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Undisputable Advantages
The future of investment in the Iranian market is bright for foreign
investors, especially those willing to weather a stay of 20 to 30 years.
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Tahmasb Mazaheri, Minister of Economic Affairs and
Finance |
One of the most principle
developments pertaining to the world economy since the early 1980s has been
economic globalization. Economic globalization is the elimination of national
boundaries, one of the characteristics of which is the gradual mergers of
national economies with the international economy. This merger is done through
the expansion of the volume of products and services traded, foreign direct
investment (FDI) as well as investment in international stocks and tourism.
Under such circumstances, the international economic scene is not an arena for
the struggle or contention of countries with one another, but a field in which
each contestant wants to score and win.
The historical background of this phenomenon on an
international and global level can be traced back to the beginning of the
second half of the twentieth century. In the wake of the discredit of some
non-performing economic models, such as centralized planned economy in the
past two decades, the world economy has gone through major transformations and
developments. In the modern economic approach, the application of market
economy elements has come to be accepted by the majority of developing
countries. In fact, many developing countries have moved towards
privatization, reduction of state intervention in economic affairs,
deregulation, liberalization of trade, internationalization of economic
behavior and efforts towards attracting foreign investment. These developments
in the international political economy have gradually led to the formation of
the General Agreement on Tariffs and Trade (GATT) and subsequently to the
World Trade Organization (WTO), which is regarded as the economic side of the
globalization process.
As has been the case with many other developing countries, Iran
has no alternative but to develop its industry, foreign trade and securing a
fair share in the international trade to put behind its underdevelopment and
realize economic growth and prosperity. That is why when drafting the details
and fine points of the country’s five-year social and economic development
plans such areas as legalization of economic behaviors, privatization,
settlement of state companies, gradual elimination of monopolies and
introduction of competition in economic activities, pinpointing or targeting
of subsidies, curtailment of the government from further expanding its
economic domination, creation of capital market and establishment of security
for domestic and foreign investments are given serious attention by planners.
Iran—with enormous relative advantages in raw material, cheap
and skilled manpower, as well as relatively cheap energy resources, in
addition to large domestic and regional markets—has a lot to offer foreign
investors. The new law on attraction and protection of foreign investment,
which has provided every guarantee and assurances for the investors, will
gradually pave the way for those potential hesitant business people who are
thinking of investing in Iran. As for the political and social atmosphere of
Iran today, observers see some kind of relaxation which can add to the
attraction of doing business in Iran and one can make sure that the new
situation will get momentum in the years to come.
The future of investment in the Iranian market is bright for
foreign investors, especially those willing to weather a stay of 20 to 30
years. The Iranian market, after passing a transient period, has now turned
into a reliable tension-free world market. It has plentiful advantages such as
untapped hydrocarbon reserves, talented workforce, and access to different
markets in the region and high domestic demands for consumer goods. The
long-term profits ensured by this market encourage foreign investors to make
investments despite some inevitable risks.
The first thing that draws the attention of a serious foreign
investor or an international company to Iran is the economic capabilities and
economic data of the country. Such capabilities can be restricted to the
country’s economic geography, economic structures or political and economic
policies. Iran
is among the first twenty countries of the world in this respect and this is a
phenomenon to which foreign investors pay serious attention. The investor has
to take other factors into consideration as well. Factors such as political
structure and stability, foreign trade policies, the trend of policy making,
existence of monopolies in a number of economic domains, together with a long
list of various political, economic and social factors pose some challenges in
the status of the Iranian market with initial positive signals. Minister of
Economic Affairs and Finance, Tahmasb Mazaheri believes that “All in all, one
can say that the initial attitude towards making investments in the Iranian
market is very positive for the majority of foreign companies.”
Many factors in a country are taken into consideration by
foreign investors before they embark on making investments. These factors are
generally shared by other countries but there are some factors that are unique
to each country. Iran is among the countries with the largest oil and gas
reserves in the world. Therefore, the presence in this country is, in itself,
regarded as a strategic factor for a foreign investor. The reality is that in
the next twenty years, many of the world’s hydrocarbon resources will run out,
with Iran being an exception to this rule.
Therefore, these firms are told that their presence under the
current risky conditions prevailing in the Iranian market will ensure the
continuation of their booming businesses in the future under stable political
and economic conditions. Dr. Mehdi Karbasian, Deputy General of the Ministry
of Economic Affairs and Finance, stresses that “We should not forget that the
higher Iran’s diplomatic relations with a country are, the higher the risk the
export insurance companies of that country will accept. As we have recently
witnessed, the European Union decreased the investment risk rating of Iran
while at the same time increasing the ceiling of its insurance cover for
export of commodities to the Islamic Republic.” This has been achieved due to
improvement of relations with the EU member states.
