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Background and Context
Trade is an indispensable driver of economic development. This is especially true for countries that have adopted free trade policies. Almost all studies that have been conducted to examine the economic growth patterns of countries across the world show that countries with open or outward-oriented economies record higher economic growth rates than their closed economy counterparts. The European Commission advances the same line of argument by asserting that trade is beneficial to governments since it enables them to create new jobs without seeking funds from the treasury. Instead, it gives governments extra revenue that can be used for purposes of financing government activities.
This beneficial nature of trade has prompted governments across the world to open up their economies at varying levels because research shows that free trade is the driver of modern economic growth. They liberalize their economies in a bid to boost exports while at the same time attracting foreign direct investment (FDI) because these two elements of international trade are great sources of new wealth for governments and their people.
Developing, transition and emerging economies have reaped numerous benefits from inward-oriented foreign direct investment. This attribute of FDI prompts every government, including governments of developed countries, to create an ambient trading environment for foreign investors.
Foreign investors are particularly keen on countries with large populations since they provide cheap labor as well as a sizeable domestic market. Moreover, open economies with large domestic markets have the potential to experience rapid economic growth similar to that experienced by China in the last three decades. The rapid growth is facilitated by the availability of numerous investors who are willing to be part of such economies since they are assured of getting returns on their investments.
The Research Problem
Despite the availability of such information in the public domain, the Islamic Republic of Iran (Iran) attracts insignificant numbers of foreign investors. Its leadership has in the past tried to formulate trade and fiscal policies aimed at making Iran an investment-friendly country through several five-year development plans, but no major changes have occurred in its economic development patterns in the process.
Further, according to the World Population Review, as of 2013, the country had an estimated population of about 77 million. This population makes Iran one of the countries with the largest domestic markets in the world. The country also boasts of the third-largest oil reserves and second-largest natural gas reserves worldwide. These resources should make Iran a lucrative business destination that attracts individual investors and multinational companies from all over the world.
Instead, foreign investors show a general lack of interest in Iran. Its massive natural resource and human resource endowments have failed to work to the countrys advantage. In fact, the few foreign investors who operate in Iran constantly express discontent over the countrys business environment. In addition, some strategic trade partners contemplate ceasing their business activities with Iran. Considering this state of affairs, it is unlikely for new international businesses to enter Iran. It is therefore imperative to analyze Irans business environment to understand the factors that contribute to its current situation.
Purpose of the Study
Every indicator points to the idea that a country with an open economy is an attractive business destination. The proposed study therefore seeks to explore the factors behind the unfriendliness of Irans business environment to foreign investors and propose possible ways of eliminating them to open the countrys economy to foreign investors.
Justification of the Study
Irans population, like any other population in the world, has the right to enjoy decent living standards and benefit from their natural resource endowments. The Iranian government seems to be oblivious of the factors that cause investors to shun Iran as a business destination. The proposed study seeks to illuminate these factors with the hope of instigating corrective measures that will spur rapid economic growth in Iran and improve the livelihood of the Iranian people.
Literature Review
Trade, both at the domestic and international levels has proven to be an important driver of economic development. Many studies have been carried out to decipher how trade contributes to economic growth. The results are mixed and are in some cases complex in nature. However, majority of these studies concur that openness to trade significantly boosts the economic growth of a country since it leads to increased trade flows.
In addition, existing literature suggests that countries that do not play a major role in global trade record slow economic growth. There is a consensus that China did not make any significant economic progress until it opened up its economy to free trade and became part of the mainstream global trade system. As a result, many countries in the developing world are clamouring to realign their trade policies with the expectations of the global trading system in order to reap the benefits.
Trade and foreign policies are key areas of concern for a country that seeks to position itself strategically as a major player in the global trading arena. For example, Iran has in the past, rolled out several five-year development plans aimed at spurring economic growth. As part of these plans, the country overhauled its tax regime and adjusted its tariffs. In addition, it joined the World Trade Organization (WTO) in a bid to become part of the mainstream global trading system. Intriguingly, the country has largely failed to enter the mainstream global trading system.
This example calls for a closer examination of the kind of openness that a country should pursue. Another issue that begs consideration in relation to this example is the other factors that boost a countrys business attractiveness besides trade and foreign policies. India and China pose as typical examples of countries that opened up their economies to the global trade system and have since then reaped unequaled benefits.
