Foreign direct investment pertains to an investment made by a company or individual in another country. Such an investment typically involves establishing business operations and acquiring business interests or assets in a different country.
Most countries view FDI favorably, seeing them as drivers of economic growth. As such, more and more countries are opening up their economies to foreign direct investors. And the competition for foreign direct investments has led governments to allow foreign ownership where it used to be prohibited.
As a case in point, UAE foreign ownership of up to 100% is now available to foreign business entities and individuals.
Traditionally in the UAE, 100% foreign ownership was available only in specifically designated free zones. Companies operating in free zones, however, were restricted to offshore operations. To do business in the UAE mainland, they had to have an agent to comply with the rule that said a company operating onshore should be 51% owned by UAE nationals.
However, in 2018, the federal government approved 100% foreign ownership for 122 economic activities across 13 sectors. This rule allowed foreign individuals and entities to wholly own businesses in the UAE mainland as long as their business activities fell into any of the 122 identified economic activities.
And in 2020, the federal government amended the Commercial Companies Law of 2015 and made 100% foreign ownership in the UAE mainland permissible by default, except in activities with strategic impact.
The emirates or the autonomous city-states comprising the UAE have the final say on implementing this new policy. They can allow up to 100% ownership or a fraction thereof. And they have to identify the economic activities where they will allow foreign ownership.
Abu Dhabi and Dubai have already identified more than 1,000 economic activities where foreign individuals and entities are allowed 100% foreign ownership.
The case of the UAE demonstrates how trade interdependence continues to grow more profound and more vital, and how governments and nation-states are making FDI an essential strategy for economic development.
But why would a firm or individual ride the FDI wave to invest in another country?
There are many l reasons for a company to invest in a foreign country (i.e., the host country). Before proceeding any further, however, note that investing in another country in the context of this article refers to investing in business operations, assets, and interests.
Foreign direct investment is not a mere portfolio investment, where one simply acquires equity in a company located in the host country.
Retaining your market in the host country is a solid reason for direct investment in that country. Suppose you manufacture construction equipment, and the UAE and the rest of the GCC are your biggest markets. In this case, it makes sense to establish business operations in Dubai, Abu Dhabi, or any other emirate.
Investing in another country also makes sense if you wish to expand your market to include the host country. For instance, if you manufacture shoes and want to export to Indonesia, making a capital investment in Indonesia can make doing business in Indonesia easier.
In the UAE, free zone companies are not allowed to operate onshore. However, if a free zone company sets up a company in the mainland, it can expand into the UAE mainland and open up new markets for its products and services.
If you are highly reliant on imported resources for your business operations, investing in the country where you import your resources makes business sense. Not doing so can leave your supply chain vulnerable to economic and political upheavals.
Countries usually have protective trade policies like tariff walls and import quotas to protect domestic producers from foreign competitors. Tariff walls are custom duties applicable to goods coming into the economy, whereas import quotas are policies that restrict the flow of such imported goods.
You can bypass a country’s protective trade policies when you invest in and operate from that country. Through FDI, you can become one of the country’s domestic producers instead of a foreign competitor.
One of the reasons many foreign firms make foreign direct investments is to take advantage of the raw materials and labor resources available in a host country.
For instance, if the labor cost in a host country is low, then transferring labor-intensive operations to the host country makes strategic sense.
And what if the host country restricts access to specific resources such as ores, timber, and other industrial resources to locally domiciled companies? In this case, a foreign company gains a strategic advantage by establishing business operations in the host country.
Some countries have attractive FDI incentives. Such incentives include advantageous corporate tax structures, prolonged tax holidays, favorable property lease and ownership agreements, and financial subsidies.
Strictly speaking, this qualifies as one of the incentives host countries use to encourage foreign direct investments. However, this incentive applies to individuals rather than business entities and, thus, deserves to be discussed separately.
The Turkey citizenship by investment program is an example of this particular incentive. Under this citizenship program, a foreigner who fulfills certain conditions, such as substantial property investments, can obtain Turkish citizenship in addition to their current citizenship.
In the UAE, foreign investors may already have a path to acquiring Emirati citizenship, according to reforms to the Executive Regulation of the Federal Law concerning Nationality and Passports announced on 30 January 2021.
However, it is not something anyone can just apply for. Only nominations from Rulers and Crown Princes Courts, Executive Councils, and the Cabinet are going to be considered. While the move remains highly restrictive, it’s a development FDI investors can benefit from in the future.
The world is increasingly becoming integrated, interconnected, and interdependent, and countries have come to acknowledge the benefits of foreign investments. Consequently, governments are increasingly opening up their economies to foreign investors.
But why should you invest in another country?
Because it makes business and strategic sense.
If the reasons discussed above resonate with you, perhaps it is time you make a foreign direct investment, too.