Impact of Free Trade Zones on Foreign Direct Investment in the UAE

This essay delves into the significant role of free trade zones (FTZs) in the United Arab Emirates (UAE) in attracting foreign direct investment (FDI). It begins by defining FTZs and their purpose, highlighting their function in promoting economic integration through the elimination of trade barriers and the relaxation of regulations. The essay then focuses on the UAE, detailing the numerous FTZs across the emirates, with a particular emphasis on Dubai. It explores the incentives offered to foreign investors within these zones, such as 100% ownership, repatriation of profits, and tax exemptions. The essay examines the impact of FDI on the UAE's economic development, supported by statistical data illustrating the growth of FDI inflows. It also discusses the strategic advantages of the UAE's location and the government's initiatives to boost investment, concluding that FTZs are critical for the country's economic growth and diversification. The essay references numerous sources to support its analysis and provides tables and figures illustrating key data points.

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Introduction
Free Trade Zone (FTZ) refers to an area particularly designated to promote integration on
an economy with the world economy in terms of elimination of tariff and other trade barriers and
relaxing bureaucratic regulations. The similar institutions also named as Export Processing
Zones (EPZ), Free Zones (FZ), Special Economic Zone (SEZ) and Maquiladora in different
nations. This kind of areas are designed to enhance presence of a nation in the global economy
by attracting foreign investment and new business. Different Middle East countries as Egypt,
Syria and Jordan adapted policy of establishing free trade zones in early 1960s and 1970s. In
UAE first free trade zone was developed in 1980s (Abdouli and Hammami 2017). Dubai
however stands apart since it successfully developed its reputation in the international market
long before establishment of the free trade zones. The essay discusses role played by free trade
zones in UAE to attract foreign direct investment in the country.
Free Trade Zones in UAE
The government of UAE has developed almost 40 free trade zones in the nation. These
free trade zones allow 100 percent ownership of foreign investors and is free from any regulator
tax. Most of these free trade zones are located in Dubai with the state having a total of 23 free
trade zones. Number of free trade zones in Abu Dhabi is 5, that in Ras Al Khaimah is 4 followed
by 3 free trade zones in Sharjah, 1 free trade zone in Ajman and 1 in Umm Al Quwain. If the
foreign investors are to establish business outside free trade zones, then they need local sponsor
and also the ownership is limited up to 49 percent (Shayah and Qifeng 2015). Nearly 80 percent
of oil non-oil export in UAE is originated from UAE. These zones provide investors exemption
from licensing, emiratisation, agency, national ownership and various regulations that are
applicable to custom territories. The first free trade zone in UAE was built in 1980 at Jebel Ali.

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The success of the free trade zone in bringing foreign investment, technological expertise,
growth of export and transshipment became one major activity in the zone. Viewing success of
the free trade zone, other emirates were encouraged to develop similar areas for attracting inward
investment, generation of employment and enhance overall economic development (Fernandez
and Joseph 2016).
Foreign Direct Investment in UAE and role of Free Trade Zones
The advantageous geographical location of UAE between Europe and Asia and the
position of the nation as the Middle East’s cargo traffic center benefits the nation significantly.
The first emirates that developed free trade zone was Dubai. The free zone in Dubai developed at
Jebel Ali has some excellent characteristics in the world. Later on, government established free
trade zones in other emirates in order to make UAE as a global hub of trade in gold bullion,
center for technology and research development and expansion of financial activities (Mosteanu
2019). Within the free trade zones, the nation provides relaxation to foreign investors working in
some specific real estate projects and welcome 100 percent foreign ownership of companies in
the hydrocarbon sector. In addition, UAE also lowered corporate income tax levied on foreign
companies, relaxed the administrative procedure required for administrative approval and made
significant improvement in the access of local investors to the stock market.
Inflow of FDI has played one of the important role in economic development of UAE.
Government of UAE has taken several strategies to reduce dependency of the economy on
revenue generated from oil sector. One such strategy is to encourage foreign direct investment in
the economy. In order to attract FDI government provided several incentives to the foreign
investors through establishment of free trade free trade zones in different emirates (Agha. and

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Khan 2015). In these free trade zones, the government offers various advantages or incentives to
the investors.
Firstly, in the free trade zones 100 percent foreign ownership are allowed. The 100
percent ownership gives the investors freedom to take their own decision and operate
independently. This encourages foreign investors to establish their business in the region.
Secondly, foreign companies are allowed to repatriate full profit and capital. Since the investors
has no need to share profit with the host country they focus on operating business in the host
country as efficiently as in their own country (Al-Shayeb and Hatemi 2016). Thirdly, there is no
minimum limit of capital investment in these zones. The absence of minimum capital investment
restriction gives investors greater flexibility in terms of investment. Fourthly, the free trade zones
offer excellent communication access to the investors. Effective means of communication
enhances business opportunities in these regions. Fifthly, foreign investors in these regions do
not face barriers in the form of currency restriction. Sixthly, foreign companies doing businesses
in the free trade zones can easily receive extended lease (Anwar 2016). Seven, the free trade
zones consist efficient system of transportation. Efficient transport and communication system
facilitate business opportunities. Eight, in the free trade zones, companies get advantage in terms
of access to ready-made warehouse and factories. This saves additional cost of the companies
requires to establish factories and ware-house. Ninth, foreign companies can also enjoy a cost
advantage in terms of the inexpensive and abundant supply of energies. The reduced cost gives
the companies opportunity to earn a higher profit. Tenth, the free trade zones are developed with
excellent infrastructural facilities supportive for business investment. Eleventh, apart from cost
advantages and infrastructural facilities companies enjoy good excellent facilities of
distributions. Twelve, these free trade zones also offer administrative advantages (Dona Cherian

