A PEST Analysis for the Business Environment of Iran by HoseinRahmati

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									2012


   A PEST Analysis for
   the Business
   Environment of Iran
   This is a PEST (political, economic, social, and technological) analysis for the
   business environment of Islamic Republic of Iran.




                                                     Hosein Rahmati
A PEST Analysis for the Business Environment of Iran

Islamic Republic of Iran is a country situated is Middle East region. It has a population of

75,330,000 based on population and housing census by Iranian Statistical Center (2011). The

area of country is 1,648,195 km2, and GDP (PPP) of country is $827.344 billion for the year

2010, according to International Monetary Fund (IMF) (2010). 98 percent of the population

are Muslims, and the country is very rich in natural resources including oil and gas. Iran has

the second largest resources in natural gas after Russia and third largest resources of oil in the

world. Iran’s economy is highly dependent on oil economy and about 80 percent of the

country’s revenue from exports is from oil selling.


All the statistical data are extracted from World Bank reports (www.worldbank.org). Unless

is mentioned.



1-1    Political:

After 1979 Islamic revolution Iran’s domestic and international politics is highly affected by

Islamic thoughts. However now, 32 years after the Islamic revolution some moderate political

and social groups are growing up, but still they do not have substantial effects on the politics,

and the power is on the hands of followers of Ayatollah Khomeini, the leader and founder of

Islamic revolution on 1979.


1-1-1 Regulation Structure:


The legislative branch of Iranian government for making laws and regulations is Majlis

Shoraye Islami (Islamic Consultative Assembly). All of the laws enacted by Islamic

Consultative Assembly must be approved by the Guardian Council of the constitution to be

made sure that all enacted laws are adapted to the Islamic rules and the constitution. So it


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means that all of laws are adapted to Islamic (or sharia) rules and every enterprise or firm has

to follow the necessities of working in Islamic country. Being affected by the religious and

Islamic rules is one aspect of regulation structure in Iran, but on the other hand Iranian

business environment suffers from some outdated and old regulation. For example the

commercial code of Iran is enacted by the year 1932 and only it had a revision on 1968.

Therefore, the majority of Iranian juristics believe that it has serious lacks and is insufficient

for today business environment.


In addition, Iran still does not have a strong copyright law to protect the innovative ideas of

being copied or imitated by others. however there are some basic or primary laws but they are

outdated and old, and they have to be made up to date enough to be able to answer today’s

business requisites. In addition, Iran still does not develop an advanced e-commerce code,

which is very vital for today’s pervasive e-commerce activities.


1-1-2 Deregulation:


Iran’s economic system is a mixed economic system with more similarities to the socialist

economic systems. In the past decades government has tried to control economy by a

combination of commanded prices and giving substantial subsidies to fix prices (usually for

energy and foods). But in the few past years this policy has changed. More details will be

discussed later.


On the other hand Iran has a bureaucratic official system for those who are going to establish

a new business. This bureaucratic system is harmful for the economy and business

environment in two ways:


Firstly, a bureaucratic system leads to increase in informal or underground business activities,

which it makes hard for the government to collect taxes.



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Secondly, it causes that Iranian business environment not to be an interesting and

encouraging business environment for the investors.




                 Figure 1: Time series of days required to start a business in Iran (World Bank , 2011)


As we can see in the above chart the required days to start a business had a significant decline

trough the last 3 years and decreased to 8 days in 2011, but according to figure two Iran’s

rank in the world is 48, which is not a competitive situations. Therefore, Iran has to improve

its position in this world ranking to be more interesting place for the investors and

entrepreneurs.




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   Figure 2: Iran’s rank for starting a business among world good practice and selected counties (World Bank , 2011)


Bureaucracy has positioned Iran in not good ranks for some other key factor of business

environment such as employing workers (137th in the world), registering property (153rd in the

world), getting credit (113th in the world), protecting investors (165th in the world), and so on.


