CHAPTER 6 FDI AND IRANIAN ECONOMY

Transcription

1 CHAPTER 6 FDI AND IRANIAN ECONOMY

2 6.0 INTRODUCTION Until the mid-1980s, most developing countries worldwide viewed FDI with great wariness. The sheer magnitude of FDI from MNCs was regarded as a threat to host countries, raising concerns about MNCs capacity to influence economic and political affairs. These fears were driven by the colonial experience of many developing countries and by the view that FDI was a modern form of economic colonialism and exploitation. In addition, the local affiliates of MNCs were frequently suspected of engaging in unfair business practices. Consequently, most countries regulate and restrict the economic activities of foreign firms operating within their borders. In recent years, however, FDI restrictions have been substantially reduced as a result of a host of factors accelerating technological change, emergence of globally integrated production and marketing networks, prescriptions from multilateral development banks, and positive evidence from developing countries that have opened their doors to FDI. Since early 1990s, developing countries, particularly in Asia, removed restrictions and implemented policies to attract FDI inflows. In 1960s and 1970s Iran was one of the most attractive destinations for FDI inflow, many countries like U.S., UK, Germany and Japan had investment in Iran. Since Islamic Revolution 1979 the government's policy towards FDI inflows was uncertain. But like other developing countries during 1990s the government of Iran's attitude towards FDI changed, and Iran redefined the policy of FDI inflows after fifteen years. An Overall View Prior to World War II, foreign companies had important contracts with Iran. There had been little or no foreign investments till 1931, as most of the contracts were more of a concession than an investment. In other words, foreigners entered Iran through different agreements and concessions. The first foreign agreement was signed between the governments of Iran and Britain in 1880s though it never went into action. Sixteen years later, Barron Julius Reuter, representing the UK government, was given an exclusive concession to establish the Shahanshahi (monarchy) bank. In 1901, the history s largest oil incentive was handed to William Knox D Arcy; again a representative of the British government, for a 203

3 period of 60 years but the deal was annulled in A few months later, a 60 year deal was inked with a state-run British oil firm. In 1908, the main intervention of foreigners in Iran came with the exploitation of the oil forming the AIOC (Anglo-Iranian Oil Company) formerly known as Anglo-Iranian Oil Company. The people considered such agreements a tactic by foreigners to plunder the country s natural resources. The aforementioned pacts and another contract on fisheries in the Caspian Sea (northern Iran) and a few others concerning exploitation of strategic mines and underground resources of the country have left behind an unfavorable mentality about foreign investments. Iranians began to publicly show their resentment to the concept of foreign investments as a result of which the government had to back track its stance to some extent. In 1941, simultaneous with the ratification of the Trade Law and Firms Registration Acts, another kind of foreign investments or in other words Private Foreign Investment (PFI) began in Iran. As a result, by late nineteenth century, foreigners interference in the new era of Iran's industrial development took place in the form of Foreign Direct Investment (FDI). This was the new form of MNCs exclusivity in the form of investment which was imposed by great powers. Thus, the notion of foreign investments gathered some strength among Iranians at the grass-root level, and the same attitude lingers today. In 1951, with the nationalization of oil industry and forming the National Iranian Oil Company (NIOC) foreigners interference did not end but brought a new era in foreign intervention. It took the new form of multinational exclusivity in the form of capital investment and transfer of technology and know-how in all aspect of the oil industry such as, exploration, production, refining, transport, etc. These interventions of foreigners took place in the form of consortium agreements, joint ventures and establishments of foreign banks. With the increasing of foreign exchange transactions, the attention of foreign private investors was drawn to the untapped and lucrative oil market in Iran and the increase in its hard currency revenues, but fear of foreign private capitals being nationalized prevented foreign investors from making any investments in Iran or entering into 204

4 partnership with Iranian companies during the period from 1951 to This led to enactment of "Law for the Attraction and Protection of Foreign Investment" (LAPFI) in Since then foreign participation/collaboration in Iran encouraged, with a view to utilizing foreign productive and technological resources for the development of economic infrastructure, and for strengthening competitive position of Iranian industrial goods exports. The objective of this Law was to enable the country to benefit from the favourable opportunities associated with a large international market through the foreign private enterprises, and also to place the country's economy increasingly in the mainstream of international economy change. As a result, while until the late 1950s activities of MNCs in Iran were slow but with the ratification of LAPFI there were a notable increase in the number of firms with foreign participation and a rise in the volume of foreign private investments intensified the performance of the MNCs in Iran from the mid 1960s onwards. From the early stage 1957 until the year 1974, United States of America remained the leading investor in Iran with the largest participation, as compared to other countries. However, from 1974 to 1983 Japan surpassed the traditional role of the U.S. as a leading participant of the foreign direct investment in Iranian economy. The sectoral composition of FDI inflow shows that during 1960s maximum numbers of firms were engaged in electric and electronic industry while during 1970s petrochemical industry was the leading firms which had largest share in foreign investment inflow to Iran. Further, a conspicuous increase in the foreign capital, particularly with large investment in petrochemical and generally in metallurgical, chemical and chemical products and electric and electronic industries during the late 1970s, suggests that foreign investors were mainly active in the industries, with relative sophisticated technology, advanced know-how and capital intensive. But the fact is that, the Iranian industry was only an assembly industry, benefiting the western and advanced countries only which fully exploited Iranian resources, by importing Iranian crude oil at very cheap prices and supplied Complete Knock Down's (CKD's) at exorbitant prices for assembly in Iranian factories. In these factories, the investor countries also 205

5 installed unnecessary high-capacity capital equipment at prohibitive costs. Investor countries, particularly America, W. Germany, France, Britain, Italy, etc., had planned for long term exploitation and plundering of Iranian resources for keeping Iran fully dependent on them by supplying CKD's without giving any know-how and transfer of technology and also supplying spare parts at unreasonably high prices. The characteristics of these MNCs operating in Iran can be described as following: 1. Technology of these units was sophisticated and capital intensive. 2. They had less positive effect on industrial employment due to their capital intensity. 3. Adopted technology of these units was not coinciding with the Iran's state of being. 4. In principal, these units were assembly type or they were final product processor, that is, to launch the goods into the market. 5. The MNCs caused losses on domestic consumers, because of their high cost of production and per unit cost. 6. These units prevented the establishment and expansion of the small-scale units with optimum technology. 7. The MNCs in Iran did not have production policy for export and their products were not competitive in the world market. 8. These units worked to develop and expand the consumption goods only with a motive to change consumer's tastes for their own benefits. Since 1948 to 1978 Iran implemented five Development Plans which concentrated on economic development aiming at providing the country with modern industry. Establishing industries that promote the growth, improving the import substitution industries to economize on foreign exchange by reducing the import of goods, increasing the foreign exchange earnings through promoting exports, increasing the number of factories and finally encouraging the privatization were of the main objectives of these plans. 206

6 In order to reach the above mentioned objectives all foreign investments with only a few exceptions, by MNCs in Iran manufactured final products, and were not utilized as an input in other production processes. With only minor exception, none of foreign investments produced for export markets. This was mainly due to their relatively high unit costs of production which to some extent reflected their relatively smaller scale of operations as geared to domestic markets. Not only the prices of these domestically produced goods were internationally uncompetitive but also the export possibilities were further limited by the rapid growth of the domestic demand. After the revolution of 1979, the arrival of foreign capital and the establishment of new industries slowed noticeably. The attitude of the government towards foreign investment continued to be uncertain. There was a large scale exit of foreign capital and foreign personnel from Iran. Most of the MNCs shut down their activities and left Iran. While the Pre-Revolution Iranian economy was totally modeled on the Western nation of modernization and nearly relied on Western support, the Post-Revolutionary economy emphasized more on the doctrine of self-sufficiency and self-reliance. On 27 June 1979, a law for the nationalization of some of the manufacturing industries was approved by the revolutionary council. This law was known as the law of industrial protection and expansion. In the framework of the law of nationalization about 500 companies and producing institutions were nationalized. The status of the industry was thoroughly reviewed and new policies were formulated by the government, based on achieving self-sufficiency in every sector of industry in course of time by borrowing technology only on selective basis from other countries at reasonable terms. Emphasis was being laid on transfer of know-how from other countries. The Iraq-Iran War ( ) changed the relevant approaches and economic theories of Iran, the policy aims and consequently the policies pursued. The government followed a close economic system without depending on foreign sources which was accompanied by an informal planning and programming. This policy worked well. It enabled the government to solve the basic economic and social problems, and to provide the essential War needs. The government's economic intervention on activities increased contrary to the principle law, plan number 44 of revolution that was enacted after revolution in Hence the 207

7 revolution and war changed the underlying philosophy and the conceptual foundations of economic activities. During this period Iranian economy faced some very serious economic problems. This period was characterized by very high levels of unemployment and great rates of poverty, high rates of inflation, the U.S economic sanctions, large flight of foreign capital and absence of foreign direct investments, mutual fund companies' portfolio investments, insignificant MNCs, decreasing export earnings and a reduced demand for imports. At the same time both, the traditional economic sectors such as carpet making, handcrafts, fishing and agriculture, and the modern economic sectors such as oil extracting, automobile production, houses equipment, industries producing equipment for houses and apartments, mining and construction have contracted to the self-sufficiency level related to a closed economic system. The Iranian economy during the imposed Iraqi War could not be compared with the economic standard of standard developing countries. Involuntary unemployment was high in all urban and rural areas and in all sectors, especially in industry. The inequalities in the distribution of income had remained and probably increased. There was a very heavy dependence on the oil revenues and very importantly there were restrictions on oil exports imposed by the Western countries. Consequently, the amount of oil revenues and other export earnings decreased sharply and an extremely high degree of risk and uncertainty all over the economy occurred. The gross investment rate was around 22.9 per cent of GDP in This ratio decreased to 11 per cent of GDP in Consequently all these factors affected on foreign investment inflows in Iran. Since revolution due to large flight of foreign capital, Iran had negative FDI flows. During the value of negative FDI was $ -17 million while this amount reached to $ million in 1986 and $ -308 million in In 1988 Iran received $ 61 million of FDI but again experienced negative FDI worth at $ -19 million. After war (1989), the new economic development plan was aimed at opening the economic system. In fact, the entire economic system, and, specifically, trade policies, import and export policies and monetary and fiscal policies suffered from a long lasting ambiguity through the lack of a clearly formulated policy system there was a mix-up of selected fragments of socialism and liberalism and, linked to this, 208

