Can Riyadh outshine Dubai for business?
One of the questions I am most frequently asked these days is how seriously businesses should take Saudi Arabia’s threats to exclude non-KSA-headquartered foreign companies from doing business with its state entities.
An answer to that question can be framed by the extent to which the United Arab Emirates is rising to the challenge.
While the UAE would prefer to compare its competitiveness credentials against other global business hubs like Singapore and Hong Kong, there is no doubt that it is having to respond to the potential of a new regional contender for Middle East HQ dominance in the shape of its next-door neighbour.
Initiatives such as self-sponsoring golden (10-year) visas for executive directors, investors, scientists and entrepreneurs point to a desire to ensure that talented, innovative and influential businesspeople take a long-term view of their residence and employment in the UAE.
The latest move in this direction is an extension of the Commercial Companies Law (CCL) to allow ten new “sectors of strategic importance” to qualify for 100% foreign ownership of onshore entities.
Abdullah al-Saleh, the UAE’s under-secretary of the Ministry of Economy, recently that companies operating in the following sectors will now qualify: chemicals, petrochemicals, pharmaceuticals, defence and heavy industries, national food and healthcare security industries, and industries of the future, including space and renewable energy.
The original amendment of the CCL in December, which liberalised ownership restrictions on UAE firms, and this subsequent announcement, pave the way for a substantial expansion of the areas of the economy that will be open to foreign investors. The changes are part of a long-standing opening of the economy to foreign participation and will increase the country’s attractiveness as a business destination for both local and international investors at a time when it is facing growing competition from Saudi Arabia.
The revised law allows for 100% ownership of companies and thereby eliminates the need to retain a UAE national holding the majority share. In reality, many foreign businesses will still need local partners to build their business in the UAE, but the reform is a significant step in the Gulf Co-operation Council, where states have traditionally restricted foreign investor participation.
Coming on top of other legislative changes to attract foreign workers to the UAE, the latest reforms will help to cement recent efforts to open up the economy. The industries affected by the revised legislation are those prioritised under the UAE’s ten-year plan to expand the contribution of the industrial sector to Dh300bn (US$82bn) by 2031 from Dh133bn currently. A new industrial law is also due to come into force to promote a more attractive environment for industry in the UAE, further enhancing the attraction for foreign investment.
In light of the UAE’s redoubled efforts to counter the threat of increased regional competition, we believe the UAE will remain the leading commercial centre in the Gulf and continue to attract significant foreign interest with a welcoming business environment.
The Economist Intelligence Unit (The EIU) has recently published a white paper on the subject of Saudi Arabia’s efforts to establish its capital Riyadh as the pre-eminent business hub in the Middle East.
The Kingdom has actively encouraged foreign companies to set up operations and invest in its economy for years, but has had little success in compelling business leaders to establish regional headquarters within its borders. A more forceful approach is emerging under the guise of #ProjectHQ; the new initiative requires foreign businesses seeking contracts with the Saudi government, state-owned companies or sovereign wealth fund to locate their regional HQs in the country (preferably Riyadh) by 2024.
This whitepaper explores what all this all means for businesses and investors operating in the region, including the likelihood of a more even split of regional HQs, new business clusters and increased co-operation (rather than outright competition) between the UAE and Saudi.
A fabulous parallel
The competitive jostling between Saudi Arabia and the UAE puts me in mind of Aesop’s fable The North Wind and the Sun.
The North Wind and the Sun were quarrelling about which of them was the stronger. While they were arguing, a traveler passed along the road wrapped in a cloak. “Let us agree,” said the Sun, “that he is the stronger who can strip that traveler of his cloak.”
“Very well,” growled the North Wind, and at once sent a cold, howling blast against the traveler. But the harder he blew the more tightly the traveler wrapped his cloak around him, and eventually all his efforts were in vain.
Then the Sun began to shine, its rays growing ever warmer, until the traveler became so hot that he voluntarily pulled off his cloak.
Saudi Arabia may be wise to note that creating a conducive environment will usually have the desired effect where force fails.