Post-sanctions Iran must focus on building a knowledge economy

The Islamic Republic can no longer sustain itself on oil revenues alone.
The Islamic Republic can no longer sustain itself on oil revenues alone.
Image: Left and top right: Reuters/Raheb Homavandi; bottom right: Reuters/Morteza Nikoubasi
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In 1979, the Islamic Revolution rid Iran of over two and a half millennia of monarchy. It also led to a three-decade exodus of highly educated Iranians from the country. According to the International Monetary Fund (IMF), for over twenty-five years, Iran has consistently had one of the highest rates of brain drain in the world. As revealed by various World Bank reports, the annual emigration of at least 150,000 skilled individuals from Iran costs the country’s economy tens of billions of dollars per year. According to an oft-cited 2012 survey by the National Science Foundation, which is based in Washington, DC, 89% of Iranian doctoral students stay in the United States after graduation.

Last year, Bloomberg News’s Golnar Motevalli reported that “at least 40% of top-performing students with undergraduate degrees in science and engineering left the country to pursue advanced degrees.” This staggering statistic, due mostly to Iran’s high unemployment rate and lingering lack of job security (attributable at least partly to years of economic sanctions), came directly from the country’s National Elites Foundation, “a government-run organization that supports academically gifted and high-achieving students.”

While these issues have been simmering for decades, the administration of president Hassan Rouhani has been more forthcoming than its predecessor in combating and acknowledging this devastating reality. “In today’s world, a traditional economy cannot rival the world and we can compete with the world economy if we have a knowledge-based economy,” the Shana news agency quoted Rouhani as saying last year.

Even Ayatollah Ali Khamenei, Iran’s highest political and religious authority, agrees. The Supreme Leader has directed the government to offer “incentives” to attract investment from the millions of successful and affluent Iranians abroad in order to create a “foundation to attract the expertise and scientific capability of the diaspora towards national growth.”

Still, despite understanding the importance of fostering a knowledge-based economy, the Iranian government has few avenues for transforming these good intentions into concrete practice.

Over 7,000 miles away, iBridges, a California-based non-profit dedicated to developing and growing the high-tech entrepreneurial ecosystem in Iran, may be part of the solution to this problem. A private initiative spearheaded by Iranian-American co-founders Kamran Elahian and Hamid Biglari and wholly unaffiliated with the Iranian government, iBridges is actively fostering and engaging an international network of entrepreneurs and investors hoping to collectively build the very kind of knowledge-based economy Iran so desperately needs.

Bridge to the future

Launched last year by a collective of successful Silicon Valley entrepreneurs and investors of Iranian extraction, iBridges held its first forum at the University of California, Berkeley, in Sep. 2014. According to the group, the inaugural event drew more than 1,700 attendees—physical and virtual—and “brought together thought leaders and seasoned entrepreneurs” to discuss the “opportunities and challenges” that Iran’s emerging tech industry holds for the country’s economic development.

This past June, iBridges held its second conference in Berlin, Germany, which the Financial Times described as “the biggest gathering of Iranians outside of the Islamic Republic in more than 30 years.” The three-day convening built upon last year’s success, attracting Iranian expatriates, emerging entrepreneurs, and foreign investors in huge numbers. Eyeing a now-secured breakthrough in nuclear negotiations between Iran and the six world powers, attendees flocked to Germany to explore the possibilities, prospects, and pitfalls facing Iran’s burgeoning technology sector.

The event not only highlighted iBridges’s commitment to accelerating the growth of an innovation economy in Iran, but also contained the seeds of its potential success. Among the attendees at the Berlin conference was prominent Silicon Valley venture capitalist Dave McClure, who suggested the possibility of US-based financial support for Iran’s tech sector. In an interview with The Guardian, McClure was quoted as saying, “If the country opens up and relations are restored with the US and other parts of the world, I think there is going to be a lot of economic growth. Definitely there are many interesting possibilities for tech startups, too.”

American sanctions against Iran, in place for decades, prevent US-based companies and organizations from doing business directly with the country. “Based on how US investment laws are structured right now,” explained McClure, “it’s not possible for investors like me to invest directly in startups in Iran but we are optimistic that may change in the near future if relations are normalized.”

Moving away from an oil economy

For over a century, the Iranian economy has relied heavily, if not almost exclusively, on oil revenue. In addition to being arcane and restrictive, this economic model is unsustainable, as Iran’s oil and gas reserves, while ample, are finite and non-renewable. As reported by the Financial Times, during his address to the Berlin gathering, Elahian observed that an extraction economy like Iran’s “is sitting on a time bomb.” In other words, future economic growth for the country will come not through fossil fuels, but rather through human innovation.

The Iranian government has long been wary of technology, as a potential vehicle for the West’s “cultural” invasion of the country. These days, however, the government has little choice but to embrace the technological revolution. A statement by a senior official in president Rouhani’s administration even described the iBridges conference as “a bridge between Iranian entrepreneurs across the world” that “will strengthen their scientific bases and enhance the confidence of those based in Iran.”

