Foreign Direct Investment in Iran

Foreign Direct Investment in Iran

Foreign Direct Investment in Iran has been hindered by unfavorable or complex operating requirements and by international sanctions, although in the early 2000s the Iranian government liberalized investment regulations. In the early 2000s, 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 24.3 billion dollars of foreign investment from Iranian calendar year 1372 (1993) to 2007. [ [ Iran attracted $24.3b foreign capital in 16 years] Payvand's Iran News] Foreign transactions with Iran amounted to $150 billion between 2000 and 2007 worth of major contracts and both private and government lines of credit. [ AEI - Global Investment in Iran] ] Iran has $62 billion worth of assets held abroad (2007). [ [ Iran’s foreign assets surpass $62b ] ]

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.

Foreign investment hit a record $10.2 billion in the Iranian year to 2007 from $4.2 billion in 2005 and $2 million in 1994. Asian entrepreneurs headed by China made the largest investments in the Islamic state by investing in 40 out of 80 projects funded by foreigners.cite web|url= |title=Foreign Investment At Record Level |accessdate= |accessyear= |author= |date=April 10 2007 |year=2007 |month=April |publisher=Iran Daily ] [ [ Money Magazine - Iran Is Open For Business] ] 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 $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 and transportation as well as 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 four million dollars. According to the American Enterprise Institute's estimates, 2007 promises to be an even richer year for investment in the Islamic Republic. 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. [ [ Iran Daily - Domestic Economy - 07/02/07 ] ]

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. [ [ COUNTRY PROFILE: IRAN {March 2006)] Library of Congress - Federal Research Division]

Laws concerning foreign companies

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.


Following months of dispute between the Parliament and Guardian Council, the Expediency Council ratified the final version of a new foreign investment law in Iran coined as the Foreign Investment Promotion and Protection Act (“FIPPA”) on 26 May 2002.Under FIPPA and similar to the previous foreign investment law, commercial risks are not covered but any expropriation or nationalization will be compensated by the government. In some cases, if an act of the government disrupts the business activity, the government will be under obligation to make payments for any loan installments that are due on behalf of the project company. The law also permits more options for repatriation of profits in hard currency combined with a broader definition of foreign investment. 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.Under the FIPPA, any foreign natural or legal person – including Iranian expatriates -- importing capital in Iran will enjoy the benefits and privileges of this law as long as:

*The investment leads to economic growth, promotes technology, promotes quality of products, increases employment opportunities, increases exports and entering the international markets.

*The investment does not jeopardize national security and public interests or harm the environment or interrupt national economy or disrupt products of domestic investments.

*The investment does not involve the granting of any special rights resulting into a monopoly.

*The value ratio of goods and services produced by aggregate of foreign investments does not exceed 25% in each economic sector and in each economic branch shall not exceed 35%. FIPPA will be applicable based on the nationality of the Foreign Capital as opposed to the investor. As long as the capital comes from foreign sources, any one importing it will be eligible for FIPPA protection including Iranians residing in Iran or abroad.

Potential Approaches to the Market

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 and 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.

Joint Ventures

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.


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.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.

Build-operate-Transfer (BOT)

This is a rather new possibility in the Iranian market. Recent regulations have also introduced the Build-Operate-Transfer (BOT) scheme for Iranian projects. 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.

ee also

*Economy of Iran
**Labour and tax laws in Iran
**Next eleven (Economic development perspective for Iran by Goldman Sachs)
*Environmental issues in Iran
*List of Major Iranian Companies
**Privatization in Iran
***Tehran Stock Exchange
*Government of Iran - Links to Iranian Ministries and Affiliated Governmental Agencies
*Iranian citizens abroad
*Sanctions against Iran
*wikitravel|Iran - information on business etiquette in Iran
*Select FDI projects in Iran:
**Asalouyeh (oil/gas sector),
**Flower of the East Hotel (tourism & real estate development)
*Free Trade Zones:
**Kish Island,
**Chabahar Free Trade-Industrial Zone
*Iran International Exhibitions Company


External links

* [ Ministry of Economic and Finance Affairs of Iran] - Information on the Foreign Investment Promotion and Protection Act (FIPPA) and Taxes.
* [ High Council of Iran Free Trade-Industrial Zone]
* [ Golbal Investment in Iran with Interactive maps] - American Enterprise Institute
* [] - Information about FDI in Iran from the World Bank.
* [ UNCTAD Fact Sheet] - Iran

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