Economic Research Forum (ERF)

Reformed foreign ownership rules in UAE: the impact on business entry

2456
In an effort to stimulate economic growth and diversify the economy, the government of the United Arab Emirates has recently implemented regulatory reform that allows 100% foreign ownership of companies operating in the country. This column examines the implications of the reform for entry of new firms in Dubai, using unique data on new business licences in the emirate.

In a nutshell

There is considerable evidence indicating that a business environment with fewer restrictions and barriers encourages innovation and the creation of new firms, contributing to economic growth and job opportunities.

Regulatory reforms aimed at simplifying the process of starting a business are typically associated with an increase in firm creation; new evidence shows that the UAE’s deregulation of ownership rules is having exactly that positive effect.

The findings have clear policy implications for countries in the Gulf Cooperation Council and beyond, highlighting the importance of creating an enabling business environment that attracts both domestic and international investors.

The quality of the business environment in a country has a significant influence on the levels of private investment and entrepreneurial activity. Research evidence indicates that an environment with fewer restrictions and barriers encourages innovation and the creation of new firms, contributing to economic growth and job opportunities (Chambers and Munemo, 2019; Divanbeigi and Ramalho, 2015; Kirkpatrick, 2014; O’Reilly, 2022).

The United Arab Emirates (UAE) has recently deregulated ownership rules for more than 1,000 commercial activities, allowing full ownership of commercial companies in the UAE without requiring a partnership with a national sponsor. Previously, foreign ownership outside free zones was capped at 49%, with a requirement for the majority stake to be held by a partner who is a UAE citizen.

This restriction often acted as a barrier to new firm creation, limiting foreign investors’ independence. The deregulation of ownership rules in the UAE is part of a broader strategy to attract foreign investment and foster entrepreneurship, a policy recommended by the International Monetary Fund (IMF).

Regulatory reform for firm creation

There are essentially four pathways through which regulatory reform could facilitate firm creation:

  • Empowerment of foreign entrepreneurs.
  • Streamlined administrative processes.
  • Enhanced investor confidence.
  • A lower cost of doing business.

How might these pathways lead to an improvement on the pre-reform business environment?

First, the previous ownership restrictions might have caused concerns among investors about control and decision-making authority. By allowing full ownership, the reform provides a more transparent and predictable regulatory environment, instilling greater trust and confidence among foreign investors. Foreign investors can exercise greater control and make independent decisions about their business ventures.

Second, the reform’s impact on business entry and firm creation is anticipated through the pathway of streamlined administrative processes and reduced bureaucratic hurdles. The elimination or reduction of bureaucratic hurdles is expected to encourage more individuals to enter the market, as the ease and efficiency of starting a business increase. This, in turn, is likely to stimulate higher business entry rates and the formation of new firms.

Third, the reform’s impact on the cost of doing business represents another crucial pathway influencing business entry and firm creation in the UAE. With the removal of ownership constraints, entrepreneurs can allocate resources more efficiently and effectively. Previously, ownership restrictions often led to additional costs, such as those associated with partnering or maintaining complex ownership structures. By reducing these costs, the reform is expected to create incentives for more individuals to enter the market.

Figure 1: Pathways connecting the ownership law to firm creation

The new law

In 2021, the UAE government implemented amendments to the Commercial Companies Law, allowing foreign investors to have full ownership (100%) of various business activities. Notably, these new rules on full foreign ownership do not make it necessary to have any modifications to the licensing procedures or requirements for conducting business. Furthermore, there are no additional fees, guarantees or capital requirements associated with attaining complete foreign ownership.

Effective from 1 June 2021, the new ownership rules have been implemented for 1,065 types of business activities, encompassing both commercial and industrial sectors, with the exception of two specific economic activities.

The first category comprises economic activities that possess a strategic impact, which are limited to seven sectors: security, defence, and military activities; banks, exchange houses, and finance companies; insurance; currency printing; communications; Haj and Omra services; and Quran centres. These sectors are considered strategically important and are thus excluded from the ownership reform.

The second category of business activities that remain unaffected by the reform is professional activities. In these cases, foreign investors are still required to collaborate with a UAE national to fulfil the necessary judicial formalities for starting a business. This exemption is primarily due to legal considerations, as professional licences fall under the purview of the Civil Transactions Law, while commercial and industrial licences are governed by the Commercial Companies Law.

