Post-Sanction Era and Attracting Foreign Direct Investment

The interest of the economic officials of the eleventh government in attracting foreign direct investment, especially in the post-sanction period, is not hidden. The current conditions of the Iranian economy, characterized by recession, reduced government oil revenues, budget deficits, and inefficient allocation of financial resources to matters such as cash subsidies, leave little opportunity for the government budget to be utilized for investment in infrastructure. Therefore, one of the important conditions for overcoming the current recession-inflation is economic growth and job creation through attracting foreign direct investment. However, according to a recent World Bank report, 'foreign direct investment may reach about $3 billion a year, which is double the current figure but still lower than its peak in 2003.' In the years following the revolution, the foreign investment attracted by Iran from total global investment has been very insignificant and has decreased particularly during the sanctions period. Concurrently, the competition among developing countries for attracting investment has intensified. As a result, attracting investment from developed countries for a specific country like Iran—facing both external and internal tensions—will be more difficult. Meanwhile, some Gulf countries such as Bahrain, Qatar, the UAE, and Oman have attracted more foreign direct investment compared to Iran. Although these mentioned countries are not comparable to Iran in terms of the volume of economic activities, market size, climatic diversity, geographical extent, and population size, they still have a better infrastructural position than Iran. If we consider the per capita foreign direct investment or the geographical population ratio as a comparison criterion, the efficiency difference between Iran and Middle Eastern countries in attracting international investment becomes more evident. The per capita foreign direct investment in Iran is significantly lower than in the mentioned countries. These countries, with consumer markets several times smaller than Iran, have managed to attract investment several times that of Iran. The comparison of foreign direct investment to Iran's foreign trade indicates that although Iran has high potential for international trade, investors do not consider the conditions in Iran suitable for investment. This has resulted in Iran's foreign trade not being balanced with the level of investment attraction. If we base this comparison on the net inflow and outflow of investment to Iran, the situation becomes even more complicated. Iran has maintained its foreign trade balance through crude oil exports and has a limited trade and currency surplus. However, this currency surplus is later transferred abroad. This means that the financial and currency returns from crude oil sales are also transferred out of the country. The presented image raises the question of what factors and conditions are at play that place the Iranian economy in such a process. According to economists, the key to understanding the movement of foreign direct investment lies in the ratio between financial returns (profitability) and risk. Based on this understanding, the inflow and outflow of investment to a specific economic environment ultimately depends on the ratio between financial returns (profitability) and risk in that specific economic environment. Risk, however, is a composite set of political risk, commercial transaction risk, currency risk, trade risk, credit risk, business environment risk, and so on. Therefore, if foreign investors do not consider the profit derived from investment in Iran appropriate relative to the level of risk, little investment will be attracted to Iran. If the risk of an investment project is high but the profit derived from operations on an international scale is not commensurate, it is said that the project is expensive. Expensive projects usually do not hold much appeal for investors. With the interconnection and digitization of international markets, investors now have more freedom to choose markets and determine risk-return rates. With risk management institutions and the rapid and optimal circulation of information, investors do not suffer from informational vacuums and do not confine themselves to a specific market. The high investment risk in Iran is mainly due to the high political risk. It can even be claimed that currency risk, financial risk, short-term credit risk, and trade risk in the current conditions of Iran are dependent on political risk. The reason for this is clear. The allocation of the main source of income and currency revenue to the government and the significant role of another part of the authority in the private sector means that any political change will significantly impact the aforementioned risks. The high degree of political risk in Iran is the result of a series of various structural factors that have emerged in a historical process and are the result of several factors. First, the political system of Iran is not inclusive and does not cover all political tendencies in Iran. Second, the mechanism for transforming conflicts within the authority into harmonization is also not effective and system-dependent; rather, it is the mediation of influential individuals that temporarily brings the internal tensions of the system to reconciliation but does not resolve them definitively. Therefore, the political system of Iran, in the first place, lacks the necessary ability and efficiency to involve the broadest spectrum of social classes and various tendencies. As a result, significant political tendencies remain outside the authority, which, despite representing part of the citizens, do not have political expression and representation at the level of public and official policy in society. The silent segment of citizens, although seemingly quiet, can create long-term instability in a political system if their views are not reflected within the framework of official policy. The silent segment of citizens, even in European democracies, where political tendencies usually do not remain hidden, can be the source of unpredictable changes. The events of Khordad 2, the Green Movement, and the subsequent rise of Rouhani are different facets of this hidden discontent. Besides the lack of inclusivity of the political system, another factor reflecting the high political risk in Iran is the severe challenge within the authority itself. The multiplicity and divergence of interests and concerns in political systems is a very natural and even positive matter. The point is that if there is no specific and fundamental mechanism for channeling and harmonizing conflicting interests and concerns, the divergence turns into open intra-system conflict. Such conflict reduces the degree of rationality in the behavior of political actors. The ultimate goal of the political actors in Iran's official arena is the complete seizure of power for their faction, which is usually achieved by ousting the rival. The experience of such a process, which began the day after the fall of the previous regime, started with the elimination of the first president and continued with the house arrest of Mir Hossein Mousavi and Mehdi Karroubi. In established political systems where the roles of the opposition and the ruling party are defined by law or political tradition, these two forces usually deepen the political process instead of locking each other out with constructive criticism and formulating alternative programs. With what has been presented, it can be claimed that the current conditions of society are such that any potential change, even if not structural, will have unpredictable consequences. The existence of such a situation is enough for the economic environment of Iran, despite its many attractions, to become unpredictable. Therefore, foreign investors do not consider Iran preferable for investment compared to other countries, as structural or quasi-structural changes in Iranian society are not unexpected.