Operation Management Research, 2012

Foreign Direct Investment and its Impact on United Arab Emirates.

BatoulModdarees. Associate Professor of Operations and Research, Zayed University, Abu Dhabi, UAE ArefAlHammadi, Abdullahalsaridi, Nasser Abdulla Nasser Student, College of Business Science, Zayed University, Abu Dhabi, UAE 1 ABSTRACT The project aims to identify the impact of Foreign Direct investment on UAE for the period 2000 to 2010. To examine the impact of FDI, regression analyses were applied on the collected data. This study shows significant positive impact of Foreign Direct investment on GDP and economic growth of UAE. Furthermore, the research indicates that economic growth, openness, and employment. The study shows negative relation between FDI and economic stability, which determined by inflation rate. The recommendations are that UAE should support Foreign Direct Investments in order to minimize the dependencies on oil exports and encourage foreign investors to establish more MNE, because it has significant impact on the country economy and Balance of payments (BoP). Keywords: FDI, GDP, Economic Growth, Inflation
1.1 LITERATURE REVIEW

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Various studies have been made for similar topic and the results are varied between accept or reject the realty of FDI and its impact on countrys economy. Based on Laura Alfaro and AreendamChanda, that the results show that the same amount of increase in FDI, regardless of the reason of the increase, generates three times more additional growth in financially well-developed countries than in financially poorly-developed countries (How Does Foreign Direct Investment Promote Economic Growth. 2006). In study of the GCC, Dr.FatimaAlshamsi concluded that the GCC, FDI has been an important factor in this blocks economic growth. (Foreign Direct Investment and Economic Growth in the GCC Countries). Other study done by many researchers in US about FDI and GPD growth find out that The results show that greater trade openness, more limited rule of law, lower receipts of bilateral aid, and lower income level in the host country reinforce FDI-to-growth causality. Greater political rights and more limited rule of law, on the other hand, reinforce growth-to-FDI causality. (Foreign Direct Investment and Economic Growth in Asia). Another study in China concluded that Chinas economic growth would inevitably lead to the rise of FDI. However, the rise of FDI can promote economic growth but economic growth is not always the result. (Co-Integration Study of Relationship between Foreign Direct, 2011). Another research about GCC shows that the high inflows into the GCC countries generated in return a surge in imports of goods and services, along with high outflows in the form of foreign direct investments worldwide. (The Changing Pattern in International Trade and Capital Flows of the Gulf Cooperation Council Countries in Comparison with other OilExporting Countries, 2011). On the other hand, Counter researches shows that increase the outflow will affect on balance of Trade and

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it will affect negatively on economic, and the investment motivations which shows that not all FDI are positive for hosts countries (Dr. Ali JassemAlSadiq). Finally, although there are few counter arguments, still the number research that proved the relationship between Foreign Direct Investment (FDI) and Economic is high. 2 FOREIGN DIRECT INVESTMENTS IN UAE
2.1
WHAT IS FOREIGN INVESTMENT ?

The definition of Foreign Investments could be summarized as any investment in non-home country, or any management of enterprise in non-home country is foreign investment. Foreign Investment divided into two types, Foreign Direct Investment and Foreign Portfolio Investment.
2.2 ENTRY OPTIONS FOR FOREIGN INVESTORS IN UAE?

Investors can setup their business operations in UAE by establish wholly owned branches or incorporate wholly owned subsidiaries in each of the free zones, without the need to appoint a UAE national sponsor or have any UAE national ownership, and start agreement between local and foreign party which refer to jointventure.( Bashir Ahmed and James Bowden Afridi& Angell, Dubai).
2.3 INVESTMENTS MOTIVATIONS IN UAE?

UAE looking forward to diversification and less dependencies on oil export revenues, so the governments sought toremove the barriers by provide stable political condition, telecommunication, banking services, and tax Exemption. Other factors such as regain profitability and speak English widely is considered as reason to

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set up business in UAE. Further, the availability of free zones that gives some freedom form internal commercial lows.
2.4 CURRENT IN-FLOWS FDI IN UAE.

As known before the impotency of FDI is been in its inflow, because it may lead to surplus or reduce the deficit in balance of payment.
Figure1

Inflow
Inflow 12805.99 10899.93 10003.50 1183.84 -506.33 2000 2001 4255.96 4002.70 2004 2005 2006 2007 2008 2009 2010 95.30 2002 2003 3948.30 14186.52 13723.60

* United Nation Conference on Trade and Development (Billion AED)

Its recognizable that the FDI inflows increase from the period 2003-2008 and that was normal because rapid development at that period, however the reason behind the decline in inflows from 2008-2010 is the emergence of financial crises.
2.5 COUNTRIES CONTRIBUTION LIST OF FDI IN UAE.

Based on latest data available from National Bureau of statistic the most county contribute in FDI is United Kingdom for the period of 2007-2009.

