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International Journal of Management and Humanity Sciences. Vol., 4 (1), 4394-4400, 2015
Available online at http://www.ijmhsjournal.com
ISSN 2322-424X©2015
Factors Affecting Foreign Direct Investment in Iran
1
2
Esmaeil Mazroui Nasarabadi, and Majid Pornour*
1- Ph.D. in management
2- M.A in management
*Corresponding author Email: [email protected]
Abstract
With the rapid advancement of technology and the consequent enlargement of the
advanced economies and striking distance of the developing countries, most of these
countries to boost heading to the economy, create employment and to attain the
sustainable developed economic, they are faced with the problem of shortage
of invest their capital. Shortage of foreign exchange earnings due to absence or nonequity exports an unfair exchange rate, often to the detriment of commodity exporters
is changing. Population growth in developing countries is multitude factor which
invested sources in such countries, including our beloved country Iran, is quite
limited.
In this paper, with due attention to importance of direct foreign investment in
developing countries, including Iran, we planned a brief explanation with definitions,
resources, benefits and various factors affecting foreign investment in our country,
Iran, and challenges for attracting direct foreign investment from different aspects
will be investigated.
Keywords: Foreign Direct Investment, Employment, Economic Growth, Attracting
Introduction
In this article we have tried to investigate all the factors, impacts and threats at attracting foreign
investment which may be placed benefit or detriment of economy of the host country.
To purely economic reasons, to attract foreign direct investment in such a way that lack of proper planning
and lack of proper financial structure makes the hitting and severe damage to the economy of not be so
strong Iran, Because the laws and half baked financial structure of the financial system in a way that Foreign
investors because of extensive experience in investing in different countries, they can see the flaws in the
financial system and regulatory And ultimately with abuse of it leads harm the country and their profits.
The research literature
Definition of Foreign Direct Investment (FDI)
There are various definitions of FDI, but the most common definition is related to United Nations
Conference on Trade and Development (UNCTAD). Based on this definition, FDI is involving investments
that guarantee long-term relationship and reflects control of continuing benefit of the person or legal person
that are resident in a country outside of the home investor. In this type of investment, the investor buys the
stock unit and their ownership is owned and it can be indefinite. Also, to allow the sale of goods and
produced services within and outside are given to investors.
Types of Foreign Investment
Foreign investment in the host country is usually done in one of the following forms:
 Commercial loans: bank loans to corporations or foreign governments.
 Official flows: including development aid from developed countries to developing countries.
 Foreign direct investment: there is international investment in which a person or legal person who
established in a country, firm's shares and permanent interest in the other country is allocated.
 Foreign indirect investment or foreign investment in a financial basket: involving investments a person or
legal person who resident in a country and invest in securities of another country. The purpose of this type
of investment, to obtain maximum profit through the efficient allocation of capital in an international cases,
Intl. J. Manag. Human. Sci. Vol., 4 (1), 4394-4400, 2015
such foreign investment only include those investment which provided by person or foreign legal person in
securities and only in order to make a profit through the purchase and sale of these securities are carried.
History of Foreign Investment in Iran
Although Baron Julius Reuter was not the only person who wants to trade to Iran, but he undoubtedly was
named the first foreign investor in Iran's economy. But a few years later, he succeeded in obtaining the
necessary permits for the establishment of the Imperial Bank of Iran.
Development of foreign trade in the late thirteenth century and early fourteenth century AD, the difficulties
West’s business challenges in the areas of banking and monetary transactions over, And a willingness of
north and south neighbors deal with Iran's trading cause banks, including Bank of New East (1925), the
Imperial Bank of Persia (1926) and State Bank of Iran (1926) to be established.
Years later, in the throes of intense competition, Britain, Russia and some other European countries, a
contract oil rated "Darcy" was signed with another commercialized English, subsequent Iranian government
unilaterally accept another contracts in which economic and political history of Iran left bad reputation.
Fisheries agreements and conventions referred to the North and a few other investment and contracts
imposed by government’s dominant which was signed on strategic resource, bring unpleasant subjective
experience of foreign investment. After approval and registration of corporate law in 1930 and commercial
law in 1932, for the first time, field was provided for foreign nationals to attract private capital.
