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RESEARCH ARTICLE
Growth Performance and Forecasts of FDI inflows to Iran
Neerja Dhingra*
Dept. of Economics, B.D. Arya Girls College, Jalandhar Cantt., India.
*Corresponding Author: E-mail: neerja.dhingra@yahoo.co.in
Abstract
Iran (Islamic Republic) is on the track toward becoming an attractive destination for FDI in the South Asian region. The present study is an attempt to find the growth performance and forecasts of FDI inflows to Iran. The study concludes that Iran has been able to attain the growth rate of FDI which surpasses the growth rate of FDI inflows to South Asia. South Asian aggregate FDI inflows have registered a growth rate of 24.37 percent during the period of 1990-91-2013-14. But, the growth rate in case of FDI inflows to Iran is as high as 43.27 percent. It means that it can come up to the level of its counterparts South Asian countries like India and Pakistan if it adopts a pro active FDI policy. Nevertheless, keeping in view the past trends and future projections, Iran needs to put in place a comprehensive development strategy which includes being wide open to FDI. Efforts must be made to ensure that the actual inflows do exceed the forecasted figures.
Introduction
The experience of some developing countries, which were exceptionally successful countries, drawing heavily on FDI and many regimes restrictive to FDI fairing poorly, led to belief that FDI can play positive role in the development process [1]. Like other developing countries, South Asian economies have also focused their investment incentives largely on the foreign firms. Over the last two decades, market reforms, trade liberalization as well as more intense competition for FDI have led to reduced restrictions on foreign investment and expanded the scope of FDI in most sectors. Iran (Islamic Republic) is on the track toward becoming an attractive destination for FDI in the South Asian region. The present study is an attempt to find the growth performance and forecasts of FDI inflows to Iran.
Objectives of the Study
The study has been conducted keeping in mind the following objectives:
To study the growth of FDI inflows to Iran.
To generate the short term forecasts of FDI inflows to Iran.
To discuss the FDI policy of Iran
Data Base and Methodological Framework
The present study is based on secondary data and covers the period of 1990-91 to 2013-14. The
required data have been accessed from various issues of World Investment Report (UNCTAD). The compiled data has been arranged in the form of tables so that meaningful inferences can be drawn. Percentage shares of South Asian countries in the FDI inflows of South Asia have been calculated.
Compound Annual Growth Rate
To calculate the compound annual growth rates (CAGRs), first of all, an exponential function has been fitted as shown below:
t ut
t 0 1
Y = β β e (1)
Here
Y
t is dependent variable,β
0 andβ
1are theunknown parameters and Ut is the disturbance
term. If we present equation (1) in the logarithmic manner it assumes the following form:
t 0 1 t
logY
logβ
logβ + U
(2)Equation (2) makes use of Ordinary Least Square Method of regression. The compound rate of growth (
gr
c) has been computed by taking antilogof estimated regression coefficient, subtracting 1 from it and multiplying by 100, as shown below:
c 1
gr =(A.L.β - 1)
100
c 1
gr =(A.L.β - 1)
100
Where
1
β
c 1
gr =(A.L.β - 1)
100
is a regression estimate for
β
1. Tocheck whether the growth rates are significant or not Student’s t-test has been applied which is as follows:
1
1
β
t =
t(n-2) d.f
s(β )
:
c 1
gr =(A.L.β - 1) 100
1
1
β
t =
t(n-2) d.f
s(β )
:
c 1
gr =(A.L.β - 1) 100
(4)
Where
1
β
c 1
gr =(A.L.β - 1)
100
is the regression estimate,
gr =(A.L.β - 1)
c 1100
1s(β )
therespective standard error [2].
Negative observations, if any, in the data series disallows estimation of exponential rates of growth because extraction of logarithm (a pre-requisite for estimation of the equation (1)) of negative values is not defined. In this case, the growth rates have been calculated from the year where the values are positive.