Policy-makers decided to initiate amendments to the Commercial Companies Law first, with intentions to extend changes to the Civil Transactions Law in subsequent stages. Therefore, the new flexible ownership rules now apply to approximately 40% of the various types of economic activities.

Methodology and findings

The variation in ownership regulations over time and across different business activities provides a potential instrument for identifying the causal effects of liberalisation policies on the establishment of new firms and the entry of new businesses into the market.

My research (Rashad, 2023) uses unique data on the number of newly issued business licences in Dubai as a proxy for business formation. Using a ‘difference-in-differences’ approach, the study compares the number of new licences before and after the policy change across two groups: those affected by the new ownership rules (the ‘treatment’ group) and those unaffected (the ‘control’ group).

The findings reveal a significant increase in the number of new licences following the implementation of the new ownership rules (see Figure 2). This suggests that the liberalisation policy had a substantial positive effect on business activity.

Figure 2: The impact of ownership liberalisation on business activity

Conclusion

Previous studies have consistently demonstrated that regulatory reforms aimed at simplifying the process of starting a business are associated with an increase in new business formation (Freund and Bolaky, 2008). The UAE’s deregulation of ownership rules represents a significant step towards promoting foreign investment and entrepreneurship.

This study provides early evidence that flexible ownership rules can stimulate business creation and economic dynamism. These findings have significant policy implications for countries in the Gulf Cooperation Council, highlighting the importance of creating an enabling business environment that attracts both domestic and international investors.

Further reading

Chambers, D, and J Munemo (2019) ‘Regulations, institutional quality and entrepreneurship’, Journal of Regulatory Economics 55: 46-66.

Divanbeigi, R, and R Ramalho (2015) ‘Business regulations and growth’, World Bank Policy Research Working Paper No. 7299.

Freund, C, and B Bolaky (2008) ‘Trade, regulations, and income’, Journal of Development Economics 87(2): 309-21.

Kirkpatrick, C (2014) ‘Assessing the impact of regulatory reform in developing countries’, Public Administration and Development 34(3): 162-68.

O’Reilly, C (2022) ‘Barriers to entry, entrepreneurship and income inequality within the USA’, Journal of Entrepreneurship and Public Policy (ahead-of-print).

Rashad, A (2023) ‘The effect of flexible ownership regulations on foreign investments in the UAE: An impact evaluation study using a quais-experimental method’, ERF Conference Paper.

Tags: , , , , , ,

  • Ahmed Rashad
    Ahmed Rashad
    Assistant Professor of Economic Diplomacy, Anwar Gargash Diplomatic Academy, Abu Dhabi

Most read

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Egypt’s labour market: new survey data for evidence-based decision-making

As Egypt faces substantial social and economic shifts, understanding the labour market is crucial for designing policies that promote employment and inclusive economic growth. This column introduces the latest wave of the Egypt Labor Market Panel Survey, which provides fresh, nationally representative data that are vital for examining these dynamics.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.

The evolution of labour supply in Egypt

Egypt stands at a critical point in its demographic and labour market evolution. As this column explains, while fertility rates have dropped, reducing long-term demographic pressures, the ‘echo generation’, children of the youth bulge, will soon enter the labour market, intensifying the need for policies to accelerate job creation. At the same time, participation in the labour force, particularly among women and young people, is declining, partly as a result of discouragement.

More jobs, better jobs and inclusive jobs: the promise of renewable energy

Among the many economic and environmental challenges facing the countries of the Middle East and North Africa (MENA), two stand out: the need for jobs and the need to combat the threat of climate change by moving away from reliance on fossil fuels. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digital technologies on existing jobs, reduce its carbon footprint and create significant levels of employment, particularly for women and the youth, across a variety of sectors.

Towards a productive, inclusive and green economy in MENA

Decarbonisation of the global economy is a huge opportunity for countries in the Middle East and North Africa. As this column explains, they can supercharge their development by breaking into fast-growing industries that will help the world to reduce its emissions and reach net zero, as well as offering greater employment opportunities and new export lines. Micro, small and medium enterprises in the region can lead the transition to a cleaner and sustainable future, but this may require the formation of clusters of firms that overcome some of the constraints that their limited size could involve.




LinkedIn