The Potential Business Opportunities In Oman Economics Essay

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The purpose of this research is to examine the potential business opportunities in Oman, especially in exporting telecommunication equipment into this country. Therefore, Oman's macro-environmental factors such as Cultural Environment, Political and Legal Environment and Economic Environment will be discussed in term of international trade. Moreover, the research will summary the country's current international trade 2009 in comparison to that of after 1970 when the nation's name was changed to the sultanate of Oman. On the other hand, theories and concepts of International Trade will be used to determine attitude of the government to international trade strategy. Then, some recommendation will be given in conclusion part to improve the current position international trade of Oman.

1. Business Environment in Oman

1.1 Cultural Environment in Oman

Language: Arabic is the official language of Oman, and English and Asian languages such as Hindi, Urdu, and Baluchi are also widely spoken. Swahili is spoken by some, a legacy of Oman´s former East African presence. English is widely used in business.

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Ethnic groups: Arab, Baluchi, South Asian (Indian, Pakistani, Sri Lankan, Bangladeshi), African

Religions: Ibadhi Muslim 75%, other (includes Sunni Muslim, Shi'a Muslim, Hindu) 25%

Omani Culture - Key Concepts and Values

Investing or doing business in Oman successfully requires an in-depth understanding of Oman's unique business culture and etiquette.

Omani attitudes to time are much more relaxed than in many Western cultures. People and relationships are more important than schedules and punctuality.

Status is an important part of Omani society and is determined by factors such as age, wealth and family or tribal relations. Those with status have a high level of authority and should be shown deference.

The hierarchy present in Omani society is often seen in the use of titles and formal greetings. When first entering a room or greeting your Omani counterparts for the first time, for example, you should shake hands with the most senior person first using their appropriate titles.

Relationships and mutual trust are paramount for any successful business interaction and can only be developed through face-to-face meetings. It is important to therefore spend time with your Omani business counterparts and have frequent meetings to ensure that the relationship continues to develop.

As part of the relationship building process, guests are often invited to partake in festive occasions or simply share a meal together. Accepting these invitations will help strengthen your relationship with your Omani counterparts. If you are a businesswoman or have a female partner, however, be prepared to be separated from the group since men and women do not eat together during traditional meals or religious festivals.

1.2 Political Environment in Oman

Political power in Oman is dominated by Sultan Qaboos ibn Said Al Said who is responsible for all major decision-making and government appointments. Since coming to power in 1970 in a coup d'etat, Sultan Qaboos has committed himself to promoting the country's modernization, economic diversification as well as continued political stability (EDC Economics).

Oman ranked 31st out of 180 countries in Transparency International's 2009 Corruption Perception Index, receiving a score of 5.5/10, with higher scores indicating less corruption.

Table 1.2: Corruption Perceptions Index (CPI) 2009

Rank

Country/Territory

CPI 2009 Score

Surveys Used

Confidence Range

1

New Zealand

9.4

6

9.1 - 9.5

2

Denmark

9.3

6

9.1 - 9.5

3

Singapore

9.2

9

9.0 - 9.4

3

Sweden

9.2

6

9.0 - 9.3

5

Switzerland

9.0

6

8.9 - 9.1

39

Brunei Darussalam

5.5

4

4.7 - 6.4

39

Oman

5.5

5

4.4 - 6.5

The Corruption Perceptions Index (CPI) table shows a country's ranking and score, the number of surveys used to determine the score, and the confidence range of the scoring.

The rank shows how one country compares to others included in the index. The CPI score indicates the perceived level of public-sector corruption in a country/territory.

The CPI is based on 13 independent surveys. However, not all surveys include all countries. The surveys used column indicates how many surveys were relied upon to determine the score for that country.

The confidence range indicates the reliability of the CPI scores and tells us that allowing for a margin of error; we can be 90% confident that the true score for this country lies within this range.

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Source: Transparency International

1.3 Economic Structure and Growth in Oman

Oman is a rural, agricultural country, and fishing and the government's economic development policy emphasizes the expansion of such non-oil sectors as agriculture, fishing, industry, and mining in its bid to diversify the economy and diminish its dependence on oil exports.