Yet a comparison of China and Iran shows that the two share a number of similarities in terms of how their governments influence their economies. It is argued that China adopted an open economy approach to trade but foreign companies that operate in China constantly complain of unfair treatment. Their ability to access credit facilities or even raw materials is restricted in favor of locally owned companies. Similarly, in Iran, the Bonyads and the Islamic Revolutionary Guard Corps (IRGCs) enjoy a close relationship with the government. As a result, these organizations wield enormous political and economic influence such that the private sector only plays second fiddle to them.
Clearly, the example of Iran and China indicates that economic prosperity is not exclusively tied to policy issues, but also to matters such as political influence and the rule of law among other issues such as large markets, cheap labour, and trade facilitation. These issues explain the disparity between the trade situation in China and Iran. Although Iran shares most of the outlined issues with China, it fails in some crucial ones. For instance, both are members of WTO, both rank among the countries with the large domestic markets in the world, and both have made steps towards opening up their economies to global trade, yet China continues to record exceptional economic growth while Iran does not.
Investors are keen on the political stability of a country as well as the extent of government participation in the economy. Further, they pay particular attention to the strategic positioning of a country geographically and economically. The strategic positioning of a country determines its ability to facilitate trade in a region or act as a gateway to other countries in the region.
The relationship between a country and the international community also turns out to be pivotal in attracting investors. Countries that have been sanctioned by the international community or global organizations such as the UN are largely shunned by investors. The consequences of continued business with such countries often turn out to be more damaging than ceasing to trade with them. For instance, many countries have been forced to sever their business ties with Iran because continuing to trade with it would have led to the loss of significant markets in the US and Europe. In addition, a politically or economically sanctioned country cannot serve as a gateway to adjacent markets.
As it is, open trade is important but it carries with it numerous requirements that need to be met before it can significantly benefit any country. Countries looking to benefit from the open economy strategy have to be prepared to forego some crucial privileges and autonomies in order to be accepted as members of the global trading system.
Theoretical Framework
The importance of trade to the global economy has inspired numerous research studies on prevailing trends and models that can lead to exceptional performance under given conditions. As a result, many of theories that explain given trade patterns and predict possible future patterns have been postulated.
The proposed study intends to analyse the foreign investment situation in Iran under the auspices of the International Production Theory. John H. Dunning propounded this theory in the year 1980. It is considered relevant to this study since it elaborately explains the pertinent issues that influence a firms decision to enter a foreign market and the factors that determine whether it enters the market or not.
It is arguable that many international firms have contemplated entering the Iranian market through international production but have failed to do so due to the prohibiting business situation and some international factors that are directly linked to the business. In other words, the costs associated with entering the Iranian market prompted them to either continue trading in their home countries or invest in countries other than Iran. The International Production Theory examines such issues at length. Hence, it can go a long way in helping decipher the factors that repel foreign investors from Iran.
Methodology
The proposed study is intended to make an inquiry into the issues that repel foreign investors from Iran. By virtue of its purpose, the study shall be investigative in nature since it seeks to bring to light issues that may seem obvious to some but are elusive to others.
The scope of the study further dictates the nature of data that will be available to the researcher. The issue of foreign investment in Iran extends beyond the level of the researcher to obtain primary data. As a result, the study shall exclusively utilize secondary data in the form of journal articles, reports, trade statistics, and Irans policy documents to address the research problem.
Numerical data analysis is not applicable to this study. Therefore, the chosen theoretical framework shall provide a platform on which the issues revolving around Irans trading environment shall be critically analyzed to determine their consistency with conventional theory. This approach is anticipated to effectively address the research problem.
Proposed Chapter Outline
The proposed study shall be organized into five chapters. The first chapter shall introduce the study by laying a background upon which the research problem, the purpose of the study, and its significance shall build. The second chapter shall contain a review of relevant literature and a theoretical framework that shall guide the analysis of the findings. The third chapter shall focus on matters surrounding Irans business environment, that is, the findings of the study. The penultimate chapter of the study shall contain the analysis of the findings. The final chapter shall conclude with a brief discussion and give recommendations on the appropriate course of action for Iran to make itself attractive to foreign investors.
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