Challenges of foreign investment in Iran
Challenges of foreign investment in Iran
Today, foreign direct investment has become one of the major elements in linking the domestic economies of countries, especially developing societies, with the global economy and as a factor for the transfer of capital, technology, expertise and management in strengthening their presence in the global economy and trade. Has played a significant role. This fact has intensified economic competition to take advantage of opportunities to attract foreign investment in order to improve the position of countries in the global economy.
In this regard, the Islamic Republic of Iran has taken several measures to diversify the economy and active presence in the global economy, and in this regard, the issue of foreign investment is considered as one of the effective tools of this presence.
However, in recent years, Iran has not been able to succeed in this important and find a suitable position among the host countries to foreign direct investment. The Deputy Minister of Foreign Policy and International Relations of the Strategic Research Center held a roundtable discussion with the aim of examining the challenges and obstacles of foreign direct investment in Iran, which will be summarized.
Foreign investment nature and types:
The flow of foreign investment today is an important indicator of the process of globalization of the economy. Apart from the importance of this phenomenon in the dynamics of the global capitalist system, many developing countries that suffer from a lack of domestic financial resources, find the absorption and use of these external resources necessary for the continuation of their economic development programs. These financial resources are considered today in two ways:
1- Foreign indirect investment:
These types of investments rely on borrowing, borrowing, buying bonds, bonds, and other long-term receivables from governments, international financial institutions, and private financial institutions. The use of this type of financial resources was common in many developing countries before the 1980s, which for various reasons, including high interest rates, imposing programs and policies of lending authorities and the lack of optimal use of these resources, economic problems and crises. It brought with it an abundance, including a debt crisis. The effects of this crisis are still evident in the economic structure of many developing countries.
The general characteristics of this type of investment are:
Spending 70% of the loan and credit to buy goods or services from the lending country, or in their opinion, otherwise the institutions that insure foreign loans are not allowed to insure it. This in itself creates limitations and dependencies.
Repayment of principal and interest on the loan by the borrowing government. This creates a commitment for the government, regardless of the effectiveness of the capital.
– High cost of insurance; Countries at higher risk also have higher insurance costs.
The use of these resources has been allowed due to the political and economic conditions of Iran during the first and second programs.
2- Foreign direct investment:
This type of investment is the most effective and real type of foreign investment, which is in fact one of the cycles of the global economy. In this type of foreign investors are present independently or in partnership in the production and manufacture of goods, extraction of raw materials and other stages of economic activity in the host country. This method of investing has several advantages:
– The use of these resources does not have the disadvantages of indirect investment such as guaranteeing profits, government commitment and consequently the debt crisis.
– In this way. Advanced technologies and management systems are brought into the host country along with capital to increase investors’ profits.
According to the latest statistics, developing countries attracted $ 240 billion in 2000 out of a total of $ 1271 billion in foreign direct investment worldwide. Southeast Asia, South and Pacific with $ 137 billion and Africa with $ 8 billion had the lowest foreign investment.
According to UNCTAD estimates, foreign direct investment fell to $ 760 billion in 2001 due to the global economic downturn and the events of September 11, down 49 percent ($ 510 billion) for developed countries and 6 percent for developing countries. Percent ($ 225 billion) is estimated.
Iran’s obligation to attract foreign investment:
Foreign investment due to lack of domestic financial resources or its inefficiency in developing countries is the driving force of economic and social development of these societies. The current state of Iran’s economy has also made it necessary to attract foreign financial resources. Iran’s first requirement in attracting these resources is due to the lack of domestic financial resources.
At the beginning of the Third Development Plan, there were about 3 million unemployed in the country, indicating a 16 percent annual growth rate of unemployment. If the trend that continued during the first and second five-year plans continues, by the end of the third plan, the unemployment rate will reach 16.5 percent, which is equal to eight million unemployed in the country. In addition, living standards are declining to such an extent that Iran ranks last among the countries in the region in terms of welfare. This situation does not have good consequences for the country.