8 the absence of clearly specified economic policies. The situation was aggravated through huge amounts of capital flight. Special requirements for the war reduced private consumption and state expenditures for civilian requirements, and the economic sanctions of the US and its allies against Iran for the last 30 years that is from 1978, the year of revolution, until now. This ambiguous economic circumstance came to an end by the First Five Year Development Plan ( ). The new economic activities and policies were clearly based on the liberal economic doctrine, and this even continued through the Second Five Year Development Plan ( ). It began with trade policy, followed by industrialization policy and subsequently privatization; then, barriers to imports were reduced as were government interventions. All these liberalisation measures were implemented during the first and second five year plans. In terms of foreign investment in the first economic plan ( ), due to factors such as lack of new laws or policies of foreign investment, economic sanction, a suitable fiscal and monetary policy, including liquidity control, improper interaction with the global economy and differences of opinion among the authorities regarding foreign investment there was no place for the attraction of foreign investments and even Iran had negative FDI in value of $ -19 million in 1989 and $ -362 million in During this period there were only numbers of credits which were never fulfilled. The second plan which was based on free market theory the government aimed at employing all potentials, domestic and foreign resources, to increase production and the level of the investment output ratio, in order to respond to the huge demand, which had been accumulated during the war years. This led the government to recreate the Tehran stock market, which should help the capital market to find new resources. In 1994, the admission of foreign investment and the establishment of a law on management of the Free Trade and Industrial Zones (FTZs) of Islamic Republic after 14 years of silence foreign investment came under observation but it was poorly conducted, thus Iran was unable to attract significant foreign investment. Since 1994, entry of FDI in Iran began and Iran attracted FDI worth at $ 2 million which increased to maximum amount of $ 53 million in In 1998 and 1999 FDI inflow reduced to $ 24 and $ 35 million respectively. 209

9 Since 2000 in the Third Five Year Development Plan (2000/ /05) government focused on privatization. The provision of liquidity and financial resources as were required by all economic sectors, and the reduction in unemployment and inflation rates were among the major priorities of this plan. On this basis, structural reforms appeared to be the main driving force. Reforms required large amounts of investments. Thus, foreign investment, particularly FDI was of special importance to supplement domestic investment. Consequently, in May 2002, the new foreign investment law ratified. Foreign Investment Promotion and Protection Act (FIPPA) replaced the LAPFI, which was in effect since FIPPA enhanced the legal framework and operational environment for foreign investors in Iran. Since then the inflow of foreign investment in Iran has improved. FDI inflow increased from $ 39 million in 2000 to $ 482 million in During Fourth Five Year Development Plan ( ), foreign investment grew significantly and placed Iran in global inward FDI performance from 134 in 2000 to 133 in FDI inflow rose from $ 30 million in 2005 to $ 1626 million in 2006 and $ 1670 and $ 1615 million in 2007 and 2008 respectively. In 2004, a modification of articles 43 and especially 44 of the Constitution authorized the government to privatize many sectors, which had been previously protected, such as banking, transport and oil and gas industries in the downstream of the industry. Sixteen special economic zones as well as six free-trade zones have been also introduced in the Iranian territory. In order to attract foreign investment as well as obtaining knowledge, buy-back systems have been established in which the revenues of the foreign investor partner can be repatriated in the means of goods and services produced by the project. However, unfavorable or complex operating requirements and international sanctions have hindered foreign investment in the country, despite liberalization of relevant regulations by the Iranian government. Since revolution, ranking of foreign investors in Iran has been changed and new investors have entered to foreign investors list in Iran. While pre-revolution U.S., Britain, W. Germany and Japan were the main investor countries in Iran, after revolution U.S. does not have any foreign participation in Iran and other countries also have marginal investment. Since , 73 countries had investment in Iran out of which among European countries Germany, Netherlands and Spain are the 210

10 largest investors in Iran. While among Asian countries UAE is the most important and largest participant, as the total number of foreign participation and volume is concerned. Next to UAE, Singapore, Indonesia, Oman and Bahrain are holding positions respectively. Countries such as South Korea, Saudi Arabia, Malaysia, India, Kuwait and Lebanon are the other new Asian investors. Australia and some African countries also have been added to the list of investor countries in Iran. Sectoral composition of foreign investment in comparison to pre-revolution has also changed. While electric and electronic industry and petrochemical industry were the leading firms which had maximum share in FDI inflow to Iran in the pre-revolution era, in the second generation of FDI inflows to Iran, foreign investors have concentrated their activity in a few sectors of the economy. The oil and gas industries, automobile industries, petrochemicals, food processing, and pharmaceuticals have got the maximum foreign investment. 6.1 INTEGRATION OF IRANIAN ECONOMY WITH THE WORLD ECONOMY Iran with an Islamic Republic form of political system is located in South Western Asia, and covers a total area of about 1,648,000 km², and is the 18 th largest country in the world. It is a country of particular geo-strategic significance owing to its location in the West Asia and Eurasia. Iran is the 16 th most populous country in the world. It has the 2 nd largest population, after Egypt, in the Middle East and North Africa region. Most of its people are young, with increasing hopes and expectations of a better future. In the age of globalization when the emerging economies are integrating for their business and commercial benefits, Iran has joined the membership of major multilateral and regional organizations. It is a founding member of the Economic Cooperation Organization (ECO), formed in 1984 along with Pakistan and Turkey, which later expanded into a 10 member regional conglomeration in Current members of ECO are Iran, Pakistan, and Turkey, five CAS countries (i.e. Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, Azerbaijan and Afghanistan. Besides, Iran is a prominent member of D-8 Islamic States (Iran, Turkey, Pakistan, 211

11 Indonesia, Malaysia, Nigeria, Egypt & Bangladesh). Apart from these two, Iran is also an active member of World Bank, MIGA, CCC, ESCAP, G-77, IAEA, IBRD, IDA, IDB, IFC, ILO, IMF, INTERSAT, IPU, OIC, OPEC, UN, UNESCO, UNIDO, WHO, and membership talks with the WTO are on. Iran's economy is a mixture of central planning, state ownership of oil and other large enterprises, village agriculture, and small scale private trading and service ventures. Since the economy is centrally planned, it therefore, relies heavily on Five Year Development Plans. Before revolution the First Five Year Plan in Iran was implemented in 1948 and lasted by the 5 th plan in After Revolution (1979) and latter the Iraq-Iran ceasefire (1988), the First Five Year Plan of new government, implemented from At the present, Iran is experiencing its 4 th Five Year Plan ( ). Strengthening the national currency, reducing inflation and achieving a one digit inflation rate, positive economic growth of 8 percent, the decrease in unemployment rate to 11.2 percent from 16 percent, attraction of foreign investment particularly FDI, promotion of investment and production through lifting monopolies and self-sufficiency in agriculture are among the main objectives of this plan. Moreover, creating of trade balance with the counterpart countries and economic blocks, in such a way as to increase the share of the non-oil export as a percentage of the total export of the country from 23.1% in 2003 to 36.6% percent in the year 2009, are of the other important aims of the government. The economy of Iran is the seventeenth biggest economy in the world by purchasing power parity (PPP) and twenty-sixth by market value. Iran has the largest economy in PPP terms in the Middle East and Central Asia (MCD) region, with a sizeable and diversified non-oil sector (Figure 6.1). While hydrocarbon consists 26.5% of GDP of Iran, service sector and industrial sector consists 46% and 17.1% of GDP respectively. Agriculture consists only 10.4% of Iran's GDP. The share of foreign trade (exports & imports) in the country's GDP is nearly 50%, with oil accounting for 80% of the exports income. The top three export partners of Iran are: Japan, China and the European Union. Besides oil, Iran mainly exports pistachio nuts, carpets, petro-chemical products, organic chemicals, aluminum, and 212

12 plastic materials. Its top three import partners are: the United Arab Emirates (which plays the role of re-exporting center), Germany and France. The main goods imported are: machinery, iron & steel, electric & electronic equipment and cereals. Iran's trade with India crossed US$13 billion in In , Iranian oil accounted for nearly 16.5% of India's crude oil imports. Indian oil imports from Iran increased by 9.5% in due to which Iran emerged as India's second largest oil supplier. About 40% of the refined oil consumed by Iran is imported from India. Figure 6.1 Islamic Republic of Iran: Composition of GDP and Trade, Sources: IMF

13 Iran main economic sectors are oil and gas, agriculture and industrial sector. Iran is rich in mineral resources, mainly oil and gas, copper, lead, zinc, etc. As far the Iran's significant role in the international markets, especially with regard to attracting the foreign investors and also its motivation to invest in the emerging economies is concerned, it can be seen that Iran is among the 10 leading countries with the largest mineral deposits of 100 million tones of 60 different minerals. Being the 2 nd biggest OPEC oil producer and exporter, it plays a major role in Asian oil market. Iran holds 11.4% and 15.2% of world oil and gas reserves. With the discovery of Azadegan oil field, this amount increased to at least 100 billion barrels, placing Iran as the 2 nd largest oil producer in the West Asia, and 4 th in the world, accounting for about 27% of Middle East, and more than 10% of global production. It is also the 2 nd largest world oil exporter after Saudi Arabia. With gas reserves, ranks the 2 nd largest among the countries that have these hydrocarbons, an estimated 940 trillion cubic feet in proven natural gas reserves, surpassed only by those found in Russia. Natural gas accounts for half of Iran's total domestic energy consumption, while the remaining half is predominately oil consumption. As the recipient of the oil revenues the state is the only dominant power in the domestic economy. The economy is heavily energy based, with oil exports comprising 85% of all export revenues and up to 70% of government income. The role of the oil revenues in the economy helped the government to intervene and ignore market economy. The Iranian economy is basically divided in two major sectors. Apart from the oil sector which is the main source of income, agricultural products account for the largest proportion of foreign trade. Traditionally Iran was an agricultural society before the beginning of oil production, and had always exported some agricultural goods. But with the increase in commercial relations with other countries at the end of the nineteenth and by increasing oil revenues the share of agriculture in GDP fell sharply from about 30% in 1959 to 16% in In fact, the traditional dominance of agriculture was eroded by oil and gas exploitation, which became the country's major source of export revenues as population growth made Iran a net importer of foodstuffs. Further due to weak growth of industry with the neglect of agriculture, led to deficit in food production and after nearly achieving 214

14 agricultural self-sufficiency in the 1960s, Iran reached the point in 1979 where 65% of its food had to be imported. Today, Iran has attained 90% self-sufficiency in essential agricultural products and agricultural production is increasing as a result of modernization, mechanization, improvements to crops and livestock as well as land redistribution programs. In 2003, a quarter of Iran's non-oil exports were of agricultural products. Major exports in this category include fresh and dried fruits, nuts, animal hides, processed foods, and spices. Industrial and mining sectors contribute nearly 26% to the GDP. Iran's major manufactured products are petrochemicals, steel, and copper products. Other important items include automobiles, home and electric appliances, telecommunications equipment, cement, sugar refining, food-processing, construction and industrial machinery. Traditional handicrafts such as carpet weaving and the manufacture of ceramics, silk, and jewelry are also important to the economy. According to the World Fact Book Iran ranks 3 rd among "emerging industrial powers" in the world (after China and India) in terms of its industrial growth. According to the report, Iran s industrial sector grew by 4% in the year Iran was ranked 13 th among emerging economies in Overall, Iran is ranked 31 st in the world in terms of its industrial production growth rate. 6.2 OBJECTIVES OF ATTRACTING FDI INFLOWS TO IRAN Iranian economy is an oil economy which is heavily depending on oil revenues, and oil exports account for up to 82.5% of the country s total exports. In this context, an increase or a decrease in oil prices have a great influence in the state's revenues and Iranian economy. Although non-oil exports are increasing, they are doing so at a very modest pace. Clearly, the government of Iran sees the diversification and increase of non-oil exports as a major issue in strengthening the economy by making it less dependent on oil and gas exports. Secondly, Iran needs to increase its non-oil exports in order to become an active partner in the WTO-led process of globalization. Finally, and equally importantly, the development of new and existing export markets is seen as a powerful tool to promote employment creation. In order to diversify the economy and become less dependent of its oil sector, government has decided to privatize and open to foreign investment most of the sectors of its economy. 215

