption and
Regulatory Quality and second quartile for Political Stability.

The UAE has a federal presidential-elected monarchy with the positions

of Presidency and Premiership being hereditary to the Al Nahyan clan
of the Abu Dhabi Emirate and the Al Maktoum clan of Dubai Emirate
respectively. Each emirate retains some level of autonomy from the
central government in Abu Dhabi. At present there are no immediate
threats of foreign invasion or organized domestic opposition. However
the Business Monitor International (Business Monitor International,
2006) reported that the political tensions between the US and Iran
could potentially have a negative impact on investor sentiment within
UAE given the country’s current good relations with both sides.

The federal and state government has a very active policy of

encouraging the diversification of trade and commerce. Initiatives to
draw in foreign investment to support this diversification include the
setting up of six free trade zones (Dubai Business Handbook, 2006). The
government itself generally does not seek to participate in the ownership
or operation of companies except in strategic national interest industries
such as telecommunications and petroleum.

Although Islam is a source of legislation, it is not strictly applied in

business. The law that impacts a foreign retailer would be the U.A.E.
Federal Commercial Agencies Law which requires the
agent/distributor/franchisee to be a UAE national. According to the Lex
Mundi Guide to Doing Business in the UAE (Ferris HA, 2004), the
statutory protections to the local partner include exclusivity, restrictions
on the foreign party's right to terminate or withhold renewal of the
relationship.

Many international brands that venture into the UAE market tend do so
under local agents with General Trading Licenses (GTLs) who generally
have very large diversified business portfolios. For example the Al-
Futtaim group manages both the UK brand Marks & Spencers but also
recently acquired the rights to the Singaporean retailer Robinson’s (Al-
Futtaim Website, 2008)

In addition to international brands such as Burberry (British) and JC

Penney (American) which are usually licensed to local UAE franchisees,
new entrants will also have to contend against established local and
regional retail brands. For example the Emke Group is a large
conglomerate that has interests in the entire customer product chain
from manufacturing to import/export, wholesale business and also
consumer retailing. This group operates popular brands of retail chain
stores that include the renowned Lulu chain of supermarkets,
department stores, hypermarkets and now shopping malls and
according to their website has 32% of the total retail market share
within the GCC (Emke Group Website, 2008).Another prominent UAE
based retailer Jashanmal, which incidentally owns the Burberry
franchise license for the UAE mentioned earlier, also has a successful
chain of own brand department stores (Jashanmal Website, 2008).
4.Economy
UAE has an open economy that is supported by a burgeoning annual
trade surplus, robust fiscal and monetary policies, favourable tax laws
and import/export duties. Dubai is also well known within the Gulf
region as a trade centre.

According to the CIA World Factbook (CIA, 2008) , the UAE has a GDP
of USD 192.6 billion (2007 est) and a GDP per capita of $37,300 (2007
est.). In the IMF 2007 World Economic Outlook report (IMF, 2007) ,
UAE was ranked as the second highest GDP among the Cooperation
Council for the Arab States Of The Gulf (CCASG) countries.

The UAE has a 2008 population of 4,621,399 with at an estimated

growth rate of 3.8 % (CIA, 2008). It has a favourable consumer
purchasing power trend as exemplified by the Economic Intelligence
Unit report (EIU Viewswire, 2007) that forecasted the population in the
coming years would continue to expand but real GDP growth will
exceed population growth, enabling per capita incomes to rise.

However much like the other Gulf countries, the UAE prosperity is
linked to its oil wealth. The government however is cognizant of this
dependency and has focused on boosting non-oil growth. Therefore
the UAE have re-invested the oil wealth into non-oil related sectors as
exemplified by the successful development of Dubai into a tourist
destination.

Since 1996 Dubai has held the Dubai Shopping Festival (DSF), an
annual one-month shopping extravaganza during which goods in
shopping malls are heavily discounted. The DSF has almost doubled its
number of visitors from 1.6 million to 3.3 million in 2006. (Euro
monitor International, 2007).There are also similar festivals at the
other Emirates such as the Sharjah Ramadan Festival, Abu Dhabi
Festival of Sales and the Dubai Summer Surprises. Coupled with
policies such as the “no currency controls”, and “no customs duty on
personal effects”, these efforts have served to attract a sizeable
amount of tourist traffic. UAE is a growing leader in the tourism
industry in the region with 2006 figures of over 7,944,600 visitors that
brought in the revenue of AED 15,929 million (Euro monitor
International , 2007).

However the risk of inflation is high due to the country’s currency

exchange policy being impacted by the weakening dollar, the
sensitivity of the economy to the movement of oil prices and the
general over-heating of the economy lead by a boom in real estate

The Ministry of Economy in UAE released a statement (UAE Interact

Website, 2008(a)) that inflation was at 11.0% as of 2007. The
government can already be seen as acting upon this issue with the
passing of the Consumer Protection Law in 2007 and many players in
the retailing sector have begun to feel the effects of the government’s
hard line approach on price controls for essential food items. In the
case of Americana, a Kuwaiti based company that operates
international franchises such as KFC and Pizza Hut in UAE, they were
fined 10,000 Dirhams in December 2007 for increasing prices by some
11% from 2007 levels (UAE Interact Website, 2007).

On a positive note, the MasterCard Worldwide Index of Consumer

Confidence H1 2008 (MasterCard Worldwide Website 2008) reported a
surge in consumer confidence regarding regular income and quality of
life. This finding was also supported within the Nielsen Global
Consumer Confidence Index (ACNielsen, 2008) where the UAE was
ranked 5th out of 51 different countries. The significance in this result
is that the UAE is the only country out of the four Gulf countries that
had an increase in Consumer Confidence.

