Business Startups in the United Arab Emirates

Introduction

The UAE has extensively maintained policies that encourage business startups. Further, the federal government has set up policies that attract foreign investments. It is imperative to note that the UAE economy is among the fastest growing economies globally. Traditionally, the economy has been heavily dependent on oil producing sector. Consequently, the country’s economy has been vulnerable to fluctuations in global oil prices. The UAE government, however, is strategizing on ways of reducing overreliance on hydrocarbons by enhancing private sector investment (Startup Overseas 1).

Thus, business startups, especially non-oil ventures, have shown steady improvement in the recent past. Particularly, foreign investors have made considerable contributions in the non-oil investments. Numerous initiatives to develop a favorable environment that enhances foreign investment have been put in place. However, local investors are leveraged by regulatory and legal frameworks. The real estate sector, financial services, tourism, business services, IT services are the top favorable sectors among business starters.

Apparently, for business startups to thrive in any economy, the best practices must be put into place. This project, therefore, gives an in-depth involvement in the basic requirement and business practices for business startups in the UAE. Predominantly, the project analyzes visa process, professional licensing, and business insurance requirements for new investors in the UAE economy.

Starting a business in UAE

As mentioned in the introduction, the UAE is among the most prospective places to start businesses. Additionally, proper businesses practices determine the success of businesses. Therefore, business starters must make adequate preparation before investing. First, an extensive research on the business sector must be carried out to determine its viability. The research will help investors in analyzing the viability of their business plans. Further, a study on the UAE market condition will inform investment decisions. Credible and viable business plans are likely to attract government and local support.

Second, it is crucial for entrepreneurs to comprehend legal requirements regarding business startups in the UAE. For instance, the local law requires foreign investors to have local partners. The local partners will own at least 51% of the company and, therefore, control its activities. Nevertheless, the sponsor is not obligated by law to make any financial contribution for the business startup. Alternatively, an entrepreneur can own 100% of their company provided they operate in the Free Zones (Arora 1).

Visa process for foreign business startup entrepreneurs

Investors require visa permitting them to live, work, and run businesses in the UAE. Visa regulations in the UAE change regularly and vary depending on the purpose of entry. Additionally, foreigners are treated differently from Emiratis because of limited period for the visa. Therefore, it is essential for prospective investors in the UAE market to seek up current, profound legal advice concerning entry, employment, and residency (KPMG 23). Principally, as mentioned earlier, types of visa issued by the UAE government to foreign investors vary depending on the purpose of entry.

The visa application procedure in the UAE is relatively open to foreign investors due to apparent approval of all legal business (KPMG 23). However, for local business startups, help from local sponsors in the application for visas is required. Subsequent visa registrations, nevertheless, can be done without the help from sponsors. Moreover, it is important to note that registration for visas for Free Zone companies do not require sponsorship (KPMG 23).

For one to apply for a visa, their passport, and other legal documents are required. Additionally, a letter from a sponsor is obligatory. The letter highlights the sponsor’s reasons for approving visa application by the investor and all required information (KPMG 23). Most importantly, the sponsor through the letter gives an approval on employees’ visa application.

Further, Business startups intending to hire foreign employees in UAE must fulfill certain requirements before employing staff and submitting visa application on their behalf. They have an obligation to register with the Immigration Department and undertake set documentation (KPMG 23). Moreover, they must obtain business immigration cards, which are renewable every three years. Additionally, the business startups must register with Ministry of Labor and Social Affairs upon obtaining trade license. Business startups are also required to appoint representatives to deal with immigration and labor departments of the UAE government. On completion of a three-month trading period, businesses are advised to obtain transit visa option, which allows business to get 14-day transit visas (KPMG 23).

Professional licensing for business startups entrepreneurs in the UAE

Licensing business startups is a critical issue not only in the UAE, but in all countries. Therefore, entrepreneurs must do it in the proper and legal manner. Business starters in the UAE should carry out intensive research to take correct options of licensing. However, a haphazard taking of license can lead to losing of money and time, especially when one finds out later that license taken does not cover company requirements.

Location of a business is conceivably the most important factor for business licensing in the UAE. It is imperative for entrepreneurs to know that location goes beyond the place to locate business premises. Rather, location is more about licensing jurisdiction. Therefore, an entrepreneur must carry out studies on authorities licensing jurisdiction before subscribing to any licensing services for their business startups.

