Effects Of The Export Clusters In Iran Economics Essay

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The recent shifts in trading strategies of countries, growing liberalization, competition and integration on a world-wide basis (Ural, 2009) and the tendency to turn the world into a single economy or globalization, had made internationalization one of the main strategies of the firms that pursue growth objectives (Zeng, et al, 2009). One of the first approaches towards internationalization is exporting. In the past two decades, exporting had been identified as one of the emergent economic activities. Level of exports also became one of the main criteria in assessing the success of industries in many countries. In some countries, export-performance even acts as a mean to evaluate the strength of that economy (Krug, 2010).

The reason that exporting had received so much attention by economists in the past decades is due to the tremendous benefits it is associated with. There are solid evidences that exporting has a positive contribution to many factors related to the economic wealth of countries. For instance, increase in the employment rate, the standard of living, balance of trade and economic growth (Czinkota and Ronkainen, 1998). It also has positive effects on the firms' performance by increasing the utilization of their capacity, seeking to achieve higher technological positions in order to be able to stay align with international competitors and the ability to have access to more secure financial sources. All these factors will consequently represent competitive advantages of the exporting firms in their markets (Leonidou and Katsikeas, 1996).

Despite all the benefits exporting may have, managing to export is a markedly difficult task that cannot be easily undertaken by many companies. Due to the very risky nature of operating in international markets, many companies who attempted to entre these markets by means of exporting had suffered from huge losses and empirical evidences proved that a successful domestic company cannot necessarily be successful in international markets as well (Bianchi and Ostale, 2006). Variety of reasons can be behind this lack of success. It can be macroeconomic factors such as political and economical instabilities, high interest rates and exchange-rate related issues. Or they can be factors associated with the company itself such as firm size, the attitude towards risk by managers, lack of reputation, international marketing and management expertise, required capital and reliable financing sources (Rocha, 2009). However, many of the above mentioned obstacles and risks either do not exist or have minimal effects when it comes to international companies which are based in developed countries. Therefore the problem arising is that how can international companies which are based in developing countries export and survive in international markets. One of the good methods to do so is by forming "Export Clusters" which can also be referred as "Export Consortiums".

Based on definition of UNIDO, cluster is a local association containing a group of enterprises which produce or sell similar or complementary products and they are either part of the same industry or subsector of it (Tambunan, 2006). A more advanced definition given by Porter (2000) which has a wider perspective on this concept describes cluster as a group of interrelated enterprises and the institutions associated with them, which are usually geographically proximate, operate in the same field and are linked together by either producing something in common or complementing each other. Therefore, by this definition the companies in a same cluster can be input suppliers, middle level or final customers or even exporters (Tambunan, 2006).

There are evidences in many countries that clustering is a very constructive movement towards eliminating many obstacles faced by individual enterprises, especially SMEs while attempting to entre international markets. Clustering for instance can be helpful for enterprises that are facing problems associated with their size, marketing activities, networking, competitive position or various exporting risks (Tambunan, 2006).

Problem Discussion

Iran is a developing country located in Middle East. The level of its export by the end of year 2009 had approximately been 70.32 billion US Dollars which this placed Iran on 37th position in comparison with the export level of other countries in the world (CIA Fact Book). Iran is a member of OPEC and Organization of Gas Exporting Countries (Fars News, 2010). Petroleum related products constitute a bulk amount of its total export; this amount reached to 80% of total export in 2006 (U.S. Energy Information Administration). Nevertheless, export of engineering and technical services in Iran had recently been growing and it was $2.7 billion in 2007-08. This amount had been almost twice of its previous year's figure which was $1.6 billion (Karimi, 2008). The export projects that Iranian firms implemented in this field include power plants, gas pipelines, dam construction, transmission lines, etc. (Press TV, 2010).

Iran is geographically located in a very strategic position by having access to open seas and many developing countries as its neighbors with tremendous opportunities for foreign trade and growth. They include the old Soviet Union countries (i.e. Kazakhstan, Azerbaijan and Armenia) from its north and Caspian Sea border, wealthy gulf countries from its Persian Gulf border and most importantly Iraq from its east border which is a country with many growth potentials (Assadi, 2003).

The high price of oil and gas gave the opportunity to Iran to benefit from rise in export revenues. However, with drop in oil prices in the past year which it reached to average of only $55 per barrel between March to November 2009; and their minor decline in production of oil through the past 4 years, it is predicted that Iran will face a slump in its export revenues (CIA Fact Book). Another impediment to exporting from Iran is the recent sanctions which had been imposed by US (U.S. Energy Information Administration), EU, Canada and several other countries on Iran with the aim of blocking its nuclear enrichment program and is mainly targeted on its energy sector, foreign trade and financial services that basically constitute the backbone of Iran's economical system (BBC World, 2010).

