The International Organization of Motor Vehicle Manufacturers Essay Sample
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Introduction of TOPIC
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.
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 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is one aspect of regulation structure in Iran, but on the other hand Iranian business environment suffers from some outdated and old regulation.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.
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.
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.
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.
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 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.
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.
1-2-2 Prices and Subsidies:
From the beginning of Islamic revolution to end of war with Iraq at 1989, Iran
Price changes of some items are mentioned in the below table:
Product Price (Rials) Before Subsidy Elimination 2009 Price (Rials) After Subsidy Elimination 2011
Wheat (kg) 70 4000
Gasoline (liter) 1000 8000
CNG (Compressed Natural Gas) (kg) 504 4050
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 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.
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.
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.
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 important problems for Iranian traders is that they cannot open LCs to buy or sell goods internationally.
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 migrated from their states to other states. Based on experiences Azeries and Persians are more industrious than others.
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.
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.
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