A number of licensing options for business exist in the UAE, which include onshore offered by Department of Economic Development and the growing number of free zone themed majorly for industries.

Free zone or offshore licensing chiefly offers a “suitable alternative to startups within specific segments” (Arora 1). Some of the free zones in the UAE include Jebel Ali Free Zone, Dubai Internet city, Dubai Media City among others (Arora 1).

On the other hand, onshore licensing is appropriate to “all types of commercial enterprises set ups such as Limited Liability Company” (Arora 1). Business startups that can fall under this category of licensing include logistic corporations, trading enterprises, and manufacturing companies. However, as mentioned earlier, a legal prerequisite only allows a foreign investor not more than 49% of a company share ownership. Additionally, companies under onshore licensing must take up physical office space and are subject to auxiliary government requirements and approvals (Arora 1).

Decisively, it is imperative for entrepreneurs to check for both cost-effectiveness and future orientation of a licensing authority’s jurisdiction. Therefore, entrepreneurs must exploit all avenues in getting appropriate licensing information, especially from qualified consultants or reputable lawyers.

Insurance needs for business startups in the UAE

A crucial aspect of research in the economic environment in the UAE is the risk assessment. This will help in comprehending insurance needs for startups. The UAE rating for foreign investment risks is low-to-moderate (A.M. Best Company, Inc. 1). This has a specific significance in long-term and direct investment as opposed to investment in the exchange market.

The risk atmosphere in the UAE is comprised of six categories of risk elements, including banking sector, political, economic structure, currency, sovereign and financial risks. Risk elements have a sturdy impact on business startups and, therefore, entrepreneurs must deliberately make comprehensive analysis of each before investing on new ideas.

The banking sector risk in the UAE is relatively stable (A.M. Best Company, Inc. 1). Loan payment and servicing in the UAE is among the leading in the world. Consequently, business startups should allocate appropriate insurance resources.

A political risk is a crucial category, especially in the Middle East region. The region has had political instabilities for a considerable period of time. However, the UAE is politically stable relative to other countries in the region. Consequently, the UAE political risk is rated as stable and safe for investment (A.M. Best Company, Inc. 1).

The UAE government has formulated monetary and fiscal policies to guarantee the stability of the dirham. Thus, dirham risk is rated stable (A.M. Best Company, Inc. 1). Additionally, the UAE government is encouraging measures to fortify the non-oil sector. As a result, the economic structure risk is set as low to moderate (A.M. Best Company, Inc. 1). The UAE sovereign risks are also rated as stable due to “high oil reserves and the subsequent ability to meet debts and obligations” (A.M. Best Company, Inc. 1).

Lastly, a vital category of risk to consider that affect business startups in the UAE is the financial risk. Essentially, the UAE has adequate regulations that safeguard investors’ confidence. The UAE financial risk is rated moderate (A.M. Best Company, Inc. 1).

Convincingly, the UAE risk environment is relatively stable for business startups. Entrepreneurs, therefore, should come up with ways of meeting the insurance needs of a stable to moderate risk environment.

Industry and Environmental Analysis of the UAE firms and Other International Businesses

Silicon Valley in California is regarded as a special place for innovation and startups because of a favorable business environment for startups. Entrepreneurs and innovators move to Silicon Valley because of support and funding in addition to treatment with respect and a chance to explore potential. These opportunities are not found in the UAE (King 1). In fact, the UAE does not recognize startups and simply classify them as mature companies such as Aramex, IBM or HP, for instance. In the West, on the contrary, startups can get tax breaks or negotiate taxes to meet their existing cash flows. This does not happen in the UAE.

While there are drawbacks, it is imperative to appreciate that the UAE startup ecosystem has significantly improved in the last few years. For instance, several well known startups such as Fetchr, propertyfinder.ae, Eureeca.com, Dubizzle and Souq among others focused on the UAE as their launching place and headquarters.

According to a recent study, the UAE realized the increased number of entrepreneurship-supporting institutions (about 60 percent) within the last four years. These institutions were established after the country’s unveiled its Vision 2021. Based on the regional ranking, the UAE has an impressive economic performance. It has outperformed all other Gulf region countries in several global platforms, and it is ranked among the best 30 nations globally in the world competitiveness, global prosperity, opportunities and entrepreneurship (Feller 1). The vibrancy of the UAE has a favorable landscape for startups can be achieved through concerted efforts by the private sector, the government and corporate bodies, which have often struggled to improve economic activities.