Forecasting Technique
For finding forecasts, univariate ARIMA model has been applied on the series of FDI inflows. With the help of this methodology, probabilistic values of FDI inflows to Iran have been calculated on the philosophy of ‘let the data speak for themselves’ [3]. Differenced first order i.e. ARIMA (1,0,1) has been adopted which followed the following equation for forecasting:
Ŷ (t) – Y (t-1) = µ + α (Y (t-1) – Y (t-2)) (5)
Ŷ (t) = µ + Y (t-1) + α (Y (t-1) – Y (t-2)) (6)
Where
Ŷ (t) = value to be forecasted
µ = constant
α = autoregressive coefficient
This is a first order autoregressive AR (1) model with one order of non seasonal differencing and a constant term. The adequacy of the model has been checked by auto correlation coefficient and L-Jung Q statistic. The autocorrelation [4] function has been used for the purpose of detecting non-randomness in data. Autocorrelations of residuals were worked out as under: t t+k k 2 t n-k
e . e
t=1
r (e) = ; k=1,2...l n e t=1 (7)
Computed values of auto correlation coefficient, rk(e) and the lag k were displayed graphically to
depict autocorrelation function (ACF) also known as correlogram. Residual ACF, which lies within the 95% interval taken as insignificant and insignificance of ACF, implies adequacy of the model to generate forecasts.
L Jung-Box Test has been selected to test multiple autocorrelation coefficients. This test is considered to find that the whole set of the values all at a time are significantly different from zero. Ljung-Box Q statistics was computed from the model’s residuals by using the following equation:
(8)
Where Q is Portmanteau test statistic, n is the sample size, L is the number of lags being tested. Non-significance of Q test is taken to imply that the generated residuals could be considered as white noise, thereby indicating the adequacy of estimated model [5].
Discussion and Results
The study has been done in two sections. Section I discusses the growth of FDI inflows to Iran and Section II analyses the FDI policy of Iran with a view to generate short term forecasts of FDI.
Section I
Bangladesh obtained 4.35 percent share and placed on fifth position. However, Afghanistan, Maldives, Nepal and Bhutan had almost insignificant share of FDI inflows coming to South Asia. As far as Iran is concerned it received as meager as 2.05 percent of aggregate FDI inflows
2013-14. But if we observe carefully, we come to know that except the year 1990-91, Iran’s magnitude of FDI has fluctuated irregularly during the study period. Over all, inflows have increased, except in the years 2007, 2008 and 2009.
Table 1: FDI inflows to south Asian countries as percentage of south Asian aggregate
Year Afghanistan Bangladesh Bhutan India Iran Maldives Nepal Pakistan Sri Lanka
1990-91 0.00 1.50 0.75 111.23 -170.11 2.63 2.77 130.78 20.39
1991-92 -0.07 0.31 0.13 16.78 5.06 1.45 0.49 60.84 14.99
1992-93 0.05 0.49 0.00 33.40 1.13 0.87 0.00 47.80 16.25
1993-94 0.00 1.03 0.00 39.28 15.33 0.51 0.00 29.48 14.36
1994-95 0.00 0.57 0.00 49.95 0.02 0.45 0.00 40.48 8.53
1995-96 0.00 3.28 0.00 76.38 0.31 0.26 0.00 17.47 2.31
1997-98 0.02 6.85 0.04 74.70 0.61 0.28 0.57 13.00 3.93
1998-99 -0.03 10.63 -0.01 66.85 0.79 0.21 0.43 13.13 8.00
1999-00 0.00 14.68 0.00 67.06 0.96 0.29 0.31 12.89 3.82
2000-01 0.18 9.51 0.00 66.72 0.48 0.38 0.14 16.37 6.19
2001-02 0.00 11.90 0.00 73.76 3.98 0.46 -0.01 6.35 3.56
2002-03 0.01 4.72 0.00 72.90 14.43 0.27 0.28 5.10 2.29
