FDI

Any investment made by a resident enterprise or direct investor, into the business that lives in another country which includes: management, technology, and organizational skills.

Types of FDI

By considering the investment arrangement, the foreign investor either set up a whole subsidiary in the host country. This investment structure called the Greenfield investment. In the other case, the investor will buy a share or become a partner with the firm in the host country which called Brownfield investment. 

The main Components of FDI

• Equity

• reinvested earnings

• intra-business loans.

If the investor company buys the company in the host country, then the determinants are:

1. Upstream combination, by purchasing a provider

2. Horizontal alliance, investing a company making the same product

3. Downstream integration, investing in a firm using or distributing its products

4. Diversification, investing in a company doing somewhat different things

The level of attractiveness for the foreign direct investors of any related industry in the host country depends on

• The level of know-how

• GDP level of the host country

• experienced work-force

• the cost of labor

• Tax deduction of the host country's government

• the restriction of the host government considering the environmental issues

• tariffs

• public incentives

There are other key factors which worth mentioning

Financials

•  Increase in "Total capital" of the foreign economy.
•  Increase in Official reserves of one country 
• Increase in "Total capital" of the foreign economy. 
• Increase in "Total capital" of the foreign economy.
• Increase in External trade, wages, and employment rate
• International currency built up
• In the Greenfield >> increase in job
• Rise in unemployment due to inefficient acquisition
•  Higher pay in the investor's country

Knowledge

• Greater yield for overseas corporations compare to local ones leads to innovation
• • Giving competitive superiority to investors and motivation for other rivals to join the market.

Political

• corruption solved by bribery from the high-level pie
• For each of investments, there exist different sectors for each category for investors which they invest their funds based on their investment strategy.

FDI conducted in two ways

1. Foreign investment in a new Iranian company conducted by the buy of an already-established company’s shares.

2. The exchange of contractual arrangements between the parties with or without formation of a company

The destinations of the foreign direct investment are in 9 sectors in the economy. The classified segments are

• Large-scale industries, oil & gas, mines
• Foreign trade activities
• Banking operations by non-state enterprises and public institutions
• Insurance
• Power supply, generation, and importation of electricity for domestic consumption and export
• All postal and telecommunication activities
• Roads and railways
• Aviation

There are four different methods for investors to invest their funds in these nine segments. These methods were assigned by the government to provide the best result

• Contractual Schemes; joint venture, IPC, buy-back contracts, BOT
• Investment in construction projects
• Pricing methods
• Dispute Resolution

There are four methods for FPI as

1. Iran’s Stock Exchange
2. Foreign Investments in the Tehran Stock Exchange
3. Buying and Selling Stocks
4. Global Relationship

The Pros & Cons of FDI & FPI

Risk Level in FDI

There are three critical risks for investing funds in a foreign country either by a firm, Individual or the Government.

1. Higher Transaction Costs

2. Currency Volatility

3. Liquidity Risks

There are apparently of the cost will dominate the funds, time and the brand reputation of the investor. However, in our case, we could point not the purely one, but one who oppresses the weighs of the other two in Iran's economy. You are right by that, The currency volatility which not only presented the extreme consequences for our local investors but is the newborn child for foreign investors. The main issue will get further sophisticated through the time. Iran state gave the legislation which assigns two different values for American dollars in the country's market. First, is the lower value of the rial for dollar kept by the authority in the name of helping our importers to pay less for the business transactions. The other is the real value which is not notably higher but also is the real value of rial holds against the currency. Now we pointed out in brief about the place where our stakeholders and the state having themselves involved. The full problem for the foreign investor arises when the funds invested change its value day by day growing in confusion. If we have a close look at this dilemma, we could observe in most cases the investor is the winner. However, the money-losing and the progress story creates a phycological game which might not be of concern for most investors.

