German experts from Roland Berger—a global strategy consulting firm headquartered in Munich–and the respected law firm CMS Hasche Sigle have produced a joint study entitled “How to do business in Iran successfully”.
The study examines Iran’s potential, how the local market functions and how foreign companies can successfully manage the challenge of doing business in Iran. Below is part of the study.
Iran is the only sizable economy to remain closed off from international business in an ever more globalized world, representing an enticing growth opportunity for multinationals.
Within a month of the Joint Comprehensive Plan of Action’s signature, hotel prices soared and the United Kingdom announced it would reopen its embassy in Tehran.
Opportunity Beckons
This enthusiasm toward Iran from the global business community is well-founded, as the country offers some compelling reasons to do business.
Its fundamentals clearly suggest a sleeping giant, but it’s not mere basics that make Iran a tantalizing business destination.
The country is relatively sophisticated and the government has ambitions to transform Iran into a regional powerhouse.
Foreign companies will find Iran a rewarding target for their goods, technology and expertise.
A. Strong Fundamentals
At 1.6 million square kilometers, Iran is the 17th largest country in the world and its population of 78 million is similar in size to Germany. Remarkably, 41% of Iranians are below 25 years of age, offering a firm foundation for economic growth.
Despite the sanctions and their consequences, Iran’s GDP still stands at a sizable $415 billion–almost equal to that of the UAE.
Apart from its sheer size, Iran is rich in natural resources: It is the world’s largest proven natural gas reserve holder (18.2 % of total) and the third in terms of conventional crude oil reserves. Iran also boasts vast reserves of copper, iron ore, zinc and lead.
Iran is not only rich in natural resources but also in history and culture as one of the world’s oldest civilizations dating back over five millennia. This does not constitute a prime economic motivation, but this rich heritage and friendly social environment make working in Iran a pleasant experience.
B. Sophistication
Although economically classified as a developing or emerging market, Iran can be considered in many ways a developed country. It has strong established industries such as auto manufacturing (capable of producing more than 1 million vehicles per year and pharmaceuticals (mainly generics).
Several hundred companies are listed on the Tehran stock exchange and around 8 million Iranians own shares.
Iran has impressive education standards with a youth literacy rate of 98% and a university enrolment rate of 58% (similar to developed countries like France and Germany).
Building on the golden era of Persian scientific prowess, Iran is making advances in various areas. Iran ranked 16th on global output of academic articles and is placed 43rd worldwide on availability of scientists and engineers.
Bloomberg included Iran in their 2013 overview of the 50 most innovative countries.
Despite its economic isolation, Iranians are generally more internationally oriented than western media would have us believe. Foreign languages are compulsory at school (with a surprisingly high number of people speaking German) and social media are used extensively to stay abreast of the latest fashion, technological and economic developments.
Another important link between Iran and global markets is the Iranian diaspora, which is estimated at between four and five million people (although some believe the actual number is much higher), located mostly in Europe, the Middle East and North America.
The Iranian population is tech-savvy and rapidly digitizing with 35 million smartphones and an Internet penetration above 50%. Social media usage is widespread and Iran has witnessed a surge in online services in the past few years.
Although the nascent e-commerce industry is hampered by lack of capital, knowhow and a limited number of operating licenses, the thirst for digital services will quickly put Iran on par with its regional peers.
C. Ambition
The Iranian government has ambitious plans for the country’s future with domestic industries being strong exporters, reduced unemployment and research and development to become even more central to growth (with a target of 4% of GDP spent on R&D by 2030).
Iran is increasingly nurturing SMEs and business creation, clearly acknowledging their importance for growth. To further spur entrepreneurship, awareness campaigns are being launched and policies implemented to create a friendly environment for new business.
On the “Ease of Doing Business” Index for the category “Starting Your Own Business”, Iran is currently ranked 62nd out of 189 countries—a promising score. Numerous Iranian accelerators and incubators are further evidence of a growing base of young entrepreneurs.
These initiatives demonstrate an ambitious drive for Iran to become both a hub in a region with more than 400 million inhabitants and a global business player to be reckoned with.
D. Help Needed
Iran’s allure is derived from the business opportunities it offers. Iran’s natural resources ignite great interest and have a prominent role in the Iranian economy: In 2014, 80% of the $64 billion exports were hydrocarbons, of which more than 75% found its way to China, India and Turkey.
Once sanctions are eased, other countries should be able to tap into these natural resources. Furthermore, Iran announced plans to increase output significantly, offering opportunities for foreign companies with the right expertise and financial strength to boost extraction and refinery infrastructure.
China is the major source of imports, accounting for 44% of the total, but western companies are well positioned to challenge them.
Foreign companies are not just expected to sell goods, as local partners will require foreigners to perform financial investments due to limited financial liquidity, and to bring expertise and knowhow to professionalize their business.
Practically all industries, ranging from car manufacturers to banking are in need of upgrades. For example, only 6% of the retail industry are organized. Foreign retail players can help professionalize retail operations, such as category management and procurement.
