Another group I’m working with is the Wharton School of Business, which publishes its “Knowledge @ Wharton” group of e-letters. The Arabic version just got up and running last year with a focus on Middle East/North Africa business and economic issues. This week, I wrote about “free zones,” which have incubated a lot of the business activity in the Gulf.
While many places use the free trade zone concept, it is especially important in the Gulf, which has strict limits regarding foreign ownership. (Emiratis must own 51 percent of all businesses, so foreigners must find a local partner with whom to open up shop.)
Western governments tend to use them more as a tax incentive, companies investing in a particular zone, can usually pay reduced tax, thereby lowering the cost of doing business. In the U.A.E., the issue of tax is basically moot. There are fees that do seem tax-like, but there is no income tax and the overall burden is a fraction of what a business would pay elsewhere.
“Free zones have proximity and a physical connection to the host economy, but enjoy a total separation from the rules and regulations related to the licensing and sponsoring of employees and the creation of businesses,” notes Khaled Ahmed, senior vice president of corporate strategy at Economic Zones World (EZW), a developer and operator of economic, logistics and industrial parks under Dubai World that runs the Jebel Ali Free Trade Zone, one of the oldest in the Gulf.
In 2009, total FDI through the UAE’s FTZs reached US$73 billion, the second-highest level in the Arab world, next to Saudi Arabia.
Perhaps not surprisingly, those numbers bring out the unsavory enterprises as well. The very nature of their relaxed bureaucracy make them very attractive to illicit traders and counterfeiters, whose proceeds often go to fund terrorism.
For businessmen like Anjan Turlapati, it was key to be able run and manage his business on his own and without the interference of a local partner. He moved his company Microsol, which manufactures solar cells, from India to the Fujairah Free Zone in 2003. The biggest pull to the Gulf wasn’t necessarily taxes – he said he didn’t have to pay taxes on products that were exported out of the country – but more a function of bureaucracy.
“There are no tax administrators. You don’t have the range of regulatory bodies [that India has], whether they are for [retirement] funds or labor law,” he said. “[India’s] range of departments [have regulations that] tend to cost money to comply with, and eat up management time.
“The amount of administrative staff [you need to employ] is miniscule compared to what you need in India,” he added. “To handle compliance with company law, income tax, international standards, filings with 12 different departments and customs, you need 30, maybe 40 people. In Fujairah, we have one person.”