“This is particularly significant for the country because of the sharp decline in our oil revenues, which may continue falling in the coming years,” the statement added. “It will also help to slow down the brain drain from Iran and may even encourage some Iranians to come back.”

Rouzbeh Pirouz, who leads Iran’s top investment firm, Turquoise Partners, told Bloomberg earlier this month, “The Iranian diaspora is a greater resource for the country even than oil.”

Taking inspiration from China and India

But private, independent, foreign-based initiatives like iBridges cannot remake the Iranian economy alone. In order to compete in global and regional markets, the Iranian government must actively nourish and cultivate its ever-growing crop of tech entrepreneurs. When Iran’s minister of science, research, and technology, Reza Faraji Dana, addressed Iran’s severe emigration problem in Jan. 2014, he said, according to Al-Monitor, that Iran must provide “proper conditions for the return of experts to the country.” He referenced China as an appropriate model for Iran to follow.

Indeed, countries like China and India have been successful in attracting educated expatriates back to their home countries. But how have they done this and what made their diasporas eager to return home?

Their success can largely be attributed to the massive tech boom experienced by both countries in the last decade. Last year alone, Japanese telecommunications giant Softbank flooded the Indian tech ecosystem with a hefty $10 billion in investments. One Indian company, Flipkart, managed to raise $1 billion in investment in 2014. In 2013, Indian companies pulled in $1.8 billion in venture funding, according to a report from Ernst & Young. China surpassed the Indian subcontinent that year, attracting $3.5 billion in venture capital. Chinese e-commerce sales have also vastly outstripped their Indian counterparts, amounting to $300 billion annually compared to India’s $2 billion.

During this period of rapid growth, both China and India have witnessed an influx of highly skilled professionals, who previously lived and worked abroad and have decided to return home. As one study illustrates, a powerful combination of career, family, culture, and rapidly growing economies have drawn these highly educated individuals back to their home countries.

This phenomenon has been a boon for the Chinese and Indian tech sectors. In many cases, returning professionals have leveraged the practical experience and networking skills they obtained from working in the US tech world to build companies of their own. By managing to attract and retain these young, highly educated individuals, China and India have managed to effectively reverse their own histories of brain drain. In fact, China has now become the third most popular destination for international students around the world, after the United States and Great Britain.

Iran must learn from these experiences, particularly since the recent nuclear deal is driving foreign investors back into Iran. Already, there have been signs that the Iranian government is eager to invest in its domestic, entrepreneurial scene. In Dec. 2013, president Rouhani announced on Twitter that the government would invest $1 billion in a new Innovation and Prosperity Fund, which would build technology complexes throughout the country and inject capital to invigorate Iran’s nascent knowledge economy.

Some in Iran’s tech sector are already very optimistic. On the sidelines of the iBridges forum in Berlin, Hamid Mohammadi, co-founder of the popular and profitable e-commerce platform Digikala (often dubbed the “Iranian Amazon”), told The Guardian, “The situation in Iran is quite exceptional, there is a huge market for startups, something you can’t easily find in other countries, and maybe that’s why many of the Iranian diaspora are returning to Iran.”

Recent media reports confirm this trend. Earlier this month, Bloomberg quoted Ali Zuashkiani, co-founder of the Tehran-based International Association of Iranian Managers, as saying that Iran is seeing “a wave of return.” The association is described as “a networking initiative bringing together Iranian professionals inside the country and abroad.”

Prospects of partnership

As the Rouhani administration transforms words into action, apolitical, wholly independent organizations, like iBridges, can serve as useful private surrogates to help Iran replicate the policies and strategies used by China and India to jump start their tech sectors.

Already, many in Iran are hopeful the success of the nuclear negotiations will have positive effects on Iran’s economy. “This deal will result in many changes in the Iranian startup ecosystem,” Neda Golshan, an entrepreneur-in-residence at Sarava Pars, a Tehran-based asset management firm, told TechCrunch. With the easing and eventual collapse of much of the international sanctions regime against Iran, Iranian businesses will likely have greater, easier access to global commerce and new technologies, which will, in turn, “raise competition and lead to a more mature market,” according to Golshan.

Connecting foreign investors with Iranian innovators is the connective tissue iBridges provides. In this way, hubs like iBridges, which serve as catalysts for connections and collaboration, can help reverse the brain drain phenomenon and transform Iran’s thriving, yet nascent, startup culture. The increased visibility they provide for Iran’s market will generate more foreign investment; indeed, investors from Europe and Asia are already flocking to Iran.

If Iranian businesses and eager investors can take advantage of the resources iBridges has to offer and Iran can reintegrate into the global economy, the effects of successful, multilateral diplomacy would be more far-reaching than anticipated. Indeed, Iran would be back in business.