15 Iran's long term intention is to make its industries more efficient and competitive on the world stage. For this purpose Iran needs investment which must be supplied by foreign investment. Since multinationals bring with them some sort of superior technology and know-how this will "spill over" to domestic firms, thus assisting them in improving their efficiency and, hence, productivity. Iranian government is trying to increase the GDP growth rate in coming years and reach to an annual growth rate of 8% until 2015 and then maintain it. FDI is an alternative to achieve this rate of economic growth. For this purpose Iran needs up to $300 billion in FDI to meet this objective till Moreover, Iran has one of the youngest populations in the world, providing a suitable job and employments for every member of the society and bringing down unemployment to 7% from the current official figure of 13% by creating almost one million new jobs a year is another main objective of the government. Each year some 800,000 job seekers enter the labour market, which offers only about 500,000 jobs. Consequently, unemployment is increasing each year by about 300,000 people comprising women, youth and graduates alike. Huge investments are needed and FDI is an alternative which can creates new jobs in the industrial or other "modern" sectors. FDI in industrial sector can provide potential employment to semi skilled and skilled labour which can come through FDI in manufacturing sector and also create self sufficiency for Iranian economy. The other objectives of Iran's five year development plans are; rapid movement towards a balanced and well-developed economy, lowering dependence on oil export through the expansion of non-oil exports. All these objectives need investment which should be provided by domestic and foreign direct investment. According to Iranian policy makers FDI is an important factor for spurring the development of a nation if it flows in proper sectors. FDI can introduce world-level technology and technical know-how. Developing countries like Iran by inviting FDI can introduce world-class technology and technical expertise and processes to their existing working process. Foreign expertise can be an important factor in upgrading the existing technical processes. FDI increases the level of competition in the country. 216

16 Other companies will also have to improve on their processes and services in order to stay in the market. FDI plays an important role in contributing to economic growth Promoting growth in the main economic sectors, namely primary, manufacturing, and services. Moreover, the transfer of new technology and skills by foreign direct investors not only will create new job opportunities in Iran but also are expected to increase firms export ability. As a consequence, the direct and indirect effects of FDI together will enhance Iran s export performance. 6.3 TREND AND PATTERNS OF FDI FLOW IN IRAN: PRE AND POST REVOLUTION For the purpose of detail and analytical investigation, the study of foreign investment inflow to Iran has been divided into two sections, pre and post revolution. Pre-revolution period has been divided into two sections. Concessions which imposed by big powers to Iran in the form of agreements and Foreign Private Capital Inflow which was the new form of MNCs exclusivity in the form of foreign investment begin from 1962 to Post-revolution period is also divided into two sections. Pre-war and war period which begin from 1979 to 1989, in this period most of foreign investors left Iran and Iran could not attract any significant foreign investment. Post war or Reconstruction and Reforms period which starts from Trend and Patterns of FDI Flows in Iran: Pre-Revolution Period During the early 19th century, Iran came up against two expansionist powers, Russia and Britain. Although these powers sometimes acted together, they more often were suspicious of each other. Iran was one of the places where "the Great Game" for the domination of Asia was played out. On top of the great power competition for influence there was competition from European merchants wanting to break into the Iranian market and gain economic concessions from the government. Iran was doomed to be whipsawed between the two countries during the whole of the century. 217

17 During this time, Iran faced this situation with the added disadvantage of a very weak government. The shahs of the 19th century were very reluctant to attempt any sort of modernization. Educational reform was kept at a bare minimum, and there was little investment in economic production either. Following such a policy meant that Iran was if anything more vulnerable to that European pressure than it might have been otherwise. Russia, for instance, made some important territorial gains at the expense of Iran and when a treaty recognizing these gains was made up in 1828, economic concessions had to be made. Britain also obtained important concessions from Iran. This is just one example of concessions that put Iranian merchants at a disadvantage vis-à-vis European merchants. The Iranian domestic market was thrown open just at a time when European countries were entering the Industrial Revolution. Iran in the past had exported cloth to Europe; now it became a net importer, with bad effects on the urban economy. Some of these economic changes were inevitable, but it must be emphasized that European countries used their muscle to force the pace of change to their own advantage Concessions Imposed on Iran From the nineteenth century onwards, Iran's military, political and economic weakness in comparison with neighboring European countries, further constrained the monarchy to enter into treaties in which it was at a disadvantage. These concessions had a vital impact on Iranian economy from the view point of industrial development and political structure for many decades. In nineteenth century, Britain and Russia established their influence through obtaining concessions. The major concessions granted to Britain were as follows: 1. Telegraph line concessions on the basis of five agreements in the years Concession to Reuters for establishment of Imperial Bank (Shahi Bank) and rights for currency printing, mining, irrigation, water-works and exploitation of stateowned forests in the year Exclusive concession in Iranian tobacco trade in the year Concession for the Imperial Bank for the construction of roads, railways in southern part of Iran in 1890 and

18 The concessions granted to the Russians were mainly for construction of telegraph lines and roadways. Following are concessions granted to Russians: 1. Seven agreements for telegraph construction drawn up in the north and north-east between 1881 and Freedom of extraction from the Caspian Sea and the foundation of a fish nursery. 3. Permission for establishment of Russian loaning bank in the year Monopoly concession for funding transport-insurance company in These concessions represent the first attempts at modern industrial activity in Iran. The beginning of modern transport and communications had significance in a later stage, when trade and commerce developed more rapidly. Although Iran did not become a direct colony, the investments in sectors like transport, communication and banking led to tremendous expansion in trade in the first decades of the twentieth century. In the second stage some other concession granted to Russia as following: 1. Grant of four concessions to transport insurance companies for establishment and operation of some routs. 2. Grant of mining concession to a Russian mining company in Grant of two concessions to a Russia lending bank for construction and exploitation of rail and roadways. 4. Grant of construction and exploitation of petroleum pipe line in These concession facilitated transportation for the import of raw materials from Iran into Russia and export of Russian manufactured products to Iran. The Russians also granted loans to Iran, to enable expansion of some other activities in the sphere of insurance, banking, fisheries, mining, agriculture, roadways, communications and some industries. The concessions granted to Britain in this period were as follows: 1. Concession to the Imperial Bank for the construction of railways and roadways in the southern part of Iran. 2. Concession agreement for the construction railways to the Anglo-Iraninan railways syndicate in

19 3. Permission to the British government for the building of phanos (light houses) in the Persian Gulf in The main purpose of these agreements was to expand communication from the southeast to the western part of Iran aiming to build a land link with India and to activate the import of British goods into Iran. But, on the whole, the local economy did not benefit greatly and the main impact was at the political level where the ignominious terms conceded by the rulers aroused national consciousness. During the years of (coincide with the ), 27 agreements were signed between Iranian and Russian. Russia's total capital over this period is estimated at about million rubles. If we subtract the amount spent on properties and that Iran owed to Russia, we can estimate that Russia s investment in Iran is about million rubles which include the million for ships and foreign market places and 20 million for the Russian Bank and finally 10 million for Linanazuf s fishery. During the years of (coincide with the 1241 to 1292), about 217 economic agreements between Iranian and Britain were signed. In this period, the overall investment entered Iran was 9.68 million pounds and by subtracting the debts and the loans, it amounted to 8.11 million pounds. But the concession which turned out to be the most important was negotiated by William K.D' Arcy, in May He was granted for a period of sixty years, the exclusive exploration, production and oil refining rights over an area of 1,250,000 Sq.Km, or the whole of Iran except for five Northern provinces. This concession firmly established British hegemony in Iran for some time. Together with the oil concession, they won a banking concession with currency printing rights, and the British used the influence and obtained the monetary sphere to impose their policies of the Iranian government Foreign Capital Inflow to Iran FDI Inflow to Iran during ( ) Table 6.1 reveals the growth of FDI in Iran since Foreign investment inflow in spite of the fluctuation increased from Rls 459 million in 1962 to Rls

20 million in The increase was on account of sharp climb of investments in chemical and chemical products, mining and minerals. Table 6.1 Growth of the Accumulated Foreign Equity Capital and Loan in Iran During (Millions Rails) Year Total Values Source: Ministry of Economic Affairs and Finance. Foreign direct investment inflow by 1966 and 1967 rose to Rls 2762 and Rls 3430 million respectively. In 1968 foreign investment increased to Rls 5013 million while in 1969 with large investment of Japan in Petrochemical industry the amount of foreign investment increased to Rls 8277 million an increase of 60.5%. Since 1970 foreign investment in Iran had a significant growth. In 1970 foreign investment rose to Rls million which was 78% more than the pervious year. In 1971 and 1972 foreign investment increased steadily and reached to Rls and Rls million respectively. 221

21 Foreign investment grew rapidly and reached its peak during the first oil boom In 1973 and 1974 foreign investment rose from Rls and Rls million to Rls million in 1975 which was 68% more than By the years the volume of foreign investment reached its peak level of Rls and million respectively. The factors responsible for the sharp increase were the large investment in petrochemical and metallurgical industries. In 1978 foreign investment increased to Rls million of which the maximum investment had been absorbed by petrochemical industry. Inflow of foreign investment in 1978 had growth of 23%. From 1956 to 1978, 1,641 Iranian companies with foreign private stockholders were registered in the country with the highest figures pertaining to 1975 at 498 and 1976 at 338 companies. 2. Sector-wise Investment ( ) Table 6.2 indicates the total volume of foreign direct investments in Iran and the type of activity from the year 1962 to The relevant data shows that, in 1962 construction and related activities with Rls millions of the total foreign investment of the same year had obtained the maximum foreign investment. Petrochemical industry in 1969 with Rls millions, in 1973 with Rls millions, in 1976 with Rls millions and in with Rls and Rls million or 39.8% and 31.7% respectively, was leading among all the industries. During all other years chemical and chemical related products industries had the leading position. The amount of foreign equity capital invested in this industry varied from Rls millions in 1965 and Rls millions in 1974 and Rls 8356 millions in 1978 which was holding 18.5% of the total foreign inflows. Data from the table indicate that, from the year 1962 to 1978, the total investment in the petrochemicals with Rls million of the total foreign investment was the highest and it had obtained the first position. Chemical and chemical products had the second position among the industries, holding Rls million of the total foreign inflow. Metallurgical industry and electric and electronic appliances by their investments of Rls and 6591 millions were having the next positions respectively. During the same period, food and beverage industry with Rls millions had minimum amount of foreign investment participation. 222

22 Table 6.2 Year-wise Inflow of Foreign Direct Investment to Iran through the Centre for the Attraction and Protection of Foreign Investment According to Type of Activity ( ) (Million Rials) Types of activities Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Chemical & Chemical Products Electric & , electronics Metallurgical Construction & Related activities Petrochemicals Transport & equipments Food & beverages Mining & minerals Agro- business Others Total

