Clustering as a factor of increasing investment attractiveness of the Islamic Republic of Iran.pdf Introduction In today’s context, the most important condition for the functioning and stable development of the territory (of the country, province or region in particular) is realization of its socioeconomic potential with the investment part being one of the key elements of the process. It becomes the indicator for the business activity on the territory and includes formation of the favorable investment climate, the degree of attractiveness of which contributes to formation of management subjects’ activity aimed at seeing a lasting social-economic effect. Investments can be one of the major factors of positive changes of the country’s economy through investment into the regional management sectors where greater potential has been identified. Today, investment prominence has risen on Clustering as a factor of increasing investment 185 the country, region and enterprise levels, as it gives opportunities for manufacturing and infrastructure development, for creating new workplaces, which is one of the principal factors of improving the quality of life in the region as well as in the country on the whole. Evaluation of investment attractiveness enables to reveal the current situation in the economic activity and its investment support, to find out characteristic problems and regularities on the current stage of development, and to mark possible areas for the regional adjustment program. At present, integration processes represent a special driving force of the economy, and they foster the creation and improvement of competitiveness of enterprises, regions, and countries on the whole, promoting their investment attractiveness at the international level. Representatives of business, science, authorities are interested in the integrated forms of bringing together economic entities, which is conditioned by the scientific and technological progress, competitiveness, and the increased importance of intangible assets. One of the forms of such integration is clusters representing a group of interrelated companies and associated organizations, concentrated in a particular territory and a particular sector [1]. Territorial closeness is not the only characteristic of clusters. Clusters presuppose cooperation of participants in the production, with their effective interaction contributing to the synergy effect achievement. Review of Works on Investment Attractiveness Investments are the basis for the development of both separate enterprises and regions on the whole. They guide the effective functioning of socioeconomic systems. Investments are considered to be the central factor of growth and development, expanding productive capacity of the economy and stimulating new job opportunities [2]. Different types of investments from physical assets to intellectual capital can contribute to both quality changes (power increase and efficient use of resources) and quantity changes (output growth through the accumulation of production factors or process optimization). The major part of investments is made by local investors, but only international ones can provide additional benefits apart from the fixed capital. Such investments can serve as a channel for the local spread of technology and expert knowledge by creating links with local providers and access to international markets. A cause and effect relationship between investments and economic growth is generally recognized. D. Keynes defined investments as the economic growth factor [3]. The functioning of the economy sector of the country is impossible without investments contributing to the elaboration and development of industrial, innovative, social programmes and projects, enabling to increase production and improve the functioning efficiency of social production. Investment attractiveness in its turn represents complex characteristics which can be applied both to a particular investment object and a region on the whole and reflects conformity between the region, the investment object and the objectives of a particular investor [4]. M.B. Trachenko, Ol.D. Gaisha, V.A. Dzhioev 186 Investment attractiveness issues are widely discussed by researchers, the main problems being the comparison of “investment attractiveness” and “investment climate” [5-6], economic growth factors of the territories [7-12]. Lots of assessment of investment attractiveness nowadays [13-17] differ in indicators for assessment, mechanisms of information gathering and processing, in national peculiarities of the development of territories under analysis. While making decisions even at a high expected return of an investment project, investors take into consideration a favourable investment climate. Yenchzhao Lu, T.V. Pekna & Sun Vei [12] mark out four groups of factors taken into account while making decisions: - macro- and meso-economic rate dynamics (GDP, GNI, GRP, level of industrial development, inflation rate, development of the banking sector, etc.); - national investment policy (state support of foreign investments, participation in international treaties, stability and effectiveness of the state policy, etc.); - legal and regulatory basis for the investment activity (tax legislation, customs regulation, regulation and oversight of organization activities, disputes and differences settlement, etc.); - data (facts, statistics, general framework for investment, etc.). A favourable investment climate contributes to the accumulation of capital, skills, technology and resources of industry, which encourages the expansion of