Therefore it seems that Iran should ease the regulations and speed up the deregulation process

to provide a more entrepreneurial milieu for the business activities. Some other rankings for

doing business in Iran are mentioned in figure 3.




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               Figure 3: Iran's rankings for doing business for various aspects (World Bank , 2011)




1-1-3 Pressure Groups


There are various political, religious, and militant pressure groups in Iran, which these have

very strong relationships with each other. The religious pressure groups are more dependent

to the seminary centers. On the other hand militant pressure groups are more dependent to the

military organizations. Political pressure groups are some after Islamic revolution engendered

and some of them have been established before Islamic revolution by some wealthy

revolutionist businesspersons. However, government tries to strengthen private sector and

facilitates establishing SMEs, but usually to have a large-scale enterprise it is necessary to be

connected, formally or informally, to the one of this pressure groups. In fact most of the

important and profitable businesses are managed and owned by governmental companies,

quasi-governmental companies or companies connected, formally or informally, to the one of


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the mentioned pressure groups. Therefore, it is quietly difficult to establish a large-scale

business and develop it without cooperation of governmental companies or pressure groups,

and there is no matter that how much money you have in your pocket, or even what is your

nationality, Iranian, or non-Iranian. Even strong multinational companies when they want to

have presence in Iran’s market, they have to be connected to one the mention groups. for

example the automotive producers Peugeot, Mercedes Benz, Mazda and Malaysian Proton,

produce and sell their cars in by Iran by making contracts with Iranian Automotive companies

like Iran Khodro, Bahman Group, and Saipa respectively. All this three companies are

government owned or quasi-government companies.


Also usually political and religious pressure groups oppose with the establishing of businesses

owned by judies with good relations with Israel or Zionists.




1-2    Economics

       Iran’s economy is highly dependent on oil exports. About 80% of counties income

       from exports is due to oil sales. However in the past 2 decades and after the 8-years

       war with Iraq, Iran planned to reduce its dependence on the oil exports but some

       limitations such as international sanctions by USA and UN have caused to Iran could

       not to gain its goals.




Macroeconomic Environment:

1-2-2 Prices and Subsidies:


From the beginning of Islamic revolution to end of war with Iraq at 1989, Iran had a price-

fixing policy to control the inflation. However, after the war this policy changed for releasing

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the prices to be determined by the market demand and supply. This policy ran gradually, but

Mahmud Ahmadi Nezhad the current presidency of Iran speed it up.


Price changes of some items are mentioned in the below table:


                                                Price (Rials) Before
                                                                                    Price (Rials) After
                    Product                             Subsidy
                                                                               Subsidy Elimination 2011
                                                  Elimination 2009
                 Wheat (kg)                                 70                                4000
               Gasoline (liter)                           1000                                8000
      CNG (Compressed Natural
                                                           504                                4050
                   Gas) (kg)
           Electricity (KW/hr.)                            165                             600-2100
Table 1: Price changes after eliminating the subsidies in Iran from 2009 to 2011 (Central Bank od the Islamic Repoublic of
                                              Iran, 2011) (1USD= 11100 Rials)




Elimination of subsidies provides the government huge resources of money. But also due to

substantial increase in prices the inflation has raised up to about 25 percent. Therefore the

government decided to pay pensions of 415000 Rials (about 27 $) to everybody of the needy

people. It means that a family with five members receives about 135 USD for each month.

These pensions are very important for both the needy people and the business environment

because they help to enhance the weakened purchasing power of people due to eliminating the

subsidies.


In fact, the Iranian government has maintained the purchasing power of people buy paying

34000 billion Rials (about 2.3 billion USD) as monthly pensions to the needy people, but also

the increase in prices has affected the producers of goods and services by increasing their

costs. However, they did not receive any remarkable financial help from government. This

situation has led to closing of some businesses and increase in unemployment rate. The



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unemployment rate for the year 2010 was 13.2 according to CIA world fact book estimation

(2011).




