UAE-wide efforts to boost the country’s stock of foreign direct investment (FDI) have seen considerable success in recent times. According to the “World Investment Report 2019” by the UN Conference on Trade and Development, the country ranked first among Arab countries in its FDI capture in 2018 and accounted for roughly 22% of total FDI inflows to the wider MENA region. The UAE Ministry of Economy ascribes the country’s performance to factors such as supportive legislation, a strong geostrategic location, expansive logistics infrastructure and related services, diversified free zones, and an open and multicultural society. These underlying fundamentals put the emirate and the UAE on a good footing, even as the economic headwinds of Covid-19 weigh on near-term trade and investment metrics.
Local Strength
Investment in Abu Dhabi comprises a significant share of federal FDI capture. According to Statistics Centre – Abu Dhabi (SCAD), overall foreign investment in the emirate nearly doubled between 2012 and 2017, from Dh250.3bn ($68.1bn) to Dh491bn ($133.6bn). Around Dh108bn ($29.4bn) of the 2017 figure was classified as FDI, representing an expansion of 7.1% over the Dh100.9bn ($27.5bn) recorded in 2016.
The emirate has succeeded in attracting some of the world’s biggest brands. German technology giant Siemens and French video game company Ubisoft Entertainment, for example, established their Middle East headquarters in Abu Dhabi. SCAD attributes this to the government “establishing favourable economic conditions and enhancing investor confidence” by enacting a transparent tax structure and supporting judicial system, passing investor-friendly business legislation and establishing an array of industrial zones.
New Law
Perhaps the most important event in recent years is the passage of the new FDI Law in October 2018. This federal legislation grants individual emirates considerable leeway in its implementation. The long-anticipated framework allows for 100% ownership of local companies, removing the 49% cap that had inhibited the ability of international investors to engage fully with the economy. The legislation also established an FDI Committee and an FDI Unit, which – together with the UAE Cabinet – determine the procedures that foreign investors must follow to secure majority shareholdings.
The FDI Unit is also responsible for establishing the list of economic activities approved for full foreign ownership. In July 2019 it produced its first iteration of the list, identifying 122 activities across 13 sectors: administrative services; agriculture; art and entertainment; construction; education; health care; hospitality and food service; information and communications; manufacturing; professional, scientific and technical activities; renewable energy; space; and transport and storage. The evolution of this list is of significant interest to investors. Its contents are set at the federal level, but each emirate has discretion with regard to the degree to which each activity is open to foreign investment.
The law also listed sectors that cannot be opened to full foreign ownership without special approval by the FDI Committee. These include oil exploration and production; banking; insurance; water and electricity; road and air transport; medical retail, including pharmacies; pilgrimage services; and printing and publishing.
Ramifications
The law was a considerable change from the preceding legislation. Previously, foreign investors would usually enter into a partnership with a local shareholder who would retain at least 51% ownership of the company. This exposed the foreign investor to due diligence and legal costs, annual fees to the shareholder, and the risk of disputes resulting in the loss of control of profits and management of the company. These barriers to FDI were removed by the 2018 law. The framework also eliminated a potential block to merger and acquisitions, as the absence of a UAE shareholder means that there are fewer parties to negotiate with and no sponsorship arrangements to untangle. Going forward, Abu Dhabi is well positioned to leverage its investment regulations to diversify its economy.
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