Feb 4, 2016

As Iran moves to take advantage of the sanctions relief extended under the Joint Comprehensive Plan of Action, the recent drop in crude prices means that Tehran won’t be able to count on soaring oil revenues in the near future. What’s worse, the declining oil prices will affect the energy-intensive domestic industry, which has benefited from the high crude prices as it has been receiving indirect subsidies in the form of cheap fuel. In essence, this means that the energy-intensive Iranian industry is about to lose its competitive advantage in the global market. However, things are not all bleak. Iran has an asset that could potentially partially be relied on to tackle the issue of economic growth in the long term: its high-tech sector.

For years, Iran has been investing in industry reliant on intensive research and development (R&D). This policy has been a rare point of consensus in Tehran, which often sees controversy over economic policy driven by political rivalries. Indeed, Supreme Leader Ayatollah Ali Khamenei has called for the advancement of a knowledge-based economy, and in this vein, support for domestic high-tech firms. These companies have been benefiting from special tax exemptions, financial incentives and laws to ban imports of products whose equivalents have been produced domestically, among other measures.

The Islamic Republic’s 20-Year National Vision foresees Iran ascending to the top tier “in the areas of economy, science and technology in the western South Asia region (which includes Central Asia, Kyrgyz regions, the Middle East and neighboring countries).” The trend of increasing Iranian non-oil exports in recent years suggests a trajectory toward the latter objective. Indeed, according to the International Monetary Fund, Iranian non-oil revenues as a share of total fiscal revenues during 2012-14 were the highest among all oil-exporting Middle Eastern and North African countries at 56%. In comparison, the corresponding figure in Saudi Arabia and the United Arab Emirates was 20% and 31%, respectively. Furthermore, as of 2014, 36 science and technology parks hosting more than 3,650 companies were operating in Iran. These firms have directly employed more than 24,000 people. In addition, Iran is projected to increase the share of R&D in its gross domestic product, from the current 0.5% to 2.5% in the near future.

Sanctions were detrimental to Iran’s high-tech sector in primarily two ways. In relation to the supply chain, they made it difficult for manufacturers to purchase necessary components. Hence, manufacturers had to pay higher prices, with longer production lead times — which ultimately resulted in higher production costs. On the sales end, the sanctions caused a shrinking of exports and lack of interest in long-term contracts on the part of foreign companies. Furthermore, the high-tech sector was stripped of highly talented technicians — a trend that continues, notwithstanding the mild improvements during the past two years.

However, the sanctions also had a positive impact. For instance, they secured the domestic market for Iranian tech firms. In many cases, the final prices of imported high-tech goods were so high that customers preferred to purchase domestically designed and manufactured goods. Moreover, in relation to government procurements, there was a deliberate policy with compulsory regulations in place to prefer domestic products over imports. Hence, R&D investment in some fields became highly profitable during the sanctions era.