Archive for March 2017

Abu Dhabi Chamber of Commerce and Industry (ADCCI) recently sat down with Wes Schwalje, COO of Tahseen Consulting, to discuss how Abu Dhabi can attract more foreign investment.

ADCCI: What makes a country attractive for foreign investment?

Schwalje: There is widespread agreement that foreign direct investment flows are influenced by the size and growth of the investment destination, stability, openness, and institutional quality. This consensus is built upon a foundation of a number of stylized facts: larger economies tend to attract more foreign investment; trade openness and export orientation have a strong complementarity with FDI flows; sectoral and cluster effects often signal opportunity for foreign investors that increase investment, political and macroeconomic stability attracts investors; and good governance and institutional quality are key FDI determinants. However, emerging research on FDI shows that bilateral trade agreements, investment treaties, and customs unions potentially have a much higher influence on FDI attraction than macro-economic policy factors like business costs, infrastructure, and quality of political institutions. So, in addition to a continuing focus on strengthening the business enabling environment in the GCC, we will likely also start seeing a much stronger focus on bilateral and multilateral trade and investment frameworks.

ADCCI: What credentials can Abu Dhabi leverage to boost and optimize its FDI?

Schwalje: Abu Dhabi currently offers foreign investors a high level of political and economic stability, strategic location, world-class infrastructure, tax incentives, and strong social infrastructure. It is currently the second most preferred destination of foreign investor in the Arab World. However, there are several competing, emerging FDI destinations in the Arab World which raise questions about how investment destinations can further differentiate themselves from competitors.

ADCCI: What sort of FDI related policies and incentives could attract investors to Abu Dhabi?

Schwalje: In general across the GCC, there is a need for deeper reforms to enhance the business enabling environment and simplify investment approval and licensing. One of the most significant concerns of potential investors in the GCC, which the UAE is currently addressing at the federal level, is limitations on foreign ownership and sponsorship requirements often contained in GCC investment laws. Investment laws which give investors greater control over their investments will be critical. Over the longer term, several GCC countries will need to consider if the investor incentives and protections offered by economic and investment zones that primarily target foreign investors should be rolled out more broadly to benefit onshore businesses. Stepped up policies to support small and medium enterprises are needed. A stronger focus on bilateral investment treaties and free trade agreements can build on the achievements GCC countries have made in improving the business enabling environment. Clarifying the role of countries and the Secretariat General of the Gulf Cooperation Council in promoting FDI could also provide a stronger regional framework for FDI attraction.

Abu Dhabi Chamber of Commerce and Industry (ADCCI) recently sat down with Wes Schwalje, COO of Tahseen Consulting, to discuss the role of small and medium sized enterprises (SMEs) in Abu Dhabi and the region’s development.

ADCCI: How critical are SMEs to the development of a sustainable economy?

Schwalje: SMEs are not just important to regional economies – across the region SMEs ARE the economy. So it is impossible to separate the industrial structure of the Arab World from a discussion about sustainability. Tahseen Consulting conducted a study in 2012 which showed that, if the European Union’s definition of what constitutes an SME is applied to the region, SMEs represent 92% of companies in the Arab region with micro firms <10 employees making up 25%, small firms of 10-49 employees making up 44%, and medium-sized firms with 50 – 250 employees making up 23% of firms. Across the region, these firms employ up to 65% of the workforce depending upon the country. In Abu Dhabi, 95% of the total enterprise population are SMEs which employ 24% of the workforce. While in Dubai, SMEs make up 95% of the enterprise population and employ 42% of the workforce. At the national level, SMEs constitute 94% of the total enterprise population and employ 86% of the workforce.

ADCCI: In particular, which Abu Dhabi sectors would benefit from more SME participation?

Schwalje: The Khalifa Fund estimates that 73% of SMEs in the UAE are in the trade and retail sector, 11% are in services, and 11% are in manufacturing. The Global Entrepreneurship Monitor shows that the UAE has one of the lowest rates of total entrepreneurship activity of innovation-driven economies, and only 2.3% of new ventures are medium-tech or high technology ventures. So technology is a key sector for potential SME growth. It is also important for Abu Dhabi to enhance enterprise creation in the priority sectors highlighted in the Economic Vision 2030. A few Emirates are introducing interesting programs in which large firms in priority economic sectors are working to upgrade SMEs to indigenize their supply chains. These initiatives, which were pioneered by the extractive sector, hold significant promise in building a strong SME base which can not only generate long-term benefits for larger parastatals in the UAE but also broaden the SME base from its traditional focus on trade and retail. Trade and retail cannot provide the high skill, high wage jobs that the UAE aspires to provide for its citizens and residents. Only knowledge-based industries have the potential to do this. However, SMEs in priority knowledge-based industries can’t rely on government contracts alone – they must also be innovative and globally competitive.

ADCCI: What could encourage more SMEs to set up shop in the capital?

