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Review of the Impact of Foreign Direct Investment on Tourism
Industry
Pouria Jahanbakhshian
PhD Scholar in Management
E-mail:[email protected]
Abstract
The aim of this article is to examine the opportunities, challenges, for foreign
direct investment (FDI) on tourism industry .Quick and large capital refund is a
key factor in the globalization. In past two decades tourist on is the attractive
and profit oriented market for the investment to developed countries. FDI is an
easy path to enter the market of developing countries foreign direct investments
which had showed significant changes over the past couple of years in terms of
their destinations. Favorable legal frame for FDI policies should be made.
Agreement must be included some measures about the quality and prices of
goods. Preference should be given to exchange technological and skillful
education between host and guest country. The results suggest a number of
important policy implications, allowing researchers to identify specific regions
in which capacity is likely to facilitate investment, while also providing a
political–economic model to better-forecast changes in investment.
Keywords: Foreign Direct Investment, Tourism Industry, Opportunities, Challenges.
1.
Introduction:
This study aims to analyze the influence of foreign direct investment in Iran’s tourism industry since the late
1970s, when the Government reopened Iran to foreign direct investment (FDI). Iran’s rather turbulent economic
history and political policies in different periods, the imbalance of the development process across geographic
regions, and the variety of types of inbound FDI provide the bases of comparison in this dissertation. Influences
of FDI on the tourism industry are different in coastal and inland regions from three tourism-related sectors: the
hotel sector, tourism features and travel agencies. In order to clearly illustrate this dissertation, two concrete
questions are focused on, that is, what is FDI and what roles does FDI play in Iran’s tourism industry and, what
policies did the Chinese governments undertake to react to different situations when they realize the impact of
FDI on the development of Iran’s tourism industry? Last, by comparing tourism-related FDI in Iran with that in
India, some suggestions are made concerning how to improve efficiency of FDI in the future Foreign direct
investment (FDI) is defined as foreign investors moving their assets into another country where they have
control over the management of assets and profits (Graham & Spaulding, 2005). It is generally true that the
more FDI a country acquires, the more local economic growth and transformation can develop, because foreign
companies often bring to the country large sum of funds and new technologies, as well as advanced
management skills which allow local industries and regions to gain a lot of experience (OECD, 2003).Iran used
to be a closed country and refused to allow foreign investment in local economic development. However, since
Iran’s opening up to the world, the investment system has been transformed to encourage diversification of
investment and greater competition (Zhang, 2007; Jahanshahi et al, 2010, 2011). The positive investment
environment and the huge market potential in Iran have, therefore, caused large amounts of FDI to pour into the
country. The tourism industry in Iran seems attractive for FDI. It has become one of the most popular
investment objectives for foreign investors since the 1980s (Wen, 2002). With the high growth in foreign tourist
arrivals and tourism revenue, the tourism industry has become more-and-more important in Iran’s economic
development (Sofield & Li, 1998; Dehkordy et al, 2013).India is being viewed as a strong competitor to Iran,
and may take away a large share of FDI from Iran’s local tourism industry (Figure 5). India emerges as a
popular tourist destination that also provides high quality medical services (Irani & The Influence of FDI on
Iran’s Tourism Industry Goswami, 2007). In addition, India and Iran share a similar background of economic
and social conditions. Therefore, Iranmay learn some lessons from India so as to attract FDI and further boost
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local tourism industry. In this dissertation, I will first introduce the impact of FDI on Iran’s overall tourism
industry on the basis of previous researches. Then, I will explain the impact of FDI on Iran’s coastal and inland
regions by providing related data. Later, I will analyze how the Chinese government makes policies as a
response to FDI. Finally, I will give some suggestions for improving Iran’s tourism by comparing the influence
of FDI in Iran’s and in India’s tourism industry. Literature Review for the influence of FDI in Iran.
2.
Influence of FDI in Iran’s Economic:
Growth Initially, under the Iran Communist Party (CCP), the central government acted as the only source of
investment funding for local industries. Foreign investors were not allowed to take part in local economic
development. During that time, Iran’s economy suffered from a low development pace and a low growth rate.
