Effects of Foreign Direct Investment and Import Tariffs on Iran Car Industry - Research Proposal Example

Effects of Foreign Direct investment and import tariffs on Iran car industry Introduction/Background FDI is believed to be an appropriate tool in order to gain the necessary knowledge, increase employment, productivity gain and competitiveness, which result in development of an industry. However, there are sub arguments regarding the use of FDI and how it should be adopted and implemented. Some economists believe that due to the huge size of the investing companies, the recipient country resources might be exploited; therefore further problems might be caused as a result. Economists also believe that the adoption of an appropriate tariff policy by the governments can speed the development process. Iran car industry is the country’s second biggest industry after the petroleum industry. Iran started its Automobile industry in 1960. The first step taken by some young entrepreneurs was to produce The Body of Benz automobiles. By 1966 the company was able to assemble Hunter automobiles. In 1979 first ‘Paykan’ was manufactured which was put out the production in 2005. Currently Iran Khordro and Saipa are known as the main car producers among other 25 automakers. Iran produces a wide range of cars including large buses and heavy automobiles, minibuses, heavy-duty trucks, medium-sized trucks, vans, motorbikes and passenger cars. In the last 12 years Iran automobile industry has grown rapidly, therefore, Iran is placed in the list of top 20 car producers internationally. Exporting of automobiles have also been started within the last 5 years, which now plays a major role in the Iran economy in the non-petroleum export category. However, the primary argument is that the Iranian export remain very low compared to countries such as south Korea which started its car industry in the 1960s and currently ranked fifth largest in the world in terms of production volume and the sixth largest in terms of export volume. Most courtiers who started their car industry within the last decades used FDI related strategies in order to develop their industry. These courtiers realised that FDI will result in increasing industrialization and stimulate economic growth. (Mekki, 2005) Literature Review FDI or Foreign Direct Investment is an important contributor to the economic development of all the countries irrespective of developed, developing or underdeveloped. As per the economy watch definition FDI is the investment that earns interest in enterprises which function outside of the domestic territory of the investor (Economy watch, n.d). FDI can be classified into two different categories; vertical and horizontal. Vertical FDI is a scenario in which an MNC owns the shares of a foreign enterprise whereas horizontal FDI happens when an MNC actively engage in business activities in another country directly. Iran failed to attract either vertical or horizontal FDI to boost the economic activities in automotive sector because of their apprehensions and concerns about FDI. Kalotay and Hunya (2000) reported a close relationship between privatization and foreign direct investment (Kalotay and Hunya 2000). Privatization is the core of attracting FDI. The markets and the economies needed to be opened up for the private participation in order to attract FDI. If the government controls all the productive sectors and the private participations is welcomed only in the non-productive sectors, FDI may not come. Governments should realize that the MNC’s are doing business not for charity, but for profit. They will look for productive sectors only for investment. Iran failed to privatize the critical and profitable sectors and the FDI in Iran has been slowed down. Buthe and Milner (2008) has argues that politics is a major factor in attracting FDI (Buthe and Milner, 2008, p. 741) Iran is going ahead with the enrichment of Uranium which the Americans alleged that for making nuclear bombs. With the help of UN America is trying desperately to stop Iran from achieving nuclear weapons. America has warned Iran many times and Iran replied in the same manner which made this area a possible third warfront for America after Iraq and Afghanistan. Under such circumstances, it is difficult for the foreign investors to invest in any of the business fields in Iran. Goldar and Banga (2006) have mentioned that that trade liberalization, particularly lowering of tariff rates, had a favourable effect on foreign direct investment in Indian industries (Goldar and Banga, 2006, p.1). It is difficult for foreign organizations to work under tight rules and regulations especially in a foreign country. Liberalization of the rules and single window clearance of legal formalities are some of the necessary policies an MNC expect from a foreign country for investing. On the other hand, if the foreign country was reluctant in offering liberal policies and other infrastructure facilities, MNC’s will look for other options in the globalized business environment. Iran has not liberalized many of its policies and rules in order to attract the FDI. Compared to some other countries like India, China or Korea, the formalities for the operation of a foreign company in Iran’s soil are complex. Bhardwaj et al (2007), has pointed out that host country cultural variables, uncertainty avoidance and trust etc can influence the location choices of MNC’s. Foreign firms prefer to invest in nations with low levels of uncertainty avoidance and high levels of trust. Iranian culture is more of a traditional one. Iran is reluctant to implement any reforms in its tradition and culture. Religious fundamentalism is more prevalent in Iranian societies and every activity will be weighed against the rules of the religion and belief in Iran’s soil. Freedom of expression is also limited in Iran and all the above cultural traits are factors which retards the FDI in Iran. Iran’s reluctance in importing new technologies and their suspected eyes on foreign direct investment has cost them dearly in the economic development. Many other Asian countries like India, China, Korea and Japan have developed a lot by exploiting the possibilities of the globalization and liberalization. Even the socialist country China has implemented the privatization process in order to reap more form the globalized world. Iran was standing as a silent witness when others went yards ahead in attracting the FDI. International sanctions, high inflation, and dampened consumer demand have depressed growth in the passenger car segment in Iran (Iran’s Automotive Industry Faces Challenges as the Country Suffers from Economic Sanctions, 2009). The legal requirements of Iran are another hurdle in attracting FDI. About 28% of the GDP is contributed by the automotive industry in Iran (Strategic