23 Types of activities Total Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % ( ) Chemical & Chemical Products Electric & electronics Metallurgical Construction & Related activities Petrochemicals Transport & equipments Food & beverages Mining & minerals Agro- business Others Total Source: Ministry of Economic Affairs and Finance. 224

24 3. Country-Wise Investment ( ) Table 6.3 shows the country-wise classification of foreign direct investment in Iran during the period from 1962 to Data from the table shows that, during , United States with Rls million or 51.7% of foreign equity had the largest investment in Iran. During the same period after U.S.A., countries like W. Germany, Britain and France were the leading investors respectively, by Rls 263, 261, 206 millions of the total foreign investments. Japan's total investments during the same period were Rls 20.0 millions or only 0.6% of the total foreign investments. During the next five years, i.e., from 1968 to 1972 again the United States by Rls. 855, 2696, 560, 502, 349 million respectively maintained its position as a leading participator in the total foreign investment inflow of Iran. In the year 1970 W. Germany with Rls 720 millions, i.e., 31.1% of the total foreign investment was the leading participator, followed by U.S.A., Britain, Japan and France, respectively. During the said period, though the U.S.A. was leading, its investments declined from Rls 855 million in 1968 to Rls 349 million in From the year 1973 onwards, the overall situation of foreign investment underwent drastic change. U.S. which traditionally was holding the leading position in Iran's foreign direct investment was surpassed by Japan, whose share in total foreign investments rose from 41% in 1973 to 61.5%, 42.9%, 41.7%, 39.8% and 34.6% respectively from 1974 to U.S. had the second position, and its share declined from 34.1% in 1971 to 26.9% in 1973 to 19.3%, 14.8%, 20.2%, 18.8% and 28.5% respectively from 1974 to In the year 1978, Japan with Rls millions had the leading position among the countries that invested in Iran. U.S. with Rls millions had the second position followed by W. Germany with Rls 5115 millions, France with Rls 2241 millions, Britain with Rls 2218 millions of the total foreign investments. 225

25 Countries Table 6.3 Country wise Inflow of Foreign Direct Investment to Iran During ( ) (Million Rials) Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % Amt. % US West Germany Britain France Japan Others Total Source: Ministry of Economic Affairs and Finance. 226

26 Table 6.4 reveals overall investments of the countries during the period from 1962 to Total investment of countries during this period amounted Rls millions out of which, Japan with Rls million obtained 32.7% of the total foreign investments, and was leading among the foreign contributors. U.S. with Rls millions or 29.4% held the second position. W. Germany with Rls 9888 millions or 11.8%, France with Rls 4454 millions or 5.3% and Britain with Rls 4127 millions or 5.0% of the total investments respectively, were holding the next positions. All other countries with Rls millions or 16% were having marginal contribution. Table 6.4 Country wise Total Inflow of Foreign Direct Investment to Iran During ( ) (Million Rials) Countries Total Amount Percentage US W. Germany Britain France Japan Others Total Source: Table 6.3. Table 6.5 displays the distribution of MNCs in Iran according to their countries of origin and date of establishment from 1957 to As data show, U.S. MNCs were the main participants in Iran as compared to European countries. Out of foreign MNCs establishments during the 1957 to 1969, U.S. with 11 firms had the leading position. Out of 162 establishments during 1957 to 1974, U.S. with 45 firms remained the most important and largest participant, as the total number of foreign participation was concerned. Next to U.S., W. Germany with 22 firms, U.K. 21 firms, Japan 19 firms and France with 12 firms respectively were holding the positions respectively. Japan's participation in Iran started during late 1960's. 227

27 Table 6.5 Distribution of Foreign Direct Investment in Iran According to Country of Origin and Year of Establishment During (Number of Units) Year U.S.A. U.K. W. Germany France Japan Others Total Total Source: Ministry of Economic Affairs and Finance. 228

28 4. Industry-Wise Distribution of Foreign Investment ( ) Table 6.6 shows the number of projects and the distribution of foreign direct investment according to their type of activity and the country of their origin. Throughout the period , the maximum numbers of firms, i.e. 37 units, were engaged in electric and electronic industry of which U.S. and Japan with 7 units each, had first positions, among all the countries. In this category of industry W. Germany with 6 units had the second position. Chemicals and chemical products, associated with total number of 34 units, out of which again U.S. with participation in 12 firms was leading. U.K and W.Germany with 5 units each had second positions among all the countries. During the period under reference, almost in all types of activities except construction and related activities, and mining and mineral, the U.S. had the maximum participation as compared to other countries. In construction and related activities France with 3 firms and in mining and minerals, U.K. with 3 firms, were the leading in respective activities. As such, from 1957 to 1974, agro-business with 16 firms had a third position which was followed by transport and equipments with 14 firms and metallurgical with 11 firms. In other type of activities there were 21 firms with foreign collaboration of which Japan had 6 collaborations. Throughout the period under reference out of 162 firms with foreign contribution, construction and related activities, food and beverage with 6 firms each, had the least number of units among all the industries. 229

29 Table 6.6 Distribution of Foreign Direct Investment in Iran --By the Type of Activities and Country of Origin During (Number of Units) Types of Activities U.S.A. U.K. W. Germany France Japan Switzerland Denmark Others Total Chemical & Chemical Products Electric & electronics Metallurgical Construction & Related activities Petrochemicals Transport equipments Food & beverages Mining & minerals Agro- business Others Total Source: Ministry of Economic Affairs and Finance. 230

30 5. Foreign Investment Outflow (1970s) Until the early 1970s, Iran rarely participated in foreign businesses. The National Iranian Oil Company (NIOC) did invest in the construction of oil refineries in Madras, India, and other places, and it participated in several mixed ventures with foreign oil firms that held concessions for Iranian oil. But with the vast increase in oil revenues, Iran became one of the world's leading creditor nations; in 1974 alone, bilateral agreements worth hundreds of billions of rials were signed with France, West Germany, Italy, and the United Kingdom. In July 1974, Iran agreed to purchase a 25% interest in the German steelmaking firm of Krupp Hüttenwerke, an investment believed to be the largest single stake purchased by any oil-producing nation in a major European firm up to that time. In 1975, Iran began negotiating investments through the UNDP in developing nations. 6. Foreign Banks Prior to World War II, foreign companies had important investments in Iranian banks and insurance companies. 1 In an effort to increase Iran's industrial development, Industrial and Mining Development Bank of Iran (IMDBI) was established in Industrial and Mining Development Bank of Iran (IMDBI) was Iran's first private industrial financial institution, with capital drawn from a variety of domestic and foreign private and official sources. The primary objective of IMDBI was, to develop, encourage and stimulate private industrial, production, mining and transportation enterprises in Iran through financial aids from private foreign and domestic sources. The bank had investments in more than 100 industrial organizations and more than 350 industrial manufacturing firms. The major local and foreign participant industries in which IMDBI had invested were metallic and non-metallic minerals (24%), banking and services (19%), electrical and non-electrical machinery (11%), textiles and knit wears (11%), followed by rubber and transport equipment, food and other miscellaneous industries with 8%, 6% and 2% respectively. From the year 1965 till 1978 other banks namely Iranian-Bank with foreign equity of 35% (Citi Bank U.S.A.); Investment and Expansion Bank of Iran with foreign equity of 1 - See Table A.8 in Appendix 231

31 18.2% (U.K. Japan, W. Germany); Bank of Darioush with foreign equity of 35% (Continental Bank of Japan); International Bank of Iran with foreign equity of 35% (Chase Manhatan Bank of U.S.A.); increased the total number of banks from 8 banks to 13 banks, with foreign equity capital. 2 It is evident that the tendency of foreign ownership percentage of respective banks was lowered in 1978 as compared with that of the year The extent of total average percentage of foreign equity capital in the total capital of these banks was about 51% in 1965 and 38% in the year With the victory of the Iranian revolution, the revolutionary council in June 1979 approved a bill for the nationalization of the banks in Iran. The nationalization of banks in Iran was the effective step in the acquisition of economical and political self-sufficiency and discard of dependency on foreign capitals which enabled them to influence decisionmaking in production and the economy as a whole. For example in 1960, contrary to the earlier contract for the establishment of steel plant a Germany minister of economic in his inaugural speech on the occasion of industrial exhibition in Tehran (Iran) announced that, "Iran need not established heavy industry (such as steel plant) and should remain in agriculture just as before. Less number of heavy industries (such as steel plant) in DCs was the result of overt opposition and contemptuous attitude of industrially developed countries stating that these establishments are lavish and uneconomical for the reputation and credit worthiness of DCs Trend and Patterns of FDI Flows in Iran: Post-Revolution Period Inflow of Foreign Direct Investment in Iran's post-revolutionary years can be divided into two distinct time periods: FDI Inflow to Iran: Pre-war and war period (from ) FDI Inflow to Iran: Post War Period; FDI Inflow to Iran: Pre-war and war period (from ) In the wake of the 1979 Islamic Revolution, certain conditions emerged. Investors emigrated from Iran and with them a large amount of capital left the country, alongside 2 - See Table A 9 in Appendix 232

32 with the post revolution crises many banks had difficulty getting back the money. In such situation the government had no choice but to unify or nationalize banks and economic infra-structures. With approval of Iranian constitution in 1980, especially Article 80 caused the amount of foreign investment decline significantly. According to this Article giving of any concession for establishing of companies and institutions in commercial, industrial, agricultural, mining and services to foreigners was strictly prohibited. All these created a major constraint in attracting of foreign investment. Conflict in views and the dominant revolutionary atmosphere in the society led to nationalization of some foreign assets and production units. As a result there was a large scale flight of foreign capital and foreign personnel from the country. Foreign investors also compensated all their losses which had incurred through established international court ruling on the removal of property confiscated out of Iran. Moreover, lack of transparent policies and undeclared private ownership, limitations and laws regarding transfer of foreign currency, obstacles and limitation on foreign trade and unexpected events like the Iraqi imposed war for eight years and as well as political instability led to shying away of foreign investment. Hence, the attitude of the government towards foreign investment continued to be uncertain in the 1980's. Through Iran did not register any success in attraction of foreign investment and the arrival of foreign investment, and the establishment of new industries slowed noticeably. Thus, the study of inflow of foreign investment in Iran during 1980s has been examined as under: 1. Foreign Capital Inflow to Iran ( ) 2. Industry wise Investment ( ) 3. Country wise Investment ( ) 4. Industry wise Distribution of Foreign Investment ( ) 1. Foreign Capital Inflow to Iran ( ) Table 6.7 exposes the foreign investment in Iran after revolution for the year 1984 and 1986 according to the Law for Attraction and Protection of Foreign Investment (LAPFI). In the year 1984, total foreign investments decreased to Rls from Rls 233