In the abovementioned Nielsen survey, the UAE respondents still

stated that after covering essential living expenses, the remaining
income was still spent in the following distribution: savings (58%),
new clothes (33%), paying off debit/credit cards/loans (30%) and
holidays/vacations (28%)
5.Socio-Cultural
The UAE has a high number of expatriate workers within the country.
In a 2005 census, it was found that expatriate workers made up 78.1
% of the population (Ministry of Economy UAE , 2005). In terms of the
gender distribution, there were 67.6% males and 32.4% females. The
same report also stated that the population is centered on the key
Emirates of Abu Dhabi and Dubai.

Arabic is the official language. However English is the widely used

business language. Persian, Hindi and Urdu are also widely spoken.
The Muslim faith is practiced by the overwhelming majority, although
there is significant number of adherents of other faiths. Although Arab
and Islamic cultural influences can be found, western culture plays an
important role and business practices closely resemble those in the
United States and Great Britain.

Assuming that the target market is the Emirati population and tourists
from the neighbouring countries, the advantage that a Malaysian
brand may have is the relatively shorter cultural distance as measured
by the Hofstede Cultural Dimensions where both Malaysia and the UAE
appear to be closer to each other especially in the Power Distance and
Individualism category.

Figure 2.Cultural Distance Between Malaysia, United States and United

Kingdom compared to the “Arab World”
Source: (ITIM International Website , 2008)

However it should be noted that given the strong presence of the

expatriate community, a diverse multicultural society is present in the
key cities. Prominent nationalities among the expatriates are Indians
or Pakistanis, expatriate Arabs, Filipinos and Europeans.
6.Regional
Foreign Policy
The UAE foreign policy has maintained a principle of non-interference
in the internal affairs of others and the pursuit, wherever possible, of
peaceful resolutions of disputes, together with a support for
international institutions. (UAE Interact, 2008(b)). The UAE is an
active member of a large host of international bodies. Regionally, it is
a member state of the Arab League (And therefore also a member of
the Greater Arab Free Trade Agreement) and also a member state of
the Gulf Cooperation Council which operates as a custom union and
also has the objective to create a local GCC based common currency
by 2010.

Supporting Infrastructure
The UAE is as an important regional trading centre and a distribution
hub to much of the West Asia region as a a result of it’s excellent
infrastructure services in the area of telecommunications, ports and
airport facilities, modern transportation as well as logistics support.

For example, it has been reported (FDI Magazine ,2005) that Dubai is
served by more than 170 shipping lines and 86 airlines offering links to
over 100 countries worldwide. Dubai is also an open market with no
exchange controls, quotas or trade barriers. Dubai commands a large
market - more than $17 billion in domestic imports annually and a
gateway to a $150 billion p.a., with a 1.4 billion population regional
import market.
Bilateral Ties
The UAE is Malaysia’s largest trading partner in the Gulf region. In
2006, UAE accounted for 40.4 per cent of Malaysia's total trade with
the GCC countries. Malaysia 's total trade with UAE was valued at
US$3.2 billion, an increase of 19.4 per cent compared with US$2.6
billion in 2005 (Ministry of International Trade and Industry Malaysia,
2008).Both countries had signed five bilateral agreements as a legal
framework to further develop and enhance relations including an
agreement on avoidance of double taxation in 1995.

As of 2007, there were 40 Malaysian companies operating in the UAE

involved mainly in construction and engineering but also in the
services and hotel management industries. (Qudoos MA, 2007). With
regards to the consumer food retail sector, Secret Recipe and
Marrybrown Fried Chicken are examples of Malaysian companies that
have successfully franchised outlets within the UAE. However there
are presently no active Malaysian department store or hypermarket
retailers within the UAE.

The possible advantage a Malaysian retailer (especially in the

departmental store sub-sector) may have in entering the UAE is the
potential familiarity of the brand due to high amount of tourist traffic
from the gulf region into Malaysia. In 2003, the estimated no of
arrivals from West Asia was 80,216, which doubled to 186,821 in
2006. From the UAE, Malaysia recorded 35,118 arrivals in 2006
(Ministry of International Trade and Industry Malaysia, 2007)
7.Conclusion

In summary the UAE provides a suitable investment climate for a

Malaysian retailer seeking to expand their business in the middle east
given the large potential retail market and the high GDP per capita
that is coupled with a growing metropolitan population. The general
stability of the political circumstances and pro-foreign investment
government policies also serve to further enhance the feasibility of the
investment opportunity. It should also be noted that any company that
wishes to extend it’s network further into the middle east markets will
find the UAE to be a suitable strategic “spring-board” to set up a
regional base.

However there are specific pitfalls that a Malaysian retailer must be

aware of in that despite of all the positive points above have
accompanying flip-sides. For example despite of the high market
growth potential, the UAE has a highly competitive retail environment
and a high level of demographic segmentation that would require a
robust marketing strategy. The booming economic growth also carries
with it the risk of inflation costs impacting profits and high capital
requirements. Malaysian retailers may have a better business
understanding of “Gulf culture” due to the affinity they may share in
operating within Muslim cultures. However it should be noted that the
entry method may be limited due to “exclusive” general trade licenses
by UAE nationals that are required by law so entry methods and
affliate selection will be of the utmost importance.

However as with any international business venture , a successful or

failed entry into UAE market will depend very much on the level of
risk mitigation based on sound understanding of the local market
conditions and the formation of a healthy relationship with the local
affliates. In conclusion, the potential rewards offered by a successful
business foray into the UAE outweigh the risks.

[ Main Body Word Count : 2018 Words ]

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