Generally, I am convinced that being dependent on free-trade zones to attract FDI is mostly due to the restrictive, outdated and sometimes even complicated commercial laws and market conditions of the host country. Maybe this is the reason why free-trade zones are so popular, particularly in the Middle East and Africa region.
For decades, Dubai has been creating award-winning free-trade zones for almost any economic sector. The mixture of profit-orientated business units with almost no governmental interference, plus state-of-the-art infrastructure that assures mostly smooth operational procedures, has definitely set the standards many countries could learn from. But there are also some recent developments within the United Arab Emirates that have led to challenging experiences worth knowing for countries planning new free-trade zones.
The introduction of 5% VAT caused a lot of confusion among free-trade zone investors, as some of the zones were not excluded despite having tax incentives contractually granted for 50 years. More recently, the banking sector has started to close the bank accounts of offshore licensees and even reject small entities that don’t have a full office but a 'flexi desk' due to more appealing cost structures. Most of the banks reject any financial instruments for SMEs and private loans for entrepreneurs, making life and business very complicated for self-employed people.
Let’s be clear, change is inevitable and necessary for any country and jurisdiction. However, any free zone authority has to support its investors in times of change. For example, Mauritius had to ban its global business licences – which were similar to offshore structures – due to new government regulations. But the authorities gave foreign investors the option and the time necessary to 'upgrade' existing licences to suitable structures without interrupting their businesses or losing their banking facilities.
Becoming active in a foreign country is a serious decision, especially for SMEs or entrepreneurs. In a highly competitive environment, any free-trade zone should be strong, creative and lucrative enough to attract new investments while maintaining a positive reputation for protecting current investors if and when necessary. As we all know, it takes a lifetime to gain a good reputation – but just few minutes to lose it.
Mazdak Rafaty is managing partner of Ludwar International Consultancy and SME adviser to the joint Emirati-German Chamber of Commerce. E-mail: firstname.lastname@example.org