Entering the Iraqi Market: A Guide for Swedish SMEs (Part-2)

 Entering the Iraqi Market: A Guide for Swedish SMEs

The last decade has seen an increased amount of interest from the Western Hemisphere concerning business opportunities and investments in the Iraqi market. Since the Iraqi market today offers numerous commercially viable options, international interest in this country is only expected to increase, including among Swedish businesses.

To meet this demand for information, especially small and medium-sized enterprises (SMEs), who to date have many questions concerning this market, a project was established to compile updated information and to launch the report Entering the Iraqi Market - A Guide for Swedish SMEs.

The Iraqi market of 2010 is characterized by the potential for significant commercial viability and for technological and commercial advancement in many sectors. There is a need for a lot of reconstruction which suffered from over 30 years of war, internal conflicts, and 13 years of sanctions, and this puts substantial claims on the public and private sectors as well as on the education and non-profit non-governmental organizations.

Swedish companies have traditionally been strong in the reconstruction/post-war effort, and there is a well-known quality behind Swedish products and services, which is widely sought after. This report wishes to assist Swedish companies in their efforts to realize commercial deals in Iraq, be it long-term investments or trade, and to provide them with an understanding of both the general and the sector-specific issues found in this market.

Understanding the Iraqi Market

To understand the Iraqi market, it may be useful to first establish some key conclusions. Iraq is a large market of 40 million people, with a high level of income and GDP per capita, although much of this income is unrecorded or sitting idle in tax-exempt banks.

There is also a significant high-income segment of the population who may look to buy furniture, clothing, or luxury automobiles. Iraq is rich in oil and gas and is committed to large spending on infrastructure, telecom, utilities, and construction up to 2030. Iraq has been ravaged by violence and war, with billions of US dollars spent on military hardware, travel, and security. Much of the population lives in poverty with high levels of unemployment, but after 3-4 wars, more people are in work than before the first war.

Iraq is a diverse multicultural nation based on the Arab, Kurdish, and Turkoman ethnic groups, and adherents to Sunni and Shiite Islam, as well as to Yazidi and Christian communities. As in all places, nationality and personality have an important part to play in what people are, how they see the world, and how to talk with Iraqis. Iraq is also a country of 18 or more separate cities; Baghdad dominates all, but none.

Many of the sectors present special challenges, as the results of interviews with senior executives from over 40 of the most successful and influential firms are due to. The vast majority of firms are international. Iraq is a country of contrasts, of challenges and risks, of promise and rewards. Few of the tribulations in Iraq will form part of this guide, and the report will be based on the many positive case studies that were collected.

Market Overview

Since Iraq is a country with a young population, the potential for inward investment is significant. Iraq is currently increasing its foreign trade after the trade embargo, and therefore a window of opportunity has emerged for foreign companies. As a Swedish company, you may command several competitive edges when entering the Iraqi market. You come from a country with good business relations to Iraq, and Iraqis have a high appreciation of Swedish quality products.

Nevertheless, it is important to address the right market and employ the correct approach, as Iraq is characterized by a difficult business climate, and competition from other firms is likely to be high. It is essential to research and take into consideration the actual market opportunities and be prepared to take time to establish the business.

This document provides you with a starting point for understanding the Iraqi market and the way you should proceed to enter it. Furthermore, this guide will aim to be a living document and help your company and others achieve your business objectives in Iraq.

Starting in 2012, the main source for the study of the Iraqi economy has changed to the Management of Social and Economic Transformation Business System survey. This enables the collection of detailed information.

The survey shows that Iraq has great business potential and concurs with the thesis. The streamlining of bureaucracy would greatly decrease the time. The potential for inward investment is significant since Iraq is a country with a radical lack of light industries.

The current domestic production levels are inadequate to meet the substantial demand. Security challenges have resulted in a heightened requirement for security-related products. Furthermore, Swedish enterprises enjoy robust business relationships with Iraq, a nation that expresses considerable respect for Swedish quality goods. There is a significant demand in Iraq for specialized products and services that are predominantly absent in the market. The survey reveals potential opportunities in sectors such as oil and gas extraction, electricity generation, as well as in construction and investment related to the housing sector.

