Does Dubai benefit from clustered thinking?

Few cities or countries have adopted the concept of clusters to the same extent as Dubai. In the past 16 years or so, the emirate has extended its cluster approach to include construction, financial services, media, ICT services, manufacturing, environment, biotechnology, healthcare, education and design.

In order to attract FDI, these clusters have been supported by almost two-dozen free zones, which have enabled the country to develop new sectors and bypass current restrictions. For example, one free zone, the Dubai international Financial Centre (DIFC), has allowed foreign financial services firms to set up operations there, enabling new entrants to avoid all the restrictions imposed by the central bank, as it is overseen by an independent regulator, the Dubai Financial Services Authority.

Financial services cluster

The DIFC enjoys typical levels of inward FDI for Dubai, seen in its success in recruiting more than 1300 companies in financial services (including consultants, lawyers and accountants). The zone's estimates show it contributed to about 12% of Dubai’s GDP in 2014 and aims to comprise 18% of the country’s output by 2024.

The initial value proposition for Dubai’s cluster strategy was to allow inward investors the ability to have full ownership rights in an emirate that restricts foreign ownership to 49%. Until the development clusters, only the Jebel Ali Free Zone allowed overseas investors 100% ownership, but this was restricted to manufacturing or trading activities. So the cluster development attracted knowledge-based inward investment into the emirate. With simple setting-up procedures and a tax-free operating environment, the modern hi-tech plug-and-play infrastructure quickly attracted a wave of knowledge-based inward investment. 

A lack of synergy

Although Dubai has been exceptionally successful in attracting investment into its clusters, we believe that there has been a lack of synergistic development, with each cluster tending to operate in isolation. We are also of the opinion that the development of each new cluster was based largely on supply-side conditions. This may explain the lower level of connectivity between the different firms within a cluster.

With hindsight, we believe that a more successful approach would have been to establish a few selected clusters and to develop them in a holistic manner. We may in this regard compare Dubai to, say, California, which is many times larger with a greater population and economy. In the case of California, the approach has been to focus on three key clusters, namely IT, wine and entertainment. We believe this strategy has made a significant difference to the companies within the state as well as to its economy.

As discussed, the achievement of efficiency and the effectiveness benefits associated with the development of clusters are closely linked to synergies achieved among supporting industries, suppliers and customers in the value chain. Networking among these stakeholders that are present in the cluster creates a dynamic and positive culture of continuous innovation, thereby leveraging the benefits of geographical proximity, and achieving economies of scale.

For example, the supporting industries may interact with and supply tailor-made products and services to various firms in the cluster. For this to occur effectively, a range of supporting industries must evolve around the core product/service of a cluster. We believe that this has not been the case in Dubai, where the focus has been on the development of real estate projects rather than on core functionality.

Too many eggs?

We believe the real estate focus of the clusters and the large profits that were earned at the time may have detracted from the need to build up core activities. To a certain extent, this focus on real estate and leasing space may have led clusters to target representative or sales offices of foreign companies rather than attract new entrepreneurs.

In the blueprint for the development of clusters, it is important to define key areas so as to chart out the activities of industries joining the clusters. A mix of specific support services is required for synergy among cluster members and some services may, at least in the earlier stages, be less profitable ventures. Therefore the activities of supporting industries may be policy-driven to support the development of a vibrant, sustainable cluster with good opportunities to offer products and services both locally and globally.

The performance indicators used by some clusters may not have motivated firms to conduct R&D within the cluster. If we look at Ireland, we find that its success in developing its ICT cluster has been its ability to attract leading companies to innovate within the country. The immediate benefit of this strategy is that it led to the establishment and development of sub-suppliers within the cluster. It also created a demand for goods and services that local companies were able to supply.

Focused approach

The presence of original equipment manufacturers within the cluster has also led to the creation of R&D centres within the same cluster. We feel that a more focused approach towards actual service delivery would have led to a more fully developed and collaborative cluster.

Overall, we believe that Dubai’s clusters have offered a unique value proposition  – namely lower costs; a reduction in administrative bureaucracy; excellent infrastructure; the provision of support services; the ability to have complete foreign ownership; and exemption from corporation taxation and import duty.

This value proposition was sufficient to attract and retain inward investment when Dubai had no regional competitors. However, with strong competition appearing from other regional clusters, Dubai needs to enhance its value proposition. One method by which this can be achieved is to demonstrate a long-term commitment to the firms within the cluster rather than short-term profit through real estate-based activities.

This could be an added value practice for some Latin American and Caribbean countries that enjoy the pre-existence of similar conditions in, for example, energy, infrastructure and geo-localisation, such as Trinidad and Tobago, Suriname or the Dominican Republic.

Dr Ashraf Ali Mahate is the head of export market intelligence at Dubai Exports, government of Dubai. Ana Arias Urones is a trade and investment specialist at the Inter-American Development Bank.