2003-04 0.47 3.07 0.02 52.59 34.16 0.23 -0.06 7.69 1.84
2004-05 0.70 4.25 0.04 52.44 32.74 0.39 0.18 6.48 2.78
2005-06 1.75 4.30 0.08 53.99 26.76 0.49 0.00 10.45 2.18
2006-07 1.88 5.86 0.04 52.82 21.73 0.51 0.02 15.25 1.89
2007-08 0.85 2.84 0.26 72.81 5.90 0.34 -0.02 15.31 1.72
2008-09 0.55 1.93 0.01 73.38 5.80 0.38 0.02 16.18 1.75
2009-10 0.17 1.92 0.01 83.27 3.37 0.32 0.00 9.61 1.33
2010-11 0.18 1.65 0.04 84.02 7.18 0.37 0.09 5.51 0.95
2011-12 0.74 3.18 0.09 73.54 12.70 0.75 0.30 7.04 1.66
2012-13 0.19 2.57 0.02 81.82 9.38 0.58 0.22 3.00 2.22
2013-14 0.28 2.95 0.05 76.22 14.53 0.85 0.27 2.53 2.31
Aggregate percentage
1990-91-2013-14 0.34 4.35 0.07 65.48 2.05 0.58 0.26 21.42 5.45
Rank 7 4 9 1 5 6 8 2 3
Source: Author's Calculations on the basis of UNCTAD Data, 2013 [6]
Table 2: Growth of FDI inflows to Iran and south Asia
Year Amount of FDI to Iran in US$ million Amount of FDI to South Asia in US$ million
1990-91 -362 212.8
1991-92 22.6 446.9
1992-93 8.5 754.4
1993-94 207.6 1354.3
1994-95 0.3 1950
1995-96 8.8 2816.3
1997-98 20.5 3380
1998-99 43 5413.6
1999-00 37.6 3926.6
2000-01 15.6 3249.5
2001-02 193.6 4864.1
2002-03 1084.5 7513.4
2003-04 3657.1 10705.7
2005-06 2863.4 10700.9
2006-07 3135.6 14428.5
2007-08 1646.6 27918.6
2008-09 2005.1 34544.8
2009-10 1909.2 56608.3
2010-11 3047.6 42437.6
2011-12 3647.5 28726.2
2012-13 4150 44230.6
2013-14 4869.9 33510.7
CAGR 1991-92 TO 2013-14 43.27* 24.37
Source: UNCTAD 2014 and Author's Calculations *significant at 5 percent level of significance [6]
Never the less the growth rate of FDI inflows to Iran has not been less during the period 1990-91 to 2013-14. Table 2 exhibits the amount of FDI inflows to South Asia and Iran during this period. The compound annual growth rate in case of South Asia is 24.37 percent where as in case of
Iran it is much higher than that and is to the tune of 43.27 percent. Looking at this figure one may conclude that Iran has performed magnificently well in attracting FDI which may be attributed to its policy adopted after the year 2002.
Table 3: Iran's Ranking in FDI Performance
Year Rank*
1990-91 111
2008-09 128
2009-10 119
2010-11 115
Source: UNCTAD * Rank out of 144 countries [6]
Table 4: Iran's ranking in FDI potential
Year Rank*
1990-91 58
2007-08 54
2008-09 51
2009-10 53
Source: UNCTAD* Rank out of 144 countries [6]
However, Iran’s position regarding FDI performance has not been satisfactory if we look at the ranking of UNCTAD regarding FDI performance index. Table 3 presents the ranking of Iran, which shows that out of 144 countries Iran ranks quite low in attracting FDI. But the surprising fact is that FDI potential rank assigned to Iran is not all that dissatisfactory. It is evident from the table 4, that Iran ranks in the upper quadrant as far as FDI potential is concerned.
Section II
FDI Policy in Iran
Iranian policy is on FDI is streamlined with the enactment of Foreign Investment Promotion and Protection Act (FIPPA) in the year 2002. Under the act foreign investment is allowed in all sectors of the economy. The definition of foreign investment includes Iranian expatriates also provided that their investment capital originates from abroad. Repatriation is allowed on local sales related profits in addition to export related profits at the current official exchange rate. 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 to incorporate at least 30 percent of the contract's value in local capability and also to negotiate on specific prices.