Economic Landscape

The symbol of Iraq's post-war reconstruction has been the cranes filling its airspace. Distracted by the upheavals of the Middle East, the democratic recession, and the spread of the Islamic State, however, few outside observers realized that Iraq's economy must be a model of variety.

Ranking in the top fifteenth on the ease of starting a business index, it is Asia's fastest growing. Its core proposition as an investment destination is an extraordinary oil-driven demographic and urbanization dividend, which will concentrate enormous amounts of spending power in the hands of a buoyant middle class by the 2030s. Between 2018 and 2029, the country is expected to add more consumers with discretionary spending power, measured in terms of household income and purchasing capacity, than combined.

Accompanying the oil sector's expansion is the gradual development of economic diversification. Although the non-oil GDP remains largely unchanged, private investments are revitalizing the retail industry and fostering the rise of a consumer culture in Iraq. This trend has the potential to positively influence all sectors of the economy. Currently, Iraq has a limited customer base, presenting a unique opportunity for both large and small investors. Engaging in this market at its early stage could prove to be exceptionally beneficial and transformative.

Cultural Considerations

Iraq is a diverse society. Approximately 48 percent of the country's population are Arabs, 20 percent are Kurds, and Turkmen, Assyrians, and Armenians make up the remainder. The two Muslim groups are Arabs, who are mostly Sunnis, and Kurds, who are mostly from the same branch of Islam. There are also three Christian sects and other smaller religious affiliations.

Religions are pre-Islamic, and their teachings are followed and are evident in everyday life. Iraq is the descendant of one of the world's oldest civilizations, Sumer, which was the first to cultivate a civilization around the Tigris and Euphrates Rivers. Their writing, schools, and mathematics are some of the contributions of Sumer.

In the end, Babylon was also the place where chaos theories and the law of harmonies were born. Baghdad is considered the intellectual center of the world in the Middle Ages and is credited with the poetry and literature of one of the oldest universities teaching Iranian and Muslim scholars mathematics, physics, and other disciplines.

For enterprises aiming to penetrate the Iraqi market, it is imperative to begin with a thorough comprehension of its cultural nuances and values. The business culture in Iraq is influenced by a diverse array of factors, encompassing regional traditions, religious beliefs, educational background, and historical context. An insufficient awareness of these significant elements may lead to potential misunderstandings. When forging new business partnerships, representatives of Swedish companies ought to prioritize presenting themselves in a respectful and humble manner while concurrently highlighting the quality of the products or services they offer.

In addition to the influences of cost factors and the competitive landscape, successful negotiation tactics highlight the significance of managing the flow of information. Presentations are anticipated to be both straightforward and succinct, concentrating on the products and their potential applications in Iraq. Any information that is viewed as excessive or superfluous by Iraqi partners may be interpreted as a deficiency in transparency or integrity, which could potentially be utilized against them in subsequent negotiations.

The social fabric of Iraq is characterized by individualism, with employees frequently experiencing discomfort in the presence of their superiors, which can result in decision-making processes that do not incorporate the viewpoints of lower-level personnel. Furthermore, it is crucial to recognize that, due to cultural factors, individuals might feel apprehensive about how to engage with foreign enterprises and may only choose to proceed if they can establish a more personal rapport.

Regulatory Environment

Regulatory information is published in the Official Gazette of the Republic of Iraq in several parts covering laws, regulations, orders, etc. The gazette is available and updated in Arabic only. It is also published on CD-ROM. The Central Bank of Iraq provides consolidated bank regulations and instructions in English and Arabic.

In the context of governance, the Iraq Project Management Office is working to update and improve the availability of regulatory information on its website. Currently, many regulations and guidelines are either not accessible to the public or are available for a fee. Although there has been notable advancement in legislation over the years, challenges related to transparency still persist.