organizations, productive use, effectiveness growth due to competitiveness crowding out inefficient industry. Besides investments have an economic and social influence on improving living standards in the long term. On the regional level, organization and regulation mechanisms of the investment activity are rather complicated and dynamic because of their dependence on the micro-level. Goals and objectives of the regional investment policy must meet the main directions of the socioeconomic development of the country [18]. Researchers have different points of view concerning investment processes in the region being state-influenced. Thus, A. Haletska [19] thinks that the influence of regional authorities on the investment processes should foster effective functioning, resolution of socioeconomic, ecological and other problems. T. Bova [20] points out the significance of the state influence on reducing territorial development inequality. T. Misikova [21] states the necessity of state support development in the activities which can play the role of “points of growth” in the region economy. Investment attraction presents a very significant task to the territorial units of the countries (regions, provinces), which explains the importance of defining the most effective mechanisms for increasing investment attractiveness and makes it topical within the framework of the present research. Mechanisms For Increasing the Investment Attractiveness of the Regions The investment activity development of the most significant spheres of the socioeconomic development must become the major priority of the socioeconomic development of a territory. To a great extent, the high level of the economic activity of the territories and the significant growth of investment flows Clustering as a factor of increasing investment 187 into the economy are conditioned by the result of the longstanding and successful work of the executive power aimed at the investment attractiveness growth. All the mechanisms of influencing the authorities with a view to increasing the investment attractiveness of the territory can be divided into legal, regulatory and infrastructural [22]. Removing any barriers to the capital market access, the implementation of effective legislative and practical mechanisms, the protection of interests and rights of investors, the simplification of procedures via “one-window” principle are worth mentioning among other legal instruments of investment attractiveness increase. In the formation of an effective market infrastructure, it is worthwhile to note accessibility to information on the organisations for the purpose of analysis and choice of investment objects and improvement of information support of the business on the whole, for the balancing of competitive conditions and development of investment institutions. Integration mechanisms, contributing to the cooperation and mutually beneficial co-partnership are also worth mentioning. Representatives of business, science, and power take an interest in integrated forms of bringing together economic entities, which is conditioned by the development of science and technology progress, competitiveness and increased significance of intangible assets [23]. One of such integration forms is the clustering conception which was tested by such developed countries as the USA, Japan, Germany, and the Netherlands. Cluster is a group of organisations, joined economic subjects, and institutions closely located and large enough to develop special knowledge, services, and resources to find common suppliers. The experience of other countries proved the effectiveness of cooperation on a particular territory of scientific-educational organizations for the purpose of achieving the synergetic effect of cooperation, thus supporting the development of the regions. M. Porter [1] formulated advantages of such integrations, namely the overcoming of the science and technology gap, the upgrading of the industry, and, consequently, the development of the territories and the living standards increase. Clusters influence competitiveness of the regions via: - productivity improvement at the level of firms and branches; - creation of opportunities for innovation and industry growth; - stimulation and facilitation of new business establishment, supporting innovations and expansion of the cluster. Cluster core comprises big enterprises of several branches (extracting and manufacturing), closely connected by the same technological chain. A whole group of small enterprise forms is formed at each venture. They support different stages of innovative and manufacturing processes. In cluster management, special emphasis is placed on small and mediumsized businesses, making more than 50% of the whole number of participants characterized by flexibility and adaptability to implementation of innovations. In M.B. Trachenko, Ol.D. Gaisha, V.A. Dzhioev 188 fact, the number of people belonging to the specialty branch of the cluster is not less than 30 to 50 participants. The development of a cluster presupposes interaction of business, power, science, and education. Such partnership is called Triple Helix [24], and it implies participation of all the key participants-state authorities, business, and science-education complex with the leadership of each of them. As the main problem is harmonization of interests of the participating representatives of educational and scientific institutions, business and government bodies, only those associations in which interests of both sides correlate with common objectives can succeed. Cluster structures have specific characteristics: - geographical closeness, contributing to the spread of knowledge and maintaining a relatively cheap access to the necessary factors of the enterprise; - accumulation of information and interaction experience between the cluster entities; - maintainance of interchangeability of the cluster participants; - functioning of large amounts of representatives of small and medium-sized businesses, characterized by flexibility and adaptability to the implementation of innovations [25-26]. Functioning of the territorially close innovative businesses stimulates and supports industry development. Establishment of innovative territorial clusters contributes to the realisation of business initiatives, and work of scientific research institutes, all this resulting in the creation of new work places and improving skills. Innovative clusters technologically influence other spheres, which results in the improvement of their international competitive position. Innovative territorial clusters are characterized by a full production cycle of a scientific organisation; production of innovative technologies, production and services. The problems of cluster competitiveness and its effectiveness were investigated by many researchers [27-33], quite a big number of works deal with the assessment of potentially effective clusters and its participants [34-37]. In the framework of the previous research, the authors developed a three-staged assessment system of effectiveness of territorial cluster funding, which includes indicators showing how the cluster influences the economy in the region, indicators of the development of the cluster itself, and indicators of the financial position of the enterprises-cluster participants [38]. This system can be used in decision-making in the distribution of investments. The implementation of a sound investment policy requires a precise and rather objective analysis of the investment climate, determination of criteria for assessing the investment situation in the country and in the region, elaboration of a methodology basis, adequate to the economic situation. Informative methodology on data collecting and processing is necessary to get information concerning data on investment attractiveness of the territories. We give an adapted methodology of assessment of investment attractiveness of the MENA countries. Clustering as a factor of increasing investment 189 Methodology and Data Explanation The Technique of Assessment of Investment Attractiveness of the MENA Countries The purpose of assessment of investment attractiveness of the MENA countries according to different criteria was to reveal strong and weak points of the Islamic Republic of Iran. The assessment covered 20 indicators, characterising the region with regard to basic (stable) indicators such as economic and geographical position, as well as changing data, characterising the dynamics of the investment climate level in the region and the level of investment risks. Within the framework of the present investigation, we assessed the investment attractiveness of the MENA countries (Middle East and South Africa countries, including Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, and the United Arab Emirates). The countries have enough oil and natural gas resources, which is a very important source of global stability. About 6% of the world population lives in the investigated geographical region (according to the World Bank). The dynamics of the economic development of the MENA countries is positive and is on the level of 1.4% (according to the 2017 International Bank official information), and further growth is expected. As part of the previous studies [4], we developed an authorial methodology of assessment of investment attractiveness of the regions, which is more oriented towards the Russian Federation and its regions. As part of the present research, we modified and adapted the previously elaborated the methodology of calculation of basic conditions ratio, investment climate of the territory and investment risks, which became the basis for the calculation of the integral indicator of investment attractiveness assessment of the MENA countries. Information for the calculation of the investment attractiveness index based on the present methodology is available to anyone interested in it, and this is its significance. As part of the present research, we made calculations of investment attractiveness of the MENA countries based on three groups of indexes, characterising basic conditions, investment climate, and investment risk (Table 1). Table 1. System of rate to calculate investment attractiveness index 1. Basic conditions ratio 2. Investment climate ratio 3. Investment risk ratio Economic and geographical position (EGP). Existence of natural gas. Existence of oil fields. Existence of farmlands. Existence of forest fund. Expenses on research and development. Gross indicator of coverage of higher education. State budget expenditures on education. Gross investments in fixed capital. Standard of living. Rate of the needy population with income of 3.10 US dollars a day in terms of purchasing power parity in shares of total employment. Debt level. Unemployment rate. 190 M.B. Trachenko, Ol.D. Gaisha, V.A. Dzhioev 1. Basic conditions ratio 2. Investment climate ratio 3. Investment risk ratio The level of development of the extracting and processing productions. Privileges on taxes/rent for business. Index of covering import by export. Index of attracted foreign direct investments. Mortality per 1,000 live births. Crime level. Potential/ongoing military conflicts The