Across the Middle East, governments are announcing special projects designed to attract IT investment, aware that technology has the power to revitalise and catalyse emerging and developing economies. One problem: for all the science parks and Internet cities, old economy protection laws are being left in place to protect local businesses... Has nothing actually changed..?

It's scheduled to open in October to coincide with Gitex, still the Middle East's biggest computer trade fair. As that double deadline nears, exhilaration mixed with not a little panic is the dominant mood in the IT and Internet industries. They've all been invited to set up shop in the Internet City and the deal being offered is decidedly sweet. 100 percent foreign ownership. Renewable, 50-year leases on land. A "single window" for transactions with the government. All the mod cons required for running a business, something for which the Dubai itself is justly famous. And then there are the advantages that differentiate it from other free trade zones. These indicate that it's purpose-built for what's called the "information or knowledge-based" or, simply, the "New" economy. To wit: an Internet University specialising on all things "e-"; a research and technology centre to attract and develop IT talent; and more bandwidth than any tenant will know what to do with.

Six months before it opens, 30 percent of its 3-square kilometer area has already been taken. And while the Internet City Trade Zone Authority feels duty bound to keep its client list confidential, there are no restrictions on their clients, who eagerly want to announce their plans. In a single week, for example, DLJdirect (an online brokerage firm) and Planetarabia (a portal for Arabs everywhere) have said that they will be greeting visitors from the right side of the ribbon when it's cut.

Deciding to be in the Internet City is certainly a no-brainer for a "dot com" - a company that has either ported its business to the Web, or better yet, has built an entirely new business based on Web capabilities. Most of them are either new or new to the region. It's the other players, the IT vendors who already have a brick-and-mortar presence elsewhere in Dubai, who are still doing serious homework on the cost/benefits of shifting. In the case of Compaq and Acer, both of which have spanking new buildings in the Jebel Ali Free Trade Zone, the swotting becomes that much harder.

"Based on the Internet City's profile of preferred companies," said WS Mukund, senior manager of product marketing, "Acer certainly qualifies. We're building Internet-enabling technologies that go beyond the PC and that will require us to provide value-added services. If these are to be delivered over the Internet, then the bandwidth and secure payment gateways that the Internet City will provide become very important. However, we should be able to get the same facilities in Jebel Ali. It would be a matter of putting the request through to Etisalat (the local ISP) and Comtrust (the local PKI). At the moment we're studying the matter very carefully and three options are open: moving there, staying here or having a presence in both."

As painful as it would be to write off a legacy investment in brick and mortar, this is the easiest variable to quantify for this go/no-go decision. In fact, what's truly tough is getting a realistic assessment of what the advantages of being in the Internet City would be. It goes back to the question of why the Internet City differs from Dubai's other free trade zones. And how the zones, in turn, differ from the rest of the United Arab Emirates.

Two Worlds
Pull out the tomes and the commercial laws are clear enough. Inside the zones, a foreign company can have 100 percent ownership; outside of it, a company must cede 51 percent ownership to a local partner to be able to conduct business in the Emirates. Inside the zones, a foreign company owner can repatriate 100 percent of his earnings; outside of it, he has to apportion some of it to his partner or his dealers. The free trade zones are meant to consolidate Dubai's standing as the region's trading hub. The goods that either land or are manufactured there are meant to be exported to other countries. If, instead, they enter the United Arab Emirates, the goods will have to be sold through a company with a trading licence issued by the Economic Department. That trading company would have to be 51 percent-owned by an Emirati citizen.

Lawyers call this "dealer protection laws" and they're not unique to the UAE. "Trading is at the core of the Arab world's commercial heritage, and consequently every Arab country has special laws and practices encouraging foreign suppliers to use local sales agents and distributors," writes Howard Stovall, a lawyer who specialises in Middle East commercial law.

Historically, when the markets in this region were incubating rather than emerging, selling through a local agent made perfect sense for all the parties involved in a transaction. The buyer, for whom the physical proximity of the agent meant an assurance of delivery, service and support. The seller, because the size of the markets then did not justify the cost of setting up subsidiary offices for just delivery of goods and the collection of payment. And the agent, because he got part of the profit. As the markets grew, however, groups like the World Trade Organization and the Gulf Cooperation Council began to identify these dealer protection laws as barriers to trade. These laws, they say, make manifest the controversy in such issues as "the differential treatment of local and foreign businesses; direct investment and management in local companies; and how goods are imported and distributed."

The Fine Print
Why? As Stovall says, the bone of contention is the clause "entitling the local sales agent to claim compensation if the foreign party fails to provide adequate justification for termination or non-renewal of the relationship. This statutory right parallels, and in fact is derived from, European laws. However, in other respects, the protections available in Middle East countries exceed those available in Europe. For example, in some Middle East laws, a sales agent is given the exclusive right to import the relevant product, to receive compensation for any parallel import of the product by others and even to block the foreign supplier's direct import of the product into the sales agent's territory."

