The Role of Diversification Strategies in Economic Development for Oil-Dependent Countries: The Case of UAE
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International Journal of Business and Economic Development Vol. 3 Number 1 March 2015
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 47
The role of diversification strategies in the economic development for oil-
depended countries: - The case of UAE
Ahmed Zain Elabdin Ahmed
College of Business Administration
AUST-Fujairah Campus
Keywords
Diversification Strategies, Economic Development, Oil-Depended Economy, Competitiveness.
Abstract
Diversification strategies adopted by oil-depended economies' played an important role in the
economic development in these countries, which rely heavily on oil exports. UAE as an oil-dependency
economy has the type of strategy to diversify the sources of its national income and reduce its dependence
on oil to counter the instability in global oil prices.
This paper seek to investigate whether the diversification strategies adopted by (UAE) is adequate to
manage its economic development. The methodology employed in this study is to examine the contribution
of diversified sectors based on the country's GDP especially during and after the global financial crisis
(2008-2012) using statistical analysis procedure. The results confirm that investment in different sectors
rather than oil would have substantially improved the performance UAE economy.
1. Introduction
The United Arab Emirates has witnessed substantial development in its economic
performance since 1970, despite of the fluctuation of oil price in the last two decades & global
financial crises in 2008. The UAE's Minister of Economy – Sultan Al-Mansouri said that the
UAE's strategy of diversifying income has helped the country reduce its dependence on oil, & he
expected the UAE's GDP to have grown at its forecast rate of 4.5 percent in 2014 (Gulf News
Jan.2015). In 2012, UAE experienced considerable improvement in economic performance,
which has become more stable in the diversity phase led by a number of Non-oil sectors such as
tourism, foreign trade, financial service, and telecommunications sector. Such factors have been
reflected positively on the overall growth of GDP and achieved GDP growth by 4.4% in 2012 to
reach 280$ billion in 2011.
Non -oil-sectors contributed to the growth in 2012 by about 3.4% to rise from 182$ billion
in 2011 to 188$ billion in 2012 and accounted for 67.3% of GDP 2012 (Annual Economic Report
2012) UAE adopted strategy called UAE 2021vision. The aim of this strategy in the economy
sector is to build a high competitive knowledge economy, which is divided into 12 national key
performance indicators, the first indicator focus on non-oil real GDP growth, the indicator that
measures the real annual growth of all sectors expect oil. The target of this indicator is to achieve
5% GDP growth by 2021 (UAE vision 2021).
This study examines the relationship between the economic diversification strategies
adopted by (UAE) and its economic development.
2. Related Literature
An economic diversification strategy is regarded as one of the most important strategies
that is used to support economic and business aspects and increases their competitive
advantages. Diversification reduces the risks of focusing on a single economic sector or
business area which contribute in maintaining the stability even in hard times, and consider as
a great tool for business & economic development.
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 47
The role of diversification strategies in the economic development for oil-
depended countries: - The case of UAE
Ahmed Zain Elabdin Ahmed
College of Business Administration
AUST-Fujairah Campus
Keywords
Diversification Strategies, Economic Development, Oil-Depended Economy, Competitiveness.
Abstract
Diversification strategies adopted by oil-depended economies' played an important role in the
economic development in these countries, which rely heavily on oil exports. UAE as an oil-dependency
economy has the type of strategy to diversify the sources of its national income and reduce its dependence
on oil to counter the instability in global oil prices.
This paper seek to investigate whether the diversification strategies adopted by (UAE) is adequate to
manage its economic development. The methodology employed in this study is to examine the contribution
of diversified sectors based on the country's GDP especially during and after the global financial crisis
(2008-2012) using statistical analysis procedure. The results confirm that investment in different sectors
rather than oil would have substantially improved the performance UAE economy.
1. Introduction
The United Arab Emirates has witnessed substantial development in its economic
performance since 1970, despite of the fluctuation of oil price in the last two decades & global
financial crises in 2008. The UAE's Minister of Economy – Sultan Al-Mansouri said that the
UAE's strategy of diversifying income has helped the country reduce its dependence on oil, & he
expected the UAE's GDP to have grown at its forecast rate of 4.5 percent in 2014 (Gulf News
Jan.2015). In 2012, UAE experienced considerable improvement in economic performance,
which has become more stable in the diversity phase led by a number of Non-oil sectors such as
tourism, foreign trade, financial service, and telecommunications sector. Such factors have been
reflected positively on the overall growth of GDP and achieved GDP growth by 4.4% in 2012 to
reach 280$ billion in 2011.