Entry of foreign capital after the Revolution
Revolution in Iran in 1978, the general trend of domestic and foreign investment has changed completely
negative.
The government's approach to the state's economy and its subsequent nationalization of industries and
banks, and overall unstable political situation in the early60, foreign investors away from the spotlight, and
eventually Iraq War began and poured cold water on the Fire extinguisher ball of Iran’s economy.
Act II's economic development and how the Free Zones Act In attracting foreign investment, especially in
the period after the revolution, was very impressive So that from 1993 to 1998 more than 868 million dollars
in foreign investment enter to the country .During this period, the largest share of foreign investment in the
economy of $868 million, is dedicated to Koreans which 21.62% of this amount is allocated to them. After
South Korea, United Arab Emirate 11.51 % and France 10.52 % are on the next orders.
Iranian government to amend the Attraction and Protection of Foreign Investment 45-year-old Law and
supported by all relevant agencies was passed invest in Iran barriers ruined. It seems that in recent years
the government was successful in eliminate the subjectivity of historical about investment and it`s
acceptance.
Foreign investment in the country and the world:
Proved foreign investment in Iran in 2007 at $ 754 million and ranks 133 among 141 countries in terms of
attracting foreign investment has increased.
Also, of the total12billion and$ 90 million for the Iranian Foreign Investment Act in 2007, only 638million
and138 thousand dollars was realized. According to the Organization for Investment Economic and
Technical Assistance, realized foreign investment in Iran in 2005, totaled 915 million dollars, 317 million
dollars in 2006 and in 2007 amounted to754 million dollars.
United Nations Conference on Trade and Development Statistics show that over the past 18 years
(Since1990till now) Iran managed to attract a total of 5.29 billion dollars. At the same time, Turkey could be$
145 billion in direct foreign investment. In this respect, Turkey ranks first and Iran is in ninth place among
the14 countries in the Middle East region. Saudi Arabia, Turkey and the United Arabic Emirates were able to
absorb respectively 24, 22 and13 billion dollars in foreign direct investment in 2007 and report from first to
third. The total foreign direct investment in the Middle East in 2007totaled$ 71 billion of that amount in the
range of $754 million was awarded to Iran.
According to statistics from 1833 rule has attracted billions of dollars of foreign direct investment in 2007,
the share of the United States of America, Great Britain, France, Canada and the Netherlands to attract
capital to the extent of $236billion, 223billion,157billion,108billion and$ 99 billion respectively.
Research findings
Relationship between FDI and economic growth
Foreign direct investment in transmission capacity of mother country to the host country cause economic
growth. In addition, FDI is often associated with advanced technology, and with this matter organization and
top management enter to the host country. Thus FDI as an engine of growth in less developed countries is
recognized.
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This article on a study by Brnzytin, Gurguryo and Lee(1998) has been mentioned. They believe that the
beneficial effects of FDI on host country's economic growth, not only through the accumulation of capital, but
also by the higher efficiency of this type of investment is due to the advanced technology, will be achieved.
Rena and Doling also believe FDI has a positive effect on economic growth because capital efficiency is
achieved through the transfer of appropriate technology and enhanced.
Based of studies by Dlormelo, Wang Vblastram and Shi, subjects of "technology transfer through FDI" and
"its impact on economic growth" were under the influence of the following factor:
 The technological differences between two countries.
 The level of educational investment in the host country.
 The purpose of visitor`s country of FDI in the host country.
Impact of exports on economic growth
The notion that international trade is the driving force of economic growth has great antiquity. The various
economists have discussed this point. The 1950s, 1960s and 1970s were years of support and implement
the ideas of growth model were based on import substitution. Along with this trend, some schools and
researchers believe that countries with open economies tended to maintain the country's economic growth is
introspective take precedence. In the 1980s, development strategies should be based on the structure
changing to reduce trade barriers and the liberalization of foreign trade, respectively.
Studies conducted in the country
Following are the most important studies to evaluate the effect of FDI on economic growth and the causal
relationship between exports and economic growth will be discussed.
Mahdavi(2004) , in a study analyzes the impact of FDI on economic growth in the six selected countries
during1975-2000.The results indicate that FDI has positive effects on economic growth of such countries.