Stovall writes annual reviews on the changes in Middle Eastern commercial law. In the latest one, he reports: "Arab government officials are becoming increasingly sensitive to the disadvantages of these more extreme protections, which impede the free market, in essence allowing a sales agent to hold the supplier and consumers hostage, even in minor commercial disputes. In recent years, both Oman and Bahrain amended their law to abolish the statutory requirement of exclusivity for local sales agents. Other Middle East countries are likely to follow suit. Interestingly, the country with the strongest reputation for free trade, the UAE, currently has the most onerous dealer protection law in the region."

This contradiction is likely to be more glaring once the Internet City gets going. As things stand, there are already many contractual clauses that a foreign principal and his dealer can agree upon to make the terms of their agreement more equitable. The fact that they can negotiate, and that the negotiated terms apply when they do begin to trade, probably accounts for the ease of doing business in Dubai.

Demarcating territory, denying exclusivity rights and defining the effects of termination are among the many sticking points that can be negotiated. New entrants to the country, for example, very seldom award exclusive rights to distribution any more. They've learnt that lesson from the painful experience of others who did so, say, 15 years ago and are now "boxing with one hand tied behind their back."

Arriving at a clearly worded agreement about how to terminate a relationship is especially important because the dealer protection laws can be vague. Listen to this: "The dealer is entitled to compensation if the foreign principal wants to terminate the relationship without just cause." How much compensation? On the basis of historical, current or projected earnings? "Just cause" would refer to the agent's inadequate or non-performance. Again, however, unless quantifiable measures of performance are defined at the outset, the foreign principal may have to pay heavily for his oversight later on. "Under some of these laws," writes Stovall, "terminated commercial agents may also be entitled to block the foreign principal's imports pending an amicable settlement or court judgement."

The New Economy
Champions of free trade have always looked towards legislation and groups like the World Trade Organization to knock down barriers to global trade. Now the law is majestic - which accounts for the stately pace at which it proceeds. And the WTO can be perceived as taking sides, which accounts for the way public opinion about it dips, peaks or is divided according to camp. Information technology, as manifest in the Internet, is not represented, regulated or created by any one group. As such, it seems to have a mind of its own, capable even of creating a "New Economy" with dizzying speed.

What is the "New Economy"?
Alas, as with all newfangled concepts, this one has about as many meanings as there are trend spotters - including those who would deny that the New Economy is any different from the old. The first among its supporters was Peter Drucker who, in 1969, "perceived the arrival of knowledge workers and information's superior role (rather than the material resources or capital) in creating wealth." Two years ago, technology journalist Kevin Kelly extended this idea by emphasising the value of networks or connections.

"The grand irony of our times is that the era of computers is over. All the major consequences of standalone computers have already taken place. Computers have speeded up our lives a bit, and that's it," he wrote in his "New Rules for the New Economy". He continues, "In contrast, all the most promising technologies making their debut now are chiefly due to communication between computers - that is, to connections rather than to computations. And since communication is the basis of culture, fiddling at this level is indeed momentous."

"And fiddle we do. The technology we first invented to crunch spreadsheets has been hijacked to connect our isolated selves instead. Information's critical re-arrangement is the widespread, relentless act of connecting everything to everything else. We are now engaged in a grand scheme to augment, amplify, enhance and extend the relationships and communications between all things and all objects."

The most binding relationships being forged by the Internet are commercial - whether it's a business electronically linked to another business or one that's open to a global market of consumers. This would be hyperbole if investors were not richly rewarding the builders of networks and if the companies who take New Economy principles to heart were not raking it in by consistently beating market estimates. Adrian Slywotzky, a vice-president at Mercer Management Consulting, identifies some of the "poster boys" who were first to re-jigger their business models in an economy which "prizes superior business models above superior products or technology."

Among them is General Electric, which decided that if it were to grow, it had to shift from production to creating services and solutions. Now the company is trying to "add more value to the customer with a digital business design." Then there's Cisco which "makes 70 percent of its revenue electronically, but understands that digital business design is not just about the selling step. It's the whole system... Cisco CEO John Chambers spends 40 percent of his time with customers. Not just with satisfied customers, but more important, with dissatisfied customers - to understand why Cisco isn't measuring up and in which direction the customer is headed. The best business-design innovators are always outside listening to or arguing with their customers. They get more of the data directly, to understand what the next two or three patterns of strategic change in their industry are going to be."

And there's Dell which "has always been a lean company. Its working capital as a percent of sales in the early-to-mid-1990s was 12 to 14 percent. By moving to a digital business design, Dell achieved negative working capital. They moved from direct to direct electronic. We're talking about customers paying Dell in a couple of days and Dell paying its suppliers in 20 or 30 days. Most important, we're talking about the cutting down of cycles wherever possible not just externally, vis-a-vis the customer, but internally, in what the company does." Macroeconomics has a wonderful way of distilling case studies. Dr. Sushil Wadhwani, who is a Monetary Policy Committee Member of the Bank of England, wrote a paper on "The Impact of the Internet on UK Inflation." What the Internet does, he said, is "lower search costs, reduce barriers to entry and help shorten the supply chain."