Non -oil-sectors contributed to the growth in 2012 by about 3.4% to rise from 182$ billion
in 2011 to 188$ billion in 2012 and accounted for 67.3% of GDP 2012 (Annual Economic Report
2012) UAE adopted strategy called UAE 2021vision. The aim of this strategy in the economy
sector is to build a high competitive knowledge economy, which is divided into 12 national key
performance indicators, the first indicator focus on non-oil real GDP growth, the indicator that
measures the real annual growth of all sectors expect oil. The target of this indicator is to achieve
5% GDP growth by 2021 (UAE vision 2021).
This study examines the relationship between the economic diversification strategies
adopted by (UAE) and its economic development.
2. Related Literature
An economic diversification strategy is regarded as one of the most important strategies
that is used to support economic and business aspects and increases their competitive
advantages. Diversification reduces the risks of focusing on a single economic sector or
business area which contribute in maintaining the stability even in hard times, and consider as
a great tool for business & economic development.
International Journal of Business and Economic Development Vol. 3 Number 1 March 2015
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 48
2.1 Economic Diversification Strategies
Nowadays diversification strategies are considered as a significant tool for economics to
reduce risks. (Heydreich 2012) said that "Research results between 1992 and 2003, have shown
that economic diversification based on economic variables can lead to superior geographic
diversification" and in order to use the diversification strategies effectively (Al-Hashemi
&etal,2012) stated that the diversification of the economy towards non-oil and gas industries is a
challenging task that would require cluster based, collaborated and liberalized approach for
development between government, industries and foreign investors, in the oil depended
economy country, the economic diversification strategy mainly considered developing non-oil
sectors and lowering oil financial dependency by creating a viable non-oil modern economy that
can sustain a relatively high level of income (Fasano 2003) moreover added that the
diversification is important to reduce or spread the risk as well as to promote economic
development.
(Hvidt 2013) on the other hand identified three factors "income from hydrocarbons is
finite, fluctuates and is practically the only source of the wealth "have placed the issue of
economic diversification on the political agenda in the Gulf countries since oil was discovered.
In many cases the objectives & benefits of diversification are under debate. Many authors
think that the reasons for diversification include achieving conglomerate power, not meeting of
objectives with current portfolio of product / business and responding to opportunities outside
of current business, spreading of risks, having excess cash of having slack resources (Akpinar
2009), While in other hand (Nelson and Nelson2003) argued that "The primary purpose of any
diversification strategy is to reduce non-systematic risk".
The way to form diversification takes different forms (widest – or narrow) (Armstrong
2008) argued, "The portfolio with the widest diversification will have the lowest risk."
As things stand most of the GCC countries have tried different forms of diversification as a
tool of economic development (Karolak 2014) stated that "The beginning of 21st century marked
a crucial turn since governments of the GCC countries made a commitment to a sustainable
development independent from oil resources and to competitiveness as requirements for future
growth of the GCC region overall."
The GCC countries diversified their economics in different sectors, with a major focus key
tourism. "The path of economic diversification through development of tourism has proved its
success in the United Arab Emirates, especially in Dubai. Statistics indicate that in 2012 tourism
accounted for 14% of UAE GDP and 31% of Dubai GDP alone. As a result, UAE has become a
global leader in the higher-end leisure market” (WTTC, 2011).
The Gulf States also embarked on large scale economic diversification programs in 1990s
and 2000s these created new integrative linkages with the global economy ( ULRICHSEN 2011)
moreover he added that the GCC states became world leading center of production for a variety
of industries ranging from petrochemicals and aluminum to cements and construction products,
according to (Porter 2010) the most competitive issue facing the GCC countries as a whole is
increasing economic diversification.
According to (World Bank Report 2013) the oil exporting countries must continue to make
reforms that accelerate the pace of Economic Diversification, and invest more in infrastructure to
improve the business climate.
