The crowd grows and the camera flashes become more frenzied, illuminating a team of scuba divers performing tricks with various aquatic animals inside the Dubai Aquarium, beneath the gaze of caged tiger sharks. Situated near the entrance of Dubai Mall, this hubbub of activity around one of the world’s largest aquariums intensifies, as people, drawn by blaring music, pause to watch the divers’ elaborate routine.

It is this kind of spectacle that the first time visitor to Dubai could be forgiven for assuming is a special occasion. Yet far from being a one-off event, it turns out that the show is yet another gimmick designed to entice onlookers to visit the Aquarium’s underwater zoo. But it is grandiose displays such as these that have given Dubai a reputation of being the United Arab Emirates' (UAE's) larger-than-life city.

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Indeed, the Burj Khalifa complex encapsulates why some refer to Dubai as 'the city of superlatives'. The complex encompasses the Burj Khalifa, the world’s tallest building, and the Dubai Mall, the world’s largest shopping mall in terms of area, according to Dubai’s travel website, Guide2Dubai. Home to some of the most glamorous property developments in the world, Dubai is a popular destination among the world’s super rich who are drawn to its flagship seven-star Burj Al Arab Hotel and its exclusive man-made Palm Jumeirah islands.

“[Dubai] has been successful in creating a brand when it comes to visible icons, and this is something that we are proud of,” says Malek Sultan Al Malek, the managing director of business park Dubai Internet City. “If I say London, you think of the Big Ben; if I say New York, you think of the Empire State Building. Dubai is different. When I say Dubai... some think of the Palm Islands, some the Burj Al Arab, and some will see the Emirates Airlines.” 

UAE's hub

Dubai is one of seven emirates that make up the UAE, nestled between Abu Dhabi, the country’s capital, and Sharjah. Although many people assume that Dubai's transformation into a major logistics hub has occurred in the past few decades, it is in fact far from a recent phenomenon. Dubai’s rise as a trading hub dates back to the 19th century, when the emirate established itself as a regional centre for the pearl trade. Pearl hunting in the Persian Gulf’s turquoise waters provided Dubai with its main source of income and by the early 1900s, Dubai was well known among international merchants for its thriving pearl industry and its liberal trading policies. Although the industry declined after the 1920s, following the development of artificial pearls in Japan, Dubai’s low taxation on foreigners continued to make it a draw for traders.

“Dubai has always been a flagship emirate, from a historical perspective,” says Mazdak Rafaty, managing partner of Germany-based Ludwar International Consulting. “Dubai has always been well known as a trade destination, because 200 years ago it had already set about establishing its structures.”

Although the discovery of oil in 1966 accelerated Dubai’s economic transformation, according to estimations from consultancy Oxford Business Group, the realisation in the 1980s that Dubai’s oil reserves would run dry by 2020 prompted the then ruler Sheikh Rashid bin Saeed Al Maktoum to engage in a large-scale diversification of the emirate's economy, through investing its hydrocarbon revenues in creating an economy based on the services sector.

Doing business

Dubai has experienced considerable success in diversifying the main sectors of its industrial output. The oil and gas sector, so dominant in the 1970s, today accounts for less than 2% of the emirate's economy, according to economic intelligence provider the Business Year. Dubai's leaders have long been keen to capitalise on its strategic location. Situated the crossroads of commerce between Europe, Africa and Asia, the Oxford Business Group estimates that approximately 1.8 billion people live within a five-hour flying radius of the emirate. Accordingly, Dubai has worked to develop its tourism and hospitality services.

“Dubai has done well in developing itself as a base for transport and logistics,” says Marc Nassim, head of clients and markets in the Middle East at advisory firm Deloitte Corporate Finance. “The business model of Dubai is a good illustration of this. It was developed to connect the West with the East, and it encourages people to stay over for two to three days, on the way [to another destination]. This model has worked extremely well, as people from all over the world come here and they spend more.”

The Business Year estimates that in 2011, the wholesale, retail, restaurant and hotel sectors represented 32.8% of Dubai's GDP. Furthermore, these sectors are set to experience further growth, as the Business Year reports that the government expects 9 million tourists in this year alone. 

Infrastructure draw

Dubai’s infrastructure development, which, under the leadership of Sheikh Mohammed bin Rashid Al Maktoum, has accelerated at a rapid pace over the past decade, has transformed the city into a metropolis of shimmering skyscrapers, and has earned it a reputation among investors for having well-connected infrastructure. According to Umberto Cini, the managing director of general overseas markets at luxury car manufacturer Maserati, Dubai is perceived by international firms a good base from which to access neighbouring markets, and a major reason for this is its robust infrastructure.

“[Maserati] started operating in Dubai in 2006 and from here we cover Middle East and Africa,” says Mr Cini. “We chose Dubai because it is a hub in terms of services, we are very well connected to the entire world, and there was a lot of help from the [governmental] institutions to set up our business here. We have invested a lot in our future here. We see Dubai as a base from where we can access other markets, such as India, South Korea, Australia, New Zealand and South America. We have two minor representative offices in Singapore and in São Paulo, but the hub is Dubai.”