Table1

(Million AED)

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2007

2008

2009

Country

38,336 11,613 10,215 2,776 8,436 1,297 4,205 2,825 1,198 5,968 28,362 18,788

33,993 14,541 12,246 8,652 7,737 1,612 2,982 3,712 1,580 6,142 39,966 20,379

31,767 14,533 13,610 7,303 5,759 4,507 4,371 3,147 3,035 2,346 45,541 18,056

United Kingdom Kuwait Japan United States Saudi Arabia Qatar France Australia Switzerland India Unknown Other Countries

134,017

153,546

153,975

Total

*National Bureau of statistic- UAE

3 RELATION OF FOREIGN DIRECT INVESTMENTS AND MACRO-ECONOMIC IN UAE. To determine the impacts of FDI on UAE Economic, regression analyses were applied on the collected data to figure out the relationship between FDI and GDP, GDP Growth for market size, Openness, employment, and economic stability by inflation rate

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3.1 FOREIGN DIRECT INVESTMENTS AND GROSS DOMESTIC PRODUCTION (GDP) OF UAE.

After analyzing available data and use liner regression and correlation methodology we fund out that R2= 0.916, which mean there are strong positive relationship between FDI and GDP.
Figure2

GDP VS FDI
400000.00 300000.00 200000.00 100000.00 0.00 0 2 4 6 8 10 12

y = 23560x + 52579 R = 0.9169

GDP Linear (GDP)

*UNITED NATION CONFERENCE ON T RADE AND DEVELOPMENT

3.2 FOREIGN DIRECT INVESTMENTS AND OPENNESS

Openness is the degree of economic open for the global economic system and if it has capacity for more investments. Most investors prefer open economic with free capital flow and its defined by (total export + total import)/GDP. After doing Liner Regression analysis R2= .933, which mean strong positive relationship.
Figure3

Openess
150% 100% Openess 50% 0% 0 2 4 6 8 10 12 Linear (Openess) y = 0.0597x + 0.7631 R = 0.9331

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3.3 FOREIGN DIRECT INVESTMENTS AND EMPLOYMENT

Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created, what percentage of the work force is actively working, and how many new people are claiming unemployment. (www.cmsfx.com,2012) Furthermore its important to find if there is relation between employment or not. After collecting the data we found that the number of employment increase from 2007 2010. Further, R2=0.932, which mean also strong positive relationship between them.
Figure4

Employment
6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00 0 2 4 6 8 10 12 Employment Linear (Employment) y = 334.52x + 912.25 R = 0.9325

*UNITED NATION CONFERENCE ON T RADE AND DEVELOPMENT

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3.4 FOREIGN DIRECT INVESTMENTS AND ECONOMIC STABILITY

Economic Stability often measured by inflation and after the analysis we fund that the relationship between FDI and Inflation is different then other factors and its Negative relationship that mean increase in inflation will decrease FDI and vise-versa. The R2=.0348
Figure5

Inflation
3500 3000 2500 2000 1500 1000 500 0 0 2 4 6 8 10 12

y = -117.1x + 2381.6 R = 0.3485

Inflation Linear (Inflation)

*UNITED NATION CONFERENCE ON T RADE AND DEVELOPMENT

4 CONCLUSION Finally, The finding shows that FDI has significant impact on UAE economy based on important economic factors, where its effect the GDP, positively that mean increase of FDI promote to increase GDP, as well as Openness and employee. However, FDI has negative relation of inflation, whichmeansany increase of inflation will cause decrease of FDI and vise versa. Our recommendations to promote FDI are 1st provide exemplary investment environment for foreign investors, 2ND the Government should work more on

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improving policies and regulation that discourage foreign investors. 3rd encourage the local expertise to work within MNE. Finally the government should control the inflation rate and maintain economic stabilities beside to continue improve the infrastructure and keep stable political condition. 5 REFERENCES
ALEQT.COM. 2011. <http://www.aleqt.com/2011/01/27/article_496749.html>. Alfaro, Laura, Areendam Chanda and Selin Sayek. "How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages." (2006). AlShamsi, Fatima and Mohammed AlAriani. "Foreign Direct Investment and Economic Growth in the GCC Countries: A Causality Investigation Using Heterogeneous Panel Analysis ." (n.d.). "Co-Integration Study of Relationship between Foreign Direct Investment and Economic Growth ." (2011). Emirates, Doing business in United Arab. 2011. Employment, Indicators. 2011. <http://www.cmsfx.com/en/forexeducation/online-forex-course/chapter-2-fundamental-factors/fundamentalanalysis/employment-indicators/>. Development, United Nation Conference on Trade and. 2011. <http://UNCTD.org>. "Foreign Direct Investment and Economic Growth in Asia ." (n.d.). http://unctadstat.unctad.org/. 2012. http://www.uaestatistics.gov.ae. 2012. http://www.scad.ae. 2012. http://databank.worldbank.org. 2012. "The Changing Pattern in International Trade and Capital Flows of the Gulf Cooperation Council Countries in Comparison with other Oil-Exporting Countries ." (2011).

Operation Management Research, 2012