33 45182 millions in the year 1978 while in 1986 total foreign investment declined to Rls million. In other word total foreign investments in Iran had declined to 85% in 1984 and 34.8% in 1986 over the year 1978 level. Table 6.7 Inflow of Foreign Direct Investment to Iran During (In US $ Million) Year Amount Percentage Source: Ministry of Economic Affairs and Finance. According to UNCTAD reports, after 1979, foreign investment inflows to Iran experienced significant changes. Throughout the period of 1980s not only Iran was not successful in attraction of FDI but the trend was negative (Table 6.8). Year (Annual Average) Table 6.8 Inflow of Foreign Direct Investment to Iran During (In US $ Million) Iran, Islamic Republic of Source: World Investment Report (UNCTAD). As shown in the table, from the year 1980 till 1989 there is a substantial amount of negative FDI in Iran. 3 The negative FDI in Iran reflected the out flow of investment and the repatriation of profits were greater than inflows of new investments. From 1980 to 1985 Iran had negative FDI amounting to $ -17 million. In 1986 negative FDI rose to $ -112 million while this volume by 1987 reached to maximum amount of $ -308 million. In 1988 Iran attracted FDI worth at $ 61 million for the first time after continued negative FDI flow. But by 1989 again Iran faced with $ -19 million of negative FDI. 3 - FDI flows with a negative sign indicate that at least one of the three components of FDI (equity capital, reinvested earnings or intra-company loans) is negative and not offset by positive amounts of the remaining components. These are instances of reverse investment or disinvestment. (UNCTAD) 234

34 2. Industry-Wise Investment ( ) Relevant data from the Table 6.9 indicate that in 1984 except for petrochemical, which absorbed Rls millions or 56.5% of the total foreign direct investment, all other industries experienced a decline over their preceding period. Metallurgical industry with Rls 5783 millions or 15% had a second position, followed by chemical and chemical products with Rls millions or 8.6%. Mining and mineral activity with Rls. 25 millions or 0.1% had minimum foreign investment. In the year 1986, total foreign investment decreased to Rls millions. The leading position of the various activities, attracting foreign investment significantly changed. Petrochemical industry with Rls. 470 millions lost its leading position. Among the industries, metallurgical industry with a large foreign investment of Rls millions or 36.8% of the total foreign investments was holding the leading position. The corresponding figure in chemical and chemical products was Rls millions or 17%, and in electric and electronic appliances was Rls millions or 14%. Mining and minerals with Rls. 25 millions or 0.1% of the total foreign investments had the last position. In all other industries the amount of foreign investments remained steady. This means, during 1980s no fresh investments were made by the foreign countries in Iran. Table 6.9 Inflow of Foreign Direct Investment to Iran According to Type of Activity During (Million Rials) Types of Activities Amount % Amount % Chemical & Chemical Products Electric & electronics Metallurgical Construction & Related activities Petrochemicals Transport & equipments Food & beverages Mining & minerals Agro- business Leather, textiles and paper Others Total Source: Ministry of Economic Affairs and Finance. 235

35 3. Country-Wise Investments ( ) Table 6.10 (A) reveals the country-wise inflow of the foreign investment to Iran for period from 1978 till It is evident from the table that in 1983 Japan remained a leading investor with Rls millions, and had a 61.3 percent share of total foreign investments in Iran. After revolution, U.S. experienced sharp decline of 98.6% over that of 1978 with investment of Rls. 180 millions or 0.5 percent. European countries Like W.Germany with Rls millions or 11.5% held the second position followed by France and Britain with Rls and 1237 millions respectively, holding 4.3% and 3.2% of the total foreign investments. Table 6.10(A) Country wise Inflow of Foreign Direct Investment to Iran During ( ) (Million Rials) Countries US West Germany Britain France Japan Others Total Source: Ministry of Economic Affairs and Finance. As shown in the table 6.10 (A), in 1984 the investment by the other countries had declined in comparison to 1978, and countries like Switzerland, Italy and Netherland became the new investors in Iran with investments of Rls. 1221, 1859 and 1739 millions respectively. Among the Asian countries India with investment volume of Rls 28 millions in 1983 entered into the list of foreign investors in Iran (Table 6.10 (B)). In 1986, investments of all the countries had declined. This position can be seen from the data in Table 6.10 (B). Investment of W.Germany surpassed that of the Japan. W.Germany absorbed 21.8% or Rls 3247 millions of the total foreign investments. Japan with Rls 2295 millions or 14.6% fell to the second position. France and Britain respectively had Rls and 1174 millions of the total foreign 236

36 investment in Iran. The U.S. investments in this period remained the same as it was in Other countries held 44.6% of the total foreign investment. Foreign investments of India remained the same volume as it was in Table 6.10 (B) Supplementary to Table 6.10 (A) During ( ) (Million Rials) Countries Amount Percentage Amount Percentage US West Germany Britain France Japan Switzerland Italy Netherland Sweden Denmark Canada Panama Pakistan 25 * India 28 * Luzemburg Liberia South Africa Spain Greece 22 * Austria 22 * Others Total Source: Ministry of Economic Affairs and Finance. Note: * = Negligible 237

37 After revolution 1979 some developing countries started making investment in Iran. Foreign direct investment by developing countries in Iran is shown in the Table 6.11, for the years from 1979 to Data indicate that the operation of the developing countries in Iran remained unchanged during this period. Total capital of these countries amounted to Rls. 620 million. Liberia with Rls. 464 million had the highest investment. Panama with Rls. 103 million, Indian and Pakistan with Rls 28 and 25 million each were the other participants from the developing countries. Countries Table 6.11 Foreign Direct Investment by Developing Countries in Iran During ( ) (Million Rials) Total No. of Participation Total capital employed (Amount) Total foreign equity capital (Amount) Percentage India Liberia Pakistan Panama Total Source: Extracted from the data obtained from CAPFI. Table 6.12 denotes the distribution of MNCs in Iran from 1979 till 1986 according to their country's of origin. As shown in the table, in 1984, Germany with 27 establishments, held 20.1% of the total number of MNCs, and was the leading country among the other investing countries. Britain with 19 firms or 14.2% was holding the second position. Japan, France and U.S. each with 15, 12 and 8 firms respectively had proportionate share of 11.2%, 9% and 6% of the total number of foreign firms. The other countries like India had one firm. In 1986 the total number of the establishments with foreign participation declined to 120 units. In spite of this decline, W. Germany with 20 firms or 16.7% of the total firms was leading among the countries. Britain with 18 firms, Japan with 14 firms, France with 11 firms and U.S. with 8 firms was holding 15%, 11.7%, 9.2% and 6.7% of the total foreign participation. Other countries like Switzerland with 10 firms, Italy, Netherland and Denmark with 7 firms, each, Sweden with 6 firms and India with 1 238

38 firm contributed to the Iranian industries. The remaining countries maintained the same number of units which they had in Table 6.12 Countrywise Distribution of MNCs in Iran During (Number of Units) Countries Units Percentage Units Percentage US West Germany Britain France Japan Others Total Source: Ministry of Economic Affairs and Finance. 4. Industry-Wise Distribution of Foreign Investment ( ) Respective data shown in Table 6.13 indicate that during 1984 total number of units with foreign investment were 134 firms, out of which 32 units were engaged in chemical and chemical product industries. Metallurgical industry had 29 firms, electric and electronic industry 20 firms, construction and related activities with 15 firms were holding respectively position, with 21.6%, 14.9% and 11.2% of the total firms in this period. In 1986, total number of units with foreign participation had fallen to 120 units. During this year chemical and chemical products lost their leading position and with 23 firms or 19.2% of the total firms got the second position among the industries. Metallurgical, with 29 firms had a leading position. Electric and electronic appliance industry with 17 firms, construction and related activities with 15 firms, and food and beverage with 11 firms respectively, holding 14.1%, 12.5 and 9.2% of the total firms. Number of firms engaged in all other industries remained almost. 239

39 Table 6.13 Distribution of MNCs in Iran According to Type of Activity During (Number of Units) Types of Activities Chemical & Chemical Products Electric & electronics appliance Units % Units % Metallurgical Construction & Related activities Petrochemicals Transport & equipments Food & beverages Mining & minerals Agro- business Others Total Source: Ministry of Economic Affairs and Finance FDI Inflow to Iran: Post War Period; Reconstruction Period ( ) Reforms and Liberalization Period, 1989 onward Reconstruction Period ( ) After the war (1989) due to lack of new laws or policies for the attraction of foreign investments, improper interaction with the global economy, economic sanctions, lack of coordination between management methods and global developments, cultural and social problems, differences of opinion among the authorities regarding foreign investment, legal restrictions, state-run economy, weak currency, political risks in the country, the region dissuaded the foreign financiers from considering investment in Iran for almost one and half decade. 240

40 With the sudden turnaround in the management of the country there was a need to concentrate on economic reconstruction and attempt was made to put the economy in the new framework. Thus, the need of country for investment increased. But due to limitations in financial resources for investment and low level of technology, some measures were taken for attracting the foreign investment. During the reconstruction phase, which coincided with First Five Year Development Plan (FFYDP ), no remarkable attention was paid to the issue of foreign investment. Throughout the period 1989 to 1992 not only Iran was not successful in attracting FDI but the trend was negative (Table 6.8). As shown in the table, from the year 1989 till 1992 there is a substantial amount of negative FDI in Iran. 4 The negative FDI in Iran reflected the outflow of investment and the repatriation of profits were greater than inflows of new investment. In 1989 Iran had negative FDI with value of $ -19 million while this amount increased to $ million in By 1991 foreign investment situation in Iran improve, and Iran could attract FDI worth at $ 23 million for the first time after many years of negative FDI flows. But again in 1992 FDI inflow to Iran became negative to the tune of $ -170 million Reforms and Liberalization Period, 1989 onward Reforms and liberalization era in Iran begins from the end of the FFYDP (1993) or beginning of the Second Five Year Development Plan (SFYDP ). In the Second Five Year of Development Plan, when Iranian economic experts and officials reached a consensus on the Article 81 of the Iranian Constitution in 1993, the then High Council for Investment approved a proposal to lift obstacles on the way of foreign investments after 14 years. With accepting of foreign investment and the approval of Free Trade and Industrial Zones (FTZs), once again attraction of foreign investment was on the agenda of policy makers but it was poorly conducted when we compare it to other developing countries. 4 - FDI flows with a negative sign indicate that at least one of the three components of FDI (equity capital, reinvested earnings or intra-company loans) is negative and not offset by positive amounts of the remaining components. These are instances of reverse investment or disinvestment. (UNCTAD) 241

41 The Third Five Year Development Plan (TFYDP ) marked the beginning of a transformation. The country's new economic management, emphasis on privatization, single parity rate for hard currencies, reforms in major economic laws, reforms on economic infrastructures and attention to interaction with global economy were among the factors effective in reviving the flow of foreign investment. These factors together with ratification of the Foreign Investment Promotion and Protection Act (FIPPA) in May 2002 after changing hands several times between the Iranian parliament and the supervisory Guardians Council, and with some amendments, prepared the ground for expansion of foreign investments in Iran. To this end, the country's political stability and improvement of its position in international arena were also effective in attracting foreign capitals. In this section study of foreign investment in Iran and its analysis shall be based on the available data provided by the Foreign Investment Promotion and Protection Act (FIPPA), affiliated to the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) and World Investment Reports (UNCTAD) There are significant differences in data of foreign investment in Iran provided by OIETAI and international organizations. UNCTAD 2005 report, explain the reason for this difference. Data provided by OIETAI contains foreign direct and foreign indirect investment, such as Buy-Back and BOT (Build-Operate and Transfer). Moreover, data provided by OIETAI is available only for the period But UNCTAD reports contain only FDI data. Moreover, since second half of 1980s UNCTAD has provided the data on FDI for Iran. Thus, here we try to provide foreign investment data which has been provided by OIETAI through FIPPA and then data which has been provided by UNCTAD. 242

