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Foreign direct investment in Iran (FDI) has been hindered by unfavorable or complex operating requirements and by international sanctions, although in the early 2000s the Iranian government liberalized investment regulations. Iran ranks 62nd in the World Economic Forum's 2011 analysis of the global competitiveness of 142 countries.[3][4] Iran ranked sixth globally in 2010 in attracting foreign investments.[5]
Foreign investors have concentrated their activity in a few sectors of the economy: the oil and gas industries, vehicle manufacture, copper mining, petrochemicals, foods, and pharmaceuticals. Iran absorbed US$24.3 billion of foreign investment from 1993 to 2007 (& US$34.6 billion for 485 projects from 1992 to 2009).[6][7]
In the 1990s and early 2000s, some indirect oilfield development agreements were made with foreign firms. Buyback contracts in the oil sector, for instance, were arranged in which the contractor funded all the investments, and then received remuneration from the National Iranian Oil Company (NIOC) in the form of an allocated production share, then transferred operation of the field to NIOC after a set number of years, at which time the contract was completed.
Firms from over 50 countries have invested in Iran in the past 16 years (1992–2008), with Asia and Europe receiving the largest share, as follows:[8]
| Continent of origin | Leading countries investing in Iran (1992–2008) | Number of projects | Total amount invested |
|---|---|---|---|
| Asia | United Arab Emirates (UAE), Singapore, Indonesia and Oman | 190 | $11.6 billion |
| Europe | Germany, the Netherlands, Spain, UK, Turkey, Italy and France (20 countries in total) | 253 | $10.9 billion |
| Americas | Canada, Panama, the USA and Jamaica | 7 | $1.4 billion |
| Africa | Mauritius, Liberia and South Africa | N/A | $8 billion |
| Australia | Australia | 1 | $682 million |
As of 2007, Asian entrepreneurs made the largest investments in the Islamic state by investing in 40 out of 80 projects funded by foreigners.[9][10] The largest amount of foreign investment was in the industrial sector, including food and beverage, tobacco, textiles, clothing, leather, chemical, steel and oil derivates. The figure exceeded US$8.76 billion. Water, electricity and gas sector ranked second, attracting $874.83 million. In the third place, the real estate sector absorbed more than $406 million. Investments in service, telecommunication, transportation and mines reached $193 million, $14.3 million and $14.2 million respectively. Asian countries invested $7.666 billion in various projects followed by several multinational consortia. Investments by these multinational companies exceeded $1.39 billion (in four projects). Although European entrepreneurs were involved in 34 projects, they invested only in the range of $1.2 billion in the Islamic Republic. American countries also committed $12.329 million in the country; while investments by African states registered close to $4 million.[9]
Foreign investment hit a record $10.2 billion in the Iranian year 2007 from $4.2 billion in 2005 and $2 million in 1994.[1] Net FDI inflows amounted to $901 million in 2008.[11] Iran attracted $1.6 billion in direct investments from abroad in 2008, $3 billion in 2009 (ranking sixth worldwide in terms of annual growth) and $3.6 billion in 2010 despite a general decline in FDI in a majority of other world countries .[12][13][14] Turning to "Vision 2025", the plan has set an investment target of $3.7 trillion within two decades of which $1.3 trillion should be in the form of foreign investment.[15] The EIU estimates that Iran's net FDI will rise by 100 per cent within the next four years.[16]
Among developed nations, the most active investors have been Germans, Norwegian, British, French, Japanese, Russian, South Korean, Swedish, and Swiss companies. The Swedish Svedala Industri has played a major role in developing Iran’s copper mines since the late 1990s while Tata Steel of India has been investing in the steel sector. The Kia, Nissan, Peugeot, and Renault auto companies have licensing agreements with Iranian auto manufacturers. Nestlé of Switzerland and Coca-Cola and Pepsi-Cola of the United States have joint ventures with Iranian companies. Total, Statoil, Shell, Gasprom, and Lucky Goldstar of South Korea have been active in Iran’s natural gas industry. Iran’s constitution prohibits direct concession of petroleum rights to foreign investors. Alcatel of France, MTN Group of South Africa and Siemens of Germany gained major telecommunications contracts in 2004 and 2005, respectively.[17] Further information: Global Investment in Iran - AEI.