The government has been focusing on bolstering the role of small businesses in the UAE. In the year 2009, for instance, the UAE reviewed its definition for SMEs to introduce favorable lending environments and enact more supportive regulations. The SME law of 2014 provides for allocation of ten percent of tenders to SMEs while government institutions only get five percent. Consequently, many SMEs have realized improved performances. At the same time, the SME100 program is meant to celebrate some successful small businesses in the UAE with a yearly award and support. Startups such as The Box and Careem have been recognized.

The public-private partnership (PPP) for innovations has been established to “develop startups through linkages with companies and universities” (Feller 1). For instance, IBM worked collaboratively with Mubadala to establish Cognit to facilitate the introduction of Watson supercomputers in the UAE (Feller 1). This partnership would allow organizations to leverage big data capabilities while it is intended to enhance “the growth of new tech firms in the UAE, specifically startups in data analytics and business intelligence to keep up with developments in knowledge-based economy” (Feller 1).

In addition, corporate-startup linkages are also increasing in the UAE. As such, some multinationals have realized the need to partner with startups to enhance the development of the UAE startup ecosystem. For instance, some large corporations such as “PayPal, Google and Aramex worked together to ensure the success of ShopGo and, therefore, created a better e-commerce company” (Feller 1). At the same time, some corporations such as DP World, STC and MBC support various startups while Google works with AstroLab and Majid al-Futtaim supports Beam Wallet. Telco giants such as du are also in other partnership programs to support startups. As a result, many startups, including Careem and Souq have now surpassed $100 million valuations (Feller 1).

Such increased levels of support alongside emerging e-commerce opportunities have encouraged other startups to launch in the AUE. It is forecasted that the GCC e-commerce market will grow to “$41.5 billion by the year 2020, but it is the UAE that will claim about 53 percent” (Feller 1).

Some governments such as the government of “Chile give $40,000 to foreigners who settle there to start businesses while Singapore’s EntrePass allows entrepreneurs to move there” (Feller 1). The UAE is yet to create such incentives, and it is not clear when improvements will be made. In fact, the government is silent on the intended entrepreneurship visa discussed in 2014.

Contemporary Business Issues inside the UAE Startup Firms

The UAE wants to create a more attractive business investment destination in the Middle East region. However, many startups continue to experience critical challenges related to business landscape in the UAE. Most successful startups, for instance, the founder of Fetchr Joy Ajlouny recently complained that many new firms were not getting adequate support.

Entrepreneurs only have two options in the UAE when starting a venture. First, they can consider a limited liability company, which needs an Emirati partner with not less than 51% shareholding. Alternatively, entrepreneurs can only consider the available 21 Free Zones without a local partner. This implies that foreign business ownership is extremely difficult outside the Free Zones, a factor that can fundamentally influence decisions of would-be entrepreneurs for establishing their base in the UAE. The UAE has not reviewed its current laws to initiate any meaningful changes.

However, as previously mentioned, the UAE business laws and regulations do not distinguish between startups and well-established companies. Besides, few initiatives exist to assist startups.

Visa restrictions, red tape and license are critical challenges in the UAE that make it tough for any startups to grow. Many entrepreneurs feel that such restrictions are frustrating because they lead to less a supporting ecosystem for startups (King 1). Entrepreneurs have also expressed their concerns about the cost of starting a business. For instance, startups must obtain a business license for $25,000. In addition, they must also register the business with the government at a similar cost of $25,000. As such, it becomes extremely difficult for startups to prosper in the UAE.

While many startups can raise significant capital from investors, local regulations still impede business growth. It is noted that even multinationals such as IBM face growth challenges in the UAE because of extreme expenses (King 1). In fact, most startups spend more than half of their original capital on licensing (King 1).

The UAE also experiences a critical talent shortage. It is noted that the country has been investing in the real estate sector rather than investing in talent and innovation. Consequently, it is equally difficult for the knowledge driven economy to prosper. The lack of adequate human capital is a fundamental challenge that many startups face in the UAE. The startups often turn to expatriates who are ‘kicked out’ shortly because of visa restrictions, and they eventually leave the country. The startups must bear ticket costs and other related costs, including medical examination. In short, most entrepreneurs argue that the aggregated costs for running a startup lead to ‘death before the start’.