42 Table 6.14 reveals the number of projects and amount of foreign investment in Iran. Table 6.14 Foreign Direct Investment Inflow to Iran According to FIPPA During (In US $ Thousands) Year Number of Projects Amount , , , , , , Total Source: OIETAI 2008 According to FIPPA report (2008), total volume of foreign investment for the period of amounted to $ 34,180,478 billion with total 513 investment projects. In 1993, with 2 projects worth $ 20,320 million, foreign investment began in Iran. Italians and Greeks were among the first foreign investors to assess the Iranian economy as suitable for investment. In 1994, the number of foreign investment projects reached to 3 worth at $ million. South Korea, Cyprus and Singapore embarked on investing in Iran. In 1995, the number of foreign investment applications rose to 7 amounting to $ 122,738 million. One year later Iranian economic officials registered a record of 13 cases with $ million foreign investments. 243

43 In 1997 foreign investments in Iran marked its turning point with value of $ millions with 19 cases. In 1998 the upward trends of foreign investment suddenly fell to 6 cases and amount of investment also decreased to $ 5840 millions. However, the downward trend of foreign investment did not continue in 1999, and investment increased to $ millions, the number of investment applications also raised to 18. Thus, total number of foreign investment projects from (SFYDP) reached to 68 worth at $ 1,627,690 million. Foreign investment sharply declined in 2000 to the tune of $ 438,669 millions and number of investment projects also fell to 16. In 2001, foreign investment applications once again experienced a downward trend when the figures showed investment of $ 67,991 millions with only 7 applications. Being under influence of other sectors somehow linked with the economic sector, the Iranian economy had yet to introduce itself as a serious rival at regional and international levels to foreign investors although economic officials efforts to this effect were going on. The year 2002 was a relatively successful year in terms of attracting foreign investment. The number of investment projects suddenly rose to 27 cases worth at $ 612,705 millions. In 2003 with 40 cases Iran received a highest amount of foreign investment of $ 1,357,626 millions since With slightly downturn of foreign investment in 2004 number of investments declined to 31 cases, but the amount of investment rose to $ 2,702,738 millions. By 2005 foreign investment increased steadily and reached to maximum level of $ 4,234,474 millions with 56 cases. The total number of foreign investment projects for period of (TFYDP) reached to 177 with worth of $ 9,414,203 millions of FDI. In 2006 and 2007 Iran received the highest amount of foreign investment of $ 10,227,722 and $ 12,089,192 millions with 78 and 104 cases of investments respectively. In 2008 foreign investment reduced to 86 cases worth at $ 821,671 million Iran's Share in Global FDI Flows Iran's share in global FDI inflow has been increasing. In 2005, 30 parent corporations and 55 foreign affiliates were active in Iran, which in 2008 increased to 44 and 238 respectively. But Iran's share in FDI inflows in comparison to other emerging destinations like China, Brazil, Mexico, Russia and India still is very low. 244

44 Table 6.15 shows that Iran's share in global FDI inflow in 2008 increased significantly as compared to 1980s and first half of 1990s wherein Iran had negative FDI flows of $ -130 million and $ -17 million, but its share in comparison to other countries is still not attractive. Data in the given table reveals that during the period FDI inflow in Iran has increased from negative flows to $ 26 million in 1996 which was percent of total global FDI flows. Although Iran's share in global FDI inflows has increased from percent in 1996 to percent in 2008, but this is not a significant flow when it is compared with other countries in the region like Saudi Arabia, Turkey and United Arab Emirates and other major emerging destinations. Numbers of Greenfield FDI projects attracted by developing countries were 2355 in 2002 and 1315 in 2005 whereas Iran received 10 and 7 Green field investments. In the years 2006, 2007 and 2008, the numbers of projects attracted by developing countries were 1776, 1671 and 2534 while Iran's share was 8, 7 and 8 respectively Table A10 in Appendix. 245

45 Years / Economy (Annual Average) Table 6.15 Share of Iran in World FDI ( ) (In US $ Million) World FDI Iran s share in World FDI Iran s share in Percentage Source: Compiled from the various issues of WIR (UNCTAD). 246

46 Iran's Share in FDI Flows to Developing Countries Iran with all the economic capabilities like huge natural resources, reserves of oil and gas, young population, good skills and business environment, FDI inflows has been low in comparison to other developing countries in West Asia due to a combination of political and structural factors. During the period 1990 to 2008, Saudi Arabia, Turkey and UAE were top destinations of FDI inflows in the region as compared to Iran, which received a small amount of FDI (Table 6.16). Table 6.16 reveals that in 1997 and 1998, Saudi Arabia, Turkey and UAE attracted maximum level of FDI in the region to the tune of $ billion, $ 805 and $ 232 million respectively. During the same period Iran received $ 26 and 53 million. Since 2004, share of these countries of the total global FDI inflow is increasing significantly, while Iran's share in comparison to their share is very low. During 2005 Saudi Arabia, Turkey and UAE received FDI flows worth $ 4628, $ 9681 and $ million respectively, while Iran attracted $ 30 million. In 2008 FDI inflows recorded the highest volumes to these countries. Saudi Arabia, Turkey and UAE received FDI worth $ , $ and $ billion respectively, and Iran only received $ 1615 million. Therefore, among 14 countries in the West Asia, Iran s record in terms of attracting of FDI is very poor. 247

47 Host Region/ Economy (Annual Average) Table 6.16 FDI Inflows in Selected Asian Developing Countries During (In US $ Million) Asia West Asia Iran, Islamic Republic of Saudi Arabia Turkey United Arab Emirates Source: Compiled from the various issues of WIR, UNCTAD 248

48 Iran's FDI Performance Index Table 6.17 shows ranking of Iran among 141 economies in terms of inward FDI performance (relative to the size of the economy). The table indicates that the performance of Iran regarding the inflow of FDI, as compared to its potential, is very low. During the period in terms of performance index, Iran ranked 117 in 1990, 134 in 2000, 133 in 2005 and 133 in According to data given by UNCTAD, FDI inflow to Iran is improving but in comparison to potential index Iran ranked 49 in 1990 and 72 in 2000 and 58 and 50 in 2005 and Data show that Iran's potential for attracting of FDI is very high but performance is not satisfactory in comparison to other countries. Table 6.17 Inward FDI Performance Index rankings Economy Iran, Islamic Republic of Saudi Arabia Turkey United Arab Emirates Source: Compiled from the various issues of WIR, UNCTA FDI as Percentage of Gross Domestic Product and Gross Fixed Capital Formation Share of FDI stock as percentage of GDP in countries of West Asia is presented in the tale Table exemplifies share of FDI in GDP in different countries of West Asia. In Iran the share was only 2.3 percent in 1990 then it rose to 2.4 percent in In 2005 share of FDI as percentage of GDP was 1.9 percent, which reached to 2.1 percent in On the other hand, share of FDI stock in GDP of Saudi Arabia which was at meager 20.9 percent in 1990 reduced to 9.3 percent in By the year 2007 and 2008 this share rose to 20.2 and 24.4 percent respectively. In case of Turkey the share was around 7.4 percent in 1990, which increased steadily and reached to 19.6, 22.2 percent in 2006 and 2007 respectively. Among these countries UAE has been the top 249

49 performer where the share has crossed 21.1 percent during In 2007 and 2008 FDI share in GDP was 25.5 and 26.7 percent. Table 6.18 Share of FDI Stock as percentage of GDP During Country Iran, Islamic Republic of Saudi Arabia Turkey United Arab Emirates Source: Compiled from the various issues of WIR, UNCTAD Share of FDI in Gross Fixed Capital Formation (GFCF) in West Asian countries is shown in table From the table it is discernible that share of FDI in GFCF in case of Iran accounted for 0.2 percent in the year The share reached up to 0.8 percent in 2005 and 1.9 percent in On the other hand, the share of Saudi Arabia has increased from -5.7 in 2000 to 30.1 percent and 46.1 percent in 2007 and The share of Turkey grew steadily from 2.2 percent in 2000 and reached to 15.6 percent in 2007, but in 2008 came down to 12.3 percent. In case of UAE the share continuously increased from -3.9 in 2000 to 30.4 percent in 2006, but in 2007 and 2008 its share declined to 26.7 and 24.9 percent. This decline is due to global financial recession which has affected FDI flow in most of the countries. Table 6.19 Share of FDI Flows as percentage of GFCF During Economy Iran, Islamic Republic of Saudi Arabia Turkey United Arab Emirates Source: Compiled from the various issues of WIR, UNCTAD 250

50 6.4 TRENDS AND PATTERNS OF ORIGINATING COUNTRIES Firms from over 50 countries have invested in Iran in the past 16 years ( ), with Europe and Asia receiving the largest share in number and volume of foreign investment. The presence of European companies investing in Iran is stronger than other continents. Table 6.20 displays foreign investment in Iran according to continents on the basis of volume and number of investment from As data show during this period out of 452 investment projects worth $ billions, Europe by 241 projects worth $ $ billion or 32.11% has the largest investment in Iran. While Asia with $ billion or 33.8% and 171 projects is holding the second position. Africa with $ 8 billion and 9 projects and America with $ 1.4 billion and 7 projects obtained the third and the forth positions respectively. Australia with 1 project or $ 682 million among the regions holds the lowest share in investment in Iran. Table 6.20 Distribution of Foreign Direct Investment According to Continent and National of Origin ( ) (Number of Units) Region Leading countries investing in Iran Number of projects Total amount invested Europe Germany, the Netherlands, Spain, UK, 241 Turkey, Italy and France (22 countries $ billion in total) Asia United Arab Emirates (UAE), Singapore, Indonesia and Oman 171 $ billion Americas Canada, Panama, the USA and Jamaica 7 $1.4 billion Africa 9 $ 8 billion Australia 1 $ 682 million Multiple Nationality 20 $ billion International 3 $ million Total 452 $ 3, billion Source: OIETAI 2008 Table 6.21 reveals the country wise classification of foreign investment in Iran during As shown in the table, during , Germany with 68 projects worth $ 3,004,440 billions is the largest investor among European countries in Iran. 251

