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Dubai, Inc.

Overview
The story of Dubai is a bright spot in a gloomy world economy. Amidst the 2002 global recession, Dubai’s economic growth was estimated close to 10%. Within the oil-dependent Gulf Cooperation Council (GCC) states, Dubai’s economy is highly diversified (only around 10% of GDP comes from oil). Dubai thrives on retail, tourism, wholesale, transportation and a host of other growing sectors – with a business climate of optimism and expansion.

By way of background, Dubai is one of the seven emirates that comprise the United Arab Emirates (UAE), a sovereign state on the Arabian Gulf (see map). The UAE was formed in 1971 with Abu Dhabi as its capital.

Abu Dhabi controls the vast majority of the state’s oil revenues and reserves and its leader serves as head of the federal government.

Dubai, by contrast, is a center of trade and commerce. The UAE’s per capita GDP is over $21,000 with overall real GDP growth upwards of 5%.

Dubai’s economy is estimated to be growing at closer to 10% per year.

Intrigued by Dubai’s success story, five HBS students visited Dubai and Bahrain over winter break as a “proto-trek”. Over two weeks we met with HBS alums, senior officials in Dubai’s development agencies, regional entrepreneurs and leading multinationals including McKinsey, HSBC, Citibank and Pepsi. We returned with cautious optimism for the region, a network of leaders and several job opportunities and leads.

We also returned with fond memories of the perfect January weather, golf courses that have played host to Tiger Woods and beautiful beaches and water sports. We were also intrigued by the bustling souks (markets) alongside state-of-the-art shopping malls that attract shoppers from around the world. Next time, we resolved, we would need to make more time for recreation!

This article reports some of the impressions we gathered during our company visits and networking. The article is not, however, a complete or detailed study of the region. A team of EC’s is currently developing a field study on Dubai’s development that examines the topic with much greater rigor. When completed, the study will be a valuable resource for understanding the region more deeply.

With that disclaimer, below are several key findings of our proto-trek to Dubai.

Secrets of Success
Why has Dubai grown and diversified so effectively? Several themes emerged in our discussions with public and private leaders.

Dubai, Inc.: Government promotion of business
As a senior official explained to us, “What’s good for business is good for Dubai.” Dubai’s crown prince Mohammed bin Rashid al-Maktoum is passionate about business development and his government has launched dozens of initiatives to attract business and talent. These include ports and shipping initiatives, a favorable tax environment, a stunning airport, and customer-focused public agencies. These also include Dubai Internet City and Dubai Media City, two business development zones created to attract international firms and cultivate regional talent. Dubai’s initiatives have drawn the likes of CNN and Microsoft. Dubai’s development strategies broadly draw on HBS Professor Michael Porter’s cluster model of development: fostering key industries that draw on the economy’s sources of competitive advantage and create synergy amongst each other.

The government’s top team also engineers alignment between sectors in the economy much the way a complex corporation might. The public sector coordinates, for example, a month-long Dubai Shopping Festival each winter. Emirates Airlines shows an in-flight video about the event for weeks before the festival, hotels offer packages and retailers are required to offer discounts if they want to participate in the festival. Such coordination focuses economic activity around the government’s central development priorities.

Expatriate Talent
Like other Gulf states, Dubai has relied on expatriate talent in feeding its development. Dubai stands out, however, because expatriates comprise the vast majority of its population. Dubai’s population was very small when boom times began in the seventies, and locals comprise only 20% of the population today. The 80% that come to work in Dubai originate primarily from the Indian subcontinent, the Arab world, Europe. They migrate for economic reasons and fuel the economic growth. In essence, the society is one recruited for economic growth. Dubai also attracts top regional talent because of its openness and social freedoms: Dubai offers nightlife and religious freedoms, for example, that are not found in more conservative Gulf states.

Federal System of the UAE
As a member of the UAE, Dubai is spared the overhead needed to run a federal government. Dubai does not need its own military and diplomatic corps, monetary agency, etc. Abu Dhabi, the UAE capital and possessor of vast oil reserves, bears the costs of maintaining the federal government. This frees Dubai’s resources to focus on economic development.

Best Game in Town
Dubai’s infrastructure, openness and effective government services make the emirate the most appealing place to do business in the Gulf (and perhaps in the entire Middle East). Dubai’s proximity to India makes the port a natural point of access to the subcontinent. The subcontinent and the Gulf are markets that multinational firms cannot ignore – many see Dubai as the best place from which to serve them. Pepsi, for example, keeps its regional headquarters in Dubai.

