Economy, Business And Markets

FDI Issues & Challenges

Post-Doc and Teaching Fellow at Alzahra University
FDI Issues & ChallengesFDI Issues & Challenges

United Nations Conference on Trade and Development publishes an annual report called the World Investment Report focusing on trends in foreign direct investment. According to its 2015 report, FDI inflows in Iran decreased to $2105 million in 2014 from $3050 million in 2013.

Using the data from world investment reports across years, the graph shows the trend of Iran’s FDI flows during 1994-2014 in million dollars. The blue line, which represents FDI inflows shows an upward trend until 2012 when it started to decline dramatically due to the international economic sanctions. The red line indicating FDI outflows is more oscillating and was at its maximum in 2001 at $2812 million. FDI inflows reached an all time high of $4662 million in 2012 and a record low of $2 million in 1994.

There are two jumps in the trend influenced by the liberalization of investment regulation and the international economic sanctions. Evidently, the effect of the sanctions is visible over a time period. FDI inflow in 2014 fell almost to half of its peak in 2012 and outflow registered a decrease of 58% compared to the 2012 level of $1441 million.  

While the economic sanctions have declined both Inflows and outflows of investments to the same extent after two years, liberalization rules in 2002 reduced FDI inflow and increased outflow within a year of implementation. Interestingly, FDI outflows had climbed to a record high a year before adoption of the new law, probably in anticipation of substantial inflows afterwards that did not happen according to the available data.

Impact of the 2002 reform process plus the Foreign Investment Promotion and Protection Act is not fully captured by the data on FDI inflows. This is because a large number of projects with foreign participation are not covered by FDI statistics compiled on a balance-of-payments basis as they involve low levels of equity or non-equity arrangements.

The value of foreign investment approved by the Organization for Investment, Economic and Technical Assistance of Iran increased significantly after 2002. Approved data shows an increase in foreign investments by a factor of 3 in 2003. After eight years of liberalizing investment law, Iran ranked sixth globally in attracting foreign investment. In the absence of economic sanctions there should have been more divergence between FDI flows, which has the maximum difference in 2011.

 More Appealing

As Iran embarks on the process of normalizing economic and political ties to the international community and offers attractive contracts in the oil/gas industry where foreign participation up until recently was limited to buyback arrangements, figures for 2016 should indicate a substantial improvement in FDI inflows. Under the buybacks the foreign firms received payments after a fixed period of time, rather than equity shares, in return for their outlay on goods and services they supplied for the large energy projects. Reports have it that the new deals, to be officially revealed early next year, have been sweetened to a large degree, and understandably so. They propose setting up joint ventures and are designed in a way that investors’ profit is a function of production and thus more appealing than their buyback predecessors.  

Ever since the July nuclear agreement Iran is seen as the strategic region’s new hub and FDI destination due to its market size and its geopolitical proximity. Iran has borders with seven countries and access to a 300-million-strong market.

However, FDI is not only needed for the production sector but also to lift market share. Iran has had a hard time establishing competitive advantage in the non-oil sector compared to the UAE. Free zones are primarily designed to attract FDI and promote exports and the UAE has 21 free zones and its free areas are always on the top of the fDi magazine’s global ranking of economic zones.

Compared to the successful Mideast free trade zones, the same zones in Iran have lagged behind. This is partially attributed to lack of quality infrastructure and insufficient network of transportation that needs to be addressed by the government. Their poor performance is more than evident in the reality that instead of promoting exports the industries in these areas are highly dependent on imports and the given financial incentives have not produced the desired results.

Finally, although Iran has liberalized investment laws, one major constraint is the fact that any dispute is subject to the exclusive jurisdiction of Iranian courts, which international companies are obviously not comfortable with.