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2017). The procedure for business approval in the free trade zones is quick. Moreover, there are
no corporate taxes and personal income taxes in the free trade zones.
There are different free trade zones in different emirates of UAE
Table 1: Free Trade Zones in Dubai
Jebel Ali Free Zone Techno Park
Dubai Maritime City Dubai Airport Free Zone
Dubai Cars and Automotive Zones Dubai Internet City - Tecom
Jumeirah Lake Towers Dubai Textile City
Gold and Diamond Park Dubai Media City – Tecom
Table 2: Free Trade Zones in Sharjah and the Northern Emirates
Sharjah Airport Free Zone Ajman Free Zone
Fujairah Media Zone Ras Al Khaimah Free Zone
Hamriyah Free Zone Fujairah Free Zone
Ahmed Bin Rashid Free Zone Rak Media City (RAKIA)
Table 3: Free Trade Zones in Abu Dhabi
Abu Dhabi Airport Free Zone
Free Trade and Logistic Zone

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All the facilities together help to in increase FDI flow in UAE. The figure below explains
the trend in FDI inflow in UAE for past twenty-three years.
Figure 1: Trend in FDI inflow in UAE
(Source: Agha. and Khan 2015).
As summarized in the above figure, the inflow of FDI in 2012 stimulated to 268303 AED
million. The figure increased from a FDI figure of 191759 AED million in 2011. The average
FDI in UAE from 2007 to 2012 was 191759 AED million with reaching to the all-time highest
level in 2012 and reached to the all-time lowest level in 2007.

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Figure 2: Percentage share of FDI in GDP
(Source: Data.worldbank.org. 2020)
Increasing inflow of FDI is one of the significant contributor of economic growth of
UAE. This can be seen from growing share of FDI in GDP of UAE. Since, the establishment of
free trade zones in UAE in 1980s, the inflow of FDI in the nation increased significantly
accounting for a greater share in FDI.
In 2018, the free trade zone council of Dubai has taken initiatives to attract foreign direct
investment in the free trade zones. Key agendas in these initiatives include ease of setting
business lowering fees in these regions, enactment of new e-commerce regulations, evaluation
process related to practice of anti-money laundering and reducing terrorism financing. The free
trade zones of Dubai have played an instrumental role in boosting FDI and GDP of the emirate.
Because of investment and legislative benefit and other strategic advantages foreign investors are
attracted to invest in the nation (emirates247.com 2018). The council of free trade zone places

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importance on innovation, collaboration and integration as prerequisite of economic progress and
success. This makes Dubai an attractive destination for international companies and investors.
Figure 3: Inward FDI flow in UAE
(Source: Unctad.org. 2020)
Figure 4: FDI Stock in UAE

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(Source: Unctad.org. 2020)
Figure 5: Number of Greenfield investment in UAE
(Source: Unctad.org. 2020)
The FDI figures though undergo phase of turbulence between 2010 and 2013 because of
economic crisis globally, favorable policies to boost FDI and incentives provided in the free
trade zones FDI recovered significantly (Al Hamdani, Lazarova and Di Maria 2017). As shown
in figure 3, 4 and 5 FDI inflow, FDI stock and number of Greenfield investment increased
between 2016 and 2018.
Conclusion
In an integrated world, different nations across the globe undertakes different policies to
promote openness. In this regard, establishment of free trade zone in one way to boost openness

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and attract foreign companies to investment in the nation. Free trade zones are areas that offer
foreign investors relaxation in terms of ownership, regulatory requirement and other facilities
supportive for business. For UAE, government encourages foreign investment as a means to
reduce dependency on oil sector. There are forty free trade zones in UAE most of which are
located in Dubai. These areas by providing facilities such as 100 percent foreign ownership,
good infrastructure and distributional facilities, relaxation in tax and other led to a greater flow of
FDI in UAE.

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References
Abdouli, M. and Hammami, S., 2017. Exploring Links Between FDI Inflows, Energy
Consumption, and Economic Growth: Further Evidence from Mena Countries. Journal of
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Agha, S. and Khan, S.H., 2015. Impact of FDI in UAE over the main elements of sustainable
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Al Hamdani, H., Lazarova, E. and Di Maria, C., 2017. FDI, Economic Performance and
Technological Spillover Effects: Evidence from UAE. Economic and Social Development: Book
of Proceedings, pp.531-544.
Al-Shayeb, A. and Hatemi-J, A., 2016. Trade openness and economic development in the UAE:
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Anwar, S.A., 2016. A regiocentric strategy for industrial clusters: reflections on international
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