In response, the Government of Iraq has undertaken several initiatives to enhance transparency. One area being examined is customs, which is governed by the Tariff Law, the Anti-Smuggling Law, and the Production Tax Law. Customs duties are determined based on the Customs Tariff Schedule, which employs the Harmonized Commodity Description and Coding System for categorizing goods. Within this system, certain products incur high taxes, while others are exempt from tariffs.

Tariff rates are generally elevated, and imports from the European Union do not benefit from any particular advantages. The customs procedures are intricate, which frequently leads to prolonged processing times and administrative difficulties. These circumstances can lead to delays, inconsistent decision-making, and possible hold-ups with certain officials. Moreover, it is crucial for air carriers and operators to supply prior notifications about the cargo landing requirements at the airport. Compliance with operational schedules is essential for the secure transport of hazardous materials on passenger flights.

To ensure efficient customs clearance, it is advised that all necessary information be submitted at least six hours prior to arrival, with any issues related to dangerous goods communicated promptly. Individuals seeking relevant requirements and information can contact the office at Baghdad International Airport, where the necessary details are available.

Legal Framework

Whether foreigners or Swedes, all investors are subject to the same laws that come under the umbrella of the new liberal economic policy. If they decide to invest in Iraq, Swedish companies will be under the obligation to follow both the spirit and the letter of legislation as it is enforced by the Iraqi government.

Necessarily keen as the government is to encourage foreign-owned companies to establish themselves in the country, it seeks to further guarantee investment by offering entirely secure conditions for doing business. Indeed, it can truly be said that Iraq stands out as a country that has entirely restructured and liberalized its economy to make it attractive for foreign investors.

The framework of the new policy is built upon the abolition of all duties, save for customs and luxury taxes. Not only is it lawful and possible for foreign-owned firms to repatriate their profits, but also to transfer them out of the country if they wish. Companies are also allowed 100 percent ownership in Iraq project-related installations, so that there are no restrictions in place, even in respect to the quantity of the goods they distribute within the country at the end of the completion of projects.

The Iraqi government freely offers full exemption from income tax to companies for the first five years of their operations within the country. Should they decide to reinvest the amount in an Iraqi project, the tax authority also offers a further five-year exemption. Moreover, it is worth noting that taxes in Iraq are lower than in any other country in the region.

Import Regulations

Sometimes the customs levy additional charges, usually between 1% and 2% of the declared value, to cover customs handling and immigration procedures. Additional charges also apply to storage fees if the goods remain in the warehouse longer than 24 hours after they have arrived at the Iraqi borders.

These fees are around 2% of the declared value of the imported goods. The first step for a company is to approach a bank and open a letter of credit. The letter of credit is opened in favor of either an Iraqi general contractor or in favor of an Iraqi official. If the requesting party is a private company, only the central bank can open the letter of credit in favor of that company in person at the headquarters of the selected bank. This is a time-consuming process and should be considered while calculating the time required to complete the goods delivery procedure in Iraq.

The private company letter of credit moves the contractor, which may import the goods only for the end-user, usually the Ministry of Transportation. Other ministries should proceed through the Iraqi Consultative Council to get their goods.

The Ministry of Transportation informs the contractor or the selected supplier about the goods needed. After receiving the goods list, the supplier provides the contractor with the technical specifications, the brand, the model, and the price of the goods. The contractor contacts the authorized person named in the letter of credit mentioned earlier, who opens the letter of credit in favor of the supplier.

Business Registration Process

Upon identification of the business premises, the investor has to register the company with the respective authority in the province. Moreover, the main and branch offices must be registered with the Business Licensing Department. Registration is often done simultaneously and takes around 15 days. It usually occurs faster when facilitated by the chamber of commerce.

The information required to register a company includes the following: – A certified copy of the Articles of Association; – A certified copy of the decision of the Commercial Court from the Ministry of Justice that approves the company statutes; – A certified copy of the form certifying the company is enlisted in the chamber of commerce, which has been stamped by the Business Licensing Department; – Company Branches: When registering a company with branch offices in different governorates, a file must be opened for each branch in the governorates where they operate. A file is required for the central branch as well.

