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Introduction
United Arab Emirates is built on a trading history, and business has always been at the centre of the entire region for many years. The region enjoys abundant benefits and opportunities meant for a contemporary age when it comes to commercial matters.
Even though it is scarcely populated apart from having most of its area being very dry, the region boasts of a perfect business positioning that enables it to collaborate easily with financial markets in various parts of the world. UAE has significant oil deposits and is among the top global leaders in the production of oil in the world today.
According to recent government reports, the oil reserves in the region are about 98 billion barrels. Abu Dhabi claims the largest portion of this amount with about 92 billion barrels. The remaining percentage is shared among the other emirates, with Dubai and Sharjah taking considerable portions.
More importantly, the region harbors Dubai city which has been a major attraction of foreign investment at a period of heightening economic development. As a matter of fact, these expansive opportunities have made the region an ideal hub for modern day commercial activities.
Dubai city is a unique destination that offers dynamic business opportunities for both local and foreign investors, thus connecting UAE with the rest of the world (Strong and Robert 38). Apart from offering vast business opportunities, Dubai boasts of a variety of other aspects that provide more attractions to people from other regions of the world.
Some of these attractions would include sports events, tourism, and innovative construction projects that manifest all sorts of architectural magic. However, no matter the many resources within the UAE region in addition to the advantage of being in a strategic point, the region is lacking in an expansive economy that can fully utilize these opportunities.
In order to address this need, governments in the region have embarked in the idea of establishing free zones all over the entire UAE. These are geographically placed business establishments within which business organizations operate under special conditions.
The history of free zones in the UAE dates back 29 years ago, when the first free zone was established in Jebel Ali area in Dubai. Jebel Ali Free Zone harbors over 6400 business organizations from allover the world, and this makes it one of the biggest free zones today.
The main reason behind these developments was to increase the region’s economy by attracting investors possessing experience in different sectors from allover the world to invest in the region. So far, the free zones have proved to be successful in their mission of promoting business in the region.
Objectives of the study
This study analyses the idea of Free Zones as it applies in the UAE and other regions of the world. These zones are meant to draw investors from foreign countries to help in building the economic power of a certain country or region.
The study will also examine the current scenario of free zones in United Arab Emirates with the aim of showing how these establishments have helped to promote economic activities in the region. More importantly, the study also focuses on some of the common challenges associated with free zones in the UAE.
Finally, the study provides a personal opinion about the possible solutions to some of those problems.
Current scenario in general
The idea of free zones comes with immense economic benefits to countries intending to reduce barriers to economic success and excellence, through effective investment policies. The establishments promote economic freedom through fair and specialized trading, among other aspects that are significant in enhancing business success.
As a matter of fact, free zones offer an alternative avenue through which foreign investors can become free citizens of the countries they are intending to invest in. Free zones are based on real experiences, and are intended to bring together entrepreneurs having similar business intentions or aspirations.
This way, the establishments offer more independence and flexibility to players in today’s dynamic business world. Normally, a free zone authority gives business licenses to organizations that are owned by foreign investors. Each free zone is build around businesses belonging to the same industry category, and in that case, it provides licenses and other relevant business permits to organizations within those classifications.
Free zones are established in regions possessing vast geographic advantages and promising opportunities for commercial activities. National frontiers and other entry points to a country are some of the common areas that would provide suitable platforms for these economic establishments.
One notable aspect of free zones is that they are exempted from certain taxations, and for that reason, businesses within the zones have the freedom of operating without the worry of being interrupted by custom authorities. This special exemption from certain customs provides businesses within free zones with the freedom needed to increase their efficiency in the manner by which they carry out business operations in the global market.
Another outstanding advantage associated with the idea of free zones is that it satisfies entrepreneurs, thus helping them to achieve their business goals more easily. More importantly, the establishments play a significant role in promoting new business opportunities.
There is no doubt that these establishments also aid in the creation of employment opportunities across the world, thus helping to lessen the big burden of unemployment facing governments today.
Current scenario in the UAE
UAE is one of the regions that are leading in the establishment of free zones in the world today. Over the past few years, UAE has managed to establish various free zones in its plans to attract more business opportunities to its bulging economy.
Currently, there are 40 active free zones across the region, with more others expected to be launched in the near future. Ever since the first free zone was established in Dubai in 1985, UAE has realized a significant and remarkable achievement in matters involving both domestic and international trade affairs.
For instance, these establishments have played a key role in promoting the export and imports business in the region, due to diversified business opportunities as well as ready market for products. More importantly, the establishments have been a veritable opportunity for the region’s development in business matters.
As a matter of fact, these business establishments have proven to be more successful in drawing a large number of foreign business organizations into the region. Free zones in the UAE, just like in other regions of the world, are classified under three main categories that include industrial zones, export processing, free trade zones, and special economic zones (Rao 249).
Industrial zones comprise of establishments that specialize in economic activities, such as media and textiles. Export processing zone, as the name suggests, is associated with those business organizations that specialize mainly on exports. The main goal of these types of zones is to provide exemptions of some specific taxation on re-exported goods.
Finally, special economic zones are actively involved in both local and international business affairs where they tend to apply specific strategies to develop businesses in multiple sectors. Free zones in the UAE are governed and managed by Free Zone Authorities.
