Foreign Direct Investment in UAE- Carrefour

TABLE OF CONTENTS
Sl. Particulars Page
No
INTRODUCTION
1 1

ECONOMIC ENVIRONMENT
2 1

FOREIGN DIRECT INVESTMENT IN UAE

3 3

FORMS OF FDI IN UAE

4 3

GOVERNMENT POLICIES TOWARDS FDI

5 5

WHY COUNTRIES INCREASED FDI TO UAE?

6 6

7 ABOUT CARREFOUR 8

MODE OF ENTRY & ITS BENEFITS

8 9

BENEFITS & PROBLEMS FACED IN UAE

9 10

10 REFERENCES

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 Foreign Direct Investment in UAE- Carrefour

EXECUTIVE SUMMARY

The United Arab Emirate is one of the most business friendly economies in
the world. The superior infrastructure, booming economy, legal systems,
low crime rate and foreign policies earned a huge amount of foreign direct
investment in the country. In 1995, Carrefour expanded its hypermarket
chain into the United Arab Emirates. They selected Dubai to enter the
market by understanding the potential to grow in the region. The first
objective of Carrefour was to select the right mode of entry which suits the
economy and legal systems in UAE. By properly analyzing the market they
formed joint venture with Majid Al Futtaim (MAF), a pan-regional
conglomerate with retail experience in the UAE. This helped them to locate
their stores in prime locations and to adapt to the socio-cultural differences.
Now, after their success in the UAE Carrefour expanded to other potential
markets in the Middle East.

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 Foreign Direct Investment in UAE- Carrefour

INTRODUCTION

United Arab Emirates is federation of seven

states formed in 1971. It is one of the most
important economic centres in the Middle East.
Each state – Abu Dhabi, Dubai, Ajman, Fujairah,
Ras Al Khaimah, Sharjah And Umm Al Qaiwain
– is ruled by separate rulers. The supreme council
of rulers forms the UAE govt. Sheikh Khalifa bin Zayed Al Nahyan is the
president of the United Arab Emirates and ruler of Abu dhabi emirate. Sheikh
Mohammed bin Rashid Al Maktoum is the prime minister of UAE and ruler of
Dubai.

ECONOMIC ENVIRONMENT

Economy of UAE was dependent on fishing & pearling industry in the earlier
times. The discovery of oil in 1950s exponentially increased the pace of economic
growth in UAE. Since 1962 UAE exports oil across the world. Now it is the third
largest oil exporter in the world (US energy information administration). UAE
diversified its economy into tourism, retail, manufacturing, construction & real
estate, in order to reduce the dependency on oil exports. UAE exports consist of
47% oil & gas, 34% Re-exports, 13% Free trade zones and others form 6% (Dubai
chamber of commerce and Ministry of Finance 2009)

Successful economic diversification reduced the portion of GDP based on oil and
gas output to around 25%. Total GDP (PPP) 2010 estimate is US $ 294.175 billion

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and nominal per capita estimate is US $ 49995 (UAE International Monetary Fund
2010).

Components of UAE GDP

Investment
13%

Exports Consumption
56% 31%

Source: Dubai chamber of commerce and Ministry of Finance (Uppal 2009)

In March 2006 UAE government allowed foreign ownership in the real estate
sector. This resulted in a huge investment in the real estate sector. UAE imports
machinery, electronics, automobiles and food. It imports around 80% of the food
items (RNCOS Report 2008)

The economic transformation increased the standard of living. Govt. spends a lion
share of its revenue for job creation & infrastructure expansion (BBC News). The
well established transport network also provides a better environment for many
industries to grow. One third of the world population is accessible from UAE
within a four hours flight (UAE interact 2008)

UAE is One of the most globalized economy with 80% of its 4.9 Million
population being foreigners representing 185 countries (CIA-The World Fact
Book). Indians form the major single expatriate group. UAE falls under high
income category.
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UAE is one of the most liberal countries in the Gulf. The country allows private
sector involvement in many utilities. The free trade zones in the country are
offering 100% foreign ownership and zero taxes. These economic zones attract a
lot of foreign investors. The Jebel Ali Free Zone (Jafza)
has played a key role in attracting FDI into UAE
(AMEinfo.com).

A total of 65120 companies invested in Jafza as it offers

excellent investment atmosphere. Within the last 10 years,
the number of companies in Jafza increased by 600%, even during the time of
downturn. About 5% of the total trade through free trade zones are handled by
Jafza (Malhotra et al 2008).