According to United Nations Conference on Trade and Development, Iran ranked sixth globally in 2010 in attracting foreign investments.[5] According to the head of the Organisation for Investment, Economic and Technical Assistance of Iran (OIETAI), in 2008 Iran ranked 142 among 181 countries in terms of working conditions last year. Iran stands 96 in terms of business start, 165 in getting permits, 147 in employment, 147 in registering assets, 84 in getting credits, 164 in legal support for investments, 104 in tax payment, 142 in overseas trade, 56 in feasibility of contracts and 107 in bankruptcy.[18] Iran is a member of the World Bank's Multilateral Investment Guarantee Agency.[19] Iran ranks 69th out of 139 in Global Competitiveness Report.[3] Further information: Investment climate in Iran
Iran is OPEC’s second largest oil producer. It has approximately 9% of world oil reserves (some 94 billion barrels). It has the second largest reserves of natural gas in the world at some 812 trillion cubic feet. Iran also possesses enormous mineral resources, including coal, copper, iron, zinc and gold. This has spawned a number of processing industries, particularly steel. Iran is already the third largest producer of copper in the world.
Iran has made the development of non-oil exports a priority. The country has the advantage of a broad domestic industrial base, an educated and motivated workforce, cheap labor and energy resources and geographical location, which gives it access to an estimated population of some 300 million people in Caspian markets, Persian Gulf states and countries further east.[20] Further information: Potential Export Comparative Advantages of Industry & Mine
Generally speaking, Iran has two types of laws concerning foreign companies. The first are laws that address issues concerning foreign companies directly such as the Foreign Investment Promotion and Protection Act (FIPPA) and the second are general laws of which certain articles or by-laws address foreign companies, for instance the Taxation Law and the Labor Law.
General laws and regulations regarding foreign business in Iran could be regrouped under the following categories:[21]
According to the Civil Code, foreign nationals will, subject to the existence of a treaty on reciprocity, enjoy the same rights and privileges of Iranians. The companies formed by such foreign nationals will be of Iranian nationality and subject to the same laws which regulate the activities of Iranian companies.
Foreign nationals can, in the framework of the Commercial Code and subject to the observance of the relevant procedures, form and register companies in Iran. Iran’s Commercial Code does not differentiate between Iranian and foreign stock holders of Iranian companies. In other words, there is no restriction regarding the nationality of those who want to establish companies in Iran. In this context, foreign exchange restrictions are equally applied to Iranian and foreign investors. Such companies, however, do not enjoy the privileges set out in FIPPA.
Provisions of the 2002 Act entitled Foreign Investment Promotion and Protection Act (FIPPA) include:[21]
For the first time, project financing schemes such as buy back agreements and BOT projects (only under an operator status) are specifically covered under the foreign investment law.[22] Under the FIPPA, any foreign natural or legal person importing capital in Iran will enjoy the benefits and privileges of this law as long as:
The Organisation for Investment, Economic and Technical Assistance of Iran (OIETAI) is responsible for receiving and processing all foreign investment applications. OIETAI is also responsible for approving overseas Iranian investments. In other words, the organisation is in charge of consolidating and implementing two-way foreign investment flows.
First and foremost, it is crucial to realize that Iranian authorities insist on a long-term commitment and a transfer of technology as a requisite for getting a share in the market. Foreign companies are therefore advised to adopt a medium- to long-term strategy for the Iranian market. Iran will almost never honor the interests of a company that does not show long-term commitment. Tenders are strictly required for government contracts for purchasing or projects. These are rarely competitive. Breaking up contracts into smaller parts is a common practice to try to incorporate at least 30% of the contract's value in local capability and also to negotiate on specific prices.