The Third Plan law provides for the creation of 765,000 annual jobs to reduce the unemployment rate to 10 percent at the end of the plan. This requires a 6% investment growth. This annual investment is equal to 12 thousand billion tomans or 145 billion dollars. Since the government’s annual oil revenue is about the same, it is clear that the government is not capable of such an investment. The domestic private sector is also unable to perform such a function for various reasons.
Therefore, in a situation where domestic financial resources are unable to feed economic and social development programs, the use of external financial resources, which is also provided for in the law of the Third Plan, is necessary.
Another requirement of Iran in attracting foreign financial resources is the urgent need for the introduction of advanced technologies and management systems. Attracting foreign investment naturally provides the ground for the transfer of state-of-the-art technologies and efficient management techniques to the country. Undoubtedly, Iran’s successful and active presence in the field of world economy and trade requires the coordination of economic and industrial structures with modern technologies and new management techniques. In addition to the above, attracting a higher percentage of foreign investment indicates the improvement of Iran’s economic credibility and, as a result, the promotion of Iran’s position in the world economy and trade.
Barriers to attracting foreign direct investment in Iran
Despite difficult economic conditions and the urgent need for foreign direct investment, Iran has not been successful in attracting these financial resources. According to reports published between 1996 and 2000, Iran is ranked 59th among 60 countries accepting foreign direct investment and seventh among eight countries in the region. This is important due to the following issues and obstacles:
1- Economic weakness:
Investment is generally made both domestically and externally in a place where there is security. Economic security basically refers to the property rights of individuals and the guarantee of the implementation of contracts. Individual property rights mean private property rights.
2- Granting incorrect concessions and facilities to investors:
One of the common mistakes in Iran is to consider giving concessions and facilities to investors instead of guaranteeing contracts in the framework of creating investment security. This has not only not helped investment in the country, but has also caused corruption and diverted investment. That is, people who have not entered the investment field and have acted solely by taking advantage of the economic conditions of the economy and abusing the privileges and facilities granted. Providing cheap currency, bank facilities and various exemptions pave the way for rent creation. This has disrupted the investment and production process.
3. Extensive bureaucracy:
The biggest cause of insecurity in the Iranian economy in general and investment in particular is the bureaucracy of the government. The main reason for this is cumbersome regulations and the existence of similar and parallel institutions. The rule of law is inconsistent with the implementation of many regulations and by-laws. In fact, the rules are not enforced when they increase. Too much regulation means getting out of the rule of law, freeing up certain wills, and increasing the power of bureaucrats. In Iran, what has existed has been a parallel, cumbersome, and sometimes contradictory rule of law until the rule of law.
4- Institutional and legal problems
A – Labor Law:
One of the most important factors of inefficiency and investment insecurity is the labor law. This law is based on the premise that the employer wants to exploit the worker and the employee, and the labor law prevents this. This has led to mistrust between workers and employers and insecurity of investment and production. Labor law should be based on the alignment of the interests of the worker and the employer and not on the conflict of interests.
B- Social security
Iran Social Security has one of the highest rates with the lowest service line. This social institution absorbs 30% of the employer’s profit and labor rights. This increases production costs by 30% and has no economic justification.
C- Tax law
The tax rate in Iran is very high in production and investment affairs, for example, if the investment has an income of more than ten million tomans, it must pay 50% tax. This has made Iran’s tax law one of the strangest tax laws. Recently, however, the Ministry of Economy and Finance is seeking to reform it.
Requirements for attracting foreign direct investment
As mentioned, the above issues and problems have prevented the effective and serious presence of Iran in the dynamic flow of foreign direct investment in recent years. Apart from political issues, this has increased the risk of investing in Iran, and foreign investors have so far shown no willingness to operate in Iran in the usual way. Therefore, in a situation where the economic structure of Iran is in dire need of foreign financial resources and attracting advanced technologies, it is necessary to provide the following conditions and contexts:
1- Creating domestic belief to attract foreign investment
The most important condition for attracting foreign investment is the public belief in the efficiency and usefulness of these resources in the process of economic development of the country. As long as the idea that the presence of foreign investment dominates the country prevails, these resources will not be absorbed.