Or, as PC Week's John Dodge said, "Maybe something more fundamental is going on, such as control returning to where most of the value is created."

The Internet City can't be the Internet Ghetto Now that Dubai has an Internet City, will the dynamics of the New Economy operate within it - particularly that which shortens the supply chain? That's a given. So the real question to ask is this: will this new economy break through the perimeter walls of the Internet City and spread to the Emirate containing it? Specifically, will electronic commerce, which opens a direct line of communication between vendor and customer, eventually eliminate the middleman even if the law protects him?

We put the question to Stovall, who with a true lawyer's caution, gave the caveat that he didn't have a copy of the Internet City Regulations and would give an opinion based only on his knowledge on how computer companies in other free zones are allowed to sell to Dubai. "I would think you might begin to conceptualise some of the issues along the following lines: foreign companies licensed to do business in the Internet City, like in Jebel Ali, are not authorised to conduct commercial activities 'on-shore' the UAE. Consequently, a foreign company licensed only in the Internet City should not be able to freely conduct business 'on-shore' the UAE, such as visiting and consulting with clients on-shore the UAE or performing projects at the client's on-shore facilities."

"Probably some limited activities along those lines already take place by computer companies from Western countries, without a local business registration - such as through brief sporadic visits by expatriate staff on tourist visas. Perhaps some similar 'de minimis' on-shore activity would be tolerated from the Internet City companies, but I believe any major changes would require a shake-up in the current business registration rules."

He continued: "As for hardware imports, I expect that the same rules would apply to the Internet City as apply to Jebel Ali - imports are deemed coming from off-shore and, just like imports from the Far East or Europe, must clear customs before entering the country. Software imports are a bit more interesting - if loaded on the software and valued as part of the product cost, customs will obviously be assessed. Software downloaded into the UAE from an Internet site outside the UAE very well may fall outside the customs department's ability to record the transaction. The same result might apply if the Web site is 'located' in the Internet City and thus arguably off-shore the UAE. Companies established in the Internet City, like companies in Europe or the US, should not need an on-shore UAE business registration to consult by telephone, fax and email to clients on-shore the UAE."

Software and services, indeed, make for the biggest dilemma - especially since the preferred Internet tenant is one who traffics in knowledge and value-added services rather than just physical goods. As part of our research on software availability as well as how the commercial laws apply to goods bought online, we bought an operating system from a software maker who does not have a Middle East representative. The CD containing the software landed on our desk two days after we placed the order - delivered by Federal Express who, like us, were not notified by Customs that someone had to pay a tax. Note that there was a physical transfer of goods but, like a download from the Internet, this transaction did not register as a bleep in any of the government's radars.

The Internet City Trade Zone Authority has also encouraged content developers, those who tend CRM sites and call centres as well as other support organisations to locate their operations in the City. These companies, by their very nature, have no need for a middleman. That, and the fact that they will not be required to have a local partner in the Internet City, has made speculative thinking a sport in many a Dubai-based company that may not have even built a Web site yet. "Old Economy" content developers, in particular, might be tempted to re-invent themselves given the limited number of trade licences issued by the Economic Department to publishing and advertising houses.

The Dubai Ports Authority (DPA) and the Jebel Ali Free Trade Zone (JAFTZ) are also getting directly involved in the building of business-to-business portals (see Network News, page 72). They're in such a hurry to do so that the site will have to be hosted in the United States pending the opening of the Dubai Internet City in October. Oracle will provide the hosting platform and the software technology. Asked about what the implications are of business-to-business sites providing a direct link between vendor and customer, Oracle's regional manager Husam Dajani says that he expects transactions to go by the old rules. And the goods presumably to go through the old channels.

Commerce One, on the other hand, is not a home grown business-to-business portal. But their clients, like General Motors, Shell and Ford, are not without customers in this region; and the local offices of Schlumberger, among others, are in search of customers abroad. So Commerce One too are setting up office in Dubai, although whether it will be in the Internet City or the city proper has not been decided. We posed the same question to the managing director. And what he said was: "It's early days yet to say whether the agency laws will protect the local market from e-commerce, whether it's business-to-business or business-to-consumer. But a Penguin paperback will get to you from Amazon even if there are booksellers here who have distributorship rights to Penguin. How is any middleman different from a dealer who is selling just books? All of them will have to re-think their business and find a way to add value to make revenue as e-commerce provides an infrastructure for people to trade."

"There is no exclusivity on the Internet and anybody who wants to maintain exclusivity will fail because what the Internet does is promote competition on a global scale. Anybody who doesn't want that, or is afraid of it, should take the cable that connects this country to the Internet and cut it."