In today’s globalized world Foreign Direct Investment (FDI) is used as a helpful tool to unify economies and reduce barriers of trade between nations. It is a popular method by which companies can identify and realize new investment opportunities and thereby expand their market reach across their national borders. It has also become vital for emerging markets as it provides much needed capital investments that support and improve domestic living standards and boost the recipient country’s economy. Within the last few decades, the United Arab Emirates (UAE) exceeded expectations and became one of most successful economies in the Middle East and in the world for that matter. Its economic growth and diversity continue to attract billions of FDI annually. While Abu Dhabi is known for its political gravitas and large oil reserves, Dubai has developed over time into a large centre of commerce. This paper provides insights into Foreign Direct Investment regulations and highlights the current opportunities that exist in one of the most attractive destinations for foreign investments. The primary aim of this paper is to analyse the benefits and challenges of the FDI sector in Abu Dhabi and Dubai. Furthermore, it provides a brief overview of FDI, compares performance of the past and highlights the positive upward trend of FDI in Abu Dhabi and Dubai based on an analysis of the past few years. Building on the FDI discussion, this paper continues by analysing the risks of investing in the UAE by discussing economic, social, and cultural factors. Last but not least, this paper provides an overview of the laws that regulate the FDI sector and provides additional legal information pertaining to the business environment in Abu Dhabi and Dubai. 6 2. Introduction Foreign Direct Investment (FDI) is a mechanism by which investors can enter a foreign market and take advantage of its untouched opportunities and resources. The FDI system consists of various strategies and models through which an investor can establish his or her business operations or gain control over his or her invested capital overseas. Although this mechanism provides a potential investor with a variety of opportunities such as market expansion, greater economic performance, access to resources, lower operational and production costs, and more conducive regulations; it also can bear many risks such as an unexpected economic slowdown, new competition from other rivals, cultural impediments, intrusive government interventions and regulations, as well as geopolitical instability. Therefore, taking the decision to invest should not be taken lightly. When analysing FDI inflows into the United Arab Emirates (UAE), it becomes very apparent that this region is one of the world’s “hot spots” for one foreign capital. The UAE, specifically Abu Dhabi and Dubai, welcomes FDI as a mean to reduce its economy’s reliance on natural gas and oil. The main goal of both Emirates is to diversify their domestic economies whilst reducing their reliance on fossil fuels. One could argue that investing in Abu Dhabi and Dubai might be risky and complicated due to their economic regulations and national laws, which currently are more conducive to national business owners. In addition, one should bear in mind that current low oil prices might have adverse affects on their economies’ performance. Nonetheless, the UAE continues to be an economic poster child based on its FDI inflows and well-diversified economy. It promotes a conducive business environment 7 that is built on trust and honesty. Its pro-business government provides a high level of intellectual property protection rights and mandates a regulatory system that continues to attract foreign capital. 3. What is Foreign Direct Investment? In today’s era of globalization there are a variety of ways to cooperate and establish trade relations amongst other nations. According to the Organization for Economic Cooperation and Development (OECD), one of these ways or keys drivers of globalization is the so-called Foreign Direct Investment (FDI), which leads to greater economic integration among countries (OECD Benchmark Definition of Foreign Direct Investment, 2008). FDI occurs when an organization in country A invests into a company in country B with the aim of achieving managerial control. This usually occurs by purchasing stocks or physical assets of the other company. The percentage of stock owned is usually between 10% and 25% but the number varies from country to country based on local laws and regulations. Generally speaking FDI identifies the various types of capital that flow across borders. There are two major forms through which FDI can be established namely the Greenfield and Brownfield Investments and two types of models – Horizontal and Vertical (“Foreign Direct Investment (FDI)”, n.d.; “What Are the Different Kinds of Foreign Investment?”, 2016; “What is the difference between Foreign Direct Investment (FDI) net inflows and net outflows?”, n.d.; Wild, & Wild, 2012).
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