FIPPA allows for international arbitration in legal disputes. There are two major arbitral institutions in Iran: the Tehran Regional Arbitration Centre (TRAC) and the Arbitration Centre of the Tehran Commercial Chamber. The establishment of a maximum 45-day period for the processing of individual foreign investment applications has been fixed.
time. Under the FIPPA, any foreign natural or legal person 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 percent in each economic sector and in each economic branch shall not exceed 35 percent. 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.
The Organization for Investment, Economic and Technical Assistance of Iran (OIETAI) is responsible for receiving and processing all foreign investment applications. OIETAI is also responsible for approving overseas Iranian investments. In other words, the organization is in charge of consolidating and implementing two-way foreign investment flows.
Currently there are three main routes that a foreign company can follow to establish a long-term presence in Iran. These are: (i) Joint Venture (ii) Buy Back and (iii) Built-operate and Transfer (BOT)
Joint Venture
The first 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
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. In August 2010, the 25 percent ceiling set for joint venture companies in enjoying facilities from the foreign exchange reserve account has been eliminated. Industry, mines, agriculture, transport and services such as IT and Tourism and the export of goods and services are the sectors authorized to enjoy the new facilities from the Foreign exchange reserve account. The joint stock company in which the capital is divided by shares, is the most common and acceptable type of company which can be recommended to foreign investors.
Buy Back Contract
In February 2007 the government of Iran unveiled its new buyback-contract formula, which significantly extended the length of the contracts to as long as 20 years. 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, compromise solution was found in 1989 with the First Five year Economic, Social and Cultural Development Plan. Under the said plan, the Iranian Government is allowed to employ ‘buy backs’ 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.
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)
Recent regulations have introduced the (BOT) scheme for Iranian projects. This is a rather new possibility in the Iranian market. 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.
Forecasts of FDI in Iran
Future research or forecasting is the best way of examining the different alternatives, identifying the most probable ones and thus reducing the uncertainty to the least. Forecasting is the best designed tool to help decision making and planning in the present [7]. Forecasting is a
necessary input to planning. It can empower the planners because its use implies that they can modify the variable, now, to alter or to be prepared for future. This enables them to formulate the economic policy which can affect the future value of variable the way, they wish it to be. A prediction is an invitation to introduce the best desirable changes in the existing system [5]. ‘What will happen in future’ is the function of ‘what happened in the past’. Believing this, the study endeavors to generate the forecasts of FDI inflows to Iran on the basis of study of past behavior assuming that it may help the policy makers in the country to monitor the FDI inflows the way they think most appropriate. Iran’s FDI forecasts are explored and results are shown in Table 5. It gives an idea that Iran may get FDI equal to US$ 4718.17 million in the coming year and in the year 2020 to the tune of US$ 5334.04 million. The upper and the lower confidence limits are also shown in the table. Ljung Q statistic for the test of significance is 16.665. Figure 1 also shows the path of FDI growth of FDI in the previous years and the future years.
Table 5: Forecasts of FDI Inflows to Iran
Amount in US$ million
Year Forecasts UCL* LCL**
2015 4718.17 6215.36 3220.99
2016 4659.94 6417.66 2902.22
2017 4758.72 6561.93 2955.5
2018 4926.12 6737.90 3114.34
2019 5123.52 6936.93 3310.11
2020 5334.04 7147.76 3520.31
Source: Author's calculations by using SPSS Version 17 * upper confidence limit
** Lower confidence limit
Fig. 1: Model fit and forecasts of FDI inflows to Iran
Conclusion
The study concludes that Iran has been able to attain the growth rate of FDI which surpasses the
means that it can come up to the level of its counterparts South Asian countries like India and Pakistan if it adopts a pro active FDI policy. Nevertheless, keeping in view the past trends and
more comprehensive development strategy which includes being wide open to FDI. Efforts must be made to ensure that the actual inflows do exceed the forecasted figures [8-48].
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