Schwalje: Several of Tahseen Consulting’s clients have become interested in the ongoing experiment of Chile in implementing Startup Chile. This initiative has a mission to attract early stage, high-potential entrepreneurs to bootstrap their startups in Chile. It is similar to what the Dubai Future Accelerators initiative is trying to achieve but on a much larger scale. To date, Startup Chile has invested $40 million in accelerating 1,309 startups. These firms are now worth $1.3 billion, have a survival rate above 50%, and created 5,162 positions worldwide. In essence, Chile has achieved a 34x return on its investment while also positioning itself as a global startup and SME hub. We expect to see a lot more Startup Chile type initiatives in the GCC. So national acceleration programs and supply chain indigenization are key strategies that could help attract SMEs to Abu Dhabi and position it as a global startup hub. Such programs would be in addition to resolving the bureaucratic obstacles and barriers to operating an SME in the UAE. It is not enough to gauge progress relative to the quite methodologically flawed World Bank Doing Business Rankings. It is typically the processes which are not measured by such indices that cause SMEs headaches. One particular challenge that comes to mind is cost businesses in eth UAE pay for internet – at an average price per megabyte of download speed of approximately $18, the common entry-level fiber broadband packages offered in the UAE cost 5 times more than similar packages offered by the leading countries in the World Bank’s Ease of Doing Business Ranking.

Abu Dhabi Chamber of Commerce and Industry (ADCCI) recently sat down with Wes Schwalje, COO of Tahseen Consulting, to discuss how Abu Dhabi Global Market Place is faring after one year in operation and how Abu Dhabi’s plans to establish the UAE as a global MRO and manufacturing hub is evolving.

ADCCI: How might Abu Dhabi Global Marketplace (ADGM) change the economic landscape of Abu Dhabi and the UAE?

Schwalje: Abu Dhabi has traditionally been a strong player in the regional financial services sector. ADGM will enable Abu Dhabi to expand its influence from a regional financial hub focused primarily on commercial and Islamic banking to an international financial center that offers a wider array of financial services such as private banking, wealth management, and asset management. Financial centers like ADGM and Dubai International Finance Center support economic diversification efforts as well as respond to demand for increasingly sophisticated financial services fueled by development. This is why the Abu Dhabi Economic Vision 2030 and Dubai Vision 2021 have a strong focus on increasing economic diversification by developing a sustainable economy which can prosper in a post-carbon era. Over the longer term, the vision is to position the UAE and its constituent Emirates as a unified international financial services hub offering a full spectrum of financial services comparable to other leading global financial centers.

 ADCCI: One year in, has ADGM been a success?

Schwalje: ADGM registered 170 companies in its first year of operation. If you contrast this with the initial tenant attraction of other regional financial centers and free zones, ADGM has had remarkable success. For example, a year after the Qatar Financial Center opened in 2004, it had attracted approximately 50 tenants. Back in 2000 the recently launched Dubai Internet City signed up 180 tenants in its initial year of operation. Three years after its launch in 2008, the Dubai International Financial Center had about 400 tenants. However, the number of companies licensed by ADGM to date does not say much about whether Abu Dhabi is developing a broader financial services industry in line with the Abu Dhabi Economic Vision 2030. ADGM’s true success in becoming a financial services hub will only be apparent in a 5-10 year timeframe, but the initial signs of success that have foreshadowed the success of other industry free zones in the region are there.

ADCCI: Shifting gears a bit, what are Strata’s strengths?

Schwalje: In 2008, the Economic Vision 2030 outlined Abu Dhabi’s intention to become a global player in the aerospace MRO and parts manufacturing segments. Aerospace was chosen as a capital-intensive, export-oriented focus sector that could advance economic diversification and knowledge based economic transformation objectives.

Strong government support for the development of the aerospace sector, investment in aviation infrastructure like Nibras Al Ain Aerospace Park and the Midfield Terminal, as well as the growth of both Dubai and Abu Dhabi as global aviation hubs has ensured that Strata has a strong local market for its products. As one of the largest global purchasers of Airbus and Boeing, UAE national carriers are strong captive domestic customers which Strata has leveraged to grow internationally. The success of Strata is both a function of the support the aerospace industry has received from the Abu Dhabi Government as well as shrewd strategic execution of Strata and its owner Mubadala to build world-class MRO and manufacturing capabilities. Strata has leveraged the capabilities it has built serving domestic customers to become a global supplier to aerospace industry leaders like Airbus, Boeing, Rolls-Royce, and GE.

ADCCI: What might the pitfalls/competition be in the coming years?

 Schwalje: Decreasing passenger unit revenues due to the fall in oil prices, along with foreign currency fluctuations, and pricing pressures are currently a key risk to Strata. For example, in November 2016 Emirates Group reported profits down 64% from the previous year due to strong competition and dampened travel demand. However, the internationalization of Strata’s activities will enable it to better weather industry demand fluctuations that may affect aircraft deliveries and maintenance requirements. Competition from other emergent MRO hubs will likely also present a challenge to Abu Dhabi’s plans to consolidate its gains to continue to build its aerospace sector. For example, India, with its growing aviation sector, skilled workforce, and cost advantages, could present strong competition to Abu Dhabi. Another emerging issue that is still unclear is how the introduction of value added tax in 2018 will affect the sector in terms of competing with foreign MROs.