Is Dubai a Good Business Model for the Arab Region? Thesis/Theme Dubai is a city in the Middle East on the Persian Gulf. This location is a critical factor for its economic success in transportation and tourism. These two industries along with finance and real estate have put Dubai on the map. The city is known for its glitz and glamour but underneath this is a city that took on a massive debt in order to finance all its construction projects. This debt load however is what brought people and business to the city.
Dubai is a city that is flourishing in the Middle East, ut other Middle Eastern and North African countries should not try emulating all their policies due to the different history that Dubai has compared to the rest of the Arab world and the massive debt load cause by the ambitious plans of Dubai. History of Dubai Since 1833 In 1833 the A1 Maktoum family took over Dubai without any physical harm from the Abu Fasala clan. This date is important because the A1 Maktoum family were the first rulers of Dubai to put business interests first.
The family believed that if there were low tariffs that traders in the region would leave their country and set up shop n Dubai. The A1 Maktoum’s envisioned Dubai as being a world class port city. They had confidence that due to the high tariffs and government red tape in the region would drive traders to their city. This idea was true and helped Dubai but the city was still mostly fishermen living in mud houses. Dubai started becoming an entrepot in the region in the 1920’s. Due to their low duties on exports and imports, businesses would drop goods of in Dubai which would be re-exported to another market.
In 1959 Rashid bin Saeed A1 Maktoum started the dredging of Dubai creek with a loan from Kuwaitl . Sheikh Rashid was very business friendly and is quoted as saying, “The business of Dubai is business. ” Any vessel in the world could dock at the port due to the new depth provided by the dredging. The re-export business grew larger. In 1966 there was the discovery of oil in the emiratel . This discovery helped the emirate build up its infrastructure. Oil was an important part of the economy until the turn of the century. Oil was 43% of GDP in 1992(1).
In 1971, Dubai along with other Emirates such as Abu Dhabi came together and formed the United Arab Emirates. The port of Jebel Ali was created in the late 1970’s and later the Jebel Ali Free Trade Zone was built around the port in 1985(1). Jebel Ali port is the biggest man made port in the world. The Jebel Ali Free Zone allows companies to manufacture and import tax free. This is used by many companies as a distributing hub (2). Sheikh Rashid set Dubai up with Western allies by allowing some Western countries to have a base in the Emirate which was critical during the Gulf War.
In 2001 a law was passed Dy el sn Kn Monammaa tnat allowed a person 0T any nationality to own lana which started the real estate boom for Dubai. Dubai State Financed Corporations The driving force behind Dubai’s boom has been its state financed corporations. It all starts with the Investment Corporation of Dubai. This is a sovereign wealth fund worth Just under 20 billion dollars (3). Investment Corporation of Dubai has subsidiaries underneath it which include the government owned Dubai oil company, Emirates Group, Emaar, Dubai Holdings, and others.
The main goal for the investment group is to maintain Dubai’s state owned enterprises and accrue wealth through investments. Another state financed group is Dubai World. The three major companies they own is DP World, Nakheel, and Istithmar World. Dubai World is a holding company that manages investments for the government of Dubai and has fifty thousand employees (5). DP World is a company that owns and operates ports around the globe. It is one of the biggest operators of marine terminals in the world (4).
Nakheel is a real estate developer that has benefited along with Emaar by the government of Dubai owning stock in the company with gifts such as land at a reduced price(l). Istithmar is an investment group with investments such as consumer product companies like Barneys New York to real estate companies such as Fontainebleau Miami (5). Dubai World was riding the boom until the recession in 2008. Property prices plummeted in Dubai while financing and insuring the financing for property development shot up (1).
Due to the lack of transparency with Dubai World no one saw the company having trouble paying its debt until the holding company asked its creditors to wait six months for payments from the now financially troubled Dubai in 2009. The city was saved by its neighbor Abu Dhabi with $10 billion to help with its $59 billion debt (7). Nakheel had a majority of the Dubai World debt along with property developer Limitless. Dubai’s Economy Many believe that Dubai’s main source of income is oil due to its location on the Persian Gulf which has many oil rich countries.
This used to be true with oil accounting for 43% of GDP in 1992 but it only accounts for roughly 5% today. Oil helped build the infrastructure for the Emirate which allowed it to tap into different industries. There are free zones’ located all throughout the Emirate with specific industries in mind for each one. These free zones have no income tax, corporate tax, or limitations to currency. There is the Media City and Internet City which companies such as Oracle, 18M, CNN, and others have set up shop. The Jebel Ali Free Zone is the biggest and most important free zone in the country.
Many companies use this free zone as a place to import and then re-export from. Sony has the biggest electronics warehouse in the world in the Jebel Ali Free Zone. Companies like to setup these warehouses so there goods have a place to be safe and secure before the re export. It only takes around two months by the time a company submits a two page questionnaire until they can setup shop in the free zone (2). This free zone has become an entrepot that linked the regional economy to the world economy. Another mportant free zone is the Dubai International Financial Centre or DIFC.
The DIFC opened In 2004 wltn tne nopes 0T Decomlng a Tlnanclal nun Ilke New York Cl Hong Kong. There is a stock market which trades national companies as well as an international stock exchange market. The DIFC has its own Jurisdiction from the Emirate mostly for different commercial laws. Judges are taken from around the globe and for arbitration the financial centre uses the rules of arbitrating from London. This free zone has lived up to expectation with 80% of the world’s largest banks and insurance companies doing business in the DIFC.