investment attractiveness index elaborated for the analysis reflects the factors presented in Table 1 and equals to an algebraic sum of the weighted ratio of basic conditions, investment climate, and investment risk. Index of IA = 0.2 • BC ratio + 0.6 • IC ratio + 0.2 • IR ratio. (1) It is worth mentioning that as a result of the conducted calculations, statistic information was rather complicated as either it was not available or it did not exist (Djibouti, Libya, Yemen). Exclusion of some parameters from the general index is considered to be inappropriate, that is why those countries were not included into the general chart. The cost-of-living standard within the present methodology is calculated as the ratio of average monthly wages (1 person) to the fixed minimal wages in the country. As state fixed minimum wages do not exist in some countries, the cost-of-living standard is not determined. The authors believe that war conflicts and business benefits are important in choosing countries for investment and developing business. Thus, these data are rather significant as part of methodology - from 0 to 1. Index is 0 if there are no conflicts and it equals 1 if there are any (potential). While calculating tax/rent incentives for business in the country, index is 1 in case of the war conflict, in some countries taking into account restrictions of those enterprise activities which can qualify for benefits, the rate is at the level of 0.5. The results of the tested methodology of the assessment of the investment attractiveness of the MENA countries are presented in the Results of Analysis of Investment Attractiveness of MENA Countries section (Figure1 and Table 2). Existing and Potentially Possible Clusters on the Territory of the Islamic Republic of Iran The Islamic Republic of Iran is the second largest oil-producing state among the OPEC countries [39], and has a developed industry. The main export accounts for oil, industrial goods, machinery and equipment, as well as metal products. The main partners of Iran are China, the UAE, India, Turkey, and South Korea. The committee on export development strategies lays special emphasis on the creation and development of industrial clusters in the country. Thus, industrial clusters are actively developing on the territories (ostans) of Iran, for instance a building cluster in Teheran. Industrial clusters of Iran are established and headed by a group for business-cluster development and are implemented together with the Iran Small Industries Clustering as a factor of increasing investment 191 and Industrial Park Organisation (ISIPO). The latter established their own order of cluster-building, consisting of stages of cluster-development analysis possibilities, establishing contractual relations, research, investigation, formation of development plans, and their immediate realisation. There is a rise in the proportion of export on the world market, as there is strive for competitiveness, though Iran, occupying the 89th position in the global competitiveness index rating, is marked as a less open country than Ethiopia. As it is stated in the report at the World Economic Forum [40], openness of the country is significant for its competitiveness openness of economy contributes to the development of innovations, and markets are competitive. As a result of the earlier studies based on the method of correlative-regressive analysis of innovative development data and subindex of cluster development of the global competitiveness index in the countries of the world in 2018, a close connection (correlation rate 0.7086 which is the evidence of a high connection according to Chaddock’s scale) was revealed between the investigated factors, which proves the significance of the cluster conception in the development of innovative systems. The Islamic state of Iran should not stay behind the transition of strategic importance, as the entire leading world economies take the innovative way of development. For that purpose, the elaboration and implementation of strategies of the innovative development of Iran should be viewed. Priorities should be given to the implementation of knowledge-based manufacturing enterprises, technologies, inflows of innovative investment, technological modernisation of the enterprises, formation on their basis of competitive innovative and territorial clusters. The most labour intensive and important process in the cluster formation is its identification. Mapping is one of the most important methods of cluster revealing. By means of mapping, information on professional, interdisciplinary connections and clusters in the regions and the level of their development is visualized. According to the current administrative-territorial division the Islamic Republic of Iran consists of 31 ostans, the biggest of which according to the number of population and development level are: - Teheran: it is one of the main economic supports of the country and the biggest industrial center of Iran, where 44% of the workers of workshops of the whole country are employed and more than 50% of textile and electronic goods are produced. - Isfahan: it hosts the largest metallurgical and petrochemical industries of the country. The stable economic growth of the ostan based on science and technology can be viewed. - Khuzestan: it is rich in oil and petroleum, it is the locomotive of the southwest of Iran, and it takes the second place in the metallurgic development of the whole country. It is these kinds of districts that are suitable for cluster policy development due to the concentration of different enterprises, different