How Do You Explain the Success of Uae – Sez?

How do you explain the success of UAE – SEZ?

As per the Analytical Assessment SEZs in UAE have contributed immensely to the UAE economy by creating jobs, facilitating transfer of technology and attracting huge Foreign Direct Investments. As per the data, the trade value increased by 6.7% in 2012. The exports increased by 50% from AED 2.5 billion to AED 3.7 billion. Re-exports for free zones climbed 19%. JAZFA has been the major contributor towards GDP i.e 21% and approx. 40% of FDI into UAE followed by DAFZA which issued 210 fresh licenses in 2012.

Due to its strategic location, favourable tax provisions and government support UAE ranks the best amongst other cities to arise as an international destination for new businesses.

The following factors contribute to the success of UAE – SEZ-

1. Location advantage:

UAE is located centrally on the world map which gives it the strategic geographic advantage of serving as the mediator/ connector in the trade world between the West and the East. The country is surrounded by the Persian Gulf and Arabian sea and sharing its borders with Oman and Saudi Arabia. There are many free zones across UAE which contribute to the economic growth of the country, however the most critical one’s are the Jebel Ali Free Zone (JAFZA) and Dubai Airport Free Zone (DAFZA). The government strategically placed the free zones near seaports and airports to provide excellent connectivity and cater to a wide range of customers, for instance the JAFZA (focussed on manufacturing), DAFZA (commercial and business hub of the Middle east and the Gulf region) and Sharjah Airport International Free Zone (for servicing client in the Indian Ocean and Arabian Gulf region)

1. Government support:

• Infrastructure facilities: Services such as roads, sea ports, airports, storage facilities and state of the art buildings. Support services such as electricity, water supply, telecommunication, internet and commercial services such as banking, insurance, transport, medical care. Under Free Zones, the companies could offer work permits, residency visas and trade licenses, freedom from Forex control and unrestricted repatriation of profits to their home countries.
• SME development: Govt offered additional incentives such as exemption from the requirement of the license fees for the first 3 years, financing projects at the capex of 3 million AED, organising training & development and providing infrastructure to SMEs thereby encouraging entrepreneurship.  This resulted in SMEs contributing more than 60% to the GDP of UAE and provide 90% of the country’s employment.
• Tax Exemption: Companies, SMEs and individuals in the Free zone were exempted from any kind of tax, customs on any imports. Companies can operate without being under the legal obligation of UAE authorities or have a local sponsor. Some free zones offer low rentals for office space.

Why are FDIs important for economic development?

Long Term

Foreign Direct Investments have triggered technology spillover, enhanced human capital formation, innovation, created competitive business environment leading to increase in GDP of the emerging and developing economies. FDI’s have funded developing countries in which the domestic investments have failed to meet the investment requirements needed for growth.  FDI’s have raised total factor productivity and income growth beyond the levels of domestic investments. Injection of technology by the multinationals in the domestic firms have increased the technological growth. FDI’s have played a critical role in creation of jobs, foreign exchange revenues and filled tax revenue gaps in the developing countries. Thus, in the long run it will be beneficial to the overall development of an economy.

Short Term

FDI’s have helped in boosting exports and imports in the short and medium terms. It is a major source of modernization, employment and income growth. FDI’s might improve social and economic conditions in the host country. For e.g., transfer of cleaner technology and leading to socially responsible corporate policies. It has led to better standard of living. It encourages innovation through licensing, staff training, introduction of new processes and products by foreign firms.

Thus, it plays an important role in the overall economic and social development of a country.