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TheUAEandForeignInvestment

References Griffin and Pustay, Chapter 6; Hamilton and Webster, Chapter 2

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Topicsaddressed

» OutwardFDI:UAESovereignWealthFunds» SWFObjectivesand‘first’and‘second’generationfunds» InwardFDI:StrategicGoals» FDIStatisticsfortheUAE» CompanyLawandForeignOwnershipintheUAE

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Sovereign Wealth Funds

A SOVEREIGN WEALTH FUND IS:

astate‐ownedinvestmentvehiclethatplacessurplusrevenueintoavarietyofoverseasfinancialinstrumentssuchasequityshares, governmentbondsandother assetssuchasproperty.

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Key SWFs

» Largestsovereignwealthfundsbyassetsundermanagement

Rank Country Funds Assets Origin

1 Norway GovernmentPensionFund‐ Global(est.1990) 838.0 Oil

2 UAE ADIA(est. 1976) 773.0 Oil

3 Saudi Arabia SAMAForeignHoldings 675.9 Oil

4 China ChinaInvestmentCorp(est.2007) 575.2 Non‐oil

5 China SAFEInvestment Company(est.1997) 567.9 Non‐oil

6 Kuwait KuwaitInvestmentAuthority(est.1953) 410.0 Oil

7 ChinaHongKong Hong KongMonetaryAuthority(est.1993) 326.7 Non‐oil

10 Qatar Qatar InvestmentAuthority(est.2005) 170.0 Oil

18 UAE ‐ Dubai InvestmentCorporationofDubai(est.2006) 70.0 Oil

20 UAE– AbuDhabi InternationalPetroleumInvestmentCo(est. 1984) 65.3 Oil

Source: SOVEREIGN WEALTH FUNDS INSTITUTE, 2014

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SWF Objectives

» SWFstypicallyhaveoneormoreofthefollowingthreeobjectives:

» Itmaynotalwaysbepossibletoachievealloftheseobjectivessimultaneouslyastheyrequiredifferentinvestmentstrategies

1. Stabilization

2. Long‐termsaving

3. Economicdevelopment/diversification

» ADIAhascombinedstabilizationwithlongtermsaving,whileMubadala hasfocusedoneconomicdevelopment/diversification

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SWF Developments in the UAE

Contrast‘firstgeneration’SWFsintheUAEwith‘secondgeneration’SWFs:

» FirstgenerationSWFs:historicallytendedtoinvestinindustrialisedworldequityandgovernmentbonds

» Forexample,ADIAtendedtoinvestpassively,orindirectly,holdingabroadrangeofassetclasses,suchasequity,fixedincomeetc.

» WhilesecondgenerationSWFsintheUAE:haveamandatetomakeactiveforeigndirectinvestmentsinordertoaidtheeconomicdiversificationprocessandcreatesynergieswithnascentdomesticindustries

» E.g.relativelynewpublicinvestmentfundssuchasMubadala,whosemotivescanbeclassedas‘strategicassetseeking’

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Case Study: Mubadala Development Company

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UAE Outward FDI: The ‘Partnership’ Model

» WhilemostSWFinvestmentisinequitiesandbonds,IPICandMubadala haverecentlyacquired‘active’stakesinawiderangeofhi‐techcompanies,thisprovidestheUAEwithcutting‐edgetechnology

» A‘partnership’modelhasemergedwithMubadala providingcapitalandforeigncompaniestechnicalexpertiseand‘knowhow’

Synergiesinclude:

» Aerospace&+

Microchips&+

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Outward FDI Stock from the UAE

» OutwardFDIstockislessthaninwardandexhibitsaregionalbias

» Duetofactorssuchas(a)previouslymuchGCCFDIwasportfolioinvestmentand(b)duetogeographicproximityandculturalsimilaritiesAconsiderableproportionofSaudiandKuwaitioutwardFDIflowsintoBahrainandtheUAE

AnnualStockof OutwardFDI($mn) Asa%ofGDP

1995 2008 2012 1995 2008 2012

UAE 710 50,822 57,737 1.1 16.2 17.1

Qatar 5 12,265 18,572 0.1 6.5 11.2

SA 2847 10,876 29,970 2.0 4.3 5.3

WestAsia 9957 126,679 161,029 1.5 6.5 7.7

DevelopingCountries 330,042 2,342,750 3,131,845 5.7 15.1 17.9

World 3,615,425 15,982,295 20,408,257 12.7 27.2 33.6

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Attracting Inward FDI: A Strategic Goal

