How to do business in Iran successfully

How to do business in Iran successfully

How to do business in Iran successfully

The benefits of business in Iran and how to overcome the challenges facing by international companies

A Report by Roland Berger and CMS 

After the signature on 14 July 2015 of the Joint Comprehensive Plan of Action (JCPOA) by Iran, China, France, Russia, United Kingdom, United States, Germany and the European Union, executives around the globe toasted this game-changing breakthrough. In fact, Iran is the only sizeable economy to remain closed off from international business in an ever more globalized world – representing an enticing growth opportunity for multinationals.

In this regard, expert from global consultancy Roland Berger and CMS have investigated the business prospects in Iran and published an analysis document entitled “How to do business in Iran successfully”. In the following, a summary of the report is provided.The full version of study can be downloaded from CMS website.

Opportunity beckons

This enthusiasm towards Iran from the global business community is well-founded as the country offers some compelling reasons to do business.Foreign companies will find Iran a rewarding target for their goods, technology and expertise.

1.Strong fundamentals

Iran is the 17th largest country in the world and its population of 78 million is similar in size to Germany. Apart from its sheer size, Iran is rich in natural resources: it is the world's largest proven natural gas reserve holder (18.2 % of total) and the third in terms of conventional crude oilreserves. Iran also boasts vast reserves of copper, iron ore, zinc and lead.Iran is not only rich in natural resources but also in history and culture as one of the world's oldest civilizations dating back over five millennia.

     2. Sophistication

Although economically classified as a developing or emerging market, Iran can be considered in many ways a developed country. For example,it has strong established industries such as auto manufacturingand pharmaceuticals;its rail infrastructure is internationally respected and the metro system in Tehran can compete with its European counterparts; Iran has impressive education standards with a youth literacy rate of 98% and a university enrolment rate of 58%; Iran ranked 16th on global output of academic articles and is placed 43rd worldwide on availability of scientists and engineers.

The Iranian population is tech-savvy and rapidly digitizing with 35 million smartphones and an Internetpenetration above 50%.Social media usage is widespread and Iran has witnessed a surge in online services in the past few years. For example, the country's leading ecommerce player, Digikala, is already estimated to be worth around USD 300 million.

   3. Ambition

The Iranian government has ambitious plans for the country's future with domestic industries being stronger exporters, reduced unemployment and research and development to become even more central to growth.Iran is increasingly nurturing SMEs and business creation, and on the 'Ease of Doing Business' Index for the category'Starting Your Own Business', Iran is currently ranked 62nd out of 189 countries. These initiatives demonstrate an ambitious drive for Iran to become both a hub in a region with more than 400 million inhabitants and a global business player to be reckoned with.

      4. Help needed

Iran's allure is derived from the business opportunities it offers. Iran's natural resources ignite great interest and have a prominent role in the Iranian economy; for example, in 2014, 80% of the USD 64 billion exports were hydrocarbons, of which more than 75% found its way to China, India and Turkey. Now, once sanctions are eased, other countries should be able to tap into these natural resources. On the other hand, Iran announced plans to increase output significantly, offering opportunities for foreign companies. Also, Iranian consumers are an unquestionable attraction for foreign companies.One survey byOn Device shows that 66% of respondents prefer imported goods because of their perceived better quality. Currently, China is the major source of imports, accounting for 44% of the total, but Western companies are well positioned to challenge them.

Challenging place to do business

With all these positives, Iran is being discussed in the boardrooms of many multinationals, but at the same time it is not an easy place to do business and foreign companies must tread with care.Despite a promising outlook, Iran is still a fragile economy, plagued with uncertainties. Foreign companies need to establish a strategy for coping with Iran's unique business context and culture.

     1. Fragile economy

Although of considerable size and impressively resilient whilst facing international sanctions,the Iranian economy is still fragile – making foreign players wary.Iran's unstable economic context, largelydue to sanctions, creates uncertainty around workforce availability, regulatory initiatives that impact business dealings and guarantees of government contracts, and makes the country as a whole more vulnerable to global shocks.