51 After Germany, Netherlands, Spain and Turkey are the leading investors respectively, with $ , and $ billions of the total foreign investment, by 10, 6 and 46 projects. The other countries like Italy with 20 projects worth $ millions, Virgin Islands with 6 projects worth millions, France with 30 projects worth $ millions, Cayman Islands with 3 projects worth $ millions and Belgium with 5 projects worth $ millions of the total investments respectively are holding the next positions. Other European countries such as UK, Switzerland, Luxembourg, Cyprus with an amount of $ , $ , $ and $ millions respectively or 8, 8, 4 and 2 projects are other investors in Iran. Southern Ireland, Sweden, Austria, Denmark, Azerbaijan and Slovenia with investments volume of $ , $ , $ , $ 6.603, $ and $ millions are among the other European foreign investors in Iran. There are some other European countries also which are having marginal contribution in foreign investment in Iran. Out of 7 projects of investments by foreign companies from U.S.A, Canada by 4 cases with volume of $ billion are the largest investors in Iran. U.S.A which before revolution was holding the leading position in Iran's foreign investment, now holds a very low position with a project worth at $ millions. Among Asian countries UAE with 25 cases worth $ billions is the most important and largest participant. Next to UAE, Singapore with 3 projects worth of $ millions holds the second position among Asian countries investing in Iran. Indonesia, Oman and Bahrain with 1, 1 and 4 projects each worth of, $ , $ and $ millions are the other countries. Countries such as South Korea, Saudi Arabia, Malaysia, India, Kuwait and Lebanon are the other Asian investors respectively, by 1, 2, 3, 24, 6 and 2 projects worth $ , $ , $ , $ , $ and $ millions. Since 1993 some African countries have also started investing in Iran which before revolution had no participation in foreign investment. Among them Morris MNCs are the main participants. Out of 9 investment projects from Africa, Morris holds 6 projects worth $ billions, followed by South Africa and Liberia with 2 and 252

52 1 project each with volume of investment $ 4085 and $ 6000 thousands respectively. Australia with a project worth at $ millions has a low position among foreign investors in Iran. Throughout this period Multi-National States with investments worth $ billions with 20 projects contributed in foreign investment in Iran. Countries such as UAE-Switzerland, UK-UAE, Germany-Spain, India-Pakistan, Sweden-Germany-UK, Singapore-Virgin Islands and Canada-Barbados Islands are among the major investors with highest foreign collaborations. Table 6.21 Country wise Inflow of Foreign Direct Investment to Iran According to FIPPA During (In US $ Thousand) Region / Country Number of Projects Amount Europe ,779,315 Greece Germany 68 3,004,440 Cayman Island 3 477,750 British Virgin Island 6 689,424 Azerbaijan 1 4,670 Netherlands 10 1,653,114 Luxembourg 4 67,875 Cyprus 2 61,095 France ,563 Switzerland 8 124,385 Swedish 4 18,941 Denmark Turkey 46 1,115,377 Bosnia and Herzegovina Belgium 5 435,166 Italy ,341 Austria 4 11,936 England 8 280,

53 Slovenia 7 5,118 Spain 6 1,505,238 Romania 1 1,470 Southern Ireland 2 34,800 America 7 1,040,344 Jamaica United State 1 12,329 Canada 4 1,006,235 Panama 1 21,500 Asia ,353,448 Japan Turkey 1 1,997 Armenia Afghanistan 55 44,211 United Arab Emirates 25 8,663,290 Bahrain 4 200,886 Taiwan 2 3,846 Azerbaijan 4 5,873 Islamic Republic of Iran ,420 Singapore 3 837,928 Oman 1 317,000 China 8 14,831 England-Germany Indonesia Georgia Iraq Jordan 2 21,220 Pakistan 2 1,120 India 24 88,561 Malaysia 5 94,780 Kuwait 6 86,820 Saudi Arabia 4 186,450 South Korea 5 192,485 Lebanon 2 72,

54 Africa 9 7,988,869 Mauritius 6 7,978,784 Liberia South Africa 2 4,085 International 3 25,900 International 3 25,900 Multiple Nationality 20 1,695,869 United Arab Emirates ,290 Switzerland England-Germany Afghanistan-Russia 1 1,456 Afghanistan-Pakistan Kuwait-Iran England- United Arab Emirates 1 230,00 United Arab Emirates-Saudi Arabia United Arab Emirates-Saudi 1 1,370 Arabia Germany-Spain 1 4,636 Ireland-Turkey India-Pakistan 1 11,500 Turkey-Iran Germany-Iran 1 3,720 Sweden-Germany-England 1 236,580 Singapore-Virgin Island 1 62,123 France-Ireland 1 1,500 Canada-Barbados Island 1 16,800 Pacific Australia Total ,565,744 Source: OIETAI

55 6.5 TRENDS AND PATTERNS OF FDI FLOW AT SECTORAL LEVEL Sectoral-wise Inflow of Foreign Direct Investment ( ) Table 6.22 indicates the inflow of foreign investments in Iran. The relevant data from the table reveal that throughout this period, the maximum numbers of projects were engaged in Industrial sector by 315 projects worth $ billions or 60.9% of the total foreign investment inflow to Iran. The next position was held by Water, Electricity and Gas sector with 7 projects and investment volume of $ billions which obtained 13.8% of total foreign investment. Service sector with $ billions or 10.9% of the total foreign investments with 47 projects, was at the third position. During the same period Mining and minerals with 11 projects at investment value of $ billions or 6.7% out of total foreign investment inflow, held the forth position among the sectors. Transport and communication sector with $ billion or 4.9% of the total foreign investment with 11 projects got the fifth position. Construction and related activities with $ million or 2.7% of the total foreign investment and with 51 projects had the sixth position. Agriculture sector with 7 projects worth $ millions or 0.06% from total investment obtained the next position. Other sectors with 3 projects of $ million and 0.02% from the total investment are among the sectors which received the lowest amount of foreign investment in Iran. Table 6.22 Inflow of Foreign Direct Investment to Iran According to Type of Activity During (In US $ Million) Type of activities No. of Projects Amount Percentage Agriculture 7 20, Mining and minerals 11 2,239, Industry ,432, Water, Electricity and Gas 7 4,639, Construction , Transport and communication 11 1,655, Service Sector 47 3,663, Others 3 6, Total ,565, Source: OIETAI

56 6.5.2 Sectoral-wise Distribution of Foreign Direct Investment ( ) The relevant data in the Table 6.23 show that, out of $ billions foreign investment absorbed by industrial sector, Chemical industries, petroleum, rubber and plastic with 82 projects worth $ billions got the leading position and obtained the maximum foreign investment in comparison to other industries. Basic Metal industries with 25 projects with investment of $ billions obtained the second position. Transportation equipment and Automobile industries with 29 projects with investment volume of $ millions secured the third position in attracting the foreign investment. Food, beverage and tobacco industries with 47 cases and investment worth $ millions obtained the forth position followed by Industrial machinery, equipment and metal products with 45 projects and investment volume of $ millions. Non-metallic mineral products industries except petroleum and coal by absorbing of $ millions with 10 projects acquired the sixth position of the total foreign investment inflow. While Cellulose industries (wood and paper), printing and publishing and Textile, clothing and leather with the amount of $ and $ millions with 12 and 39 projects respectively, obtained the seventh and eighth positions among all the industries that attracted foreign investment. Electric and electronic industries and appliance manufacturing, Recycling and Medical device industries, optical and precision instruments with 22, 2 and 1 project worth $ , $ 874 and $ 560 millions respectively received the minimum amount of foreign investment. In water, electricity and gas sector, the maximum amount of foreign investment was attracted by refining and distribution of natural gas with 3 projects worth $ billions, followed by generation, transmission and distribution with 4 projects to the tune of $ billion. In service sector, tourism industry with 10 projects worth $ billions is leading industry by obtaining the maximum amount of foreign investment. Financial 257

57 services obtained second position, followed by public services with 20 and 4 projects to the tune of $ and $ millions respectively. In mining sector, exploration and mining (except oil and gas) with 11 projects absorbed $ billions of total foreign investment in Iran. In transport and communication sector, post and telecommunication with investment volume of $ billion, turned out to be the largest amount of foreign investment. Support services and water transportation with investment worth $ and $ millions respectively secured the second and third positions. In construction and related activities, housing and construction with 13 projects worth $ millions obtained the second position followed by building material with 38 projects and investment volume of $ millions. In agriculture sector, agriculture and horticulture and poultry with 5 and 2 projects each, and investment volume of $ and $ millions respectively, attracted the least investment among all sectors receiving foreign investment in Iran. Table 6.23 Industry wise Distribution of Foreign Direct Investment to Iran According to FIPPA During (In US $ Million) Types of activities No. of Projects Amount Agriculture Agriculture and horticulture 5 19,348 Poultry 2 1,135 Total 7 20,483 Mine Exploration and Mining 11 2,239,592 (except oil and gas) Industry Food, Beverage and Tobacco ,902 Industries Textile, clothing and leather 39 86,334 Chemical Industries, 82 10,464,619 Petroleum, Rubber and Plastic Cellulose Industries (wood and paper), Printing and Publishing ,

58 Non-Metallic Mineral ,413 Products Industries(except petroleum and coal) Basic Metal industries 25 8,158,286 Industrial Machinery, ,007 Equipment and Metal Products Electric and Electronic 22 30,113 Industries and Appliance Manufacturing Transportation Equipment and Automobile Industries ,465 Recycling Medical device industries Others Total ,432,577 Water, Electricity and Gas Generation, Transmission 4 1,165,404 and Distribution Refining and Distribution of 3 3,474,430 Natural Gas Total 7 4,639,834 Construction and Related Activities Building Material ,160 Housing and Construction ,743 Total ,903 Transport and Communication Post and Telecommunication 3 1,539,476 Support Services 5 75,979 Road Transport 2 1,850 Water Transportation 1 37,750 Total 11 1,655,055 Service Sector Tourism 10 2,417,545 Financial Services ,598 Public Services 4 353,420 Other Services 13 61,667 Total 47 3,663,320 Others 3 6,070 Total 3 6,070 Total ,565,744 Source: OIETAI 259

59 6.6 FOREIGN DIRECT INVESTMEN POLICY IN IRAN: PRE AND POST LIBERALIZATION Realizing the important contribution that private foreign investment can make to economic development and growth, Iran has introduced investment regimes. Since 1950s with the ratification of the law for foreign investment, there has been some relaxation in the foreign investment policies. As a result many countries had made investment in Iran. After revolution of 1979 and during 1980s, there was huge flight of foreign investment. The major policy initiative towards attracting FDI was outlined in Since then, several measures have been taken to liberalize and simplify the norms and procedures pertaining to FDI. Restrictive investment regimes have been liberalized. In addition, various types of incentives are being offered to attract FDI. Greater attention is also being paid to making the macro-economic environment more conducive to foreign investors. Changes in policy frameworks in Iran dealing with Foreign Direct Investment are studied in two periods pre and post revolution viz Policy Measures for FDI in Pre-Revolution period Policy Measures for FDI in the Post-Revolution period since Policy Measures for FDI in Pre-Revolution period In 1955, the Law for Attraction and Protection of Foreign Investment (LAPFI) came into existence which sought to attract foreign investors into the country by giving necessary assurances that private capital will not be nationalized. The Law for Attraction and Protection of Foreign Investment (LAPFI) of 1955 and its bylaw of 1957 are considered as a turning point in the history of foreign investment in Iran. A Center for Attraction and Protection of Foreign Investment (CAPFI) was established on May 7, Since then foreign participation/ collaboration in Iran has been encouraged, with a view to utilizing foreign productive and technological resources for the development of economic infrastructure, and for strengthening competitive position of Iranian industrial goods and services. Further, objective of LAPFI was to enable the country to benefit from the favourable opportunities associated with a large international market through the foreign private 260

