Economic Research Forum (ERF)

Sustaining entrepreneurship: lessons from Iran

711
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.

Further reading

Cheratian, I, A Golpe, S Goltabar and J Iglesias (2020) ‘The unemployment-entrepreneurship nexus: new evidence from 30 Iranian provinces’, International Journal of Emerging Markets 15(3): 469-89.

Cheratian, I, and S Goltabar (2023a) ‘Finance-growth nexus in time of COVID-19 lockdown: Case of Iranian MSMEs’, ERF Working Paper No. 1695.

Cheratian, I, and S Goltabar (2023b) ‘Beyond sanctions: Unpacking growth moderators for Iranian MSMEs’. Available at SSRN: https://ssrn.com/abstract=4674116 

Cheratian, I, and S Goltabar (2023c) ‘Testing the persistence in firm entry by size, sector, and location: Case of Iran‘, ERF Working Paper No. 1692.

Cheratian, I, S Goltabar and CD Calá (2021) ‘Spatial drivers of firm entry in Iran’, Annals of Regional Science 66: 463-96.

Cheratian, I, S Goltabar and MR Farzanegan (2023) ‘Firms’ persistence under sanctions: Microlevel evidence from Iran’, The World Economy 46(8): 2408-31.

Farzanegan, MR (2014) ‘Can oil-rich countries encourage entrepreneurship?’, Entrepreneurship and Regional Development 26(9-10): 706-25.

Laudati, D, and MH Pesaran (2023) ‘Identifying the effects of sanctions on the Iranian economy using newspaper coverage’, Journal of Applied Econometrics 38(3): 271-94.

Majbouri, M (2016) ‘Oil and entrepreneurship’, Energy Policy 94: 10-15.

Nyström, K (2007) ‘An industry disaggregated analysis of the determinants of regional entry and exit’, Annals of Regional Science 41(4): 877-96.

Most read

Sustaining entrepreneurship: lessons from Iran

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.

Happiness in the Arab world: should we be concerned?

Several Arab countries have low rankings in the latest comparative assessment of average happiness across the world. But as this column explains, the average is not a reliable summary statistic when applied to ordinal data. The evidence from more robust analysis of socio-economic inequality in happiness suggests that policy-makers should be less concerned about happiness indicators than the core development objective of more equitable social conditions for citizens.

Financial constraints on small firms’ growth: pandemic lessons from Iran

How does access to finance affect the growth of small businesses? This column presents new evidence from Iran before and during the Covid-19 pandemic – and lessons learned by micro, small and medium-sized enterprises.

The economics of Israeli war aims and strategies

Israel’s response to last October’s Hamas attack has led to widespread death and destruction. This column outlines the impact thus far, including the effects on food scarcity, migration and the Palestinian economy in both Gaza and the West Bank.

It’s too early to tell what happened to the Arab Spring

Did the Arab Spring fail? This column presents a view the consensus view from ERF’s recent annual conference in Morocco: careful analysis of the fundamental drivers of democratic transitions suggests that it’s too early to tell.

Arab regional cooperation in a fragmenting world

As globalisation stalls, regionalisation has emerged as an alternative. This column argues that Arab countries need to face the new realities and move decisively towards greater mutual cooperation. A regional integration agenda that also supports domestic reforms could be an important source of growth, jobs and stability.

Gender differences in business record-keeping and planning in Iraq

Only one in every ten informal businesses in Iraq is led by a woman. Yet as research summarised in this column reveals, those businesses are more likely to set budgets and sales targets, and to keep business records. This may be evidence of the role of social exclusion in motivating greater reliance on the formal bureaucratic system.

Self-employment in MENA: the role of religiosity and personal values

How important are individual’s values and beliefs in influencing the likelihood that they will embrace the responsibilities, risks and entrepreneurial challenge of self-employment? This column presents evidence from 12 countries in the Middle East and North African region on the roles of people’s religiosity and sense of personal agency in their labour market choices.

Reformed foreign ownership rules in UAE: the impact on business entry

In an effort to stimulate economic growth and diversify the economy, the government of the United Arab Emirates has recently implemented regulatory reform that allows 100% foreign ownership of companies operating in the country. This column examines the implications of the reform for entry of new firms in Dubai, using unique data on new business licences in the emirate.

Conflict and debt in the Middle East and North Africa

With the global economy is in its third year of deceleration amid declining inflation and oil prices, the Middle East and North Africa grew by just 1.9% in 2023, with a forecast for growth in 2024 at 2.7%. In addition to heightened uncertainty brought on by the conflict centred in Gaza, many countries in the region are also grappling with pre-existing vulnerabilities, including rising debt levels. This column summarises a new report that unpacks the nature of debt in MENA – and explains the critical importance of keeping rising debt stocks in check.