The role of Foreign Investment in the Energy Sector of Iran

Iran's Foreign Investment Promotion and Protection Act, methods of investment are Foreign Direct Investment where the activity of the private sector permitted. Foreign investment in all industries within the framework of "Joint-venture," "Buy-back" and "Build-run-transfer" schemes where the return of capital and profits accrued emanated from the economic performance of the project in which the investment made. The revenue of such wealth and benefit shall not depend on a guarantee by the government, state-owned companies or banks. In the energy sector, power plant projects, the model based on BOT or BOO and the contractual model is often Energy Conversion Agreement.

1. First, investing in Iran's power industry is to set up a Project Company in Iran with 100% foreign ownership and carry out the project so. Foreign investors bid for Power Plant tendering after forming the Project Team. Guiding an invested country, the subject of the project and its performance requirements, building a joint venture which has a separate legal personality from its members and often called "Corporate joint venture." These days, one of the most important debate according to article 3 of Iran's Foreign Investment Promotion and Protection Act, methods of investment are in two forms. Foreign Direct Investment where the private sector permitted; foreign investment in all sectors within the framework of "Joint-venture," "Buy-back" and "Build-run-transfer" in which profits collected from the economic performance of the project. Moreover, such return of capital and benefit shall not depend on a guarantee by the government, state-owned companies or banks. In the energy sector, power plant projects, the model based on BOT or BOO and the contractual model is often Energy Conversion Agreement.

Foreign direct investment in economic transition

1. Our starting point is to recognize the heterogeneity of FDI.

Different projects have different characteristics, undertaken for some reasons, and connected with conditions of host economies. We concentrate on two aspects of this heterogeneity; The first is the distinction between FDI projects whose primary function is to serve local and local markets and those aimed at exporting beyond the region. Also, FDI projects directed at local markets are like the actions of the company abroad and might involve reproduction of management resources.

In comparison, export-oriented FDI involves projects specializing in a part of the firm's manufacturing process and is often more like relocation task than replication. Our proof, so, shows Part of this diversity can account due to the path and pace of repairs. Structural reforms relate to privatization, of businesses restructuring, the scope, and openness of markets, progress in financial sector reform, and production of both legal and institutional framework supporting the private sector action. The EBRD's transition indications can grade progress on these dimensions.

2. The Nation risk estimated by the survey respondents.

Interviewees asked to rank the states they felt confident assessing into four hazards categories, with number 1 pointing out high-risk countries and 4 to considerable uncertainty. The data reported here represent the average ratings. It is reasonable to remind respondents who have before invested in a state wherein regarded its threat () is better than those that do not. They also sought to describe the size of particular sources of social risk. From five alternatives offered to them, regulatory and macroeconomic risks considered being of most significance by far of all country risk measures, accompanied by transfer risk.

In such a political situation in Iran, foreigners are not interested in investing in Iran. Attracting foreign investment has resumed since 1993 after a long halt in 10 years, but, due to special political and economic conditions prevailing in the country, fluctuations in the rates of foreign 126. During 1993-1998, the government passed specific plans for foreign investors.

The statistics released show the amount of approved foreign investments and not the amount of investment entering the country. These figures show only those external expenditures the to the law on attraction and protection of foreign investment and do not contain those capitals made in the free trade zones. The volume of international investments approved in 1994, the first year of the Second Five Year Economic Development Plan, increases nine-fold to stand at $187.9 million. In 1995, foreign investments which invested by foreign investors tripled. About the number, joint venture projects increase by 34 percent to $251.1 million. The trend of international investment reverses in a 1997 by 54 percent to $203.8 million. By 1998, the volume of foreign investments made is expenditures triple of the number of joint venture projects and increases by 34 percent to $251.1 million. The trend of international investment reverses in a 1997 by 54 percent to $203.8 million. By 1998, the volume of foreign investments made is five times as much as that of 1997 and increases to about $1.2 billion. During 1993-1998, the government approves 64 foreign investment plans worth about $2 billion. European countries with $1.6 billion and Asian nations with $401.5 million are major international investors. Nationalizing foreign trade, expanding land reform and setting up new protection laws for labors, brought up conflicts among members of the parliament oversight body empowered to veto all legislation.

