Preparing for FDI

Post-Doc and Teaching Fellow at Alzahra University
Preparing for FDIPreparing for FDI

News and reports that foreign companies are preparing to return to Iran puts a big smile on most Iranians. While the logic seems pretty simple and based on the fact that increase in competition decreases prices, the capacity to assess the incoming business proposals is limited, not to mention the inefficiency of breaking state ownership by introducing only one competitor. As previously noted by Ali Tayyebnia, the minister of economic affairs and finance, the government priority is to attract foreign direct investment that so far had been hindered by complex operating requirements and tight economic sanctions.

In the light of the nuclear deal in July and sanctions relief, to boost FDI we need to establish a strong framework of laws, regulations and practices regarding how we want to do business with the outside world.

Given the relative success of the government in stabilizing the economy and taming the galloping inflation, what is now needed is keeping the good practice while increasing the transparency of government policy that influences economic variables, which in turn affect FDI.

A research published in a WTO Staff Working Paper series indicates that on average a country could expect 40% increase in FDI from a one point increase in its transparency ranking. While improvement in transparency ranking cannot be instantaneous, the government should consider long-term consequences of short-term goals that now seem necessary. However, there are signs that the Rouhani team is preparing the needed conditions.

Short-term decisions by authorities are of enormous importance. The government should incentivize the economic institutions to speed up the process of business startups as authorities are not willing to engage in the process due to four reasons. Firstly, generally the prospect of FDI in the near future is dim. Second, economic institutions might believe that they will not benefit from the incoming FDI. Third, in case of believing in the potential benefits, they might not see enough progress on the ground and get disappointed. And lastly, relevant bodies may consider their actions a drop in the ocean and hence wait for the first big moves.

Given this line of reasoning, the government should heavily incentivize the responsible authorities as the picture we will first create has anchoring effect* on our ability to attract more FDI. This is very important as the previous level of FDI has been proved to be one of the most important determinants of FDI.  We hope for the anchoring effect of sanctions relief on the part of foreign companies and the government’s good intentions to improve transparency. This is vital because increase in investments not only improves market competitiveness but also translates into more resources, which in turn improve economic efficiency.   

*Anchoring effect refers to human tendency to heavily rely on the first piece of information to make subsequent judgments in the process of decision making.