2.2 Economic Development
There has been many published studies that focused on economic development (Porter
2003) said that the responsibility for economic development shifted from the old model "the
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 48
2.1 Economic Diversification Strategies
Nowadays diversification strategies are considered as a significant tool for economics to
reduce risks. (Heydreich 2012) said that "Research results between 1992 and 2003, have shown
that economic diversification based on economic variables can lead to superior geographic
diversification" and in order to use the diversification strategies effectively (Al-Hashemi
&etal,2012) stated that the diversification of the economy towards non-oil and gas industries is a
challenging task that would require cluster based, collaborated and liberalized approach for
development between government, industries and foreign investors, in the oil depended
economy country, the economic diversification strategy mainly considered developing non-oil
sectors and lowering oil financial dependency by creating a viable non-oil modern economy that
can sustain a relatively high level of income (Fasano 2003) moreover added that the
diversification is important to reduce or spread the risk as well as to promote economic
development.
(Hvidt 2013) on the other hand identified three factors "income from hydrocarbons is
finite, fluctuates and is practically the only source of the wealth "have placed the issue of
economic diversification on the political agenda in the Gulf countries since oil was discovered.
In many cases the objectives & benefits of diversification are under debate. Many authors
think that the reasons for diversification include achieving conglomerate power, not meeting of
objectives with current portfolio of product / business and responding to opportunities outside
of current business, spreading of risks, having excess cash of having slack resources (Akpinar
2009), While in other hand (Nelson and Nelson2003) argued that "The primary purpose of any
diversification strategy is to reduce non-systematic risk".
The way to form diversification takes different forms (widest – or narrow) (Armstrong
2008) argued, "The portfolio with the widest diversification will have the lowest risk."
As things stand most of the GCC countries have tried different forms of diversification as a
tool of economic development (Karolak 2014) stated that "The beginning of 21st century marked
a crucial turn since governments of the GCC countries made a commitment to a sustainable
development independent from oil resources and to competitiveness as requirements for future
growth of the GCC region overall."
The GCC countries diversified their economics in different sectors, with a major focus key
tourism. "The path of economic diversification through development of tourism has proved its
success in the United Arab Emirates, especially in Dubai. Statistics indicate that in 2012 tourism
accounted for 14% of UAE GDP and 31% of Dubai GDP alone. As a result, UAE has become a
global leader in the higher-end leisure market” (WTTC, 2011).
The Gulf States also embarked on large scale economic diversification programs in 1990s
and 2000s these created new integrative linkages with the global economy ( ULRICHSEN 2011)
moreover he added that the GCC states became world leading center of production for a variety
of industries ranging from petrochemicals and aluminum to cements and construction products,
according to (Porter 2010) the most competitive issue facing the GCC countries as a whole is
increasing economic diversification.
According to (World Bank Report 2013) the oil exporting countries must continue to make
reforms that accelerate the pace of Economic Diversification, and invest more in infrastructure to
improve the business climate.
2.2 Economic Development
There has been many published studies that focused on economic development (Porter
2003) said that the responsibility for economic development shifted from the old model "the
International Journal of Business and Economic Development Vol. 3 Number 1 March 2015
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 49
government drives economic development through policy decision and incentives" to the new
model "Economic development is a collaborative process involving government at multiple
levels, companies, teaching and research institutions",
While others think that the best way to achieve high economic development should be
done through economic diversification. (Shihab) states that the successful implementation of
human development policy in the UAE hand, to hand with industrialization, urbanization, and
modernization, is one of the rare example of a country which has successfully used income from
huge natural resources for its long-term development over a short period of time( from early
1970s to late 1990s)
Other approaches find that there is a link between three concepts at which relying on
economic diversification enhances competitiveness of countries which finally enables economic
development. (Maskell & et al 1998) describe that the economic prosperity of regions or
countries is associated with their ability to generate or attract economic activities which are able
to increase the income by performing well in the market.
The UAE’s National Strategic Goals driven from the VISION 2021“To enable the UAE to
become one of the most competitive countries in the world.”Through knowledge economy
supported by sustainable and diversified economy.
3. Data and methodology
For examining the relationship between the economic diversification adapted by UAE and
economic development, the following area of development has been evaluated.
1- The contribution of the different diversified sectors in the GDP.