Malekzade and Najarzade (2005) in their study to determine the effect of FDI on economic growth in oilexporting countries have paid during the years1990-2000.
The results indicate a positive effect of FDI on economic growth; the results indicate that the effect of
gross domestic investment is on economic growth under the effect of human capital.
Hoseini and Molaee(2006)In their study, the effect of FDI on economic growth in the years 1978-2002
were examined. The results indicate that FDI has a positive effect on economic growth and human capital
reinforces its effectiveness. On the other hand, rising inflation, taxes and government spending have a
negative impact on economic growth in Iran.
The impact of legislation to support and encourage foreign investment in Iran
With the support and encouragement of foreign investment law in 2002, many of the previous obstacles
were overcome to attract foreign investment, foreign investors Activity expanded, and new methods of
funding were recognized as a single entity called the service center for foreign investment created. In this
law, foreign investment funds in addition to other aspects, such as creating a supplier of productivity
enhancing technology transfers from abroad, development and management skills to improve the quality of
domestic labor, the development of export market sand increase the competitiveness of domestic products
is also considered.
The following are the main challenges that still exist include:
 There is regional and global competitors that move toward economic self-guiding foreign investment.
 Problems related to the transfer of funds from abroad through foreign banks.
 High general level of prices, thereby increasing the risk of long-term funded projects.
 Lack of connection with foreign capital markets.
 Lack of basic amenities to provide the tools necessary to attract foreign capital in the form of an effective
organization.
 Lack of strong specialist staff in legal matters, review and monitor projects to attract foreign investment.
 Failure to provide information for foreign investment by separating activities, areas and types of
investments during the period of time consistently and regularly.
Strategies to increase foreign funds
Iran due to abundant natural resources, various geography and internal and external mass consumer
market in the periphery countries, great potential to attract foreign investment in various fields of industry,
agriculture, oil and gas and other mineral resources, but there are some of the problems caused by large
amounts of potential distance. To overcome the existing problems and move towards the proper use of the
country's economic potential and attract more foreign investment following strategies should be considered:
 Review and evaluation of laws and regulations related to trade and investment, adjust and improve the min
order to facilitate the presence and compete on an international level.
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 Strengthening the private sector entities in the investment decision-making by facilitating and expediting
the implementation of Article 44 of the constitution and the abolition of monopolies.
 Promotion and protection of foreign investment, particularly foreign direct investment.
 The liberalization of trade and finance through the development of financial markets, reform of laws and
regulations governing business activities an improving conditions for foreign investment.
 Providing political and economic stability.
 Facilitating affairs to promote incentives for foreign investment in some context, such as how to travel, to
hire and registered trademarks.
 Develop strategies to encourage and attract investment Iranians living abroad.
 Effective legal protection of intellectual property.
 Active participating in community and international economic and trade organizations to take advantage of
opportunities in the areas of international and regional.
Factors affecting foreign investment
Foreign investors to invest in selected regions and countries that would be attractive to them. Besides the
existence of favorable conditions for economic, political, legal, and so they are an important factor in
attracting foreign investment, which is one of the ways to make active more foreign investors to the
investment and capital exporters from developing countries is applying use of financial incentives.
In general, we can say that investing in a variety of economic, political, social and even cultural dependent.
Tax policy (tax exemptions and deductions), government regulations such as financial services subsidies,
preferences and priorities, including the granting of an exclusive patent, trade barriers low and reason able
tariffs, infrastructure, energy and fuel low cost, political stability, economic and social quality regulations
including law enforcement, judicial, economic, and despite a host of other factors affecting foreign
investment and attract foreign investment.
In this study and according to the studies done in recent years to attract foreign investment factors, we
divided into 3 categories:
 Economic factors
 The socio-political factors.
 Of natural, cultural and historical background
Factors affecting the attraction of FDI are describing on economic, political, social, cultural and natural. In
this section, factors that have the greatest impact, as well as factors that have little role in attracting FDI is
assessing and ranking .These factors are known as the most important factor in planning a route for them to
reach the expected level of achievement.
All the factors of economic factors-political, social, cultural and natural are to be achieved in the overall
assessment. The following is the most and the least important factor.