Analysis on the Automotive Markets in Iran, 2005). Yet the Iranian administration failed to boost this sector despite of the high demand and growth potentials. Iran is believed to be a country which gives more importance to the religious fundamentalism. Religion cannot be isolated from any areas of human life in Iran and the business sector is also not an exception. Foreign automobile manufacturers are reluctant in investing heavily in Iran because of Iran’s strained relationships with the western world. The relationships with Iran and US are extremely vulnerable at present and many political Gurus are foreseeing a US intervention in Iran also. The hostile attitude of the Iranian administration has made the peace keeping efforts futile. The alleged involvement of Iran in sponsoring terrorism, Iran’s nuclear weapons ambitions and human right violations in Iran are the major obstacles in between the US and Iranian relationships (Background Note: Iran, 2009) Iran has one car for every 21 inhabitants whereas Turkey has one for every 12 people and Japan has one for every 2 people (FDI in Irans auto industry picks up speed, 2004). Iran is one of the heavily populated and economically developing countries in the world. The growth prospects of Iranian automotive sector are tremendous as per the statistics mentioned above. Most of the other global car markets are almost saturated whereas the Iranian market shows immense growth potentials. The domestic supply of vehicles is not adequate and Iran forced to import more cars from the foreign markets. Nasr (2008) mentioned that the transfer of new technologies to the Iranian soil is not taking place at a rapid pace. The automotive industry in Iran is one of the best examples of this slow progress of technological transfer to Iranian soil (Nasr, 2008). The reasons for the slow technological transfer to Iran can be attributed to the policies of the administration. Iran’s administrators have a habit of looking suspiciously at the technological innovations initially. They suspect some hidden agenda whenever an MNC brought new technology to Iran. Thus the MNC’s are not keen in either investing or bringing new technologies to Iran Research Objective and Research Questions This research proposal is aimed at finding out the reasons for the underdevelopment of Iran’s automotive industry. Many other countries like the Koreans who actively started to produce the automobiles at the same period or later than that of Iran, has progressed a lot compared to Iran. This research explores the reasons which prevent Iran from exploiting the FDI possibilities opened up by the globalization and liberalization policies. Research Design Both primary and secondary data will be used for this research. Primary data will be collected by visiting the major automobile manufacturing units in Iran. Interviews, surveys and questionnaire will be used to collect the primary data. The top executives and the employees of different automobile manufacturing units in Iran will be interviewed for the collection of the primary details. Secondary data will be collected from already published studies about the global automotive industries in general and Iran’s automotive sector in particular. Data Collection and analysis The primary data and the secondary data collected will be analysed thoroughly to reach conclusions. Global automotive sector is undergoing a dull period at present and Iran’s automotive sector also likely to follow the same pattern because of the current financial crisis across the world. The interviews and the surveys will definitely give enough data regarding the present, past and the future trends in Iranian automotive sector. These data can be compared against the global trends in order to find out any significant variations in Iranian automotive sector. Political, ideological, cultural, communal, legal and economical differences of Iran with other parts of the world may have significant role in the underdevelopment of Iran’s automotive sector. Time scale This research is intended to complete within three months. The first month will be used for visiting various automotive industries in Iran and to collect the primary data whereas the second month will be used for collecting the secondary data from internet, books, journals and other published sources. The third month will be used for the analysis, interpretations and comparisons of the data and to write the final research paper. Conclusions Iranian automotive industry has tremendous growth potentials, but the government of Iran failed to implement suitable strategies to attract FDI in the country. The demand for the automobile vehicles is huge in Iran, but Iran’s strained relationship with westerners and the over influence of religion on administration retards the progress of automotive industry in Iran. Reluctance in implementing privatization and political factors retards Iran’s ability to attract the much needed FDI for the development of the automotive sector. References 1. Bhardwaj, Arjun; Dietz, Joerg; Beamish, Paul W (2007), Host country cultural influences on foreign direct investment, Retrieved on 30 December 2009 from http://www.accessmylibrary.com/article-1G1-167777773/host-country-cultural-influences.html 2. Background Note: Iran, (2009) Retrieved on 30 December 2009 from http://www.state.gov/r/pa/ei/bgn/5314.htm 3. Buthe Tim and Milner Helen V, (2008), The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI through International Trade Agreements? American Journal of Political Science, Vol. 52, No. 4, October 2008 Retrieved on 30 December 2009 from http://www.princeton.edu/~hmilner/forthcoming%20papers/ButheMilner_AJPS_PoliticsOfForeignDirectInvestmentIntoDevelopingCountries.pdf 4. Economy watch,(n.d), Foreign Direct Investment (FDI) Retrieved on 30 December 2009 from http://www.economywatch.com/foreign-direct-investment/ 5. FDI in Irans auto industry picks up speed, (2004), Retrieved on 30 December 2009 from http://www.ameinfo.com/46564.html 6. Goldar Bishwanath and Banga rashmi, (2006) Impact of Trade Liberalization on Foreign Direct Investment in Indian Industries Retrieved on 30 December 2009 from http://www.ris.org.in/India_Globalisation_Impact_of_trade_liberalization_on_FDI_in_Industries_RBanga%20BN%20Goldar.pdf 7. Iran’s Automotive Industry Faces Challenges as the Country Suffers from Economic Sanctions (2009), Retrieved on 30 December 2009 from http://www.newswiretoday.com/news/42681/ 8. Kalotay Kalman and Hunya Gabor (2000) Privatization and FDI in Central and Eastern Europe, Retrieved on 30 December 2009 from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=878026 9. Nasr Samiei, (2008), A model for effective technology transfer to Iranian automotive Industry, Retrieved on 30 December 2009 from http://portal.acm.org/citation.cfm?id=1503955.1504004 .html Read More