60 enterprises, and also to place the country's economy increasingly in the mainstream of international economy. Foreign private parties and companies and establishments that by permission of the Iranian government and this Law bring into Iran their capital in the form of cash, factories, machinery and their parts, equipment, patent rights, expert services and the like, for the purpose of development and rehabilitation and productive activities in the areas of industry, mining, agriculture, and transport, had to enjoy the facilities set out in this Law. The net impact of the Law was visible in the short span of time. From 1956 to 1978, 1,641 Iranian companies with foreign private stockholders were registered in the country with the highest figures pertaining to 1975 at 498 and 1976 at 338, mainly representing the countries such as U.S., UK, France and Japan. However, the application of the LAPFI was optional and not obligatory. In other words, foreign private share holders must apply for legal permission and the government could apply the law to such foreign investments only if it deemed it economical and in its interests. Otherwise, foreign investors could invest in Iran under the Trade and Firms Registration Acts Policy Measures for FDI in the Post-Revolution period since 1990 Since 1955, the legal framework of Iran s foreign investment regime was defined under the Law for the Attraction and Protection of Foreign Investments (LAPFI). Moreover, in line with reforms in the overall economic framework, Iran s parliament undertook to propose and approve a plan concerning a new foreign investment law entitled: The Foreign Investment Promotion and Protection Act (FIPPA) which was ratified in May FIPPA replaced the LAPFI which was in effect since FIPPA s replacement of LAPFI has further enhanced the legal framework and operational environment for foreign investors in Iran. FIPPA is more liberal than the former law and its regulations are designed to encourage and protect foreign investments in Iran whether by way of equity investment in Iranian companies or in financing of Iranian projects. Some specific enhancements introduced by FIPPA for foreign investments in Iran can be outlined as follows: 261

61 1. Broader fields for involvement by foreign investors including in major infrastructure. 2. Recognition of new modes of foreign capital exposure in addition to foreign direct investment, e.g. project financing methods including "Civil Participation", "Buy- Back" financing arrangements, "Counter trade", and various "Build-Operate- Transfer" (BOT) investment schemes. 3. Streamlined and fast-track investment licensing application and approval process. 4. Creation of a one-stop institution called the "Center for Foreign Investment Services" at the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI), for focused and efficient support for foreign investment undertakings in Iran. 5. More flexibility and facilitated regulatory practices for the process of foreign investors to foreign exchange for capital transfer purposes. 6. Introduction of new legal options governing the government investor(s) relations. Clearly, the ratification of FIPPA and the approval of its implementing regulations by the council of ministers represented a significant complement to a whole host of reforms taking place in Iran s general macroeconomic framework and structural mechanisms. The trend in foreign investment applications in Iran since the ratification of FIPPA demonstrates that the new economic environment and the enhanced foreign investment legal and regulatory regime have created a good foreign investment potential for Iran that can be realized at a more accelerated pace through a concerted effort aimed at transparent communication of the latest status of Iran s dynamic economic and foreign investment framework. These economy-wide reforms intended to stimulate and benefit both foreign and local investments. Some key elements of economic reforms include: 1. Introduction of a new income tax regime with a single and competitive flat tax rate of 25%, and a range of exemptions for manufacturing enterprises and total exemption for export-generated revenues. 262

62 2. Elimination of a wide range of non-tariff barriers and further liberalization of the foreign trade regime. 3. Creation of several private banks and other private non-banking credit institutions. 4. Unification of foreign exchange rate and significant liberalization of foreign exchange regime. 5. Legal reforms for the establishment of private insurance companies. The new law of foreign investment (FIPPA) covers investments made for the purpose of "development and promotion of production activities in industry, mining, agriculture and services" based on the following criteria: 1. Bring about economic growth, upgrade technology, enhance the quality of products, increase employment opportunities and exports; 2. Does not pose any threat to the national security and public interests, and cause damage to the environment; does not disrupt the country s economy and jeopardize the production by local investments; 3. Does not entail grant of concessions by the government to foreign investors. Concession means special rights which place foreign investors in a monopolistic position. 4. The ratio of the value of the goods and services produced by the foreign investments, contemplated in FIPPA, to the value of the goods and services supplied to the local market, at the time of issuance of the investment license, shall not exceed 25% in each economic sector and 35% in each sub-sector (field). The sub-sectors and scope of investment in each sub-sector shall be determined in the by-law to be approved by the council of ministers. 5. Foreign Investment for the production of goods and services for export purposes, other than crude oil, shall be exempted from the aforementioned ratios. 6. Assignment of the whole or a part of the Foreign Capital to a local investor and upon approval of the Board and confirmation by the Minister of Economic Affairs and Finance, to another foreign investor is permitted. In case of assignment to another foreign investor, the assignee who shall have at least, the same qualifications as the initial investor, shall replace and or become a partner to the former investor from the standpoint of FIPPA. 263

63 7. The principal of the Foreign Capital and profits there from, or the balance of capital remaining in the country, after fulfillment of all obligations and payment of legal dues and upon the approval of the Board and confirmation by the Minister of Economic Affairs and Finance, shall be transferable abroad subject to a threemonth prior notice submitted to the Board. 8. Payments related to the installments of the principal of the financial facilities of Foreign Investors and their associated expenses, agreements for patent rights, technical know-how, technical and engineering assistance, trade marks and names, management as well as similar agreements within the framework of the relevant Foreign Investment, upon the approval of the Board and confirmation by the Minister of Economic Affairs and Finance are transferable abroad. According to the new policy, foreign investment may be imported into the country by way of one or a combination of the following: 1. Cash funds to be converted into Rials; 2. Cash funds not to be converted into Rials but to be used directly for purchases and orders related to the foreign investment; 3. Machinery and equipment; 4. Tools and spare parts, complete knock-down (CKD) parts and raw, addable and auxiliary materials; Patent rights, technical know-how, trade marks, trade names and specialized services; and 5. Other permissible items approved by the Council of Ministers (the cabinet). Registration of the foreign investment in an Iranian company will provide the foreign investor/shareholder with the following protections: 1. The foreign investor will enjoy the same treatment as that afforded to local investor; 2. Importation of the foreign investment amount, in cash or in kind, is only subject to the investment license and no other licenses are required; 3. Subject to any limitation stated in the relevant investment license, the ratio of foreign investment in each individual case is not subject to any limitation; 264

64 4. The foreign investment is guaranteed against nationalization and expropriation and the foreign investor is entitled to compensation in an amount equal to the real value of the investment immediately before nationalization or expropriation; 5. Repatriation of the principal amount of the investment, profit earned and capital gains derived from utilization of the invested amount in the form of cash and/or goods (as provided in the Investment License) is guaranteed; 6. Free export of the goods produced by the investee enterprise is guaranteed and, in case any restrictions are imposed on such exports, the product can be sold locally and the proceeds of such sale transferred abroad through the banking channels. According to the new law foreign direct investment is permissible in all areas open to Iranian private sector. 1. Foreign investment under contractual arrangement is permissible in all sectors of economy. 2. Foreign investment in sectors reserved for the government may only be carried out under contractual arrangements. 3. Foreign investment in oil and gas upstream activities within the framework of contractual arrangements is permissible, but FDI in such areas is not permitted. 4. Application of trade marks and names is permissible in all areas of economic activity. 5. There is no restriction for investment in companies quoted in the Stock Market. Foreign investments in these companies are eligible to enjoy the protections available under FIPPA, in the same manner as is available to foreign investment outside the Stock Market. 6. Special Economic Zones are restricted customs areas in which import of goods, machinery and equipments is not subject to the general import/export regulations. The zones may have been established for different reasons and objectives. Some of them are established for the purpose of warehousing whereas some, in addition to warehousing of goods, are designed for setting up processing and production line. At present the number of Special Economic Zones reaches to

65 7. According to the new law foreign participation in projects in the oil and gas upstream activities and in national projects that are normally closed to FDI can be implemented only through contractual schemes, including buy-back arrangements. Under the buy-back arrangements, as applied especially to the oil and gas industries, investors receive payments over a fixed period of time, rather than equity shares, in return for their outlay on the goods and services required for the execution of the projects. In terms of tax exemptions FIPPA provided the applications; Tax exemption in industry, mining and producing sectors: 1. 80% of the income derived from producing and mining activities of cooperative and private sectors are tax exempted for a term of 4 years as from the date of exploitation or extraction. 2. Any part of the declared profit of private and cooperative companies that is used in the same year for development, reconstruction, renovation or completion of existing industrial or mining units and/or for setting up of new industrial or mining units is exempted from 50% of the applicable tax. Tax exemption in agricultural sector: The income derived from all activities in the field of agricultural, animal rearing, stock breeding, fish farming, bee-keeping, poultry, husbandry, hunting and fishing, seri-culture, revival of pastures and forests, horticulture is tax exempted without time limitation. Tax exemption in tourism sector: All enterprises for internal and international tourism obtained exploitation permit from the Ministry of Culture and Islamic Guidance shall enjoy an annual exemption with regard to 50% of their applicable taxes. Tax exemption of manufacturing units in less developed areas 100% of taxable income of all units located in less developed areas shall be tax exempted for a period of 10 years. 266

66 Tax exemption for export income 100% of the income derived from exportation of agricultural and industrial finished goods as well as their conversional and complementary industries, also 50% of the income earned from exportation of other non-oil goods, is tax exempted. Tax exemptions of companies quoted in the Stock Exchange All the companies listed in the Stock Exchange whose transition of shares is done by stock brokers are tax exempted equivalent to 10% of their payable tax. Moreover, for the purpose of facilitating and accelerating the attraction of foreign investments into the country, the Center for Foreign Investment Services (CFIS) was established at the premises of O.I.E.T.A.I., comprising the representatives of relevant authorities. This center acts as a focal point for the referrals by foreign investment applicants to the relevant organizations. However, with enactment of new foreign investment law (FIPPA), FDI inflows in the non-oil and gas sector, went into a wider range of industries (including service industries, chemicals and machinery) in than in previous years (Figure 6.2). For example, no FDI was recorded in the tourism, telecommunications and electricity generation and distribution industries in , while these industries accounted for over 60% of flows in non-oil and gas industries in Figure 6.2 FDI inflows to Iran and its share in total inflows to Asia and Oceania, Source: WIR 2005 (UNCTAD) The value of foreign investment approved by the OIETAI increased significantly after 2002 (Figure 6.3). Data from OIETAI include FDI as well as various types of nonequity arrangements, referred to as "indirect" investments. 267

67 Figure 6.3 Number and value of foreign investments approved under the Foreign Investment Laws of 1955 (LAPFI) and 2002 (FIPPA) in Iran Source: WIR 2005 (UNCTAD) 6.7 DETERMINANTS AND DETERRENTS OF FDI INFLOWS TO IRAN Determinants of FDI Inflows to Iran The determinants of FDI in Iran are listed in the Table 6.24 as follows: S. No. Factors Table 6.24 Internal Determinants of FDI Inflows in Iran 1. Strategic Location 2. Market Potential & Proximity 3. Labor Privileges 4. Developed Infrastructure 5. Low Utility & Production Cost 6. Abundant Natural Resources 7. Climatic Characteristics 8. Fiscal Incentive 9. Political Stability 10. New Investment Legislation 11. Signing of MIGA 12. Bilateral Agreements 13. Organization of Islamic Conference 14 Free Trade Zones Area Source: OIETAI 268