To carry out this ambitious program, he sought to use foreign lending and efforts to attract private domestic and international investment. Assuming office at the height of a significant boost in oil price levels sustained growth and revenue increase due to the foreign exchange. The departure of international investors opened opportunities for domestic firms, those with Revolutionary Guard connections, and boosted the Tehran Stock Exchange.

Host country which investors invest their funds in projects do enjoy growth in employment rate, an increase in salary, management skills transfer, get new technology, knowledge transfer and boost in production. FDI sometimes has the potential to be harmful to the host country economy. This incident called market stealing. The foreign entities may overshadow the local firm by having the ability but hesitate to transfer the skill and knowledge which resulted in production increase.

In some countries, FDI has the adverse effect on the economy. There are two reasons for this; first, GDP is not a perfect measure of the economic growth. Second, the skill and knowledge of workers in the host country to play a critical factor in economic prosperity. The host economy requires focussing on higher indicators of infrastructure, bank reforms, and institutional policy. These reasons pressure the host economy concentrating on business climate and positive institutional changes.

THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN IRAN'S ECONOMY

Economists believe capital leads to economic development and growth and then design all designs and commercial patterns based on this point of view. Lack of market trade actions in buying and selling of technology is of FDI concern. If the host country could buy technology, FDI would never happen. Because no one sells technology and even no one can buy or sell technology like other goods and also enterprises do not want to sell technology for reasons: first, he or she does not want his or her innovation showed, second since management and technology ever complement each other. They cannot leave technology to other countries with low management efficiency and foreign direct investment by enterprises -keeps enterprises benefits, Studies have found a positive relationship between openness and FDI inflows.

The relationship between openness and FDI is complicating and needs careful explanation. To simplify this complexity, I recognize two categories of transparency - "Openness to trade" and "Openness to capital flow. " On the other hand,  the second part refers to the ease by which goods and services imported and exported; the latter refers to the lack of controls for moving the capital. Trade openness attracts export-oriented FDI, while trade restriction attracts, more FDI, whose primary interest is to take advantage of the domestic market. "The competitiveness approximated by the real exchange rate. In theory, the influence of this variable on FDI is ambiguous and depends on the motivation of foreign investors. Low inflation rate makes local assets and production cost cheaper, leading to higher in inflows of FDI. At the same time, this might decrease the value of domestic production due to lack of investment funds entrance by foreign investors.

From another viewpoint, attention to supply and demand of exchange, exchange rate fluctuations affect FDI from the supply side. Exchange rate increase - in the result of exchange supply shortage - make exchange movement volume to decrease thus FDI inflows reduce. Exchange rate stability improves certainty in the domestic economy so increases investment probability in the current time and future. Well-developed infrastructures such as roads, airports, water supply, uninterrupted power supply, telephones, and Internet access are significant advantages in attracting foreign investments. Poor foundations increase the cost of doing business and reduce the rate of return on investment.

2. Investors could set up a Project Company in Iran with 100% foreign ownership and carry out the project so. Foreign investors could bid for Power Plant tendering after forming the company itself. Respecting the laws and regulations of an invested country, the subject of the project and its performance requirements, sometimes building a joint venture in the form of a company in which separate legal personality formed and its members and often called "Corporative joint venture." These days, one of the most important discussions in experimental and industrial cycles optimizes the contractual mechanism in the upstream section of the oil and gas projects in Iran." February 2014, a seminar held in Tehran and some provisions of the new oil contracts which by "Oil Contracts Revision Committee" unveiled under the title "Iran Petroleum Contract." Either the production operations implemented by the National Iranian Oil Company or its affiliated companies and financial and technical support of contractor, or the development company also takes part in production operations, or to carry out and manage field production operations. Production operations company established and built in the former stage will offer financial and technical support to the production company.

3.Build-operate-transfer Contract In BOT contracts, the private sector will take part in full for the production. On the other hand, the private sector is accountable for financing, supplying, laying out the models, and project construction.By selling the project's output while developing it, the emergency fund arises.

4. Investor's background and the brief history of the company, the year of establishment area of activities in case of external investor is a natural person, a photocopy of passport and resume should be ready.

