Sustaining entrepreneurship: lessons from Iran

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Iman Cheratian and
Saleh Goltabar
March 19, 2024

Does entrepreneurial activity naturally return to long-term average levels after big economic disturbances? This column presents new evidence from Iran on trends in entrepreneurship among various categories of firm size, sector and location – and suggests policies that could be effective in promoting entrepreneurial activities.

In a nutshell

Regardless of firm size, sector or location, external economic shocks typically have only a temporary influence on rates of entrepreneurship in Iran; this implies that any effects of policy intended to boost entrepreneurial activity will only be short-term.

To encourage greater persistence of entrepreneurship, policy should productive economic activities; measures should be designed in a way that promotes economic stability, develops public infrastructure, ensures security and order, improves political relations and fosters international cooperation.

To bolster competitiveness over time, policies could gradually reduce tariffs and trade barriers, empowering entrepreneurs and businesses to innovate and compete in the global market; this approach would help to establish a sustainable environment conducive to entrepreneurial prosperity.

Policies promoting entrepreneurship have been integrated into Iran’s national and regional economic and social development programmes. But the business environment has largely depended on macroeconomic fluctuations, particularly the prolonged economic sanctions that the country has experienced.

Following the imposition of sanctions in 2012, Iran experienced a decline in GDP growth of -7.44%, and its ‘ease of doing business’ ranking dropped to 152. The sanctions not only harmed the economy, but also inflicted significant damage on the business environment (Cheratian et al, 2021; Laudati and Pesaran, 2023).

Considering the importance of entrepreneurial capital and vulnerability to external shocks, Iran provides a valuable case study to quantify the persistence of shocks on start-up rates by size, sector and location. Studies have shown that positive shocks to income in developed nations increase the number of new firms through various channels (Nyström, 2007; Cheratian et al, 2021).

But resource-based economies like Iran’s rely on fluctuating global commodity prices, since natural resources drive most of their GDP growth. In these economies, government policies aimed at promoting prosperity tend to be temporary rather than persistent. Additionally, natural resource wealth can hinder productive entrepreneurship by encouraging rent-seeking behaviour (Farzanegan, 2014; Majbouri, 2016).

Research has increasingly explored aspects of convergence and persistence in entrepreneurship over the past decade, but less attention has been paid to emerging and resource-based economies compared to developed nations. To address this gap, our recent study investigates the persistence of new firm establishment in Iran.

As an emerging resource economy, Iran has experienced significant shocks, including war, sanctions, inflation, recession and protests, which have affected its business environment. Theory indicates that if the level of new firm entry remains stationary in such circumstances, policies will only have temporary effects on the willingness of entrepreneurs to enter markets. Conversely, if the level of new firm entry can change over the longer term, policies will have a persistent influence.

Our study also examines subgroups of firms to explain differences in ‘entrepreneurship stickiness’ based on size, sector and location. This can help to identify which kinds of firms are best suited for implementing business policies to achieve sustainable development goals.

Our data and method

Our study analyses persistence in firm entry in Iran over the period from 1981 to 2021, using annual data from the Ministry of Industry, Mining and Trade database. The data provide geographical and sectoral information on the quantity of entries, exits and incumbents based on the International Standard Industrial Classification system.

The data cover mining, manufacturing, electricity, support services, computer activities, research and development, and other business sectors. The information is collected at the individual firm level and includes all formal private and public single-establishment firms registered with social security, excluding informal and multi-establishment firms (Cheratian et al, 2020).

Entry rates are calculated using the labour market approach, which counts new entrants relative to the labour force. The analysis assesses both aggregate data and subgroups based on establishment size, industrial activity and province:

In terms of size, micro firms account for nearly 70% of entries in 1984-85, but only 20% by 2021; while large firm entries grew from 5% of the total in 1982 to over 30% in 2021.

In terms of industry, food/beverages and non-metallic mineral production dominated in 1981, but chemical manufacturing accounted for over 25% of entries by 2021, while food/beverages remained the second largest sector.

In terms of provinces, data from 23 out of the 31 Iranian provinces are examined, excluding some new or incomplete provinces. Tehran, Alborz and Isfahan consistently had the greatest share of entries, although entry has become more dispersed nationally in recent years.

Our findings

The findings reveal that external shocks typically have a temporary influence on entrepreneurship rates for most subgroups by size, sector and location in Iran. In these cases, any policy effects will only be short-term. But certain provinces such as Zanjan and Lorestan, along with the electrical machinery and equipment sector, exhibit permanent shock effects on entrepreneurship trends.

In terms of the implications for policy to encourage greater persistence, the government should aim to encourage production, trade and productive economic activities. The policies can be guided in a way that promotes overall economic stability, develops public infrastructure, ensures security and order, improves political relations and fosters international cooperation.

In addition, policies should focus on market development, strengthening financial systems, increasing transparency and competition, as well as enhancing the quality of laws and regulations. These measures can help gradually to boost businesses’ productive capacity and investment motivation, providing an enabling environment for healthy entrepreneurship.

The government’s primary role should be to ensure investment security and stability, rather than engaging in rent-seeking or destructive behaviours. Efforts should also steer the economy towards more effective competition and transparency.

Given the severe sanctions over the past decade, it is important to facilitate normalisation with the international financial system and stabilise the banking sector. Policies should focus on laying the groundwork for infrastructure growth, reforming laws that hinder production and avoiding interference in pricing.

To bolster competitiveness over time, related policies could gradually reduce tariffs and trade barriers, empowering entrepreneurs and businesses to innovate and compete in the market. This approach would help to establish a sustainable environment conducive to entrepreneurial prosperity.

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