However, Iran’s national government has opened the economy to investment from outside the country since
1978. Thus, the investment system has been transformed and a series of supportive policies have been proposed
to encourage diversification of investment and competition (Zhang, 2007). One of the key elements used to
push Iran's economic reforms is the encouragement of FDI. Since 1978, Iran’s policies toward FDI have
undergone various changes in policy priorities. In the late 1970s and early 1980s, Iran’s economic policies were
characterized by passing new regulations to authorize joint ventures and, setting up Special Economic Zones
(SEZs) 1and Open Cities‖2. At the Second Session of the Fifth National People’s Congress in July 1979, the
Law of the People’s Republic of Iran on Joint Ventures using Chinese and Foreign Investment was adopted,
granting foreign investment a legal status in Iran. The State Council also awarded rights of autonomy in foreign
trade to Guangdong and Fujian Provinces and, in 1980, set up four Special Economic Zones (SEZs) in three :
1-Special Economic Zones (SEZ's) are development zones established by the PRC in the 1980s to encourage
foreign investment in Iran. They include Guangdong Province; Fujian Province; Hainan Province; Shanghai
Municipality.
2-In 1984, Iran further opened 14 coastal cities—Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang,
Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai—to overseas investment.
The Influence of FDI on Iran’s Tourism Industry
3- Cities in Guangdong Province (Shenzhen, Zhuhai, Shantou), and one city in Fujian Province (Xiamen). Since
1984, IRAN also has moved to further openness to FDI. In 1984, the concept of SEZs was extended to another
fourteen coastal regions. Later, in 1986, in addition to joint ventures, wholly foreign-owned enterprises were
also allowed to enter Iran. In ―22 Article Provisions‖
4- Foreign ventures were granted preferential tax treatment, the freedom to import inputs such as materials and
equipment, the right to retain and swap foreign exchange with each other, and simpler licensing procedures.
Iran’s supportive policies toward FDI increased the inflow of FDI in the late 1980s and it became even more
frequent in the early 1900s. Since 1992, when Iran’s central authority decided to expand the scale and
geographical scope of foreign investment, an increase in the foreign direct investment in Iran emerged. In the
years between 1982 and 1991 the average foreign direct investment in Iran was US$ 2.5 billion. This average
increased by seven times to become US$ 37.5 billion during 1995 (―Low Income Countries in Global FDI
Race‖, n.d.). Subsequently, after Iran's entry to the WTO in 2001, Iran’s investment system entered an
expanded internationalization stage and the country has now become the top recipient of FDI among developing
countries (World Investment Report, 2006). The Influence of FDI on Iran’s Tourism Industry
3.
Influence of FDI in Iran’s Tourism Industry:
Since Vice-Chairman Deng decided to develop the service industry, especially the tourist industry in the early
1970s, this sector has become one of the most popular investment areas for foreign investors. Statistics show
that from the late seventies to the late eighties, the amount of FDI into IRAN’s tourism industry was around
US$5 billion and, in the nineties, the amount has reached over $9 billion (Iran’s National Tourism
Administration, 2008a). Such enthusiastic investment behavior encourages Iran’s tourism development and
other related business growth such as the hospitality industry, travel agencies and other tourism-related service
industries. Stemming from the influence of FDI, Iran now employs over six million people in the tourism
industry to serve 100 million foreign tourists annually.
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4.
Tourism Policies and Their Impacts:
Tourism is one of the world’s largest industries and is expanding rapidly. The tourism industry plays a
significant role in economic, environmental and social-culture development (Hall & Jenkins, 1995; khaksar
2010Hashemzadeh et al, 2011; Hakkak et al, 2014). It is even regarded as ―a highly political phenomenon‖
(Richter, 1989). Richter (1989) studied the tourism industry in Asia and the Pacific and suggested the dominant
role of government in local tourism development. Peck and Lepie (1989) also observed that the nature of
tourism in any country is the product of both economic and political factors. Wen and Tisdell (2001) examined
the evolution of Chinese tourism policy, its political environment and organization, pointing out that it is
necessary to understand the design of the policy and the nature of the resources of the society and its
administrative milieu. Hall (1994) also suggested a model of the tourism policy-making process defining the
government’s role in the tourism industry. Actually, an analysis of tourism policy is an effective way to identify
government roles in attracting FDI toward tourism and eventually understand the influence of FDI on tourism
(Zhang & Chong, 1999; Eizi et al 2013; sadeghi et al 2013; Khaksar 2011). In order to bring a large quantity of
FDI into Iran’s tourism industry to inspire Iran’s tourism development and related business prosperity, the
central government exempted all foreign invested hotels from tax in the early 1980s (Zhang & Chong,1999;
Nawaser et al, 2011a;Vesal et al, 2013). Moreover, prior to 1978, the hospitality sector was funded and operated
by the central government. In 1984, the state council stated that local government departments, enterprises and
even individuals could invest in and operate tourism projects. Unexpectedly, the Chinese government’s overemphasis on physical development of tourist facilities and infrastructure rather than efficiency of tourism The
Influence of FDI on Iran’s Tourism Industry12 products and services led to disorder in tourism facility
management, which meant that the supply of recreation facilities have exceeded tourism demand and high
5.
