14 October, 2006

Don't we need non-local business incubators in UAE

So we have Al Tomooh and Mohammad Bin Rashid Establishment for Young Business Leaders, both very good startup business funds and incubators. Each of them stands out on its own and out performs the other in certain aspects.

But both the great programs are UAE NATIONAL ONLY. Now taking a look at CIA Fact book statistics Emarati population is 19% of the countries total populace. Ofcourse if not 100% but atleast 90%-95% of the non-emarati popullation is the driving force behind the economy. Don't they need to be engaged in entrepreneurial-ly stimulating exercises, where they can contribute to building a more sustainable economy for the country? I think it's something that needs o be looked into, unless there are some initiatives that I do not know about.


Keefieboy said...

Well, no. The general idea with expats is you come here and slog your guts out for an employer and then you leave. Or you can come in as an investor, preferably with an established business and lots of cash (because the banks won't help you).

The Government are not going to give money to help foreigners start up a new business - that might encourage them to feel wanted!

samuraisam said...

"that might encourage them to feel wanted!"

What is this 'wanted' word you speak of? Do tell.

marwan said...

The hint is in the title: the establishment for Young Business *Leaders*.

Not office workers. Or car salesmen. Or supermarket baggers.


Same old song on the radio. We of course, will be the minions of these emerging captains of industry, so revel in your upcoming servitude!

nzm said...

Void: Every country looks after their own, and you'll find that most countries with reasonably good economical structures (or private philanthropists) have programs such as these.

In NZ, there are schemes like this for the general NZ resident population - even separate programs, scholarships and bank loans for Maori only - if they can prove that they have 1/16th Maori blood or more!

As Keefieboy points out, the expatriate population of the UAE is not expected to stay which we know is a sad, limbo situation for many people who now do consider the UAE to be their home, or were even born here, but cannot gain citizenship because of the local laws.

Expatriates moving to work in the UAE from overseas are either expected to work for someone else, or bring enough finance with them to start up their own company...

...which leads to the next issue. As an expatriate business owner, if you can't start a company in a freezone, the current laws decree that you must have a local Emirati as a business partner with a 51% stake in the company. So in order to award a non-local with startup money, this would need to be reviewed or waived, or as an expat business owner, you're going to be working your butt off to give away 51% of your earnings. Plus, you're going to need an understanding local with good business sense (i.e. not one who wants quick returns and instant profits) who realises the importance of re-investing early-years profits back into a business to make it grow, and not taking it out to spend!

The risk for the investors is also increased if expats are allowed into schemes like this. Who's to say that all will be honest with their dealings, and use the assistance as it is warranted? What's the risk of the funds (and the beneficiaries) disappearing offshore and never seen again in the UAE?

I think schemes like this are important for the local population of any country, and I applaud the instigators. I hope that all young Emirati people with a good business idea and some leadership skills will investigate how these schemes can be of benefit to them.

However, for them to work for non-locals, a lot of UAE law and constitution (e.g. business ownership, residency, naturalisation) would first need to be revised and amended.

bizzwhizz said...

nzm thanks for your insightful and political in-depth analysis, but business incubation has nothing to do with supporting nationals or not. Busness incubators and venture capital firms all have a business model of their own. So no need to modify constitutions and start civil wars, what I wanted to draw attention to, was the fact that if this business model is expanded to non-nationals it might turn out to be better for the economy.

nzm said...

Void: that's my point and the point of this scheme. In this instance, the business incubation is about supporting national Emiratis. In order for it to be expanded to include Expatriates, certain UAE laws would need to be changed to make it more attractive and easier for Incubators and VCs to invest in Expatriate ventures and start-ups, although I would draw the line at civil war!

Whatever business model they operate on, Incubators (private or public) and VCs are still governed by the constitution and laws of the country in which they operate, and those cannot be ignored. Therefore, those in the UAE must abide by UAE law.

Perhaps it would be better to include Expatriates - and perhaps not - but this is the choice that they've made when they've decided to run these particular projects. They are for Emiratis, just as some schemes in NZ are only for Maori, some schemes in the US are only for African Americans.

Do you notice a pattern here? There are schemes for minority groups, and as you pointed out in your initial post, Emiratis are in a minority group according to population.

There are no freezones for VCs and entrepreneurs, and no foreign VC company is going to entertain the idea of giving away 51% to local ownership to invest in Expatriate UAE-based ventures – in business terms this conservatively quadruples the required Return on Investment (ROI) for the venture to be attractive to the VC or incubator, extends the time to realise the investment gains, and complicates the running of the company. VCs are into high risk, but they're not stupid, and they're incredibly choosy about who they invest in. They also look for a successful exit strategy within a few years of investment, and this means either a complete sale of the investee company as a going concern to a bigger player in the same market, or a lucrative buyout of their shareholding by the other shareholders within the company. There just aren't enough bigger competing players in any of UAE business sectors for the former to happen - local companies already have the monopoly, and quickly find ways to shut down any possible competition, sometimes before it even gets off the ground.

