Doing Business in the Middle East

by Zina Kiryakos February 22 2010, 11:04

I. INTRODUCTION

 

The Middle East with a fast growing population of over 300 million, abundant supply of natural resources, and governmental efforts aimed at privatizing and expanding country industries has cultivated this region into a growing, lucrative market for U.S. companies. Middle Eastern countries have undertaken globalization efforts to facilitate foreign direct investment and encourage trade with other regions. The economic importance of the Middle East along with these globalization efforts suggests that any U.S. company wishing to become a global business leader should have a presence in this Region.

 

This article provides an overview as to the state of U.S. investment and business in the Middle East, while detailing some of the industry areas and cultural issues that U.S. companies should consider prior to investing in the Region. The six member states of the Gulf Cooperation Council (GCC), Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, and the United Arab Emirates (UAE) have become important trading partners with the U.S. [1] This article additionally focuses on foreign investment in two of the GCC countries, Saudi Arabia and United Arab Emirates, as well as the issue of Dubai’s request for the delay in repayment of bonds announced on November 25, 2009. Furthermore, the article reviews the region as a future force of market opportunity for U.S. companies.

 

II.  BACKGROUND

 

The Middle East encompasses a variety of cultures as well as being the home of three dominant religions born from this region, Christianity, Islam, and Judaism. To prosper in this region U.S. companies should be culturally sensible to the local customs and norms of the region. Although the countries can vary as to acceptable social norms, the dominance of conservative behavior and traditional values are synonymous in most Middle Eastern countries. Therefore, U.S. companies that have entered or are interested in entering the Middle Eastern market must pay close attention and operate with sensitivity in ways that are not offensive to the public norms of traditional roles for men and women. [2] Additionally, U.S. companies must understand the social interrelations in the Middle East, such as understanding that handshakes are a common form of greeting in the Middle East at the start and end of a business meeting or that interpersonal exchanges with colleagues may vary from accepted norms in the West, especially when Middle-Eastern women are involved. [3] Furthermore, generous forms of hospitality should be expected and accepted from Middle-Eastern business colleagues. [4] Demonstrating sensitivity to cultural norms not only destroys misunderstandings and stereotypes between regions of the world in this global marketplace, but also provides U.S. companies with further opportunities for business relationships with our top trading partners.

 

In 2009, Saudi Arabia, United Arab Emirates, and Israel were among the top 30 trading partners for the U.S. [5] In addition, various factors demonstrate that the continued expansion of the Middle East means potential growth for U.S. companies in this region. These factors include, a steady growth in people being more interested in U.S./Western culture, which means a larger demand for U.S. products in the region [6]; a greater dependence on U.S./Western Products in countries like Oman, to give but an example, which require imports to predominantly supply its essential products to their economy [7]; a regional shift towards privatization of state-owned industries; the economic expansion from the predominant industry of oil into technology information and services; and the integration efforts between the countries through free trade agreements and foreign direct investment laws. [8]

 

Similarly, in 2009, the World Bank reported that, “the Middle East and North Africa picked up the pace of business regulatory reform faster than any other region in a year of global financial uncertainty.” [9] In the World Bank’s ranking of the ease of doing business in 181 countries, Saudi Arabia ranked #13, while United Arab Emirates jumped from a 47 to a #33 ranking and “became one of the world’s 10 most active reformers for the first time by eliminating the minimum capital requirement for business start-ups and simplifying registration.” [10]

 

III. ANALYSIS

 

The Middle East presents lucrative business opportunities in various industries for U.S. companies to supply their goods and services, including in areas such as finance, manufacturing, technology, and infrastructure. Nonetheless, there are risks in investing within foreign regions. These risks are usually translated in political strife, civil and international conflicts (with Iraq serving as the main location for the past 20 years), and nationalization of industries by the government. In light of these risks, U.S. companies must undertake a due diligence analysis to determine which Middle Eastern countries present the most opportunities by weighing the risks of operating in certain areas of the region and the benefits of doing so. In spite of these risks, certain Middle Eastern countries have modern economies and stable governments that reduce the probability that these risks would ever arise, making them, thereby, a very attractive destination for U.S. investment. Two countries where the risk associated with foreign direct investment has been greatly reduced are Saudi Arabia and the United Arab Emirates (UAE). Saudi Arabia not only holds the largest oil reserves in the world, but additionally the largest GCC economy. [11]

 