5. The record of machinery, equipment and CKD part imported into the country as a part of the foreign investors capital.

6. A comprehensive report with Supervisory Board adopting the decision. Assuming the oil and gas projects are to be in the country's overall interest, the Board conveys its favored choice through MEAF for approval and issues an Investment Decree.

THE FDI PROSPECTS IN IRAN

With the victory of Ahmadinejad in the June 2006 presidential election, the outlook for the Iranian economy has become more than ever precarious and uncertain. A self-proclaimed religious fundamentalist dedicated to Ayatollah Khomeini's ideals of individual piety and social justice, the new president has already raised the specter of a return to the early days of the 1979 revolution. Troubled by his penchant towards the "Chinese model," he has pledged once again to turn Iran into a role model of a modern, progressive, and powerful Islamic society. His post-election statements about the need of thinking in a creative way do press new state intervention and regulation. His open advocacy of redistributing Iran's wealth among the poor, increasing budget subsidies, lowering interest rates, raising government salaries, reexamining energy buy-back agreements, ending the reign of the "Oil mafia," and giving domestic entities priority over foreign oil and gas companies sound ominous. Iran's-rooted economic problems are relative stagnation, protracted unemployment, stubborn double-digit inflation, perennial budget deficits, widespread poverty and widening income gaps, low overall productivity, and a toxic mixture of crony capitalism and crude socialism must be some serious. No-nonsense undertakings, such as larger annual real net investment, greater technical know-how, and more competent management. None of these are yet to see on Ahmadinejad's radar. Should he put his populist ideas into law with the help of a complacent Majes and a supportive Council of Guardians, one should expect that all the economic reforms of the past fifteen years would reverse, and Musavi's destructive agenda would resuscitate. If his promises do not go beyond campaign rhetoric, it will still take time for investors' confidence to restore.

Already reports of capital flight and a sped up the exit of brains fill the front pages of the local press. The new president's chauvinistic pronouncements about Iran's right to enjoy nuclear power status may jeopardize Iran's chances of concluding a favorable trade and cooperation agreement with the European Union and joining the World Trade Organization. The one silver lining in this disturbing perspective is the exigency of the time. The same thorny economic problems that catapulted Ahmadinejad from being an obscure governor and a fanatic mayor to occupying Iran's highest office and becoming a potential savior could compel enough to prevent him from going further. At no time in world economic history has "Distribution before growth" solved the problem of mass poverty.

The Government Move

As foreign control over its resources prohibited by the law and the Constitution of the Islamic Republic, the concept of the so-called buy-back developed. As the constitution derived from interpreting Islamic law, its Article 2 states that only God is sovereign and legislate. Likewise, the structure shows under Article 4 that all civil, penal, financial, economic, administrative, cultural, military, political, and other laws and regulations based on Islamic criteria.

For the investment return to the risks involved, a so-called RF added to the annuity. The size of the RF is an item to negotiate, not only because it will announce the return on the oil company’s investment, But also because it affects the cost efficiency, a measure used by NIOC to test proposals from foreign oil companies or contractor, part of the Foreign investment law. Capital investment in the Iranian oil and gas industry is the new Iranian investment law, the FIPPA. Law retains most of its predecessors, the 1956 Law for the Attraction and Protection of Foreign Investment (LAPFI). However, the FIPPA goes further by extending coverage of ‘investment’ to include schemes not covered under LAPFI.

The main shortcoming of the new investment law is that it allows foreign entities to invest only in areas where private Iranian companies can spend (Article 3(a) FIPPA). So, relating to investments in the oil and gas industry, Articles 44 and 45 of the Iranian Constitution should recall, and Yet another law was affecting foreign investment. Besides FIPPA, other rules that contain provisions relating to foreign investment. The Law to administer the Free Trade-Industrial Zones 54 that has been in force since 1993 is noteworthy in this context. It brings revenue for investor's funds invested in these zones by income and property tax exemptions for 15 years.

The potential market segments in Iran for FDI

1. Iran's raw materials, attractive for foreign investments

Tehran, Oct 2, IRNA - Iran has vast reserves of mineral and hydrocarbon resources that have made the country to an attractive market for foreign investors.