Table 1.3 will illustrate economic indicators and the contribution of key sectors in the economic growth of Oman in the period of 2005-2009

Table 1.3: Oman's Economic Indicators

Index

2005

2006

2007

2008

2009

GDP (purchasing power parity)in billion USD$

40.39

44.53

60.89

67.65

69.48

GDP - per capita (PPP)

15,734

16,973

18,999

20,400

20,300

GDP- real growth rate (%)

5.6%

6.6%

5.6%

6.4%

2.7%

Contributions to GDP (%)

 

 

 

 

 

1. Petroleum Activities

49.44

47.62

44.30

50.48

40.95

1.1 Crude Petroleum

45.72

43.50

40.57

46.82

37.02

1.2 Natural Gas

3.71

4.11

3.72

3.66

3.94

2. Non- Petroleum Activities

52.80

54.10

57.22

50.60

61.30

2.1 Agrl. & Fishing

1.54

1.35

1.30

1.00

1.38

2.2 Industry

14.25

16.17

17.12

16.63

18.57

2.3 Services Activities

37.02

36.57

38.79

32.95

41.35

Source: CIA World Factbook; Central Bank of Oman

2. International Trade in Oman

2.1 The Nature of Oman's International Trade

Overseas trading is important to Oman. The discovery of oil drastically improved Oman's economy. Sustained high oil prices in recent years have helped build Oman's budget, trade surpluses and foreign reserves. Crude oil, refined petroleum, and natural gas account for most exports while imports consist mainly of machinery and transport equipment, basic manufactured goods, and foodstuffs. Some manufactured products are also exported. In spite of the fact that over the past 30 years, Oman has come to rely more and more on imports, Oman has enjoyed trade surplus through advantage of exporting the production of crude oil.

Among the country's major trading partners are China, Japan, South Korea, and the United Arab Emirates. (See Appendix 1)

Source: UN Comtrade

Items

1975

1980

1985

1990

1995

2000

2005

2006

2007

2008

2009

Export (US$bn)

1.044

2.386

4.705

5.508

5.962

11.32

18.69

21.59

24.69

37.72

27.65

Import (US$bn)

0.765

1.732

3.153

2.681

4.248

4.59

8.03

9.88

14.34

20.71

18.46

Trade balance (US$bn)

0.279

0.654

1.552

2.827

1.714

6.73

10.66

11.71

10.35

17.01

9.19

Source: UN Comtrade

2.2 Attitude to International Trade of Oman

Oman has diplomatic relations with over 140 countries and is a member of over 105 regional and international organizations.

On 7th October 1971, Oman gained membership in the UN and its specialized organs (IMF, World Bank); the nation belongs to ESCWA and all the non-regional specialized agencies except IAEA. Oman also participates in G-77, GCC, and the Arab League, as well as the Islamic Conference. Oman accessed to the World Trade Organization (WTO) on November 9, 2000, which facilitated Oman's integration into the global marketplace. In addition, Oman has sign several co-operation agreements with 20 countries. It concluded a free-trade agreement (FTA) with the United States, signed on 19 January 2006, covering trade in goods, IPRs, and services (WTO nd). Through these formal economic co-operations with other nations, Oman has become more dependable trading partner and more attractive destination for majority foreign-owned investment. Thus, the potential for exporting telecommunication equipment into Oman is closer.

The government's trade policy space, as measured by the wedge between bound and applied tariffs (the overhang), has been relatively constant in the recent years and in 2008 it was 8.3 percent for Oman. Oman has a very liberal services trade regime, and as such is ranked 13th out of 148 countries according to the GATS Commitment Index.

Moreover, the Oman's government is engaged in an aggressive effort to woo foreign investors and enhance international trade links as part of the ambitious Vision 2020 program of economic diversification aimed at reducing the country's dependence on shrinking reserves of oil.