Iran is a country that suffer from double digit unemployment rate of 11.8% by the end of 2009 (CIA Fact Book) in which up to 94% of the unemployed population are educated individuals (Assadi, 2003) and this unemployment amongst the educated youngsters of the country had encouraged their migration to other countries seeking for job opportunities abroad which can be referred to as "brain drain" (Economy Watch, 2010). Moreover, based on UNIDO in Iran's economy; majority of key economic activities is controlled by government which this put a ceiling on private sector's range of activities. Unfortunately this issue makes majority of Iranian private sector companies specially SMEs unqualified for competing in global market. There are two main reasons behind this, one is putting more focus and priority on the performance of large-scale enterprises and projects, which leads to neglecting SMEs and second is the traditional mindset and academic disinterest in studying SME-related issues. These two interrelated factors lead to low performance by SMEs since in majority of countries these areas of studies are funded and supported by governments (2003).

Presence of SMEs in any country is associated with various benefits to that economy. They mobilize national resources which will lead to job creation and growth of wealth, stimulate entrepreneurship and democracy in the society, and SMEs proved to be more flexible and innovative than larger size companies which this is an important prerequisite for the constantly changing global trends (UNIDO, 2003). As the mentioned evidences show, a solid presence of SMEs in Iran can in fact be very beneficial and can hinder many of the above stated problems that Iran is dealing with including high unemployment rate, high reliance on public sector activities and export of petroleum related products.

Fortunately recently, certain constructive actions took place in Iran with the intention to strengthen the presence of SMEs in society and more importantly in global markets by educating and supporting them and there had been evidences of a considerable number of Iranian companies which had been recognized to be eligible for exporting from both technical and human resource capability point of view (Assadi, 2003). One of these actions is the formation of export clusters. As it has already been discussed, export clusters can have a very positive contribution to the growth of export of companies, especially the SMEs. In the case of Iran; a developing country with high unemployment rate that faces various political and financial risks, the existence of these clusters are necessary for economic survival and success.

This research will therefore seek to explain the effects of the export clusters in Iran and the various types of services they offer to their members, on the export performance and growth of the country.

Area Identification

The broad area of this research is mainly Marketing and Finance. However the focus of this study will be on International Marketing and Financial Risk Management.

Purpose

The purpose of this research is to explain the casual relationship that exists between presence of export clusters and the various services they offer to their member companies, especially financial related services and the export performance and growth.

This research is targeted on the export clusters in Iranian energy industry which includes the export of products and services related to oil, gas, electricity and water. The reason for this targeting is the importance of exporting for Iran, which is a developing country that currently faces various obstacles to exporting such as high reliance on petroleum related products in exporting; high drops on oil prices and the recent sanctions imposed, which restricts its foreign trade with focus on energy industry and financial services.

Therefore, the research seeks to identify the benefits associated with forming export clusters in Iranian energy industry and the financial services they can offer to their member companies in order to be able to survive in international markets and have a positive contribution to Iran's balance of trade.

Problem Definition

MAIN RESEARCH QUESTION

What is the effect of export clusters and their offered financial services on export performance and growth in Iranian energy industry?

In order to find a proper answer to this question in a way that it covers all its aspects; it is wiser to divide the main question into sub-questions. By doing so, we will be able to have a deeper insight to the problem as a whole, as each sub-questions will cover a specific area of the main question and therefore the answer to the main question can be more credible .

SUB RESEARCH QUESTION 1

What are the challenges to exporting in developing countries and their possible mitigating measures?

The first and foremost question which needs to be addressed is that what challenges developing countries face when they try to export. Since as it is evident, the types of challenges they deal with is different and more than those in developed countries. However, identifying challenges cannot be an effective action unless it is accompanied by addressing their possible and related mitigating measures. Therefore, by getting a deeper insight on these challenges and their mitigating measures we can identify how many of them can actually get resolved with presence of export clusters in the market.

SUB RESEARCH QUESTION 2

What role can clusters play in exporting?

As it had already been discussed, clusters cover a very vast concept and they are not limited to only export related issues. However, in this research our focus will only be on export clusters and therefore it is required to be able to find out how exactly export clusters function and what role they can play in enhancing the export level.

SUB RESEARCH QUESTION 3

What sort of financial services are needed by exporters?

There are various categories of financial services. However, exporters are not concerned with all of them. Hence, it is necessary to first identify the financial services required by exporters, and subsequently find out how many of them can be provided to export companies by means of clusters with the aim of eliminating some of their export challenges.

Delimitations

Three delimitations had been identified for this research:

This research is going to study the performance of export clusters. However the focus is on export clusters operating in energy industry.

Regarding the geographical delimitation, it focuses on Iranian export clusters.

This research mainly focuses on B2B market as majority of member companies in the export clusters which are going to be studied for this thesis are operating in B2B environment, producing energy related goods and services.