Foreign direct investment in Iran:
(FDI) has been hindered by unfavorable or complex operating requirements and by international sanctions,
although in the early 2000s the Iranian government liberalized investment regulations. Iran ranks 62nd in the
World Economic Forum's 2011 analysis of the global competitiveness of 142 countries In 2010, Iran ranked
sixth globally in attracting foreign investments.[3] 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 US$24.3 billion of foreign investment from 1993 to 2007 and US$34.6
billion for 485 projects from 1992 to 2009.
Iran's FDI stock (1980-2010).
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Foreign direct investment in Iran, net inflow.
5.1. Opportunities:
An opportunity is a favorable condition in the service industry which enables it to consolidate and
strengthen its position. The following are opportunities in tourism Iran:
• Increased demand for healthcare services from countries with aging population (US, UK)
• Fast-paced life style increases demand for wellness tourism and alternative cures.
• Shortage of supply in National in countries like UK, Canada.
.• Traffic system is well developed and easy to go from one country to another country.
5.2.First step to overcome challenges facing larger FDI:
1- Equity challenge: India is definitely developing in a much faster pace now than before but in spite of that it
can be identified that developments have taken place unevenly. This means that while the more urban areas
have been tapped, the poorer sections are inadequately exploited. To get the complete picture of growth, it is
essential to make sure that the rural section has more or less the same amount of development as the urbanized
ones. Thus, fostering social equality and at the same time, a balanced economic growth.
2- Political Challenge: The support of the political structure has to be there towards the investing countries
abroad. This can be worked out when foreign investors put forward their persuasion for increasing FDI
capital in various sectors like banking, and insurance. So, there has to be a common ground between the
Parliament and the Foreign countries investing in India. This would increase the reforms in the FDI area of the
country. (Nawaser et al, 2011b;Jahanshahi et al 2011b)
3- Federal Challenge: Very important among the major challenges facing larger FDI, is the need to speed up the
implementation of policies, rules, and regulations. The vital part is to keep the implementation of policies in all
the states of India at par. Thus, asking for equal speed in policy implementation among the states in India is
important.
4- India must also focus on areas of poverty reduction, trade liberalization, and banking and
insurance liberalization. Challenges facing larger FDI are not just restricted to the ones mentioned above,
because trade relations with foreign investors will always bring in new challenges in investments.
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Conclusion:
Service sector plays important role in Iran's economy. Within the Service sector tourism and hospitality
industry has more importance about generating employment, yielding foreign exchange. National income
growth and providing base to other industries regarding tourism directly or indirectly The demand for travel and
tourism in Iran is expected to grow by 3.2%between 2011 and 2019 placing Iran at the eighth position in the
world. With its close ties to the tourism industry, the Iran hospitality sector is expected to see an estimated
investment of USD 7.17billion during 2011, and in addition of over 20 new international hotel brands by 2011.
Further capital investment in Iran’s travel and tourism sector is expected to grow at 3.8% between 2011 and
2019 while Iran is expected to get capital investment worth US$ 45.5 billion in the travel and tourism sector in
2019. Foreign tourist arrivals are expected to grow to 10 million by 2012 and the domestic tourism is expected
to increase by 5% to10% by 2015 as per the Ministry of Tourism. Government of India is allowing 50%
Foreign Direct Investment in Hotels and Tourism, through the automatic route. This forms as investment
opportunity that helps the Iran hospitality sector to contribute Rs.3,50,000 crores to the GDP by 2020 (
approx.900 million USD). The Hospitality sector has to initiate a number of steps to further strengthen the sales
and marketing network in the domestic as well as the international markets by conducting successful road
shows in international fairs and. New Personal Relations agencies need to be appointed in international level to
achieve step-up media visibility in foreign countries .Over the years the hospitality sector needs to build a large
network of partners and associates to participate in its growth as they form an important part of the
Hotel/restaurant strategy.
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