The public belief of the political elites must understand the current realities of the world and the country and conclude that attracting foreign investment is necessary for the development of the country and its life in the global economy. This does not mean that foreign domination should be accepted in the name of foreign investment, but like other countries, a framework should be designed to attract foreign capital and not create domination.
2- Accepting the scientific procedures experienced in the world
Iran is currently living in a self-invented outcome. The country’s decision-making system must be the result of expertise based on the experience of others and adapting to our own political and economic situation.
3- Useful and constructive interventions of the government in providing grounds and infrastructures for attracting foreign investment:
These interventions are manifested in the following cases
– Creating the necessary economic security
– Strengthen the private sector by respecting and guaranteeing individual and private property
– Guaranteeing contracts and economic activities by passing transparent and efficient laws and not granting unnecessary concessions and facilities to investment sectors to prevent rent-seeking and rent-seeking.
4- Removing serious and fast barriers to foreign investment
Today, speed in identifying obstacles and problems and solving them is vital. In 1987, investment barriers were similar in 33 countries. Over the past 13 years, the pace of reform has been varied among these countries. Among these, the lowest speed is related to Iran and Syria. The highest speed of it is China. Also, from 1991 to 2000, 1185 laws were passed in different countries to attract foreign investment. In 2000, 65 countries changed their law to raise capital. This process has been very slow in Iran.
5- Reducing political risk
Reducing political risk should be considered as much as reducing economic risk in attracting foreign direct investment. Investors naturally rely on their respective governments for a secure presence in a foreign country. In this situation, if the bilateral relations between the host government and the investor government are good and at the same time the host government has international credibility, this will be very effective in gaining the trust and confidence of the foreign investor to operate in the host country. Therefore, the country’s diplomatic apparatus can play an important role by reliably regulating bilateral relations and raising the country’s political position in this field.
6- Specific planning for proper use of foreign investment
Before accepting foreign investment, a clear plan must be presented for how to use these resources. The program should be based on prioritizing the use of foreign investment, ie compensation of financial resources, absorption of modern technologies or efficient management systems, or all three at the same time. At the same time, economic sectors or industries that are more profitable for the country in terms of generating more foreign exchange earnings, increasing employment and helping to successfully enter global markets, should be given priority in attracting foreign investment.
7- Linking foreign investments with the private sector
Foreign investment is attracted in the true sense of the word when it connects with the private sector of the host country and engages in joint activities. Therefore, the requirement for foreign investment is the existence of a strong private sector.
The totality of the discussions presented in this roundtable indicates the inefficiency of Iran’s decision-making structure in attracting foreign direct investment. Therefore, in a situation where the economic structure of Iran is in dire need of these financial resources, the government has an important task and function to provide the grounds for attracting these funds. This task is generally summarized in creating economic security and in other words reducing the risk of foreign direct investment. Economic security also requires strengthening and activating the private sector, on the one hand, and ensuring the implementation of contracts through reducing bureaucracy and establishing the rule of law.
In this regard, granting any concessions with special facilities to certain sectors of domestic and foreign investment to encourage them to operate is prohibited because it is important to create rent and bribery and thus divert the process of foreign direct investment is required. . The only solution in this regard is to deregulate and establish the rule of law and respect for private property and guarantee the implementation of contracts.
Another noteworthy point is that although the reform of the foreign investment law has been considered a welcome move in recent months, it is firstly very slow and slow, and secondly the mere existence of this law, which is naturally general, is not enough to attract foreign direct investment. Undoubtedly, the process of attracting foreign direct investment requires the actual provision of infrastructure, the formulation, approval and amendment of laws in various fields, including labor, tax, insurance, dispute resolution, mode of operation, reinvestment, transfer of profits, and so on. Be.