2- Value of non-oil sectors comparatively to oil sector during the period (2008 – 2012)
through analysis other data obtained from the ministry of Economic and national
business of statistics, UAE
3- The contribution of the non-oil sector in the Gross Fixed Capital Formation
3-1 The UAE Experience of Economic Diversification
3–1–1 Historical Background
The UAE is a federation of seven Emirates was constituted on December 2. 1971. The
seven Emirates are Abu Dhabi (The capital), Dubai. Sharjah, Ajman, Fujairah, Ras Al-Khaimah,
and Umm Al Quwain. The following table (3-1) showed the population and area of UAE in
(2009)
Table ( 3 – 1 ): Population and Area of UAE (2009)
Emirates Population
(Persons) Area in Sq. Km. Population Density
(persons / sq.Km)
Dubai 1.722.000 3.885 443
Abu Dhabi 1.628.000 67.340 24
Sharjah 1.017.000 2.590 393
Ajman 250.000 259 965
Ras Al-Khaimah 241.000 1.684 143
Fujairah 152.000 1.166 130
Umm Al-Quwain 56.000 777 72
Total 5.066.000 77.701 2170
Source & National Bureau of Statistics – Abu Dhabi - UAE
Oil was discovered in Abu Dhabi in the early 1960s and first exported oil in 1962, this
dramatically shifted the focus of economy of the UAE and enabled the country to initiate
enormous development programs in short period of time.
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 49
government drives economic development through policy decision and incentives" to the new
model "Economic development is a collaborative process involving government at multiple
levels, companies, teaching and research institutions",
While others think that the best way to achieve high economic development should be
done through economic diversification. (Shihab) states that the successful implementation of
human development policy in the UAE hand, to hand with industrialization, urbanization, and
modernization, is one of the rare example of a country which has successfully used income from
huge natural resources for its long-term development over a short period of time( from early
1970s to late 1990s)
Other approaches find that there is a link between three concepts at which relying on
economic diversification enhances competitiveness of countries which finally enables economic
development. (Maskell & et al 1998) describe that the economic prosperity of regions or
countries is associated with their ability to generate or attract economic activities which are able
to increase the income by performing well in the market.
The UAE’s National Strategic Goals driven from the VISION 2021“To enable the UAE to
become one of the most competitive countries in the world.”Through knowledge economy
supported by sustainable and diversified economy.
3. Data and methodology
For examining the relationship between the economic diversification adapted by UAE and
economic development, the following area of development has been evaluated.
1- The contribution of the different diversified sectors in the GDP.
2- Value of non-oil sectors comparatively to oil sector during the period (2008 – 2012)
through analysis other data obtained from the ministry of Economic and national
business of statistics, UAE
3- The contribution of the non-oil sector in the Gross Fixed Capital Formation
3-1 The UAE Experience of Economic Diversification
3–1–1 Historical Background
The UAE is a federation of seven Emirates was constituted on December 2. 1971. The
seven Emirates are Abu Dhabi (The capital), Dubai. Sharjah, Ajman, Fujairah, Ras Al-Khaimah,
and Umm Al Quwain. The following table (3-1) showed the population and area of UAE in
(2009)
Table ( 3 – 1 ): Population and Area of UAE (2009)
Emirates Population
(Persons) Area in Sq. Km. Population Density
(persons / sq.Km)
Dubai 1.722.000 3.885 443
Abu Dhabi 1.628.000 67.340 24
Sharjah 1.017.000 2.590 393
Ajman 250.000 259 965
Ras Al-Khaimah 241.000 1.684 143
Fujairah 152.000 1.166 130
Umm Al-Quwain 56.000 777 72
Total 5.066.000 77.701 2170
Source & National Bureau of Statistics – Abu Dhabi - UAE
Oil was discovered in Abu Dhabi in the early 1960s and first exported oil in 1962, this
dramatically shifted the focus of economy of the UAE and enabled the country to initiate
enormous development programs in short period of time.
International Journal of Business and Economic Development Vol. 3 Number 1 March 2015
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 50
UAE is considered one of the richest countries in the world and the richest in the Middle
East with a high per capita income reaching $ 44, 952 in 2012(World Bank Report 2013).
Table (3-2)
GDP - per capita (US$)
Country 2008 2009 2010 2011 2012
UAE 45,431 44,873 43,234 43,952 44,440
Source: World Bank Report 2013
According to (IMF 2012) UAE’s debt to GDP ratio is the third lowest in the world
following Norway and Libya. Currently standing at -93% whilst the world average at 64%
With regard to the oil production now UAE is considered as the Fourth oil producer in
the world with 2.5 million barrels a day insert the group.