VCs also like investee companies to acquire and own assets such as buildings and land which can be sold to minimise any losses and recover their investment should the company fail. Dubai expatriates cannot invest in commercial land or property to increase the book value of their companies. Sure, they could invest overseas in property, but does this help the UAE economy? UAE residential investment is too risky for VCs to be happy about, and overseas investment complicates the sale of the investee company.

The DIC was started as an incubator model. When we first opened the Dubai subsidiary of our company 3 years ago, we were under the DIC incubator scheme in shared offices and under DIC guidance and assistance until we were at the stage where we were set free (within the DIC zone) with office space of our own and could operate without any input from DIC management. Of course, no direct financial assistance was given, but we were helped under the umbrella of the freezone. This would not have been possible out of the freezone where our company branch in Dubai would have had to have 51% Emirati ownership, and we would have to pay enormous amounts of money to lawyers and the like to set up residency visas and company licenses etc.

And as our global company has just been seriously and adversely affected by the actions of the US VC firm who invested in us a few years ago, I would seriously warn people about getting involved with these sharks! They want a high level of control in exchange for their investment.

Our experience has also taught us that while we consider the UAE to be a great place to be for business and to live, the rest of the world does not see it this way. For them, it's a high-risk area to be in, and in the US, companies would choose not to do business with our company because we operated in Dubai. That’s a fact - we've lost deals because of our Dubai connection, and the VC company got jumpy enough to make some stupid decisions based upon our company being in Dubai.

The business incubators that you mention have been set up by Emiratis to achieve greatness amongst young Emiratis. There's nothing wrong with that, and because it's easier for Emiratis to set up businesses and own commercial property, the model upon which the incubator and VC companies operate, works a lot more smoothly than if they were trying to do the same with the expatriate community in the UAE.

There's also nothing to stop other non-Emiratis from setting up similar companies, but quite frankly, the whole UAE business model is not conducive to this kind of market, nor is the UAE economy stable or mature enough for these futurists to see a successful outcome of their ventures. While VC companies take risks, they also operate in proven markets.

Maybe in time we'll see a change, but what needs to happen first (apart from law changes), is a mature market created for the buying and selling of established businesses in an environment that makes it easy for foreign investment companies to commit to UAE-based businesses. There also needs to be an open market for competition instead of the (Emirati-owned)umbrella company monopolisation that is so prevalent in the UAE.

In the Residential Property Market where Expats can buy property, the UAE hasn't even started to really see a proper thriving (pre-owned) second-hand market for residential properties yet, and you certainly don't read or hear of businesses being bought and sold on a significant local level where there isn't an Emirati involved, so the business company sales sector will be further behind the residential arena for quite some time when it comes to Expat involvement.

Compare this:

Young Emirati under incubation or VC:
- it's an investment in the future of the country and in the Emirati workforce
- successful and influential players will have the opportunity to get involved in leadership roles within the government or other influential organisations
- has permanent residency and citizenship
- lower risk of flight (escaping overseas if things go wrong)
- can buy land
- can buy commercial property, as well as residential
- can own 100% of his/her company
- if the company is successful, it will be easier and more attractive for another locally-owned company to acquire (more saleable)
- if the company fails, it’s most likely that the debt will be written off, or assets sold to recover monies (that's just the way it is - the Sheikh will wipe the debt!)
- has influence in their own country (wasta – doors are opened more easily!)

Young Expatriate under incubation or VC:
- it's an investment in the country but not in the longtime goals of mobilising an Emirati leadership workforce
- cannot play a leadership role in government and other state organisations
- temporary residency granted through business ownership or sponsorship
- high risk of flight
- cannot buy land
- cannot buy commercial property
- cannot own 100% of his/her company (except in a freezone, so this rules out any ventures where retail and high volume customer traffic is mandatory for business success)
- if the company is successful, the transfer of ownership is more complicated than if the company was 100% Emirati-owned
- if the company fails, he/she will be jailed and most likely deported
- may have influence, but certainly nowhere near that of an Emirati.

As an incubator or VC company working under the confines of UAE law as it stands today, which would you choose as the more attractive option?

I think that this is a positive and constructive step to increase the Emirati workforce. How many times have we seen ridiculous schemes being announced where only Emiratis can apply for HR and secretarial positions? You can’t tell me that every national out there is trained for these positions, or even wants to work in HR or as a secretary. At least this scheme is encouraging Emiratis with leadership skills and a good business idea to initiate something that they really want to do, and create an opportunity for them to enter the workforce.

I can certainly understand your frustration at not being able to be a part of these schemes that have been set up if this interested you, but what-to-do?

The goal is to mobilize and enable young Emiratis, and give them the opportunity to develop businesses and to grow into leadership roles that the UAE will need - that’s the choice that they’ve made. It’s investing in the future leadership and success of the UAE and its citizens.

Post a Comment

NOTE: By making a post/comment on this blog you agree that you are solely responsible for its content and that you are up to date on the laws of the country you are posting from and that your post/comment abides by them.

To read the rules click here

If you would like to post content on this blog click here