AccordingtotheUAEGovernment:

“thereisgrowingrecognitionoftheneedtopromoteforeigninvestmentasoneoftheinstrumentsofeconomicdiversification”

ObjectivetwoofAbuDhabi’sEconomicVision2030states:

“itisimportanttoenlargetheenterprisebasethroughthecontinuedattractionofFDIinleadingedgetechnologysectors...thiswillencourageinnovationandmitigateagainstfutureeconomicshocks”

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Inward FDI stock for the UAE

» FDIflowsintotheregion,asaproportionofthetotal,havebeenverysmalluntilthelastfiveyears

» Thisis(a)becauseofthedominanceofthepublicsector,(b)thesmallsizeofthedomesticmarketsand(c)untilrecentlyforeignownershiphasbeenverymuchrestricted

AnnualStockofInward FDI($mn) Asa%ofGDP

1995 2008 2012 1995 2008 2012

UAE 1770 68,224 95,008 2.7 21.7 26.9

Qatar 442 17,769 30,804 5.4 15.4 16.9

SA 17,056 111,632 199,032 12.0 23.4 30.7

WestAsia 42,601 386,983 660,217 8.0 18.4 25.7

DevelopingCountries 850,536 4,367,449 7,744,523 14.4 24.8 30.4

World 3441,326 15,586,249 22,812,680 11.5 25.5 32.2

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The UAE: Inward FDI Potential

» TheUAEiscurrentlyconsideredthe14thmostdesirableFDIdestinationworldwide:

USA

China

Brazil

Canada

India

Australia

Germany

UK

Mexico

SIngapore

UAE

Source: A.T. KEARNY, 2013, FOREIGN DIRECT INVESTMENT CONFIDENCE INDEX

Low confidence High confidence

1

2

3

4

5

6

7

8

9

10

14

15

19

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The UAE: A favoured investment location

Asurveyin2011ofbusinessexecutivesbytheEconomistIntelligenceUnit,commissionedbyHSBCfoundthat:

» TheUAEisthemostfavoureddestinationintheMiddleEast,citedby63%ofrespondentsasthemostpopularinvestmentandtradinglocation

» TheUAE’sprominenceasabusinessdestinationisgreaterthanwhatitsGDPorpopulationwouldsuggest

» RatherthanfocusingontheUAE’sdomesticmarket,largecompaniestypicallyuseitasanexportgatewaytothewiderMENAregion,andoftenintoSouthAsia.

» Companiestypicallycitethewell‐developedinfrastructure,freetradezonesandexpatriate‐friendlylifestyleamongtheirmainreasonsforoperatinginplaceslikeDubai.

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UAE – Top Destination for FDI in MENA

Source: fDI intelligence 2012.

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Top Country Investors in the UAE

Top investors by ranking

Source: fDI intelligence 2012.

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UAE Company Law and Foreign Investment

“TheFederalCommercialCompaniesLaw(No.8of1984)anditsamendments:UAEnationalsmustholdatleast51%ofthecapitalofanycompanyestablishedinUAE.”(Mina,2012)

» TheUAE’slimitof49%onforeignownershipofcompaniesoutsidetheFTZshasprovedcontroversialinFreeTradenegotiationsandlimitsforeigndirectinvestmentopportunities

» Anewcompanieslawisbeingdiscussedwhichmightopenupsomesectorsoftheeconomyto100%foreignownership

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A New Foreign Investment Law?

ImplicationsofanewforeigninvestmentlawofferingforeigninvestorssimilarrightstothoseofUAEnationals:

PotentialPros:

» Willconsumersbenefitfrommorecompetition?(betterservice,morechoice,lowerprices)

» WillEmiraticompaniesbecomemoreefficientandinnovativeasaresultofcompetitionandthusbebetterequippedtoexpandinternationally?

PotentialCons:

» Willsomedomesticcompaniesnotbeabletocompetewithmoreproductiveandinnovativeforeigncompanies(initiallyatleast)?

» WillcontrolandownershipofEmiraticompaniesendupinthehandsofforeigninvestors?

» Willtheprosoutweighthecons?