    Figure 4: Iran's unemployment rate and rank for 2010 among world countries according to CIA World Factbook
                                                 estimation (2011)




1-2-3 Gross Domestic Product (GDP) PPP:


Based on the IMF Iran’s GDP (PPP) for 2010 is $827.344 billion. By this GDP Iran ranks 17th

in the world. This is a good GDP and we can conclude that the Iranian’s purchasing power is

not bad.




1-2-3 Inflation Rate


The economy of Iran has suffered from inflation for a long period. however the government

was successful in controlling the inflation rate by years 2000, 2001, 2005 and 2006, but as we

can see on the below chart based on world bank reports (2011) the inflation has raised up in

the past 2007 and 2008 but again has controlled for 2009 an 2010.




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 Figure 5: inflation rate for consumer prices and GDP deflator accotding to world bank estimations (World Bank , 2011)




1-2-4 tax rate:


According to the World Bank data (2011) total tax rate for commercial profit in Iran for the

year 2010 was 44.1 %. This tax rate rationally is not competitive for a country to be an

interesting place for investement and business. Successful countries in grabbing investors

such as United Arab Emirate (14.1 %), Singapore (25.4%), Hong Kong (23%), Iraq (28.4%),

and Malaysia (33.7%) have lower tax rates.




1-2-5 Interest Rates:


Due to high rates of inflation, interest rates are also high in Iran. The normal interest rate in

Iranian banks differs from public banks to private banks. Private bank have annual interest

rates of about 18 to 25 percent for commercial loans and public banks take this loans with

annual interest rate of about 7 to 15 percent depended on the type of business.



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However taking cheap loans from public banks is usually difficult for those who do not have

proper connections. in addition some time government promote some specific types of

business such as hi-tech industries, aerospace industries, biotechnology industries, by giving

low interest rate loans to entrepreneurs.


1-2-6 Informal Economy


Like other developing countries also Iran buckles with informal economy. However in

comparison with other developing countries Iran has lower rate for informal economy.

According to a report by World Bank (2011) informal economy in Iran is 18% of GNP. On

the other hand based on my experience of working as a merchant in Iran usually the trader and

merchants do not like to make their deals through registered companies. Normally most of

them have their registered companies but they do not buy and sell under the name or with the

accounts of their companies, unless they have to do that. They reason is that they want to

evade from paying taxes. In fact one of the major problems of the government for collecting

taxes is that it cannot identify the taxpayers or it cannot prove that they have to pay more

taxes because there is no registered contract or formal deal.




1-2-7 Exchange Rates:


After the Islamic revolution the exchange rate Rial to the USD has raised up drastically.




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            Figure 6: exchange rate of Rial to USD, (Central Bank od the Islamic Repoublic of Iran, 2011)

The above figure shows a suddenly and drastic change in 2002 and continuous increase to

2011.


however the lower value of Rial than USD has some advantages for the domestic

manufacturers and producers against imported products, specifically if they export their

manufactured products, it is complicated to determine that how much they could be benefited

or loss by this trend for exchange rate because some of them use imported raw materials or

imported manufactured parts (like automotive industries with CKD contracts, for assembling

cars of foreign brands in Iranian factories).


1-2-8 WTO and International Trade:


Iran has an observer status in the WTO since 2005. Before Iran gain a membership statue in

the WTO it has to provide some prerequisites, which need major overhaul in the business

structure and operations.


In addition, Iran has faced with some difficulties in international trading due to US sanctions

for Iran’s nuclear program. However the US sanctions on Iran economy were somewhat

effective, but still Iranians have found alternatives ways against US sanctions. One of the


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important problems for Iranian traders is that they cannot open LCs to buy or sell goods

internationally.


1-3    Socio-Cultural:

1-3-1- Society Values and Principles


Since Iran is Muslim country and 98% of Iranian is Muslim, Islamic culture has a very strong

dominance in all aspect of Iranian life and society. For example all non-halal products are

banned legally and no one is willing to buy such products. All importers must make sure and

show some certifications that foods they are going to import are produced under halal product

standards. In addition, hijab is very impactful in this society and specifically for advertising

companies. Generally, all aspects of business have to follow Islamic culture, to be allowed to

pursue their commercial goals.