What’s Hot
Our discussions revealed several industries to be fueling growth and promising opportunity to MBAs.

Tourism and Retail
Dubai has become the premier destination for tourists in the Gulf, drawing millions of weekend visitors throughout the years. The hotel Burj al-Arab, built with much fanfare as the world’s first seven-star hotel, symbolizes the growth of word-class luxury tourism in Dubai. Tourists from around the world (particularly from Europe) increasingly view Dubai as an appealing getaway for sun and shopping. Many hotels and resorts are being built or renovated to service increasing demand.

New Media and Broadcasting
As mentioned above, Dubai Internet City and Media City offer full ownership rights and tax-free status to entrepreneurs and multinationals in new media and in broadcasting. Even with the burst of the technology bubble, leading firms are developing a presence in Dubai and regional companies are serving the Gulf market out of Dubai. We toured the Media City and discussed its vision with its chief executive, himself an HBS executive education alum.

Private Equity
The Gulf region is a ripe market for private equity, as several financial services professionals explained. First, a lack of public markets makes it difficult for owners to sell businesses or spin off divisions except through private equity. Second, many family-owned conglomerates have now been inherited by next or third generation family members who lack either the interest or the expertise to run them. Private equity fills the need of these business owners.

Real Estate
As Dubai relaxes its restrictions on foreign ownership, the real estate market is heating up. One flagship development project, Palm Island, is a man-made island with hundreds of beachfront properties. Though years from completion, the properties on Palm Island were oversubscribed within hours of going on sale – largely by expatriates living in Dubai and seeking a home they could own.

Financial Services
Dubai plays host to this year’s World Bank/IMF conference and is in the midst of developing a financial center to attract global institutions to establish offices in Dubai. Dubai has already been successful in drawing some financial institutions to the emirate and away from Bahrain, the region’s traditional offshore banking hub.

What’s the Catch?
While Dubai’s growth and its vision are cause for optimism, our meetings and observations led us to identify some concerns and risks in what
we saw. One obvious risk is the prospect of war in Iraq and the consequences of this war on regional development. Other issues, it seems, also need to be addressed as Dubai seeks to maintain its remarkable success.

Lack of Reliable Data
As economists and bankers explained, rigorous analysis of the Dubai (and broader UAE) economy is extremely difficult because good data is hard to find. The financial performance of private businesses is hard to gauge, as are some key macroeconomic indicators. The signs of growth are evident, but quantifying it is challenging. Enhanced financial and macroeconomic reporting can help assure both global firms and local entrepreneurs of Dubai’s ongoing viability as a place to do business.

Too Much of a “Managed” Economy?
The leading role played by Dubai’s development agencies is in some ways a double-edged sword. The public sector takes on projects that private investors might not stomach – either because of the projects’ scale or because of uncertain viability in the marketplace. Taking the lead on major initiatives has indeed fostered additional investment by the private sector, but some business leaders fear the government may be playing too central a role in managing the economy.

As one investor explained, too many development projects can act to “crowd out” private investors. Further, government initiatives such as the Media City are in some ways sheltered from free market forces – and from the lessons free markets tell about what economic actors actually want and need.

Lack of Political Engagement
With a population of 80% foreigners and a closed political system, we found the atmosphere in Dubai to be profoundly apolitical. Everyone discusses business; very few discuss politics. Those who do discuss public affairs express confidence in the regime and in the startling economic results it has produced.

The lack of political engagement amongst most of the population can be a long-term threat to social stability. The huge number of expatriates may represent a skilled workforce but it also represents a large number of residents with only a short-term interest in the economy. As citizenship remains extremely difficult to obtain, the society fosters disengagement and lack of political involvement. These realities also make Dubai a less attractive place to settle than it might otherwise be.

Dubai Trek, 2004?
All told, Dubai remains an exciting economy and a bastion of opportunity.

Nearly all firms with whom we met expressed an interest in recruiting HBS students, and envisioned growth prospects for both their firm and for those they hired. Dubai’s track record suggests continued success and expansion in a climate that embraces and fosters business.

The story of Dubai is a fascinating one for anyone interested in economic development. We hope to plan a full-fledged Dubai Trek in the coming academic year and would welcome your interest and your suggestions.

March 10, 2003
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