Negotiating Iran: Paving the Way for Foreign Investment
For decades, Iran has largely gone it alone in developing its industries. If there were a global economic self-sufficiency index, Iran would be right at the top. This self-sufficiency, although impressive to the outside world, has nonetheless encouraged practices and processes that are inconsistent with global norms. As Iran and the P5+1 hammer out a nuclear deal the Islamic Republic contemplates a post-sanctions environment which will undoubtedly call for a revision of the country's economic and development strategies. Crucial to this transition will be a strategy to attract more foreign direct investment.
Foreign investors have done their homework on identifying both the unprecedented investment opportunities of a post-sanctions Iran as well as the obstacles and fundamental challenges. Given the Islamic Republic’s distinct profile and potential for growth, Iran is poised to become the next frontier market to be developed. But more homework will need to be done on Iran in order for investors to gain FDI contracts.
Although not unique to Iran, three key aspects of FDI negotiations are worth noting for investors: the capabilities and character of Iranian industries, the Islamic Republic’s hierarchy of values and the country’s overall post-sanctions economic and development strategies. Each of these aspects needs to be understood in depth and in relation to the others in order for foreign investors to gain favorable FDI contracts.
Below is a broad understanding of the three aspects of FDI negotiations specific to Iran that will be explored in greater detail in subsequent articles.
Capabilities and Characteristics of Iranian Industries
Iranian industries yield some impressive production numbers. For example, despite suffering under sanctions, Iran’s auto industry will produce 1.1 million cars in the current Iranian year which ends on March 21, 2015; up from a low of 737,000 in 2013 and nearly at the level of 1.6 million in 2011, when the EU introduced new sanctions. Save the inclusion of some components like engines and select electronics, what is significant is that this level of production in the auto industry was achieved without the benefit of value added exports afforded through a broader global value chain.
But this achievement is a double-edged sword. The vast majority of cars produced were for domestic consumption rather than for export. Moreover, decades of working largely outside of the global economy has bred production techniques and practices that might be unfamiliar to the network of global value chains in both Europe and Asia.
Consequently, the practices, techniques and overall ways of doing doing business for a variety of Iranian industries fall short of global norms (This situation is not unlike the policies of Import substitution industrialization popular in Latin American economies in the 1970s and 1980s). Before getting to the negotiating table, foreign investors will need to do their homework on not just the business opportunity but also the character and level of variance of business practices of their respective industries in Iran. For example, having been accustomed to working with a domestic set of suppliers, Iranian manufacturers will need to get accustomed to working with an international set of suppliers. Once the capabilities and characteristics of Iranian industries are understood, investors will be in a better position to offer the knowledge and technology transfer that the Islamic Republic desires in exchange for contracts.
Iran’s Hierarchy of Values
Having developed an industrial base to the level it has, Iran’s hierarchy of values brought to FDI negotiations will differ from that of other lesser developed countries. The likelihood of a walkout by Iranian officials from the negotiation room might be high with the rationale being the Islamic Republic could go without the investment and simply continue to muddle through as they have been. Hence, foreign investors need to have an adequate understanding of the Iran’s hierarchy of values. For example, Iranian manufacturers may prefer to acquire new capital for their factories rather than adopt new manufacturing techniques.
A lack of understanding also seems to be evident in the ongoing negotiations regarding Iran’s nuclear program which is currently on its second months-long extension. Foreign investors will need to have done their homework on understanding what specific values Iranian officials hold relative to them and offer a package of value added technology and knowledge transfers that reflect this understanding. In sum, Iranian decision makers more than the leaders of other lesser developed countries put more weight on outsiders understanding their hierarchy of values reasoning that the Islamic Republic could almost always return to an ‘economy of resistance’.
Post-Sanctions Economic and Development Strategies
As it looks now, all signs lead to a gradual lifting of sanctions on Iran which will in turn steadily open Iran to the global economy over years if not a decade or more. Iranian decision makers will need to overhaul the country’s economic and development strategies in order to accommodate the rapid increase in FDI inflows as well as the country’s broader integration into the global economy. The process will inevitably appear shambolic, haphazard and/or incongruent and occur at a seemingly breakneck speed. But if the foreign investor has done their homework knowing which knowledge and technology transfers Iran seeks at which phase and has a firm grasp of the hierarchy of values of Iranian decision makers vis-a-vis their own, they are more likely to be seen as part and parcel to Iran’s economic and development strategies and consequently granted FDI contracts. Finally, given the Islamic Republic’s penchant to go it alone if need be, first-mover advantage could be especially important and lucrative for foreign investors that are granted contracts.
Negotiations are about knowing what the other side wants in order to reach a favorable agreement. They tend to go smoothly with both sides contributing positively to the other side so as long as there is a thorough understanding of the other. If foreign investors do their homework the intricacies on the role of FDI in Iran’s post-sanctions economic and development strategies coupled with an understanding of the hierarchy of values of Iranian decision makers they can gain an advantage at the negotiating table.
Photo Credit: Financial Tribune