“Dubai is the regional headquarters for FedEx Express in the Middle East, the Indian subcontinent and Africa,” says David Ross, senior vice-president of FedEx Express in these regions. “Dubai has been, and continues to be, at the centre of our regional operations, as a result of its access to large regional and global markets. Dubai differentiates itself by investing in its world-class infrastructure such as global airlines connections, and [its] business-friendly climate.”

Managing the wobbles

Nonetheless, the collapse of Dubai’s real estate sector, in the midst of the global financial crisis in 2008, unveiled a structural weakness in the emirate. Prior to 2008, the rapid growth of Dubai’s real estate and construction sector, which the Business Year estimates accounted for 30% of Dubai’s GDP by 2007, powered the city’s six-year-long economic boom, and the city’s GDP growth peaked in 2006 to 28.7%, according to the Oxford Business Group. The announcement in late 2008 that Dubai was unable to refinance its liabilities, worth $59bn, caused the emirate's property sector, which was the fastest growing in the world at the time, to collapse.

“Hard times hit Dubai doubly because we were already in a huge property bubble that had to burst at some point, and it burst in the middle of a global economic crisis,” says Mr Rafaty at Ludwar International Consulting.

“It hit us on all levels. The city, up until late 2007, was full of activity. By late 2008, a lot of people left and... it was a disaster for everybody. The real estate prices, which are a good indicator for activity in the city, fell by 50% to 70%. The [crash] revealed inherent structural issues. Dubai’s weaknesses stemmed from a lack of legal structures, which are still a serious problem here. The World Bank’s Doing Business report found that [by every measure], Dubai is perfect except for transparency. People got too greedy and there was a price for everything.”

Transparency challenge

The financial crisis exposed a systemic lack of transparency which, according to many commentators, continues to pose a challenge to investors operating in the city. “One of [Dubai’s] weaknesses is transparency,” says Mr Nassim at Deloitte. “In addition, anything related to the judicial system [is a challenge as] in Dubai there are two different systems. There is the Dubai International Financial Centre [DIFC] law – applied in the DIFC and which is [based on] the common law – and there is the one applied in the Dubai courts, which is inspired by sharia. The issue is that it takes a long time and so it is not very appealing for investors from the US, for example.

"The company law is also an issue, because as a foreigner you are not allowed to own more than 49% [of a company when operating onshore]; however, a foreign investor can own 100% in a company established in a free zone, but the company will pay custom tax if it sells its products onshore.”

Dubai’s onshore judicial system is seen as highly biased towards locals, and there exists the perception, among foreign business owners that should disputes between a foreigner and an Emirati be presented before a court, the foreigner will not operate on a level playing field.

“There are certain parts of doing business in Dubai that are very easy; for example, establishing a business is easy and the infrastructure is excellent,” says Ayesha Sabavala, an economist at research and analysis firm the Economist Intelligence Unit.

“Yet there are other aspects of doing business that [pose challenges]. Any investor investing in Dubai should be confident that should they be involved in some sort of lawsuit or court case with a local company, they will get a fair trial in court. But the perception is that the courts favour local companies over foreign companies, and this is a big issue. The government has started addressing this because there was a ruling in 2012, which opened the DIFC courts, which are based on UK law, to all companies in the UAE that want to address legal issues.”

Regional unrest

The violence that erupted in Israel in November was a fresh reminder that Dubai sits in a region with several fault lines. According to Mr Rafaty, the threat of a possible escalation in tensions between Iran and Israel mean investors operating in the region remain acutely aware of the negative effects such geopolitical tensions could have on their operations in the emirate.

“A lot of foreign investors that come here have an eye on Iran,” he says. “Dubai as an emirate has historically had a close relationship with Iran. When you look at the statistics from 2005 to 2007, Iran was the top trading partner in terms of re-exports coming out of Dubai. Every office that wants to do business with Iran came here. If there is a war [involving] Iran, we will definitely go down with it. This is the risk Dubai is facing as [the local government] is trying to be as restrictive on trade [sanctions] with Iran, to [align with] international regulations.”

Yet according to others, the probability of instability spilling over into Dubai is remote, and the city is perceived by many as a safe haven, mainly because all external parties have no interest in damaging the city’s economy. “The Iranian and Israeli tension and the volatility is not good for the economy,” explains Mr Nassim. “But no one has an interest in damaging Dubai’s economy. It would be a lose-lose game for everyone.”

With Dubai’s economic activity set to rebound strongly in coming years, investors remain upbeat about the emirate's ability to reform its structural weaknesses. Although Dubai’s GDP dropped to a low of 0.9% in 2009 and 0.5% in 2010, according to the International Monetary Fund, economic research and strategy firm Arabia Monitor predicts Dubai’s economy will grow by 3.7% in 2012 and by up to 5.5% by 2015.

“I believe that the financial crisis actually cleared a lot of things,” says Mr Cini at Maserati. “There is now a system where there was no system in place before. The government has reacted brilliantly to this situation. It has been able to turn a disastrous situation into a positive one, with extremely positive results. [The Middle East] is stable and it is growing steadily.”