Saudi Arabia’s policies have allowed the expansion of its markets to foreign investment. For example, foreign investors have the ability to repatriate their investments. [12] Also, SA has facilitated a wave of privatization of certain sectors such as, “telecommunications, electricity, and airline industries, postal services, railways, port services, and water utilities,” providing U.S. companies a potential market for their goods and services. [13] Furthermore, U.S. companies have an advantage with the use of technology and personnel that assist Saudi Arabia in its desired agricultural expansion, with the ability to use Saudi Arabia government funds through loans to promote agriculture in a mostly desert country. [14]

 

The UAE also serves as a great example of successful U.S. investment. Indeed, the seven city-states that make up UAE continue as a role model of expanding financial district with its modern skyline, impeccable amenities, and with the one of the most developed economies in the region. The main focus for foreign direct investment in regard to the United Arab Emirates includes its capital city, Abu Dhabi, and the second largest Emirate, Dubai. Although Abu Dhabi functions as the financial stronghold of UAE with over 90% of the country’s oil reserves, Dubai has expanded UAE’s manufacturing and finance industries. [15] The Jebel Ali Free Trade Zone has become increasingly attractive to U.S. companies as they can expand their businesses in this area without requirement of licensing with the government, enjoy corporate tax exemption, and have the ability to repatriate capital and profits. [16]

 

Despite all the great economic opulence of the UAE, on November 25, 2009 (or 25/11 as it is commonly known), the beaming economic epicenter known as UAE took a hit when the state owned conglomerate, Dubai World, requested a delay in repaying US$26 billion in bonds that were coming due. [17] Although this announcement sent fears of market crashes in the Abu Dhabi and Dubai stock exchanges and gloom and doom predictions from some financial analysts, the vitality of this region expects a rebound. As with the world economy the main factor in the Dubai crisis stemmed from its real estate arm, Nakheel, which does not have the cash flow to meet payments due on bonds. [18] Nonetheless, other Dubai companies in various sectors such as port operations, the London Stock Exchange, hotels, airlines, and stakes in buildings around the world support that this city-state has the assets to sell along with potential cash flow in order rebound and grow in the future. [19]

 

The future for business opportunities continues to be bright in the Middle East despite the effects of the Dubai announcement and subsequent market activity. In February 2010, the Prime Minister of UAE announced a new vision of growth for the country through the year 2021, which included a focus on moderate economic growth, healthcare, and education. [20] Furthermore, although analysts cut 2010 growth forecasts for UAE, the Economy Minister announced an expected growth forecast of 3% in 2010 for the country. [21] The high oil-reserves contribute to the GCC States continued creditworthiness based on Standard & Poor’s (S&P), although the rating agency expects further corporate defaults in the region. [22] S&P has slashed GCC’ companies ratings based on “deterioration in GCC companies’ asset quality among worsening economic conditions and concerns over the impact of debt defaults at Saudi conglomerate Al Gosaibi and Saad Group,” as well as due to the Dubai loan delay announcement. [23] In a world economy that is facing similar woes, these issues appear to be more representative of the times versus systematic problems indicating a lack of growth. As demonstrated by the work of the Middle East Council of American Chambers of Commerce, which represents over 700 U.S. companies doing business in the Middle East, a vital role exists for trying to level the playing field for U.S. companies due to strong global competition over the lucrative Middle Eastern market. [24]

 

In addition to the six countries that make up the GCC, the need for rebuilding the infrastructure and modernize the oil refineries in Iraq places it as an additional future business opportunity. [25] These developments have led U.S. companies to continue their operations in Iraq or recently enter the market in hopes of acquiring large government contracts for pipeline repairs and potentially the operation of a new port. [26] Although this provides U.S. companies with further opportunity in the country, it also provides the same or new U.S. companies to redeem themselves from past practices of overcharging for work not up to par or not finishing projects U.S. companies have started in Iraq. [27] Instead of taking advantage of a country that has been ravaged by years of horrific international sanctions, war, and a government suffering from corruption and the inability to regulate so many contracts, foreign companies should expand upon the opportunities in the country in a legitimate manner.

