In this post I want to go into practical detail and answer a series of questions investors ask themselves when they decide to implement a process of internationalization here in the Emirates.
Tackling and solving these first questions is fundamental to the success of the whole venture, because building such a project is a bit like erecting a building, brick-mortar-brick; if the foundations are not solid, the final outcome is unreliable.
What are the typical basic questions?
- Is it better to enter the market on our own or with a local partner?
- What kind of partner is it best to choose? A silent partner or an active partner?
- What guarantees do I have that the partner will help my company enter the market and achieve the expected results?
Regarding the first question, from my experience, there are two entities that might decide to answer “I’ll do it by myself”:
- the entrepreneur who has already spent a few years doing business in the foreign market, knows the rules to enter the market and feels comfortable with self-organizing locally.
- companies that have policies forbidding them to enter foreign markets with local partners because they want to keep 100% control (in the Emirates, except for free zones, the 49-51% formula is applied, which means that at least the 51% of shares must be owned by Emiratis).
In these cases the two entities have two options on the table. One, they may decide to operate in Mainland and open a branch or a representative office (a solution that doesn’t warrant the 49-51% formula, but requires only that an Emirati be appointed as a service agent to take care of paperwork – such as license renewal or resident visas). Alternatively, they decide to establish in a free zone, where the shareholding of Emirati nationals is not mandatory.
Investors who immediately have a clear idea about how to establish themselves in the Emirates are, however, a minority.
Most of time it’s necessary to explain the ABCs and, in particular, the pros and cons of the different establishment opportunities.
I happened to assist some clients who at first wanted to go it alone but, after a few years of failures, turned to me for aid in identifying a reliable partner.
In these cases, choosing not to launch a joint venture with a local partner from the very beginning of the initiative wasted time and, above all, money (including incorporation of the company, office, administrative costs, salary of the General Manager, etc.).
Now, let’s look at the other option: organizing with a local partner, through a joint venture.
In my experience, the local partner often turns out to be the most appropriate solution, but the next question is: what local partner is best to choose?
Approaching a reliable Emirati is critical to the success or failure of the whole venture, especially if the investor is not already introduced in the market.
What can happen?
For instance, my Emirati partner might sponsor not only my company, but also other companies.
When this happens, it often means that this person has a problem – for example, the non-renewal of a license – on one of them. This problem automatically affects the licenses of all the other companies associated with this person.
The most serious consequence for the foreign entrepreneur is that the Resident Visa for the employees or the renewal of the license is halted.
Let’s get back to our basic questions.
The second question is: is it best to choose an active partner or a silent partner?
The basic difference is that the first is an active sponsor who gives real help to enter the market, while the second merely receives a yearly remuneration (remember: the 49-51% formula is mandatory to work in Mainland).
Even in this case one must be careful and not to fall in easy traps, like those of people promising overnight success upon payment of tens of thousands of Euro.
I remember, in fact, a client coming to my office in an attempt to recover a huge investment made to a local company that promised to unlock the Dubai market for her upon establishment of a company.
Result: after a year she obtained a license for an offshore company established in Jebel Ali (a free zone located 35 km south-west of Dubai). But this license was completely useless to her since it couldn’t be used to commercialize within the country.
And to add insult to injury: this license cost little more than 2,000 Euro for the first year, while the remuneration to the Emirati company amounted to 100,000 Euro!
And, finally, the third basic question: what guarantees does the entrepreneur have that the partner will truly get the foreign company into the market and achieve the expected results?
This is a question that has a twofold answer.
First, the guarantee can be given by the professional who assists the entrepreneur along the process of internationalization.
Generally this person has a network of reliable contacts who have already worked successfully with the professional in the past.
Together with this professional, the entrepreneur can conduct a thorough market analysis and choose the most suitable type of local partner or company type or whether to set up in free zone.
My recommendation is always to invest more at the start, not only in terms of money, but also of time.
Second, well, the guarantee of achieving the expected results is given by a mix of factors, some predictable and maneuverable, others unpredictable (the known entrepreneurial risk).
Among the predictable factors are: the assistance of a reliable professional; the implementation of a project and a strategy which are well studied, structured and complete under all points of view (legal, fiscal etc.); and, last but not least, determination, commitment and perseverance by the entrepreneur. A venture like this is complex, but can offer great satisfaction to the committed entrepreneur.
Do you have further questions about business in Dubai? Get in touch and I will reply directly or in another post.