Currently there are three main routes that a foreign company can follow to establish a long-term presence in Iran:
One possible strategy is for the foreign company to enter into a joint-venture agreement with a public or private Iranian partner. The existing level of technology and infrastructure makes many Iranian companies suitable for expansion and development in conjunction with foreign companies. Many Iranian companies, especially those in the private sector, are currently actively seeking joint-venture partners both to fill their technological as well as management gaps. Others are looking for a revival of their company through foreign capital.
Should a company decide to adopt this approach to the market, it is advisable to look for products and services that have both domestic demand as well as regional export potential. If a joint-venture company can earn hard currency through export of its goods, it will not be too dependent on the Iranian banking system for the repatriation of profits and dividends. It should be noted that some joint ventures consist purely of the transfer of technology to Iran by the foreign partner without any capital commitment. Since Iranian authorities are very keen on the introduction of modern technologies, this path can prove very constructive. In August 2010, the 25% ceiling set for joint venture companies in enjoying facilities from the foreign exchange reserve account has been eliminated.[23] Industry and mines, agriculture, transport, services (such as tourism), IT and the export of goods and services are the sectors authorized to enjoy the new facilities from the Foreign Exchange Reserve Account.[24]
There are seven types of juridical entity or company which can be established under the Iranian Commercial Code. From among all these different types, Joint Stock Company, in which the capital is divided by shares, is the most common and acceptable type of company which can be recommended to foreign investors. For legal and tax purposes, opening a representative office in Iran, by itself, is not considered foreign direct investment. Further information, see the document titled "Establishing a Joint Stock Company in Iran".
In February 2007 the government unveiled its new buyback-contract formula, which significantly extended the length of the contracts to as long as 20 years.[25] The buy-back scheme is a formula used by the Iranian government to attract foreign investment. Following the end of the Iran-Iraq war in 1988, Iran faced a major problem: it needed foreign investment if it did not want to lose its vital income from the oil and gas industry, yet its revolutionary ideology and Constitution forbid granting “concessions”. A compromise solution was found in 1989 with the First Five-Year Economic, Social and Cultural Development Plan. Under Note 29 of the said plan, the Iranian government is allowed to employ “buybacks” in its effort to meet the industrial and mineral needs in connection with exports, production and investment. Put in laymen terms, a buy-back transaction is a method of trade where plants, machinery, production equipment and technology is supplied (by a domestic or foreign private firm), in exchange for the goods that will be produced directly or indirectly by means of such facilities.[11]
Under this scheme, the foreign partner that makes the initial investment can repatriate the return on the investment (at a pre-agreed fixed rate) through goods and services produced by the project. While many foreign companies believe that this method is a mere financing instrument for Iran, it is more accurate to say that it is a compromise formula for foreign investment in the short-run. In the medium to longterm, more appropriate laws and regulations will probably replace the buy-back scheme. In other words, once the constitutional concerns have been dealt with, the foreign partners of buy-back agreements can take over the projects that they are involved in, or they can enter into a joint venture with an Iranian partner.[11] Further information: Buy-backs in Iran's oil industry
Recent regulations have introduced the Build-Operate-Transfer (BOT) scheme for Iranian projects. This is a rather new possibility in the Iranian market. In this scheme, the foreign partner invests in one project, which is then operated for a certain period of time by the foreign investor before it is fully transferred to the Iranian government. Iranian authorities are showing some flexibility regarding the BOT, which could potentially pave the way for more foreign investment in the market.[11]
Free-trade (FTZ) and special economic zones (SEZ) have been established to provide additional investment incentives such as:[21]
As of January 2010, there were six free trade zones (FTZ) and 16 special economic zones (SEZ) in Iran.[26] More FTZ and SEZ are planned in Iran.[27]
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