In the US, in Silicon Valley, for instance, startups do not experience such challenges because of incubation. Instead, talented entrepreneurs are encouraged to innovate, try their ideas, receive funding and support from investors without restrictive regulations. As such, startups can thrive rapidly as supports come from various source. This supportive ecosystem is not found in the UAE for startups. The UAE should provide such a business landscape for startups because it attracts expatriates from various geographical regions with diverse talents.

Banking regulations are even tougher for small and medium-sized enterprises (SMEs) operating in the UAE. For example, in the year 2015, it was noted that the number of SMEs leaving the country had increased significantly because of unpaid debt. SMEs had accumulated about $1.4 billion in debts with the year 2015. As the price of oil continues to slump in the global market and weak economic growth increases, the UAE banks experience liquidity challenges. Consequently, many startups and small business owners flee the country, leaving behind millions in unpaid debts (King 1).

Many lenders have expressed their concerns because of this growing trend. The current legislation provides for a jail term for any bouncing check. Consequently, many entrepreneurs choose to run away rather than go to jail. This implies that the financial institutions rarely support startups because they do not proactive risk management systems. The UAE generally lacks a credit guarantee scheme to assist lenders to mitigate risks associated with lending to SMEs or startups. While the government encourages banks to extend credit facilities to SMEs, many banks are not prepared for such businesses.

At the same time, legal experts have pointed out that the existing bankruptcy laws in the UAE are outdated and generally untested while only few struggling firms can use them. The UAE government, therefore, should develop laws and regulations that encourage lending to startups and SMEs. Nevertheless, banks are reluctant to lend to SMEs because of high default rates and low returns. Banks have traditionally acted as the major sources of capital for entrepreneurs, but the UAE banks have low risk exposure for SMEs while none for startups, and they are rarely an option for startups. At the same time, venture capital (VC) is not well developed in the country.

The UAE banks only lend about four percent of their total lending to well-established small businesses. Startups have been generally left out in the lending equation of the UAE banks. In fact, according to Grant Thornton, “Many banks have made it clear in the UAE and the region that the start-up scene is not for them; they are only investing in established companies with a track record, good potential cash flow, transparency and all of those factors” (Grant Thornton 1). It is therefore advisable for startups in the UAE to develop and maintain proper financial records to enhance their chances of receiving financial support from banks. They should also focus on effective corporate governance to facilitate assessment of risks and viability of the business.

For startups, the issue of emiratization is important, specifically in relation to globalization. Currently, there is a conflict emanating from developing local talent and enhancing global competitiveness (Feller 1). Emiratis are only about “12 percent in the UAE while only 20,000 have opted for private business” (Feller 1). From a critical perspective, the UAE has visa restrictions while, realistically, the current workforce cannot meet unique talent requirements for startups.

Besides, Emiratis cannot fill talent gaps available today. This implies that it is difficult for startups to realize their objectives when policies associated with emiratization and visa restrict talent acquisition from external sources. Moreover, the UAE government will have to create incentives to attract more talented, well-educated foreigners to assist in developing startup hubs to support startups. It is imperative to recognize that the UAE lacks programmers and engineers required to spur business growth and incubation. This scarcity makes the UAE an unattractive destination for startups.

Research and development (R&D) is also important for startups. While the UAE has led other countries in the region based on technology adoption, the country does not spend much in R&D. in fact, it is among the low-spenders. Most OECD countries spend about 2.5 percent of their GDP on R&D, whereas the UAE spends about 0.5%. This implies that startup supporting environment is “poor and low patent rate (about 20 patents every year) is observed relative to other countries such as South Korea (100,000) and Singapore (1,000)” (Feller 1).

It is further observed that most of the investments in the R&D come from the government (49%) and universities (44%). Companies are roughly responsible for the remaining seven percent, depicting that they are not keen on the UAE as a place with vibrant R&D activities. On this note, the government must focus on concerted efforts to drive the creation of a knowledge society that characterize the modern startups. Thus, corporations must be convinced to be critical players the local R&D environment by providing technical expertise and resources. The UAE government should focus on the development of knowledge clusters to spur startups. A free zone for startups, for instance, can help many startups to realize their objectives. The idea of corporate collaboration with startups is rarely adopted in the UAE.