The reality is that during President Khatami’s term in office
Iran’s foreign relations with the European Union and Japan have improved. Such
rapprochement in diplomatic relations has been effective in encouraging
foreign firms to take a more positive approach towards Iran. At any rate, the
political and economic reforms envisioned in Iran’s Development Plans, lifting
of some monopolies, making certain financial and taxation laws more
transparent and legislation of a new law on foreign investments are all signs
of Iran’s outward looking policy towards other countries of the world.
At the same time, the Iranian government has consistently
followed a policy of detent and constraint, making its utmost effort to
distance itself from the flare of war in neighboring Iraq. The policy proved
to be quite rewarding and demonstrated
Iran as the most suitable venue in the region for doing business. If that
comes true in practice, then one can make sure that the future for all kinds
of investments in Iran will become more promising than in the past.
Recent economic developments and increase in the economic power
of the private sector in Iran are all signs of such positive developments. For
instance implementing the policy of a single parity rate for hard currencies
and keeping the foreign exchange rate unchanged for a period of four to five
years is quite a feat for the post-revolution years. The risk of sudden
depreciation of the national currency is an economic risk but the decrease in
the volume of the country’s foreign debts is regarded as a positive factor.
The cultural and social risk is one of the risks to which
foreign firms pay attention. The fact that Iranian society and culture accepts
the presence of foreign firms is a very important issue and the Iranian
society is more welcoming of foreign investors than similar countries in the
region.
In identifying investment opportunities, the first question
that may arise is what are the relative advantages of
Iran’s market? The Iranian market enjoys high advantages including its rich
hydrocarbon resources.
Iran has plenty of untapped onshore oil reserves. This is a
strange advantage. These are completely untapped oil fields and they are quite
different from having to revive oil fields which have been used for thirty
years.
Another advantage is Iran’s rich mineral resources, which
provide lots of investment opportunities. However, we have the same legal
problems as mentioned above in these two fields. The country’s geographical
location and its access to various markets in the region are other relative
advantages of Iran. If the necessary infrastructures are built, many will
express willingness to transfer their regional head offices to Iran.
There is no country with so many neighbors to all of which it
has access through a single center. This is of great importance for long-term
programming and production. The existence of a big domestic market with huge
wealth can be regarded as a relative advantage particularly for consumer goods
and commodities that require a large domestic market. On the Iranian market,
demands for goods ranging from textile industries to auto industries are at
such a level that investing in these fields will have relative advantages. You
know that the product you are producing will be on demand at high levels. In
fact, investment opportunities in Iran are not restricted to certain domains
though we may have no relative advantages in certain fields.
For instance, the infrastructure of telecommunication in Iran
is one of the fundamental structural problems for technological investment.
The weak infrastructure of Internet is another example of such restrictions.
Therefore, many may be willing to invest in energy and information technology
because there exists a young talented workforce in the country while proper
technological infrastructures have not yet been built.
In order to make an earnest entry into world markets as well
maintain a continued and beneficial presence in them, making use of the
relative natural advantages as well as the relative acquired advantages will
be necessary. And it is only in this way that an indigenous national industry
can become competitive and get the requisite preparation in order to enter the
world market and the international trade system.
Relative advantages are of two categories: relative natural
advantages and relative acquired advantages. Examples of relative natural or
inborn advantages are such things as possessing plenty of oil (thus low cost
of fuel), having the blessing of experiencing all the four seasons around the
year, being located at the main crossroads of trade (east, west, south and
north). However, merely enjoying these relative natural advantages is not
enough. In fact, having access to relative acquired advantages is by far more
important and determining.
Another significant factor regarding the present economic
situation in Iran is the import tariff policy implemented by the government in
recent years. By this new policy, which some observers interpret it as
preliminary steps taken towards Iran membership at the WTO, almost every
commodity could be imported into the country.
This means that the Iranian market is becoming more and more
competitive and the Iranian consumers can enjoy a better choice in meeting
their demands. Another advantage of the new policy is the decline of goods
trafficking into the country and the termination of the black market for
consumer’s goods, which prevailed over the economy for decades and endangered
the legitimate interests of legal businesses in the country.
To some experts, the side effects of this new policy will be
temporary and due to the software and hardware potentials existing in Iran,
the Iranian producers and manufacturers will finally overcome the aftermaths
of the tariff policy and will enter a new era of doing business with the
world. This means that the realities of free trade will help promote Iranian
industries and non-oil exports, and will attract many potential domestic and
international investors to invest in various sectors of industries, namely in
consumer’s goods, to meet the ever-rising domestic, regional and international
demands. |
