This May, the MSCI index from Morgan Stanley will promote Qatar and the United Arab Emirates from ‘frontier’ to ‘emerging market’ status. It is the latest signal of investor appetite for the region, fuelled by successful bids from Dubai and Qatar to host the World Expo 2020 and the FIFA World Cup 2022 respectively.

As investors focus on opportunities above the Gulf’s ground and not just below it, attention is turning to the business environment. And while the Gulf Cooperation Council (Qatar, the United Arab Emirates, Bahrain, Kuwait, Oman and Saudi Arabia) became a common market in 2008, there are marked differences between them. A new Economist Intelligence Unit report sponsored by Merck Serono and published this week – called “The Business Environment in Gulf Cooperation Council Countries" - fleshes them out, and points to common challenges.

Of all the factors shaping the business environment, the treatment of foreign entities – companies and workers - is emerging as a priority question in the GCC. On some measures, there are clear divergences in policy. While Qatar, for instance, might rank well on many popular measures of ‘competitiveness’, it is one of the most restrictive countries in the region when it comes to foreign ownership. Bahrain, in contrast, ranks low on many metrics but high compared to Qatar in terms of openness to foreign ownership. Kuwait allows foreign participation only in specific industries, and bans all private ownership in the oil sector, as do other GCC members, while the UAE allows full foreign ownership in its free-trade zones.

The jobs push

In contrast, the group looks similar on the question of labour. Post-Arab Spring, they are all concerned about the employment of nationals. Saudi Arabia has cracked down on expatriate workers, targeting those with questionable visas. One million left the country last year, and the government fines companies for failing to hire enough locals. There have been sudden lay-offs of foreign workers in state entities in the UAE. Kuwait has plans to reduce the number of expatriates in the country, and in Oman there is a push to ensure the government hires more nationals, and quotas exist for private firms. More modestly, Qatar has similar policies, although the population is too small and the country’s plans too large to make wide-scale ‘Qatarization’ practical. Bahrain is perhaps the outlier. After having quotas for years, the government is focusing on boosting local employment in management ranks, and pondering dropping quotas altogether.

Glitches to localisation reforms

As noted in this week’s EIU report, for countries pushing local hiring hard, the challenges are clear. Because these states typically inflate the wages of their public sector workforces, private sector employment – with longer hours, fewer holidays and lower salaries – is less attractive for nationals. Inadequate education systems can make qualified local nationals hard to find and expensive to hire. Kuwait went so far as to pay companies subsidies to hire nationals willing to work in the private sector.

Then, there are the unintended consequences – which countries in other regions have faced too. South Africa’s Black Economic Empowerment programme has been riddled with fraud and misrepresentations. Malaysia’s affirmative action effort faced criticism for being race rather than deprivation-based, and for creating an urban middle class but no wide-scale economic transformation. Zimbabwe’s haphazard reforms to boost black asset ownership have been blamed by some for causing the country’s economic collapse.

Indigenisation programmes in the Gulf, while originating out of different historical circumstances, face similar challenges. While the Saudi Labour Ministry said in December 2013 that its ‘Nitaqat’ indigenisation programme had caused unemployment to fall from 12.4% to 11.5% in the fourth quarter, the following month the Saudi press quoted the country’s Shoura Council members criticising the programme, with one saying that “companies manipulate the system to give the impression that they have helped Saudis get employed.”

Like South Africa, Saudi Arabia’s government has also seen companies game the system – for instance, adding locals to the payroll but not giving them jobs, thus missing the skills transfer essential to the policy’s success. GCC members have also been criticised for not linking education systems to the labour market – another similarity with South Africa’s programme.

Here to stay

Gulf governments need the programmes to boost employment, and they are not likely to be rolled back – if anything, they look set to ramp up. For all the problems, companies should see localisation programmes as an opportunity rather than a challenge. While competition is stiff for local talent, multinationals will need to learn to compete on this as they compete on other areas. And these are government-led economies; companies wanting to win public contracts will help their cause if they score well on national hiring measures.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.