 

Furthermore, in May 2010 Israel will receive an upgrade from the status of “developed from emerging market” in the MSCI World Index and the MSCI EAFE Index, which means potentially more investors in Israel’s equity market. [28] The country imports items varying from petroleum, coal, to aerospace and defense products from U.S. manufacturers. Additionally, the free-trade agreement Israel entered with the U.S. provides further justification for expanding U.S. sales into the country. [29]

 

IV. CONCLUSION

 

There is a potential for U.S. companies to grow and expand in various industries in the Middle East.  From the traditional oil industry to rebuilding infrastructure in Iraq, finance and telecommunication services in the GCC States, as well potential for agriculture development in Saudi Arabia. The keys to success in this region, as with others in this global market, includes performing a thorough due diligence as to the country’s atmosphere and political and legal stability as well as obtaining expert assistance on understanding the culture and sensitivity to the traditional norms of the region.  Saudi Arabia is a strong example of the investment success that U.S. companies can achieve with proper due diligence prior to investing in the Middle East. [30] Furthermore, strong growth prospects, as more U.S. companies expand their operations, workforce, and infrastructure in the Middle East, as well as the continued creditworthiness of the GCC States indicates the lack of impact from 25/11.

End Notes: 

[1] John H. Donboli & Farnaz Kashefi, Doing Business in the Middle East: A Primer for U.S. Companies, 38 Cornell Int’l L.J. 413, 415 (2005). 

[2] Maria Mussler, Doing Business in the Middle East and North Africa, U.S. Department of Com., Middle East North Africa Bus. Info. Center (2005), http://www.export.gov/middleeast/Doing%20Business%20in%20the%20Middle%20East.pdf. 

 

[3] Id.

 

[4] Id.

 

[5] Int’l Trade Admin., TopU.S. Trade Partners (2009), http://ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf

 

[6] Donboli & Kashefi, supra note 1, at 414.

 

[7] Id. at 444.

 

[8] Id. at 414.

 

[9] The World Bank, Doing Business 2010: Middle East-North Africa Sets Business Regulatory Reform Pace (2009), http://www.worldbank.org/mena.

 

[10] Id.

 

[11] Donboli & Kashefi, supra note 1, at 431-32.

 

[12] Id. at 432.

 

[13] Id.

 

[14] Id. at 434.

 

[15] Id. at 438-39.

 

[16] Id. at 440.

 

[17] Simeon Kerr, Dubai Offered an Alternative Future, Ft.com, Feb. 8, 2010, http://www.ft.com/cms/s/0/be4c185c-14c7-11df-9ea1-00144feab49a.html

 

[18] Richard Spencer, Dubai’s Financial Crisis: A Q&A, Telegraph.co.uk, Nov. 27, 2009, http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6668281/Dubais-financial-crisis-a-QandA.html.

[19] Id.

 

[20] Kerr, supra note 16.

 

[21] Trade Arabia, UAE Economy ‘To Grow By Up to 3pc’, Feb. 15, 2010, http://www.tradearabia.com/news/ECO_174932.html

 

[22] Mirna Sleiman, S&P Sees More Defaults in Middle East, Wall St. J., Feb. 9, 2010, http://online.wsj.com/article/SB10001424052748704820904575054740931380412.html

 

[23] Id.

 

[24] Middle East Council of American Chambers of Commerce, http://www.mecacc.org/aboutus.html (last visited Feb. 21, 2010).

 

[25] Timothy Williams, U.S. Companies Join Race on Iraqi Oil Bonanza, N.Y. Times, Jan. 13, 2010, at A4, available at http://www.nytimes.com/2010/01/14/world/middleeast/14rebuild.html

 

[26] Id.

 

[27] Id.

 

[28] Israel: MSCI to Raise Rank to Developed Market, N.Y. Times, June 15, 2010, at B5, available at http://www.nytimes.com/2009/06/16/business/global/16fobriefs-MSCITORAISER_BRF.html

 

[29] Id.

 

[30] Saudi Arabian General Investment Authority, http://www.sagia.gov.sa/en/Key-sectors/ICT/Success-Stories/ (last visited Feb. 21, 2010).

 

Tags:

Corporate

Comments are closed

Theme by Mads Kristensen

Invitation


We invite law professors, practitioners, and students to submit short articles for publication on this website. Simply email articles to the editors of the journal using the "Contact" form link above.   We also strongly encourage readers to post comments relating to a specific article or a topic covered by an article on the website. Just click on the "Comments" link located in the post footer below each article.

Recent Comments

Comment RSS

Disclaimer

This Journal is published by members of the Business Law Society at the University of Illinois College of Law. It is not a publication of the University of Illinois, and, therefore, the University of Illinois bears no responsibility for its content. Moreover, this Internet publication is prepared as an informational service only and should not be relied upon as legal advice. Although every attempt is made to ensure the information is accurate and timely, the information is presented "as is" and without warranties, either express or implied.