FOREIGN DIRECT INVESTMENT IN UAE

FDI into the United Arab Emirates amounts to $69bn (UAE ministry of Economy
June 2010). Total foreign direct investment inflow into the UAE is expected to
increase to $108bn in 2011 (Barclays Wealth). UAE does not publish official data
on FDI figures. According to Barclays Group, FDI inflow into UAE is rising and
growing. Sterling performance has enabled Jafza to play a central role in the flow
of foreign investments into the country.

FORMS OF FDI IN UAE

Green field investments:

Liberalization of real estate & creation of economic zones resulted in a large

amount of FDI inflow in the form of green field investments (WTO 2006).
Establishing a new company or service in a country from scratch is a riskier

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investment. Even though, companies are doing direct FDI overseeing the
increasing economic integration of GCC countries (World Investment Report
2008).

Mergers & acquisitions:

In M&A, a company merges with a MNC. It is a beneficial mode of entry, as they

encourage corporate governance and provide local knowledge. UAE’s national
telecom Etisalat plans to buy 46% stake in Zain, a Kuwaiti telecom firm.

Joint Ventures:

There are many companies forming alliances with UAE based company. Majority
of JVs are happening with small and medium sized industries. SMEs form the
backbone of Dubai’s economy. 45% of the total SMEs in UAE are located in
Dubai (Dun & Bradstreet Maceda 2009)

SMEs in UAE
Manufacturing
11%

Services
16%

Trade & retail

73%

Source: Dun & Bradstreet (Maceda 2009)

Franchising:
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Many global companies entered UAE market through franchising. This helped
many SMEs to partner with MNCs utilizing their market expertise, innovation
expertise and customer expertise (Prashantham and Birkinshaw, 2008). UAE is
known as the Hong Kong of the Middle East or hot franchise market. In UAE only
UAE citizens or corporations wholly owned by UAE citizens or those with a UAE
partner or sponsor are allowed to enter into franchising agreements. To develop the
SMEs in UAE, government is promoting franchising. The UAE Franchise
Association was launched by the UAE government in 2004 (franchise.com).

GOVERNMENT POLICIES TOWARDS FDI

The UAE is one of the most liberal countries in the Gulf. UAE is a member of
WTO as of 10 April 1996 and a contracting party to GATT since March 8 1994
(WTO 2006) and also the founder member of Gulf Cooperation Council (GCC).
UAE has been actively trying to gain FDI through its foreign policy.

In the earlier times investment in the UAE demanded a 51% native ownership.
Foreign ownership is capped at 49%. This system is known as sponsorship system.
Later the country liberalized its policies and allowed 100% ownership in free trade
zones in the country. This policy acts as primary motive for investments in Jafza
(Malhotra et al 2008). Free trade zones offer duty-free imports, reduced
bureaucracy, improved logistics and good access to markets. Sponsorship system
still exists in a majority of places outside the free trade zones.

Since 1983 the GCC member states decided to exempt customs tariff on goods
produced from the free trade zones. Since 2003 a common 5% tariff has been
introduced. This also helps in FDI inflow into UAE. UAE formed bilateral

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agreements with many developed and developing countries. This eased the trade
between these countries. Recently the United Arab Emirates and the United States
Sign Bilateral Agreement for Peaceful Nuclear Energy Cooperation (UAE
Embassy)

WHY COUNTRIES INCREASED FDI TO UAE?

UAE’s economy is very business-friendly. The United Arab Emirates developed

systems which help in rapidly establishing a company. Out of 183 economies
surveyed, UAE is ranked 40th in terms of Ease of doing business, ranked 46 th in
starting a business, fifth in paying tax and third in trading across borders (Doing
Business 2011 UAE).

Custom duties on imports are low. The UAE offers no taxes on corporate and
individual profits (excluding the oil sector and financial sector).

UAE allows 100% repatriation of profits and capital back to the home country.
Government did not put any requirement on minimum capital investment. Legal

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system is strong and speedy. UAE has very low rate of crime and violence. There
exists high security for women in the country.

UAE has one of the best infrastructure facilities in the world. Transportation
networks are well established and are connected to all parts of the world through
air and water.

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 Foreign Direct Investment in UAE- Carrefour

ABOUT CARREFOUR

Carrefour was founded as a supermarket retailer by the French Fournier and

Defforey families in 1959. In 1963 they opened their first hypermarket which led
to the success of Carrefour. Its international expansion started by opening its first
hypermarket in Belgium in 1977. They introduced unbranded products as a
substitute for popular products without compromising quality. The idea to create
lower prices at the market made them a brand and fasten its expansion worldwide.
Extremely low prices were the strategy used by them to compete and buy other
chains. Carrefour followed country by country expansion strategy into emerging
markets.