3. Viewing Oman's International Trade Through Theories Related

3.1 The nature of Advantage

Daniels and Radebaugh (1998) have summarised advantage in the context of International Trade Theory into five categories as below:

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Natural advantage refers to climate, soil and nature resources;

Acquired advantage refers to technology and skill development;

Comparative advantage against another nation's endowment of assets;

Country size as a proxy for the range of natural factors such as climate, soil, minerals and etc, size of population that provides opportunities to process materials and create markets;

Factor proportions that suggest their optimum utilisation in production.

Daniels, Radebaugh and Sullivan (2004) Framework, the evolution of International Trade Theory is depicted as below:

Besides Porter's Competitive Advantage of Nations theory, this research will use Product Life Cycle theory and Absolute Advantage theory to explore the status of international trade in Oman.

Adam Smith's Absolute Advantage Theory

According to Adam Smith (1776), a country's would be either natural or acquired. Relating to Oman, this country's economy is heavily reliant on oil exports for revenue, though diversification into natural gas production has mitigated this to a degree. About two-thirds of Oman's total energy consumption comes from natural gas and the remainder comes from oil, reflecting the country's relative abundance of oil and natural gas reserves.

Product Life Cycle theory

"Raymond Vernon's (1966) International product life cycle (PLC) theory of trade states that the certain kinds of products shifts as they go through a continuum, or cycle, that consists of four stages - Introduction, Growth, Maturity, and Decline- and that the location of production will shift internationally depending on the stage of the cycle" (Daniels & Radebaugh, 1998 pp. 206).

Telecommunication equipments are the major products that Oman imported to speed up telecommunication industry growth. In 2007, Oman imported of USD$217 billion for these products. Therefore, the market for telecommunication equipments in Oman would relate to figure (C) less developed countries, because Oman has been lack of resource and ability in term of innovative technology to produce itself these products that require higher technology. In contrast, some countries in EU have advantage of technology and knowledge will focus on exporting telecommunication equipments into Oman to gain more profit.

3.2 Justification of Telecommunication Equipment Industry Potential in Oman

The Oman's government has embarked on an ambitious campaign to develop the information technology (IT) sector. Agreements between Oman Telecommunications Company (Omantel) and foreign firms hold the potential to significantly expand telecommunications services and lay the ground for the establishment of a state-of-the-art IT infrastructure. In May 2006, Telecommunication Minister Mohammed bin Abdullah bin Isa Al-Harthi announced that the government is preparing to "fully liberalize" the telecommunications sector, with private companies permitted to offer fixed-line and Internet services (U.S Commercial Service 2009).

In July 2005, the government, which was required per WTO commitments to liberalize its telecom sector, floated 30 percent of its shares in state telecoms giant Omantel (formerly known as the General Telecommunications Organization, or GTO).

3.3 Summary of Oman current trade position using the extended form of Porter's Diamond of National Competitiveness

Source: (Dunning 1993)

According to Porter (1994), there are four principal attributes of a nation's international success in a particular industry such as: Factor conditions; Demand conditions; Related and supporting industries and; Company strategy, structure and rivalry. In addition, Porter defines the role of chance as well as the role of government as the secondary determinants. However, a further research by Dunning (1993) proposed that multi-national business activities bring additional factors that may encourage advances in support industries, etc.

In term of exporting telecommunication equipment into Oman, the four board attributes of the nation are:

Factor conditions would be capital, quality of infrastructure.

Demand conditions would be determined that "Overall telecommunications infrastructure and service in Oman remains less developed than in its Gulf neighbors. Fixed line and Internet penetration rates are low, yet the young and growing population is generating increased demand for modern telecommunications and broadcasting systems" (U.S. Commercial Service 2008) .

Related and supporting industries would be the profitable oil and gas industries. Oil and Gas is the leading economic sector (U.S. Department of State 2007). Revenue generated can help the Kazakhstan's government fund the healthcare industry. Firm strategy, structure, rivalry would be depicted as below:

"In 2008, imports of U.S. equipment reached an estimated $31 million, while market share declined to 3.8%. America's closest competitors are Russia, Germany, and Japan. Local production of medical equipment in 2008 accounted for only 1.7% of the total market" (U.S. Commercial Service 2001-2009).

Relating to exporting medical equipment into Oman, the three secondary determinants are:

Chance for Oman is observed that in term of oil and gas reserves this country is ranked the 24 and 29 respectively in the world (CIA nd). Besides that, Oman has a strategic geographic location for marine trade.