The regional integration is slowly evolving in the Middle East. Consequently, the current trade barriers are not supportive of entrepreneurship. Since the founding of the Gulf Cooperation Council by the six countries, including the UAE, major political and economic goals have been realized. However, the proposed single GCC currency, the Khaleeji was proposed in the year 2001, it is a vision yet to be realized more than ten years later. Nevertheless, the GCC implemented “the GCC Customs Union in the year 2015 to improve taxation on some imported goods” (Feller 1). Every step that eliminates trade barriers among the member countries is “vital for the interest and success of startups” (Feller 1). Nevertheless, the biggest challenge for some startups and SMEs is expanding to other neighboring Arab nations.

Conclusion

With several major indicators in the UAE showing enhanced growth of startups and other small businesses, the UAE is poised to be the regional leader as a startup hub. The UAE strives to be startup hub in the region by creating sustainable entrepreneurship landscape. Today, the country is the most competitive in the region on favorable business ecosystem ranking. Consequently, it can attract some innovators and entrepreneurs.

Clearly, it has outperformed other GCC member states and now focusing on becoming a global startup destination. The country must however initiate some reforms in its business laws and regulations, which require effective decision-making, quick implementation, and strategic planning. Despite the current achievements in improving business environments for SMEs, critical challenges still face startups in the UAE.

Issues such as visa restrictions, high registration fees, ownership structure and finance are vital ones that have often led to huge unpaid debts by SMEs whose owners flee the country to avoid jail terms. Clearly, this situation is not supportive for startups. In fact, the bankruptcy law is the most redundant and outdated because insolvent entrepreneurs face jail sentence. There are currently no clear directions on such laws. However, when new laws are introduced, entrepreneurs will overcome another obstacle.

Since the government is slow to adapt to the needs of startups, these recommendations are for business startups in the UAE.

  • Huge capital base is necessary. No banks are interested in startups in the UAE. Thus, capital is necessary during incubation and after the launch to cater for registration, visa and other statutory requirements as well as operations.
  • A clear business plan is mandatory with market details, projects and cost forecasts to ensure proper implementation of the ideas.
  • Startups require clear growth strategy in the UAE. Every stage will require critical decision-making as the startup grows. Changes in management, leadership, and operations are inevitable for successful startups. The company founders should focus on their specific areas of expertise to spur the growth rather than hindering growth. This is vital for Emiratis who may lack proper managerial skills. In fact, some startups fail because of poor managerial skills of their owners.
  • Startups should test the UAE market soonest to determine the demand for the product. That is, startups should not focus on developing and designing a perfect product that the market may not require. Given the extreme costs incurred in the UAE by startups, promotional activities should be cost-effective while focusing on the right market segments through the right channels. Better products and services are most likely to succeed in the emerging UAE market.
  • Startups also need to create a network of partners. Networks of customers, mentors, service providers and other support teams are necessary for growth. To curb costs, a startup can outsource some services to specialized firms, acquire new relations and focus on wider distribution of its services and products.

Despite some challenges, the UAE startup business environment is gradually improving. Many startups have considered it as a significant startup hub. Besides, laws and regulations are slowly improving and, therefore, entrepreneurs continue to overcome regulation bottlenecks. The UAE government, corporate and private sectors must continue to support startups. Specifically, the government should review its visa, licensing and registration laws to allow more foreigners to establish startups in the country while supporting more SMEs to do business. The government should further focus on creating enabling, nurturing business environment for startups and innovation.

At the same time, reviewing funding sources for startups should be given utmost priority in the UAE. Overall, the UAE is gradually becoming an important startup hub in the Middle East region as institutions such as Free Zones, Dubai International Financial Center (DIFC), Dubai Silicon Oasis among others continue to provide favorable business environments for startups.

Works Cited

A.M. Best Company, Inc. AMB Country Risk Report: United Arab Emirates. 2015. Web.

Arora, Prajit. The How-To: Licensing Your Business In The UAE. 2015. Web.

Feller, Jonas. Can the UAE become a global startup hub? 2015. Web.

Grant Thornton. With better access to VCs, banks can help UAE SMEs. 2014. Web.

King, Neil. “You’re dead before you start”: Top UAE start-up lashes out at local business environment.” Arabian Business. 2016. Web.

KPMG. Investment in the United Arab Emirates. 2006. Web.

Startup Overseas. Why Start a Business in the UAE? n.d. Web.