Apart from helping companies to establish their businesses in Free Trade Zones in the UAE, the authorities have the responsibility of providing operating licenses to free zones. Foreign entrepreneurs planning to establish businesses in UAE through Free Zones can either register their businesses as Free Zone Companies or put up branches of their parent organizations that have been in existence within the region.
Free Zone Companies or Free Zone Establishments in UAE are governed by the legal terms of the Free Zone in which they are established. As it would be observed, free zones come with a number of incentives to the owners of free zone companies and other businesses within the establishments.
These incentives include, but are not limited to, full foreign possession of businesses, full relief from custom duties, prolonged lease periods, abundant and less costly energy resources, excellent storage facilities and fast approval of procedures.
Other benefits associated with free zones in the UAE include things such as exceptional operating facilities, confidentiality of business, special assistance for labor recruitment, and the opportunity to engage in more than one activity within the free zones. These incentives provide foreign investors with a promising business platform that enables them to benefit from the vast business opportunities in the region.
Challenges associated with free zones
Free zones experience many challenges in the course of their establishment and operation. One of the biggest problems facing these establishments in the UAE is the heightening competition in the market.
Even though free zones operate under a particular industry or business category, organizations within these establishments usually face great challenges from competitors who are fighting for equal opportunities and position in the market. There is also the challenge of strict operating conditions of free zones in the UAE.
The idea of exempting free zones from customs is said to have encouraged unethical business practices such as smuggling of goods, customs fraud, and money laundering, among other vices (Wong and Bo-sin 312). In order to take full control of such vices, the UAE government has responded by enforcing strict operating conditions for the free zones.
Another common problem with the Free Zones in the UAE is the law of restraint which limits investors in a particular free zone within the operations of that zone. This would have the meaning that investors contained in free zones can only operate within the zones in which they are established, and therefore cannot expand their business operations to reach other external markets within or even outside the region.
Another common problem with free zones is that people cannot put up any type of business in the zones because they are only meant for businesses falling within a particular industry. Cultural problems also form part of the many challenges facing free zones in the UAE, thus limiting their success and development.
For instance, the Middle East has been in the global limelight for all wrong reasons as far as terrorism is concerned. This negative perception, however, has triggered serious contempt against the Arabs from various communities around the world. For these reasons, some foreign investors would not think of investing in the UAE, since it is part of the Arab world.
Solution to the problems
While it is not possible to come up with long term solutions to all the challenges facing free zones in the UAE, there are some effective approaches that can be applied in combating some of the problems associated with free zones in the region. Regarding the issue of heightening competition in the developing global market, free zones and free zone companies can embrace the strategies used by other businesses in the market to address this big challenge (Kim and Renée 79).
For example, free zone companies should adapt effective business management strategies that will enable them stay ahead of their competitors in the market. Such approaches may include offering excellent consumer services, manufacturing high quality products, and embracing the power of technology to improve business operations within the zones.
Moreover players within free zones can easily beat competition by repositioning themselves in the main areas of excellent business performance such as market know-how, timely response, innovative and creativity, and price/quality factors, among other aspects. In regard with the cultural problems, free zones in the UAE should establish strategies aimed at educating the rest of the world about the vast business opportunities that can be explored in the region.
This approach can also be used to inform the global community that, even though many terrorists are of the Arabic origin, there is no direct connection between the UAE business environment and the several acts of terror that have been witnessed in the world recently.
In order to achieve these goals, free zones in the UAE can embrace modern technologies such as the internet to build good reputation about themselves. On the same note, interactive social media platforms such as Facebook and Twitter can also play a significant role in selling UAE free zones to the outside world.
Conclusion
As it is shown in this report, free zones play a significant role in promoting economic bases of countries. The use of free zones for the purpose of enhancing international trade has become increasingly common in the modern world. There is no doubt that free zones come with immense benefits to businesses, and for that reason, their contribution to the global economy can never be overestimated.
As it is shown in this paper, UAE is one of those regions that have benefitted a lot from the use of free zones as attractions for foreign investments that will play a crucial role in shaping its business operations. Moreover, free zones create avenues that foreign investors can use to gain access of a country’s economic ground without having to undergo various registration procedures.
This must explain the reason why free zones are associated with rapid growth of businesses in all the places where they have been applied. As a matter of fact, the benefits of free zones far outweigh the disadvantages, and for that reason, the idea of free zones is what developing countries should embrace in their plans of building strong economies.
Works Cited
Kim, Chan, and Renée Mauborgne. “How strategy shapes structure.” Harvard Business Review 87.9 (2009): 72-80. Print.
Rao, Kishore. “Free zones in the Middle East: Development patterns and future potential.” Trade Policy Developments in the Middle East and North Africa 2.8 (2000): 245-249. Print.
Strong, Michael, and Robert Himber. “The Legal Autonomy of the Dubai International Financial Centre: A Scalable Strategy for Global Free‐Market Reforms.” Economic Affairs 29.2 (2009): 36-41. Print.
Wong, Siu-Wai, and Bo-sin Tang. “Challenges to the sustainability of ‘development zones’: a case study of Guangzhou Development District, China.” Cities 22.4 (2005): 303-316. Print.
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