The structure of Iran's industry and the factors affecting it

Subject Areas : Computational economics

Aydana Rostami ^{1 *} , farhad ghaffari ² , محمدرضا ناهیدی ³

1 -
2 - Department of Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran
3 - استادیار، گروه اقتصاد، واحد تبریز، دانشگاه آزاد اسلامی، تبریز، ایران

Received: 2024-12-28 Accepted : 2025-02-22 Published : 2025-04-08

Keywords: Herfindahl-Hirschman, generalized moments, degree of industry competition,

Abstract :

Extended Abstract

Purpose

Industrialization is a necessary condition for dynamic economic growth, but it is not a sufficient condition. The dynamism of any economy is a function of its production structure, the importance of industrial development lies in the backward and forward links, links whose real manifestation is in the connections between industrial sub-sectors in an endogenous manner and competition in order to improve innovation and the emergence of new technology is as much as possible. Therefore, the structure of the industry is one of the channels of the desired impact of industrial development on economic growth. The competitive structure of an industry is a function of several factors. Exports, economic growth, and the volume of gross domestic product, growth of the industrial sector, and capital are among the factors that can affect the structure of the industry. All of these factors can be defined under returns to scale. Whenever the level of demand for industry is increasing in the economy, due to the increase in demand, the amount of research and development costs increases, and therefore technology and innovation in such industries increase. Of course, it should be noted that the above effects have a real manifestation when there is an endogenous relationship between economic sectors, and increased economic growth leads to growth in demand for the industrial sector, and the growth of the industry in general is associated with the growth of industrial sub-sectors. In this case, competition among industries to absorb demand increases, and technology and innovation grow exponentially to reduce costs, and as a result, efficiency at the production level and welfare at the consumption level grow increasingly. Therefore, the question arises as to what is the structure of Iran's industries and what factors affect it.

Methodology

Export is one of the most important determinants of the competitive structure of the industry, as the share of exports in the sales of firms increases, due to the high level of production and the placement of firms in the scale economy sector, the diversity of products in order to enjoy the benefits of labor and capital in other regions increases, and through this, a competitive structure will prevail over all regions. As the industry grows in general, the amount of effective communication between sectors increases and endogenous growth, in other words, a competitive structure will be created at a higher speed. As the rate of economic growth increases, demand will be created at a higher level for different sectors. In terms of scale, higher demand will motivate producers to respond to increased demand, and since the amount of inputs and capital required by the demand of the economy is not available in a region, the diversity of activities will increase, and through this, a competitive structure will prevail in the market, which in the case of favorable transportation conditions, competition is truly created in the economy. These conditions exist if the economy is relatively closed. Finally, capital, as an indicator of maintaining and expanding production capacity, is one of the factors affecting the competitiveness of the industry. As capital increases in the economy, it paves the way for the creation of new and diverse activities based on a competitive structure. As capital decreases in the economy, a monopolistic structure is created in the economy due to the reduction in the capacity of the sectors.

To examine the factors affecting the Herfindahl-Hirschman structure (HHI) as an indicator of the degree of market competition, factors such as the value added of the industrial sector to total value added (INDU), the ratio of industrial exports to total sales (EXPORT), real gross domestic product (RGDP), real capital accumulation (CAPITA), and finally the structure of diversity in the production structure (DGDP) have been used:

 

Findings

The model estimation using the generalized moments approach shows that as the export ratio in an industrial sector increase, the competitiveness of that industrial sector increases significantly. The second factor affecting the structure of the industry is the development of the industrialization ratio. One of the main characteristics of the industrial sector is the high level of forward and backward linkages of industrial sub-sectors with each other and with other economic sectors. Therefore, as the share of industry in GDP increases, the scope for the emergence of linkages increases, and thus the diversity in the industry increases and the degree of competition in it increases significantly. Economies that concentrate a higher share of their production in sectors with higher added value will experience a relatively higher degree of competition in the industry. The third variable affecting the structure of the industry is real GDP as an indicator of demand for industrial sector products. GDP in the manufacturing sector increases the demand for intermediate and capital inputs in the industrial sector, and thus industrial diversity increases due to the increase in demand for inputs. Therefore, with the increase in real GDP, the level of industrial diversity increases significantly. The Iranian economy has experienced very low economic growth in recent years, and this is one of the confirmations of the low level of industrial diversity in the Iranian economy.

The structure of production does not have a significant effect on the structure of the industry and the competitiveness of the industry, in that the concentration of production in one industry cannot cause competitive conditions in production. Finally, examining the effect of the capital accumulation variable on the structure of the industry shows that with the increase in real capital in the industrial sector, the level of monopoly of the industry increases. The reason for the positive effect of real capital on the exclusivity of the industry is due to the fact that increasing capital, due to the high cost of providing it for producers, will necessarily lead to its concentration on sectors that have the greatest advantage in terms of demand and industrial supplier criteria, and the lower the cost of providing capital in the economy, the more competitive the industry structure is expected to be.

Conclusion

Exports, industrialization, and economic growth have had a positive and significant effect on competition. Therefore, focusing on meeting domestic demand by using domestic industries in order to increase the effect of real GDP, as well as encouraging exports by using tax and tariff incentives, and using the capacity of neighboring countries to increase exports, and ultimately increasing the share of industry in GDP, are the most important policies for increasing industrial competitiveness.

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