Iran’s New Industrial Policy to “Transform Political Economy”

Prior to the lifting of nuclear-related sanctions under the Joint Comprehensive Plan of Action, multinational companies seeking to manufacture in Iran were effectively required to work with a local operating partner. The historical partnership between Peugeot and Iran Khodro as well as that between Siemens and MAPNA attest to this requirement of joint operation.]

In these arrangements, the foreign company brought Iran technology and financing, and the local partner brought political support, facilities and labor. Iran’s market is large enough such that foreign companies could be enticed to invest on these terms. As such, foreign direct investment accelerated beginning in the mid-1990s. But this model necessarily led foreign companies to treat Iran as a secondary market.

Indeed, because they did not enjoy outright control over their investments in Iran, foreign multinationals did not invest proactively. The automobiles, rolling stock, industrial machinery and other output from these manufacturing partnerships were typically one or two generations old.

Subsequently, Iran struggled to export its manufactured output, being limited to only regional markets where buyers would accept the obsolete, if functional, vehicles and equipment. As it charted a new path for Iran’s economy, the Rouhani administration sought to breach the limits of this approach.

To encourage multinationals to treat Iran as a primary market, it was necessary to allow foreign control of the local entity and remove the requirement of an operating partnership with an Iranian industrial enterprise, whose contribution would always prove difficult to bring to a global standard. At the same time, given political constraints, totally eliminating the state’s role remained impossible.

The new deals struck by IDRO show a new middle way. IDRO’s own company website outlines a progressive mission for state-owned enterprise — make “great efforts to privatize … affiliated companies” in part by “promotion of local and foreign investment … with minority holdings owned by IDRO [less than 50% of the shares].” Additionally, unlike the partnerships created with the new Iran Petroleum Contract, a partnership with IDRO does not require a multinational company to have an operational partner.

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