Market Entry Strategies

Swedish authorities and commercial service providers are ready to assist Swedish SMEs attempting market entry. However, most efforts in this area tend to focus on exports and use existing funding only from Swedish and European programs.

There is no dedicated funding for SMEs aiming to enter the local markets. If Swedish companies are to succeed at market entry, they must be able to offer good and competitive products and services – anything from the cost of a telephone call to the quality of skilled personnel and power generation facilities – to build relationships with their counterparts in Iraq, entrepreneurs with strong existing relationships and extensive know-how of local markets.

The role of the Iraqi Chambers of Commerce and the future bilateral Chamber of Commerce in Stockholm, as well as their associated business councils, is essential here. The contacts and information services at the local level allow commencing business only in a couple of days almost cost-free, assuming the will to do business is there, both in Iraq and Sweden.

For successful market entry, consistent policy is needed, without significant discrepancies and divisiveness among the actors involved. Furthermore, the SME and international trade governments would do well in the mid-term to move towards more diversified direct grants to specific sectors, while the Chambers should focus on service activities rather than their own survival as a primary goal.

Direct Exporting

Direct exporting occurs when a company sells to a customer or a representative in the target market. The exporter can use its own sales staff or contract with distributors. Direct exporting typically provides better control over the chosen target market(s) and better knowledge about customer needs.

Contractual arrangements such as exclusive agreements can safeguard the market investments of the firm and its distributor. Since the firm is ultimately responsible for its sales, it is directly exposed to market feedback, ensuring fast learning for the exporting of the next high-tech product, optimizing after-sale support, and proposing necessary local adaptations.

The most common direct exporting channel is a local sales representative. It can have different formats depending on the service level that the customer requires who purchase units from the exporter and market them directly to the customer. Usually, local sales representatives and sales agents are independent sales intermediaries for non-competitive products. Their income can be a commission per unit sold, a fixed price per unit sold, or a combination of both.

Joint Ventures

Iraqi law allows for joint ventures as a preferred form for organizing relationships between owners of businesses and other individuals possessing practical knowledge, innovation, financial capacity, and expertise to implement the specified business purpose.

Having a local partner is one form of allowing a small and medium-sized enterprise (SME) to use domestic human and other resources to develop and market products or services. It is not only required by law for certain types of businesses, but it greatly facilitates bureaucracy. When there are restrictions, the law often specifies management, buying, or hiring quotas. Some types of services must be provided by Iraqi citizens.

The desire to assure a continuous domestic presence might also suggest that an SME will want to have a local partner. Relatively simple business relations exist between foreign investors and one or more Iraqi investors. Foreign shareholders are allowed to initiate such relationships in conformity with the commercial laws; establish corporations with national investors to undertake profitable business entities; arrange the terms for regulating some of the entities and clarify the required responsibilities, rights, and liabilities.

Commercial companies are governed by the Companies Act. It is silent on many aspects of corporate governance, thereby allowing companies to adopt tailor-made articles of association covering all that is required prior to the formation of the company.

Franchising Opportunities

Franchising is a quick and lucrative expansion strategy for international brands looking to enter the Iraqi market. Enabling existing products to gain visibility, credibility, and local market insights, including tastes and preferences, franchise opportunities are available in Iraq in various industries, including the food and beverage industry, clothing and textiles, retail, and sports. Some internationally successful fast food and casual dining restaurants, fashion, and sports brands have already established themselves in popular Iraqi malls, making Iraq a natural entrance to the regional market.

Inquire about current requirements and identify suitable Iraqi companies with local rights to specific international brands for a franchising partnership. Meet and explore opportunities, as well as the possibility for open franchises via leading Iraqi chambers and trade fairs. Iraq's updated and credible investment map is a valid business matchmaking and potential collaboration resource.

Note: Arabic Version of this Article is Available on (دخول السوق العراقية: دليل للشركات الصغيرة والمتوسطة السويدية (الجزء-1))