The most important of these factors include:
 Currency
 Investment security
 Expected rate of return on investment (Return)
 Provided supported government policies to foreign investors
 Ability to freely transfer capital
 Economic infrastructure such as roads, power, ports, Internet and ...
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The less important of these factors include:
Climate
Historical and cultural background
External Debt Situation
Social Stability
The participation of domestic and foreign investors
Domestic investment
Bureaucracy is cumbersome administrative
Cost of labor
Corruption
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Outlines of main economic factors affecting the attraction of foreign investment
 Rate of exchange
Exchange rate is an effective factor in the process of transferring the capital. Exchange rate stability
increases confidence in the domestic economy and making it more logical to invest now and in the future
will. Extensive transformation and exchange rate fluctuations, changes in the value of assets involved
extensive pricing and cost-benefit analysis of projects is difficult. Currency also provides a variety of areas of
financial abuse and economic instability becomes heavier.
 Rate of Return on Investment
Utility investments for foreign investors is related to their interest (UNCTAD, 1999), so decided to invest in
the economy depends on the amount of risk and return.
Teoripourtefo confirms that investment in an economy with low risks and high rates of return on a riskadjusted rate of return on investment flows in an economy of risk should be dealt with logically foreign
investment attraction elevated. This varies with productivity (marginal product) of capital measurement and
capital flows, FDI is expected to have a positive correlated.
 Infrastructure
Infrastructure is essential for economic situations. No significant deviations infrastructure moves towards
economic growth. Normally infrastructures are not only physically such as roads, ports …but also a wellfunctioning state in situations is .Foreign investors prefer the economies which have a developed network of
roads, airfields, supply water, uninterrupted power supply, telephone and Internet. Poor infrastructure,
economic activity increases costs and reduces the rate of return on capital.
 Inflation
Continuous increase in prices leads to a decline in the value of the internal assets, resulting financiers and
citizens prefer to maintain the real value of their assets for the benefit of foreign assets change their optimal
combination (capital outflow).On the other hand, higher prices will lead to lower net investment assets and
reduce capital inflows to the country. Inflation leading to increased investment risk and reduce the average
maturity of commercial loans and impairment of information transmitted through prices. Inflation is a sign of
instability and lack of control policies and FDI flows are negatively correlated.
 Extent of Market
Major Market in the country shows more features on the actual scale of its economy, however, pointed out
in an open economy fit every company can do business in foreign markets. In this context, the Extent of the
market, which should be a determinant of FDI flows, is analyzed. In the export-oriented FDI in a big market
increases the likelihood of positive externalities are spill over effects of the economic activity in the large
market of small relative to the market is exposed. This thread has more opportunities to attract foreign capital
flows creates variety. This indicator is measured by per capita gross domestic products in research and it
seems to attract much FDI and market extend are positively correlated.
 Domestic investment volume
Domestic investment rate is a reflection of the tendency for business people and their confidence in the
future economy. This variable provides information about the investment environment in the country, so
domestic investment as an independent variable, which may explain the variability of the flow of foreign
direct investment. Hence, we expect when the level of domestic investment is high, foreign direct investment
flows is high as well.
 Economy openness
Economy openness has two conflicting effects. First, it causes the development of export-oriented FDI
and seconds the negative impact of FDI on the market.
 Economic Growth
Normally development of economic potential characterized by economic growth rate, so there is a positive
relationship between economic growth and foreign direct investment flows.
The negative effects of foreign investment and the government's role in its development:
Opponents argue that the neoclassical theory of investment of foreign capital if it cans play a positive role
in the neoclassical theory that there is social capital requirement, the law effectively or at least the absence
of bribery and corruption in the society and the political stability in economically advanced countries. In the
foreign capital importer country is available. It is obvious that such conditions do not exist in many
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developing countries. Moreover, this idea believes that reduction in domestic investment of foreign capital
and multinational companies using the "transfer price" could receive bribe from a foreign capital importer
Guest country and reduce their government tax revenue. Furthermore, the theory suggests that multinational
corporations have created a serious threat against our national interests, political affiliation guests' countries
to the major powers and causes of economic and financial growth corruption. This theory suggests that
guest country government to determine the role in control of foreign capital in the guest country. In fact the
UN suggests this policy in developing countries.