In 1995, Carrefour expanded their market into Dubai, one of the emirates of UAE,
by forming a joint venture with Majid Al Futtaim (MAF). Carrefour saw the
potential in Dubai emirate; the flourishing retail industry and economy. Dubai
offered a lot of advantages for their market entry, having large population with
highest standard of living and income in the world. Well established transportation
network, legal system, low political risks & positive retail conditions provides a
favorable ground for its operation.

MODE OF ENTRY & ITS BENEFITS

Carrefour determined that a joint venture would be best for entering UAE market.
Laws in UAE were favorable towards Joint Ventures. First, risk in a joint venture
was less. Second, the UAE’s Federal Commercial Agencies Law protected foreign
companies in a joint venture from contract termination and exclusive presence in

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the region. To form a Joint Venture, companies would have to be partnered with
UAE nationals or commercial firms owned by UAE nationals. Company allowed
to rent and not to own the property.

This was a benefit to Carrefour as the sponsor taking the liability of ownership.
Selling food in a culture with important religious and cultural restrictions was a
challenging part. Joint Venture with a local sponsor made it easier for Carrefour to
obtain Food Health Certificates like Halal slaughter certificate to import food.
Carrefour enjoyed low or no trade barriers on most of its goods.

BENEFITS & PROBLEMS FACED BY CARREFOUR IN UAE

By partnering with MAF, who owned the high-traffic malls and properties helped
Carrefour to get perfect location. This prevented other large hypermarket chains
from entering the same malls. This limited direct competition. Secondly, MAF had
operations throughout the entire Middle East, and this potentially allowed
Carrefour to expand to other countries like Qatar, K.S.A, Oman, Kuwait, Jordan,
Syria and Egypt, under the same partnership. Thirdly Carrefour preferred Dubai as
a first market because of its high population. Lastly, MAF had experience in
venturing with foreign retailers. It developed a first mover advantage and
thoroughly adapted to the local cultures.

Major problems faced by Carrefour include the difficulty in finding a suitable local
partner .The local partner should accept the burden of clearing complex import
statutes and regulations such as product licensing. Local partner should ensure that
the local municipal lab has access to product samples to test that the products being
sold meet their standards. Another problem was the costs of operating. Choosing to

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open large hypermarkets rather than smaller supermarkets in a prime location,

Carrefour would have to endure high costs of rent and listing fees. Regulation
passed by the Gulf Cooperation Council acted as barrier to entry. It stated that at
the time of entrance all food products imported into the UAE must have half or
more of its shelf life remaining. Some minor problems faced by Carrefour include
the weekends in UAE. Fridays and Saturdays constituted the weekend in the UAE
and Carrefour required to adapt to local customs to conduct daily business. (SIS
International Research)

References

BBC. (2010). United Arab Emirates country profile. Available:

http://news.bbc.co.uk/2/hi/middle_east/country_profiles/737620.stm#leaders. Last accessed 18th
November 2010.

Franchise.com. (2005). HOT FRANCHISE MARKETS - DUBAI, UAE. Available:

http://www.franchise.com/franchise-news/International_UAE_Dubai.cfm. Last accessed
15th Nov 2010.

Husam Odiabat. (2010). UAE continues to attract foreign direct investment; Jafza plays a
key role in drawing multinationals to the country . Available:
http://www.ameinfo.com/238046.html. Last accessed 19th Nov 2010.

Jeff Florian. (2008). FDI in UAE to hit $108bn in 2011. Available:

http://www.ameinfo.com/156015.html. Last accessed 19th Nov 2010

SIS International Research. (2009). Analysis of Carrefour's Dubai Market Entry . Available:
http://www.marketintelligences.com/middle-east-journal/2009/2/2/analysis-of-carrefours-
dubai-market-entry.html. Last accessed 15th Nov 2010.

The World Bank and the International Finance Corporation. (2010). Doing Business 2011-
United Arab Emirates. Available: http://www.doingbusiness.org/~/media/fpdkm/doing
%20business/documents/profiles/country/db11/are.pdf. Last accessed 11th Nov 2010.

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The World Factbook 2009. Washington, DC: Central Intelligence Agency, 2009. Available:
https://www.cia.gov/library/publications/the-world-factbook/geos/ae.html#. Last accessed 16 th Nov
2010.

UAE Embassy. (2009). The United Arab Emirates and the United States Sign Bilateral
Agreement for Peaceful Nuclear Energy Cooperation. Available: http://www.uae-
embassy.org/media/press-releases/15-Jan-2009. Last accessed 13th Nov 2010.

US Energy Information Administration. (2008). Country Energy Profiles. Available:

http://www.eia.doe.gov/country/index.cfm. Last accessed 17th Nov 2010.

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