The Islamic Republic is among the ten major mineral-rich countries. It possesses seven percent of the world's total mineral deposits with about 68 kinds of commercially valued minerals, including gold reserves. The volume of Iran's metals estimated at 57 billion tons.

Gas and Oil raw materials cover most of the non-oil export section of Iran's economy. Since March 21st, gas condenses, butane, propane and other raw materials comprises top exported elements of Iran' basket for almost five months in the row.

Still, there is an opportunity attracting foreign investors focusing on raw material reserves. On top of that,  Mining and mineral industries are proper areas attracting investment. Iran has defined projects meriting over $30 billion in mining and mineral industries such as steel, copper, aluminum, and gold, according to local officials.

Regional policies revision, globe cooperation expansion, to gain the trust of the foreigners for investment, to recover the country's fragile economy due to the sanctions.

2.Hotel Development in Iran

Being a desirable tourist destination, Iran has a rich cultural heritage with 19 UNESCO listed sites. Tourist attractions range from ancient Persian ruins to beaches on the Persian Gulf and the Caspian Sea beside the ski resorts as Dizin.Tourism industry contributed 6.1% of the country’s GDP in 2014. Moreover, expected to rise by an average annual growth rate of 5.5% through 2025. Considering its young population, 60% of which is below the age of 30, relatively high GDP per capita, and a location Iran has a strong potential to become a leading tourism market globally.

Provided a series of incentives by the Iranian Government, Foreign investors looking to capitalize on these opportunities have a New hotel and tourism infrastructure in less developed areas will receive a 100% exemption on income tax if the Iranian Cultural Heritage issues a license. Situations like this, 80 % of the financing enabled by European banks for the investments projects located in Tehran and 60%  in other regions

The hospitality sector likely is one of the first to see international brands, Given that financing remains a key challenge for many projects in Iran, the favorable view taken by banks looking to hotel investments is promising. European financial institutions and local partners collaborate with the assistance of key advisors.

3. Telecommunications

4.Banking industry

5.Tourism industry

The role of tax and tax credits in Foreign Investment.

The tax system, the money portion that the government deducts from an individual or corporate entity income, has three roles. First, revenue raising aspect. Second, income distribution. Third, resource allocation.

Tax incentives for Foreign Direct Investment categorized into five sections.

1. International competitiveness

Tax deduction on exports and R&D increases the incentives. Make foreigners more eager to invest their funds as they earn more due to the lower tax level. It increases the employment and salaries which will raise the tax collected by the government.

2. Correction of “market failure.”

Tax incentives targeted at research activities, or at the development and implementation of new production processes and products, may introduce to encourage firms (domestic and foreign) to increase their investments in these areas

3. Regional development (income distribution), Increase in employment level

4. Macroeconomic considerations

Discuss a range of macroeconomic problems, including concerns over cyclical (or structural) unemployment, the balance of payments deficits, and the effects of high inflation on tax liabilities.

5. A balancing of considerations

Even though the revenue from FDI tax amount is lower than most local investment, but the benefits that the economy receive from is high.Both Iranian and Foreigner investors will benefit the same from the tax exemption for their investment.

THE INDIVIDUALS OR ENTITIES ELIGIBLE TO DIRECT TAXING

1. Owners of properties inside the country

2. If you are an Iranian and live in Iran, you have to pay tax on your income whether from the local source or foreign.

3. If you are an Iranian and live outside, you have to pay tax on income you make inside Iran.

4. If you are Iranian, you have to pay tax on your income either from the local source or foreign.

5. Any foreigner who make a profit from inside Iran or Income through delegation of authority.

OUR GROUP'S INPUT

1. The critical uncertainty affecting Iran‟s economic future is the leadership's capacity to circumvent and mitigate sanctions, thus restricting its banking relationships with Europe.

2. The drop in production level related to old oil fields, also, to political and logistical constraints on Iran's ability to address its gas resources. It will take a steeper toll on Iran‟s revenues and hard currency reserves.

3. The government might attract few foreign investors by offering more attractive contracts. However, changing the current " buy-back" system requires a massive internal political battle.