Case Studies - Three Export Clusters

As already discussed, energy industry covers a wide area of activities. This includes all related products to oil, gas, electricity and water as well as their associated services which mainly include consulting and contracting services. In order to be able to cover all these areas three different export clusters each operating in one of these areas had been chosen in which their performance is going to be studied for this research.

Case Study 1:

Iranian Oil, Gas & Petrochemical Products Exporters' Union (OPEX)

Due to the importance and relative advantage that oil, gas and petrochemicals are associated with when it comes to Iranian economy; and by considering the necessity of organization and coordination within the companies which produce and/ or export products in this field, a group of forethoughtful Iranian entrepreneurs working in private sector decided to gather together with the intention of increasing synergy, taking necessary group actions and dealing with opportunities and threats with an integrated approach.

Therefore, on September 2003 "Iranian Oil Products Exporters' Union" was established with presence of 54 members. However, the name of the association has changed to "Iranian Oil, Gas & Petrochemical Products Exporters" with suggestion of Board of Directors in the general assembly on May 2005 with the purpose of covering a wider range of activities.

OPEX had been selected as the exemplar national export cluster on year 2006. OPEX currently comprises of 163 members (OPEX Official Website).

Case Study 2:

Export Development Committee of Iranian Electrical Industry Syndicate (IEIS)

IEIS had been found on year 2000 with the purpose of organizing production and service offering activities in electricity industry related affairs, providing the opportunity to make effective investments, transferring and updating scientific and practical experiences between the involved parties and to create balanced and competitive conditions for all members. This syndicate currently contains 285 members in which they include manufacturing, contracting and consulting firms in electricity industry.

Considering the importance of exporting non-oil products and the great potential that active companies in electricity industry posses; IEIS has recently decided to form an export development committee for its member companies that already export or planning to do so in near future.

The mission of this committee is to achieve an annual export level of $30 billion in electricity by the year 2025. The committee had also drawn certain objectives for its operation which includes study of target markets for electricity industry, establishing agent offices in target countries, advertising and taking part in related exhibitions on target countries, information sharing, coordination, providing facilities and problem solving for their members (IEIS Official Website).

Case Study 3:

International Consultants and Contractors Association of Iran (ICCA)

International Consultants and Contractors Association of Iran (ICCA), is a non-profit and non-governmental association established in 1998 in order to assist the development of international business actions of its members, the association has more than 200 members which are amongst leading Iranian construction and engineering companies.

The Association's efforts are synchronized with strategic position of Iran which is an industrial leader in Persian Gulf, Central Asia and Africa.

In the past years, the association had put its utmost effort for raising the standards and efficiency of its members. As a result, member companies could qualify to take part in various international tenders and were able to win many contracts including variety of services; from engineering and design to construction, procurement, operation and maintenance. These contracts were in different sectors, including power plants, dams, bridges, refineries, roads and seaports (ICCA Official Web Site).

Thesis Outline

This thesis contains seven chapters in which a brief description of each chapter and their sequence in the research is listed below:

Chapter One - Introduction

This chapter was focused on giving a general background and a specific discussion on the problem. Introduction chapter also included the problem definition, research purpose, and delimitation. By the end of this chapter, a brief history of the cases was given with explanations on the thesis outline.

Chapter Two - Theoretical Framework

The second chapter is basically associated with providing a background and direction for the research which will provide guidance on how empirical data should be collected and analyzed. The three research sub-questions will be answered by reviewing the previously published literature and existing theories which this will consequently lead to getting an insightful answer for the main question as well. However, these answers don not represent the final outcome of the research as that will be achieved when literature review is being combined, compared and finally analyzed by the empirical findings.

Chapter Three- Methodology

In methodology chapter the type of research method that is going to be used and the process of data collection will be described in detail. A brief definition of various methods and approaches will be given and finally, there will be the discussion on why certain methods and approaches are going to be followed in the research in order to solve the problem.

Chapter Four - Empirical Results

All the empirical data that had been gathered from the three case studies will be presented in chapter four. Chapter four will therefore be solely dedicated to statement of all results and facts collected from the empirical studies without any analytical action to take place.

Chapter Five - Analysis

The analysis chapter, as it had already been pointed out will result from the combination and comparison of its two previous chapters being theoretical framework and empirical findings. In this chapter the previously published literature will be confirmed, rejected or amended by the findings from the real life practices collected from the cases.

Chapter Six - Conclusion

Conclusion chapter is the section dedicated to giving the final answers to all three sub-questions as well as the main question. After both literature and empirical findings had been analyzed, the research can finally reach the stage where it can confidently draw conclusion and summarize everything that had been achieved throughout the research.

Chapter Seven- Recommendation

The last chapter of the thesis is where the author can present constructive recommendations and suggestions based on the findings. With the aim to improve the current situation in which the study had been undertaken and provide a direction for future researchers who are interested to develop the research topic further.

The below figure seeks to demonstrate all these 7 chapters in a visual and brief form to ease the understanding of the overall thesis outline:

Introduction

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