A Challenging Place
With all these positives, Iran is being discussed in the boardrooms of many multinationals, but at the same time it is not an easy place to do business and foreign companies must tread with care.
Despite a promising outlook, Iran is still a fragile economy, plagued with uncertainties. Foreign companies need to establish a strategy for coping with Iran’s unique business context and culture.
The Iranian government understands that foreigners are nervous about conducting business in Iran and emphasizes privatization and economic reform. Some experts believe this is even more important than the lifting of sanctions and eagerly anticipate more economic reform.
Four Rules for Successful Business
However, most obstacles can be overcome if companies adhere to certain rules and guidelines. Some foreign companies are better positioned than others (e.g., based on perceived product features or loyalty throughout the sanction years).
But, in principle, most foreign companies should be able to be successful in Iran. We have identified four rules to facilitate a smooth entry.
I. Get the Basics Right
Before flying off to Iran, it is essential to do one’s homework. A good understanding of the country’s history, culture and business landscape is a minimum condition.
The same goes for language capabilities: Many documents are only available in Persian and some older Iranians do not speak English or German. Having Persian speakers in your team will prove invaluable.
Gaining a good understanding and the buildup of trust will not happen overnight, and certainly not through emails and conference calls. Expect to be present often and ideally establish an anchor on the ground.
The country and all its intricacies demand frequent face-to-face interactions.
II. Start at the Top, But Beware of Middlemen
Given the centralized nature of companies and government bodies, it will take considerable time to get anything off the ground if companies start at the lower end.
Aim for an entry point in the highest echelons of an organization. It may not be easy at first, but it will speed up the overall process.
It is always best to go directly to senior management when possible. If this proves difficult, foreign companies may need to leverage middlemen to gain access–a common practice in the Middle East, which can be an effective business accelerator.
Such locals can possess essential knowhow on how to navigate within their culture and have the right contacts, but using these individuals requires careful consideration of compliance regulations and it comes with certain risks.
Selecting a reliable middleman could be one of the most strategic moves that a company entering Iran makes.
III. Prepare Yourself Legally
Following the JCPOA, it is expected that most economic sanctions for non US-companies will be lifted or relaxed in the first quarter of 2016.
However, regardless of the status of sanctions, whether they are in the process of being relaxed or are already lifted upon entering Iran, companies need to have a good understanding of the Iranian legal context in order to mitigate their investment risk.
One way to mitigate investment risk is to structure the business in a way that it falls under a bilateral investment treaty and/or another investment agreement. There are 52 BITs in force between Iran and other countries, such as Germany, France, Italy, Austria and Switzerland.
Among other things, BITs with Iran provide protection against expropriation without compensation, free transfer of capital, guaranteed equal treatment with nationals and, in principle, the possibility of arbitration proceedings, even though the free choice of the governing law is limited.
In addition to the BITs, protection and incentives are also provided under Iranian national law. The Foreign Investment Promotion and Protection Act 2002 guarantees important privileges to foreign investments.
However, in order to be privileged, the foreign investor has to obtain a permit from the Organization for Investment, Economic and Technical Assistance of Iran. The permit will be issued fairly promptly, if–based on a substantial business plan–the applicant can demonstrate that the business activities are eligible (e.g. not purely commercial).
So, as is often the case, the devil is in the detail. Thus, the careful and timely preparation of the business plan is essential.
A positive aspect is that foreign investors are, with few exceptions, allowed to hold up to 100% of the shares when investing in Iranian companies, which is a rare privilege in this region.
Foreign investors can also choose freely between the legal forms provided by Iranian Commercial Law, with the Private Joint Stock Company proving to be the most common and suitable corporation form for foreign investors.
There are also various tax and legal provisions privileging the establishment of foreign companies in free trade zones and special economic zones. Iran has concluded numerous double taxation conventions essentially based on the OECD Model Tax Convention with Germany, France, Spain, Austria and Switzerland. However, knowledge of the Iranian practice of implementing the relevant dispositions is essential for any tax optimized structuring.
Overall, the legal framework in Iran is mature, but it can hold surprises. It is highly advisable to engage a law firm with expertise in international business that has on-the-ground experience in Iran and can demonstrate up-to-date and reliable knowledge.
IV. Position for the Long Term
Although establishing a company does not legally require an Iranian partner, no matter the type of business, foreign companies are dependent on local Iranian companies and need to establish such partnerships.
Looking for a partner may seem easy given the sheer size of the economy, but the packed hotels in Tehran indicate the interest is high and many companies are vying for the same business.
A differentiating and long-term positioning is crucial to spark interest. Providing financial investment is appreciated (and needed) but is more a hygiene factor than a true differentiating factor for a sustainable partnership.
Iranian partners expect a long-term commitment from foreign companies and this means collectively building a business, based on mutual respect and transfer of knowledge and expertise. To support such an approach, building local employment through offices and factories is a strong commitment.