The role of government would relate to: "In July 2005, the government, which was required per WTO commitments to liberalize its telecom sector, floated 30 percent of its shares in state telecoms giant Omantel. The company is now looking for a strategic investor in advance of government efforts to open the fixed-line communications sector through the issuance of additional licenses. All telecommunications companies are governed by the Telecommunications Regulatory Authority, which was established by the government in 2003 to oversee all aspects of privatization and regulation." (U.S. Commercial Service 2008).

Multi-national Business Activities in telecommunication industry in Oman have played important role in supplying technology and equipments or software solutions for development of Oman's telecommunication market. Omantel has contracted with Ericsson, Siemens and Motorola to expand GSM service in some areas of Oman (U.S. Commercial Service).

4. Recommendations for Oman's International Trade Strategy

After determine macro-environment and the current position of international trade in Oman, this paper will come into some recommendations with SWOT analysis as below:

SWOT Analysis

 

Strengths

Weaknesses

 

 

         Oman has advantages of natuaral resources, such as Oil, natural gas, copper, marble, limestone, gypsum, chromium (CIA nd).

          Small population and small domestic markets are amplified by the absence of a modern, high-value consumer market beyond the capital area (U.S. Commecial Service 2008).

      To reduce the oil sector's contribution to GDP to 9% by 2020, Oman has engaged a development plan that focuses on diversification, industrialization, and privatization (CIA nd).

       Proven oil reserves have a limited time horizon (approximately 21 years) before depletion (Coface 2009).

         In 2007, the World Economic Freedoms Index ranked Oman the 47th most freedom of trade in the world.

      Vulnerability to downturns in oil prices (Coface 2009).

         Stable political system (Coface 2009)

      Dependence on human resources from abroad (Coface 2009).

 

 

Opportunities

Threats

 

 

        The GCC Common Market has created the free movement of labour and capital among the six member states as well as removing the barriers to inter-GCC trade. (Oman Daily - 8th Aug 2010).

         Collapse in oil and gas prices (Political Risk Services- PRS, Ltd)

         Under Free Trade Agreement with USA, Oman would have more opportunities to access to the U.S. consumer market of 290 million people.

         The country has been threatened by the region's many conflicts (PRS -2009).

 

 

APPENDIX

Appendix 1: Oman Trade in Brief

MERCHANDISE TRADE

 

Value

 

Annual percentage change

 

2008

 

2000-2008

2007

2008

Merchandise exports, f.o.b. (million US$)

37,719

16

14

53

Merchandise imports, c.i.f. (million US$)

23,137

21

45

44

 

 

 

2008

2008

Share in world total exports

0.23

Share in world total imports

0.14

Breakdown in economy's total exports

Breakdown in economy's total imports

 

By main commodity group (ITS)

By main commodity group (ITS)

 

Agricultural products

2.6

Agricultural products

11.4

Fuels and mining products

78.7

Fuels and mining products

7.1

Manufactures

8.2

Manufactures

79.2

By main destination

By main origin

 

1. China

29.3

1. United Arab Emirates

27.2

2. United Arab Emirates

10.9

2. European Union (27)

17.1

3. Japan

10.6

3. Japan

15.6

4. Korea, Republic of

9.6

4. United States

5.7

5. Thailand

6.8

5. China

4.6

Unspecified destinations

14.7

 

Unspecified origins

 

 

0

 

 

COMMERCIAL SERVICES TRADE

Value

 

Annual percentage change

 

2008

 

2000-2008

 

2007

2008

Commercial services exports (million US$)

1,974

...

25

21

Commercial services imports (million US$)

6,122

17

25

26

 

 

 

2008

2008

Share in world total exports

0.05

Share in world total imports

0.17

 

 

Breakdown in economy's total exports

Breakdown in economy's total imports

 

By principal services item

By principal services item

 

Transportation

23.7

Transportation

41.5

Travel

40.7

Travel

14

Other commercial services

35.6

 

Other commercial services

 

44.5

Source: WTO and national statistics