Foreign Ownership and Local firms’ Capital labor Ratio: the Case of Abu Dhabi O.J. Parcero, A.O. Abahindy, Rashid and A.S. Kamalzada United Arab Emirate University Contents: Introduction UAE’s potential for FDI FDI productivity and Capital labor ratio Data Econometric analysis Conclusion

Introduction Foreign ownership spillovers lead to local firms higher productivity and capital labor ratio.

UAE’s potential for FDI -Average real GDP growth in the last decade for the UAE was close to 10%. -Ranked as the top 23 th economies in terms of the Easy of Doing Business Indicators. - World's twentieth biggest exporter of merchandise in 2011.

FDI flows to the UAE $-0.5 billion in 2000 and in 2011 $7.7 billion. UAE FDI average flow 47% higher than the combined average flows to Bahrain, Kuwait, Oman, and Qatar(Mina 2012). However, less than 13% of Abu Dhabi firms are registered as foreigners while over 88% of UAE labor force is expatriate.

Business License Foreign firms are required to have a UAE national as a partner or sponsor. In the case of partnership 51% of local ownership is required in a foreign firm.

Capital labor ratio and productivity FDI may produce positive externalities on the local firms’ productivity. Higher capital labor ratio - one of the channels through which a higher productivity is achieved. – Higher capital labor ratio positively effects the productivity

Capital labor ratio and productivity (cont.) (Productivity ) Local firms technical learning FDI Spillover

Capital labor ratio and productivity (cont.) + – Technical learning may lead to a higher capital labor ratio: 1.Higher knowledge leads to a reduction in the total number of employees 2.New and improved knowledge is embodied into new equipment (Productivity ) Local firms technical learning FDI Spillover K/L

Data The number of firms after screening is 21,262 (ABCEI) 18,532 nationals and 2,730 foreign. Screened outliers mainly consist of firms having: -Capital less than AED 5,000 -Capital labor ratio lower than AED 1,000 or more than AED 100,000 However, we did not consider as outliers the companies reporting zero employees.

Table 1: Descriptive statistics of nine economic classifications

Figure 1: Histograms for age

Figure 1: Histograms for capital and number of employees (cont.)

FDI, local firms’ productivity and capital labor ratio Blomström and Kokko (1998): – Through two main ways Knowledge spillovers from foreign affiliates can increase the domestic firms’ productivity: Competition: (horizontal spillovers) Cooperation: (vertical spillovers) Kokko (1994) and Perez (1998): 1.Human capital spillover to other firms. 2.Imitation spillovers allowed by proximity to local firms. 3.Concentration of related industrial activities – Industrial clusters.

FDI, local firms’ productivity and capital labor ratio (cont.) Greenaway and Kneller (2007): – Positive influence of a higher capital labor ratio has on productivity – There are two channels through which technical learning may lead to a higher capital labor ratio: Firm’s higher knowledge may lead to a reduction in the total number of employees New and improved knowledge may come embodied into new equipment Aitken and Harrison (1999) and Harrison (1994): – competition hypothesis

Econometric analysis

Econometric analysis (cont.)

Table 3: Regressions Note: Classical standard errors in parentheses. *** indicates significance at 1%, ** at 5% and * at 10%.

Table 3: Regressions (cont.) Note: Classical standard errors in parentheses. *** indicates significance at 1%, ** at 5% and * at 10%.

Conclusion UAE and Abu Dhabi have not exploited their potential to attract FDI In the context of the UAE economy, FDI has a positive impact on local firms capital labor ratio and presumably productivity Allowing full ownership in certain areas outside the free zone may benefit the UAE.

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