forms of property, personnel, transportation, and scientific research institutions. M.B. Trachenko, Ol.D. Gaisha, V.A. Dzhioev 192 As the authors believe, the main participants of the innovative territorial clusters in the Islamic Republic of Iran are: - state businesses, which, according to Article 44 of the Constitution of the Islamic Republic of Iran [41], include heavy industries, banking and insurance activity, infrastructure companies-the important participants of the cluster in the running and ensuring of the businesses; - private sector, particularly small and medium-sized businesses, which is supplementary and supportive on each stage of the value chain, and is characterized by adaptability to the approbation of innovative ways; - scientific research institutions, such as Royan and SRI of fundamental sciences under the Ministry of Science and Technology of the Islamic Republic of Iran, which is the centre of idea development; - coordinative cluster body, which presents the active group of business-clusters development. Assessment of the potential possibilities and the overall effect of cluster creation are considered important. There are different methods for it, for instance, the widely spread methodology of the European cluster observatory for the identification and assessment of potential clusters, and many others [42-44], which should be paid more attention to by the executive power bodies during the innovative cluster policy formation in the Islamic Republic of Iran. Results of Analysis of Investment Attractiveness of MENA Countries The results of the assessment of the investment attractiveness analysis of the MENA countries adapted according to the authorial methodology are presented in Tables 2 and 3 and the figure below. Kuwait Morocco Iran Tunisia Saudi Arabia UAE Jordan 3 ,686776139 >3987813 1268656 811112 40306 0454 8895 32 2,1032907 ,715251404 577778113 493567696 7997425 6159811 359424 1395603 ШПІІ vcOSls»^ ■ 5,785470897 0 8,139220141 10 Figure 1. Index of investment attractiveness of MENA countries Kuwait 0.2500 9£l9'l СЧ О O' о о ОІ 00 О о 0.0035 1.9505 О OO O' о о 0.3300 0.0320 I О l> 00 о 0.4644 to О 00 о О о о о 13.254 О о о о 0ZZ6 0 о сч о о 0.0720 О O' in сч о | 9ZZ9 0 го го о о о 0.0578 1 О О' О' о о 00 ГО го о\\ о 1 IS000 I oosro 0 01 OI о о I I 0.4085 о о 1.3690 1 0900 0 in © 40 a4 i-H о о о о о о P о сч О' о о О ГО І> О о c « U l-H | 000S0 0.0570 | о О' о о 0.2820 1 о 'О о о о тГ о о\\ о 0.0030 | | 0069 0 0.0360 1 О in о сч о l> 04 ГО о сч 0.3032 о 1.0463 О О О СЧ cr со со in о о о О 40 l> О 0.1310 1 0.1300 1 Table 2. Index of investment attractiveness of MENA countries and its components (Part 1 C7 U l-H | OOOS'O 0.1574 | о О' О' о о 0.2140 1 1 06100 ТГ о а\\ 00 о o O' о О I о о о О о g о I 0.4377 о 1.5116 40 сч о о і со cr l-H со 0.3160 о 00 о о о СЧ 00 о о О 04 to сч о Jordan | о O' in l> о О O' O' о о о О' О' о о О 0 01 о о о о о 1-Н 00 00 о 0.0033 1 0.3600 1 О ГО О о о O' о СЧ о I 0.2597 о о 0.6239 1 оіеоо 04 l-H со in l-H О о сч о о го 00 о 0.1490 1 1 0І5Г0 Israel | | 000S0 о O' о о о О' О' о о 0.2460 1 о\\ 00 о о 1-Н m 40 о 'О ОІ о о о O' 40 о о 'О о о о го о СЧ о 40 00 00 0.1562 •о о 1.0608 1 оіеоо 40 со 04 in cf I о 00 о 0.0430 1 О 04 СЧ о о btf w Basic conditions ratio (BC ratio) | OOOS'O |> о о о о О' О' о о 0.0380 1 |> о О' о о ТГ о -г m о Investment climate ratio (IC ratio) 40 О' о О 0.3400 1 о -тГ о о о 00 о I 0.2863 о 0.5722 О го О О 40 СЧ -r сч Investment risk ratio (IR ratio) 0.4270 1 0066 0 О сч о о 04 о t- -C CQ | OOOS'O 0.0157 1 о О' о о О О |> |> О' о о m го 40 О О О О О о о о 0 04 01 о о о 04 'О СЧ о I 0.3363 to о 1.1159 1 0SI00 CO 40 СЧ СЧ I 1 0606 0 0.0130 1 I CS •c o> ьх 5! о in l> ro о 0.0053 1 о О' О' о о 0.1737 1 ОІ 00 O' о о СЧ СЧ 40 Ш О О О' го 'О о 0.4300 1 о 'О о о о 04 04 СЧ о o 00 0.2683 о 0.6758 О І> О' о о СГ 40 m о in 0.0970 1 0899 0 о О' о О о 40 сч о Indicators | о w Existence of oil fields | Existence of natural gas | Existence of farmlands | Existence of forest fund | Basic conditions ratio I Expenses on research and development | Gross indicator of coverage of the higher education | State budget expenditures on education | Gross investments in fixed capital | Standard of living | The level of development of the extracting and processing productions Privileges on taxes/rent for business | Index of covering import by export Index of attracted foreign direct investments | Investment climate ratio I Rate of the needy population with income of 3.10 US dollars a day in terms of purchasing power parity in shares of total employment О > О £ О О Unemployment rate | Mortality per 1,000 live births | СЧ ГО 'О OI ГО Ш 40 00 04 сч ГО _Indicators_Algeria Bahrain Egypt_Israel Jordan_Iraq_Iran_Qatar Kuwait 5 [Crime levef 0.0015 0.0023 0.0011 0.0022 0.0016 0.0012 0.0028 0.0004 0.0015 6 Potential/ongoing military conflicts 0_ 0_ 0 1 0 1 0 0 0_ Investment risk ratio 1.0825 0.9243 1.7331 1.8852 1.5046 1.7452 1.0508 1.5474 1.0175 3 «fi "d ■d c Tunisia 000£'0 еіооо О O' O' о о 0.6157 0.0643 1.1813 0900 0 0.2700 0.0590 0.1960 2.0649 0.2035 О 0.7782 О 0 01 о о 4.5976 Syria | 000£'0 о\\ to о о о о O' O' о о 00 •О |> О 'О 0 01 о о 1-Н тГ 00 1-Н О O' о о о O' On ГО О О 40 СЧ о о I I 40 l> 40 О' 00 о 'О о о о го го 40 ОІ 00 O' о о О о 40 о о P о о 0.2270 | I ГО о 04 го о о 0 01 04 0 01 О' О о ю 1-Н 40 ю го Oman о tri l> ro о ГО On О О о О' О' о о 40 -0о о о О' о о 00 о -г -г о 1 zzooo о O' to о о to 40 о о О ГО ГО О l> 00 ГО OI oi 04 го о о о l> 40 40 о о о о ю о 1-Н 40 in UAE о O' о tri о о\\ to |> о ОІ го о о ОІ го о 00 о 1-Н I I о

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