Therefore, since the economy has not the necessary conditions to attract foreign capital, without the
supervision and control of the government and on the other hand, other foreign investment in terms of acute
shortage of national savings compared to investing in the country's urgent needs, unavoidable and maintain
eliminate any threat to its national interests and avoid creating dependence on big powers, the government
needs a coherent plan to attract foreign capital control and select.
Benefits of FDI
Foreign Direct Investment in general economic theorists have enumerated the following advantages:
 Increase the structural performance of companies with foreign partners.
 Reduce the cost of capital.
 Increase the value of the shares of these companies.
 Encourage the involvement of other institutions (especially labor).
 Enhancing technologies.
 Filling the savings gap.
 Increase the financial strength of a potential host state.
 Increase exports and thereby promote economic, employment and technology.
 International reputations.
 Increase in labor productivity.
Losses of foreign direct investment
In general, the disadvantages of foreign direct investment are as follows:
 Expect high returns.
 The increase in imports-worsening of the current account balance of payments in the beginning.
 The entry and exit of investment and the consequent adverse impact on the capital account balance of
payments.
 Increasing the volume of the domestic currency at the time often try and reduce the time of with drawl (in
the absence of central bank intervention).
 Exchange rate fluctuations on the sudden entry and withdrawal.
 Avoid visiting companies to reinvest in the least change the situation.
 Getting high interest in the domestic market, which is usually not effective formal system.
 Points (tax, assisted investment, land, public services), and prefer rather than domestic competitors.
 Enforcement of Transfer Pricing for tax evasion.
 Monopoly and eliminate domestic competitors.
 Parsimony in the transfer of technology and skills.
 The use of technology is old and second-hand machinery, particularly in production for the domestic
market.
 Commodity imbalanced economic and social perspectives of the host country and the negative impact on
production and consumption patterns.
 Exploitation of factors of production (labor, domestic capital, natural resources).
 Exacerbate income in equality by creating a class of foreign affiliates.
 Importing foreign culture.
 The possible use of economic power to direct the policies (such as Chile under Allende).
Conclusion
Considering that FDI plays an important role in economic development, settle the gap of investment
savings, transfer of technology, technical knowledge and new management techniques there for the intense
competition among countries to attract attention to the situation there and each country considering its
economic, social, cultural and political situation try to identify the ways of attracting foreign direct investment
and remove the related obstacles.
And according to the sources, benefits and threats mentioned, developing countries before attempting to
attract foreign direct and indirect investment, first need to complete the infrastructure of financial and non-
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financial markets and establish and dominate super visors in situations to the financial market, Overcome the
weakness of the domestic financial in situations and prevent entering the high volume investment can also
be one of the pillars of the sudden with drawl of foreign capital in the form of paper to domestic financial
markets are not in crisis.
One way of attracting FDI is to identify the determinants' which are numerous and can say that attracting
FDI depends on the total economic factors and entire system and economic structures, political, social and
cultural. But, some of the factors have main roles and some other factors are in minor role in attracting. And
considered these factors may vary in different countries.
Another noteworthy point that you should pay attention to is that if the investment climate can be sure in
developing countries and economies in transition, international investors participate in these markets with
more willingly.
This is also an opportunity to exploit the comparative advantages of the host countries, economic growth,
job creation and access to updated knowledge and technology to produce competitive products in the
international arena.
Thus accelerating the flow of foreign investments provides mutual benefits for host countries and
international investors. Considering what happened in order to gain maximum benefits from foreign
investment and reduce potential threats, providing Political ability and economic security, improved
infrastructure, enact and enforce rules and regulations necessary. It is clear that in the economy growth of
the countries importance of considering all aspects to the cultural adaptation, advantages, competing
national interests, cannot be ignored.
Discussions suggest that the management of foreign investment is a key element in ensuring financial
stability. Capital account liberalizations should create necessary infrastructure in the domestic financial
market, capital market laws and regulations, the regulatory system is efficient and Financial Statements
clear. South East Asian crisis showed the vulnerability of the economies of host countries, greatly improves
the performance of speculative attacks.
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