      2. Business context

Operating in the Iranian business sector is not necessarily simple either. Iran typically ends up towards the bottom of various indices such as Ease of Doing Business, Global Competitiveness and Network Readiness; for example taxes used to be opaque in the past. This landed the country in 123rdplace (out of 189) on Paying Taxes in the Ease of Doing Business index.A further obstacle is the sheer amount of red tape. Iran is a highly centralized country with the governmentregulating (close to) all activities.A final point concerns the lack of transparency with regard to companies' ownership.

     3. Business culture

Iran's business culture is characterized by centralization and consensus at senior management level. Delegation of responsibility to lower levels is rare and senior management is involved in most decisions.Once matters have reached the senior level, then various boards, members and committees must be consulted before anything is signed off. Such drawn-out processes have obvious implications for the speed of decision-making.

 

Rules for successful business

Most obstacles for entering Iran can be overcome if companies adhere to certain rules and guidelines.Four ruleshave been identified to facilitate a smooth entry.

   1. Get the basics right

Before flying off to Iran, it is essential to do one's homework. A good understanding of the country's history, culture and business landscape is a minimumcondition. The same goes for language capabilities: many documents are only available in Persian and some older Iranians do not speak English or German. Having Persian speakers in your team will prove invaluable.

      2. Start at the top- but be aware of middlemen

Given the centralized nature of companies and governments bodies, it will take considerable time to get anything off the ground if companies start at the lower end. Aim for an entry point in the highest echelons of an organization. It may not be easy at first, but it will speed up the overall process. It is always best to go directly to senior management when possible. If this proves difficult, foreign companies may need to leverage middlemen to gain access – a common practice in the Middle East which can be an effective business accelerator.. Such locals can possess essential know-how on how to navigate within their culture and have the right contacts, but using these individuals requires careful consideration of compliance regulations and it comes with certain risks.

    3. Prepare yourself legally

Following the JCPOA, it is expected that most economic sanctions for non US-companies will be lifted or relaxed in the first quarter of 2016. However, regardless of the status of sanctions – whether they are in the process of being relaxed or are already lifted upon entering Iran – companies need to have a good understanding of the Iranian legal context in order to mitigate their investment risk.

One way to mitigate investment risk is to structure the business in a way that it falls under a Bilateral Investment Treaty (BIT).There are 52 BITs in force between Iran and other countries, such as Germany, France, Italy, Austria and Switzerland.In addition to the BITs, protection and incentives are also provided under Iranian national law. The Foreign Investment Promotion and Protection Act 2002 (FIPPA) guarantees important privileges to foreign investments such as an equal treatment standard, transfer of funds and dividends, compensation against expropriation and access to foreign courts.There are also various tax and legal provisions privileging the establishment of foreign companies in free trade zones and special economic zones.

Overall, the legal framework in Iran is mature, but it can hold surprises. It is highly advisable to engage a law firm with expertise in international business that has on-the-ground experience in Iran and can demonstrate up-to-date and reliable knowledge.

      4. Position for the long term

Although establishing a company does not legally require an Iranian partner, foreign companies are dependent on local Iranian companies and need to establish such partnerships. Looking for a partner may seem easy given the sheer size of the economy, but many companies are vying for the same business. So a differentiating and long-term positioning is crucial to spark interest.Providing financial investment is appreciated, but there is another true differentiating factor: long-term approach.Iranian partners expect a long-term commitment from foreign companies and this means collectively building a business, based on mutual respect and transfer of knowledge and expertise. To support such an approach, building local employment through offices and factories is a strong commitment.

CMS Pars; legal services for doing business with and in Iran

Founded in 1999, CMS is one of the most global law firms with 59 offices in 33 countries. Strong relationships with clients who expect the best have earned us our place among the world’s leading law firms. More than 3,000 lawyers across the world offer business-focused advice in law and tax matters, ranked among the leading practices in their respective jurisdictions.

Following the lifting of the sanctions against Iran, the country is re-entering the world market. In this regards, CMS opened its own Iran office in Tehran. CMS has become the first major international law firm to open a dedicated office in the Iranian capital, Tehran, led by partners of CMS Germany. This includes the right to provide legal advice in Iran.

 

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