Foreign Direct Investment (FDI) in Iran Lags Peer Countries
On paper, Iran is an excellent investment opportunity. It is one of the few countries to combine a large, youthful, and educated population with a diversified economy that benefits from the export revenues of a large oil and gas industry. Based on these characteristics, it would be reasonable to expect that Iran would be among the most popular destinations for foreign direct investment (FDI). But when analysing data compiled by the United Nations Conference on Trade and Development (UNCTAD), it becomes clear that Iran is receiving less FDI than might be expected for a country of its size and economic potential.
Leading economic publications in Iran have identified low levels of investment, and a related problem of capital flight, as among the major economic challenges facing the country. Investment has declined 6.8 percent annual since 2011, the year before the imposition of strict financial and oil sanctions on Iran. To reserve this trend, Iran will need to attract more foreign investment, and that means increasing its share of global FDI to levels on par with those of its peer countries.
Iran was the first among its Middle Eastern peers to attract significant levels of foreign investment in the early 2000s. Iran’s share of global FDI peaked at 0.6 percent in 2003. But from that point on, Iran fell behind the likes of Turkey, Saudi Arabia, and the United Arab Emirates as a destination for global capital. There was a small rise in foreign direct investment in Iran beginning in 2008, spurred in part by the opportunities presented in growing bilateral trade with China. But by 2013, after international sanctions pushed Iran into a recession and made most investments off limits, Iran’s total share fell to just 0.10 percent of global FDI in 2015. Some additional growth in FDI inflows did take place following the lifting of international sanctions in 2016, but their reimposition in 2018 put an end to the rebound.
By analysing Iran’s share of global FDI in this way, two things become clear. First, this analysis helps explain the divergent economic fortunes between Iran and the likes of Turkey, Saudi Arabia, and the United Arab Emirates. Iran needs more foreign investment to catch up to peer countries and to upgrade physical infrastructure, revitalise manufacturing, and introduce new technologies. Second, the obvious underinvestment in Iran underpins the opportunity for those investors who do decide to invest in the country—assets are relatively inexpensive.
Iranian policymakers need to do more to make Iran a more attractive destination for foreign investors and the lifting of US sanctions will be key. In a speech given during the 2016 Europe-Iran Forum, a conference at which Serkland Invest was also represented, UNCTAD Deputy Secretary General Joakim Reiter explained that “securing the benefits of FDI… depend[s] on the capacity of the local economy to absorb [the investment].” Reiter proposed three steps for Iran policymakers and economic operators aiming to improve the investment climate: define clear objectives, align policies with those objectives, and strengthen institutions.
Such reforms will take time and Iran’s share of global FDI will not rise significantly until they are completed. But in the interim, Iran’s relative levels of underinvestment represent an opportunity that most of the world has passed up.
Photo: Kromotech