It is one of the oil producing countries whose economy is mainly based on oil products
(Ministry of Energy). UAE leaders have adopted economic diversification as a means of
reducing dependence on oil and committed to economic diversification earlier since the oil
shock of the 1970s ( Horyo Pestomo & et al 2011).
Table (3-3)
UAE crude oil production (2008-2012)
Year Production Change
2008 2,681.02 3.01 %
2009 2,412.55 -10.01 %
2010 2,414.66 0.09 %
2011 2,679.18 10.95 %
2012 2,803.61 4.64 %
Source: US Energy Information Administration
During 1970s and 1980s, diversification has been based on the development of capital –
and energy – intensive industries as well as the physical and social infrastructure ( Fasano 2003 )
and development of the productive sectors and heavy industry at that time Dubai Aluminum
started in 1980 & the other sector diversified in 1980s is the service sector, the creation of free
zones in Dubai since the Mid 1980s (beginning with Jabel Ali free zone). (Porter 2003) identified
that the 1980s and 1990 the composition of UAE economy change over time and the shareof GDP
divided by different sectors such as construction, manufacturing, government, services as well
as oil, the UAE has reduced its dependence on the oil sector significantly.
The contribution of non-oil sector to GDP from 36.7% in 1980 to 57% 1991(UAE Economic
Report 1992)
In the last decade the major aim for UAE government has been to enhance its
competitiveness through leverage clusters to organize economic policy, delivery, coordinate
government action, and direct diversification efforts (Porter 2010). During the first decade in the
third millennium the UAE government has established a strategy named Vision 2021 which
divided into six national priorities, the third one is concentrating on how to build the
competitive knowledge economy, and the first indicator is used to measure non-oil real GDP
growth, actual results for 2012 for this indicator was 3.5% and the 2021 target will be 5% (UAE
Vision 2021).
www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 50
UAE is considered one of the richest countries in the world and the richest in the Middle
East with a high per capita income reaching $ 44, 952 in 2012(World Bank Report 2013).
Table (3-2)
GDP - per capita (US$)
Country 2008 2009 2010 2011 2012
UAE 45,431 44,873 43,234 43,952 44,440
Source: World Bank Report 2013
According to (IMF 2012) UAE’s debt to GDP ratio is the third lowest in the world
following Norway and Libya. Currently standing at -93% whilst the world average at 64%
With regard to the oil production now UAE is considered as the Fourth oil producer in
the world with 2.5 million barrels a day insert the group.
It is one of the oil producing countries whose economy is mainly based on oil products
(Ministry of Energy). UAE leaders have adopted economic diversification as a means of
reducing dependence on oil and committed to economic diversification earlier since the oil
shock of the 1970s ( Horyo Pestomo & et al 2011).
Table (3-3)
UAE crude oil production (2008-2012)
Year Production Change
2008 2,681.02 3.01 %
2009 2,412.55 -10.01 %
2010 2,414.66 0.09 %
2011 2,679.18 10.95 %
2012 2,803.61 4.64 %
Source: US Energy Information Administration
During 1970s and 1980s, diversification has been based on the development of capital –
and energy – intensive industries as well as the physical and social infrastructure ( Fasano 2003 )
and development of the productive sectors and heavy industry at that time Dubai Aluminum
started in 1980 & the other sector diversified in 1980s is the service sector, the creation of free
zones in Dubai since the Mid 1980s (beginning with Jabel Ali free zone). (Porter 2003) identified
that the 1980s and 1990 the composition of UAE economy change over time and the shareof GDP
divided by different sectors such as construction, manufacturing, government, services as well
as oil, the UAE has reduced its dependence on the oil sector significantly.
The contribution of non-oil sector to GDP from 36.7% in 1980 to 57% 1991(UAE Economic
Report 1992)
In the last decade the major aim for UAE government has been to enhance its
competitiveness through leverage clusters to organize economic policy, delivery, coordinate
government action, and direct diversification efforts (Porter 2010). During the first decade in the
third millennium the UAE government has established a strategy named Vision 2021 which
divided into six national priorities, the third one is concentrating on how to build the
competitive knowledge economy, and the first indicator is used to measure non-oil real GDP
growth, actual results for 2012 for this indicator was 3.5% and the 2021 target will be 5% (UAE
Vision 2021).
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