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UAE fails to meet its full FDI potential

"Ranked as a below potential FDI performer, UAE needs to work hard to realise its full FDI potential and turn it into actual high performance," states the report.

"Efforts have to be exerted to attract more FDI flows, especially outside the Free Zones."

The report states that one of the biggest obstacles discouraging larger flows of FDI is the UAE's legal framework, described as "the single most important front to work on". The report cites in particular the need to revise company and commercial agency laws. The report suggests that several pragmatic measures could be undertaken to address the problem "such as the opening up of economic sectors, especially services, that are now off limits to foreign investment, and amending ownership and commercial laws that restrict competition".

In particular, "the UAE should be keen to attract more inward FDI flows that bring new technology and managerial expertise," states the report.

To reach its conclusions, the DCCI used two FDI performance indicators to compare the UAE's performance to that of India and China. The first one is the inward FDI performance indictor that ranks countries by the FDI they receive relative to their economic size, as measured by GDP.

The second one is the inward FDI potential indicator which captures several factors, apart from market size, that are expected to affect an economy's attractiveness to foreign investors.

The matrix, shows FDI performance and potential of the UAE, India and China, which is based on these two FDI indicators. The ranking is based on consistent results for the three time periods 1999-2001, 2000-2002 and 2001-2003. As the table shows, China emerges as a front-runner, with both high FDI potential and performance. The UAE is classified as below potential, with high FDI potential but low FDI performance. India is classified as an under performer, with both low FDI potential and performance.

Graphic shows the inward FDI stock as percentage of gross domestic product (GDP) for India, UAE and China; it is an average for 1994-2004. China ranks first, UAE second and India third. FDI stock, which is measured at a point in time, is the value of the investments existing at the end of a period of time.

The report states that when inward FDI flows are measured as percentage of gross fixed capital formation, the calculations have shown that the average for 1994-2004 is about 2 per cent for UAE, 3 per cent for India and 12 per cent for China. This is an average for 1994-2004. FDI Flows, which are measured over time, are the new investments made over a period of time.

It also states that the factors that favour FDI inward flows into UAE economy are tax incentives, availability of infrastructure, stable political environment and conditions that support physical and personal security, the investment regime and the environment for business, the rule of law and the predictability of the legal system which respects the sanctity of contracts.

In contrast, the factors that favour FDI inward flows into Indian and Chinese economies are their relatively large market sizes, the growth prospects of their economies, and their rising wage-adjusted productivity of labour.

The report also criticises the fact that in the UAE there is neither domestic statistical data on FDI nor a clear definition of what constitutes FDI. It concludes: "It is high time that domestic data, on FDI inward and outward flows and stocks, is collected using internationally accepted methodologies and definitions of FDI."