1-3-2 Religion and Cultural Sensitivity


As mentioned the main future of Iran’s culture is the Islam. In addition, because the Iran is an

ancient country with an old and rich civilization and culture, the Iranians pride to their

country and the inheritance of their ancestors. Therefore, they are sensitive with their religion

and nationality. Therefor it is more reasonable for the investors to adapt their businesses with

the Iranian sensitivity on their religion and national culture.


1-3-3 Demographic Profile and Ethnic Mix


Iran has various ethnics with different local culture and values. Based on the CIA World fact

book (2011), the Iran’s population is comprised of Persians 61%, Azeries 16%, Kurds 10%,

Lures 6%, Balochs 2%, Arabs 2%, Turkmens and Turkic tribes 2%, other 1% (2008 est.).

Each of these ethnicities are placed on their relative states. However some of them have



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migrated from their states to other states. Based on experiences Azeries and Persians are more

industrious than others.



1-4 Technology:

After Islamic revolution at 1979, US government has enacted various sanctions to weaken the

Iran’s economic and technologic power. But on the other side, these sanctions and a very

enthusiastic national demand for being independent to the western or eastern super power, has

led to very remarkable advances in technological fields. Today Iran is the 12th automobile

producer of the world with production of 1,599,454 motor vehicles (The International

Organization of Motor Vehicle Manufacturers, 2010).


Also Iran has invested considerable resources in hi-tech industries like aerospace, nuclear,

biotechnology, designing and building electricity power plants &... . In addition extensive oil

and gas industries engendered and developed in Iran after 1979 revolution, have a key role in

this situation, as motors of the industry.


Today Iranian military industries export their product to 57 countries if the world, including

NATO countries, with a worth of 100 million USD (Islamic Republic of Iran Ministry of

Defence, 2011).


1-4-1 Business Efficiency and Profitability:


However Iranian industries are able to produce hi-tech products beside consumer products,

but because the majority of these industries are state-owned many of them are over staffed

and unprofitable and run on low productivities rates, and if they are profitable they enjoy of

the extensive subsidies that government pay them.




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Summary

Iran is a wealthy country, with a strategic location in the Middle East, and considerable

opportunities to grow. But specifically in the past years US sanctions and threat against Iran

have raised political risk drastically and damaged Iran’s image of business opportunities for

investors. On the other hand some weaknesses in management and implementation of

planning have increased the business risk unreasonably.




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References
Central Bank od the Islamic Repoublic of Iran. (2011, December 20). Retrieved December
      20, 2011, from Central Bank od the Islamic Repoublic of Iran: www.cbi.ir

CIA. (2011, November 14). CIA- The World Factbook. Retrieved December 19, 2011, from
       CIA Website, Central Intelligence Service:
       https://www.cia.gov/library/publications/the-world-factbook/geos/ir.html

Internation Monetary Fund. (2010, September). World Economic Outlook (WEO) Slowing
       Growth, Rising Risks September 2011 . Retrieved December 19 , 2011, from
       International Monetary Fund:
       http://www.imf.org/external/pubs/ft/weo/2011/02/index.htm

Islamic Republic of Iran Ministry of Defence. (2011, June). Retrieved December 21, 2011,
       from IR, Iran. Ministry of Defence: http://www.mod.ir/news

Statistical Center of Iran. (2011, Novenber 13). Retrieved December 19, 2011, from
        Statistical Center of Iran: www.amar.org.ir

The International Organization of Motor Vehicle Manufacturers. (2010). OICA Production
       Statistics. Retrieved December 23, 2011, from OICA:
       http://www.oica.net/category/production-statistics/

World Bank . (2011, November). Iran, Islamic Rep. Data. Retrieved December 19, 2011,
      from World Bank Group: http://data.worldbank.org/country/iran-islamic-republic




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