The Emergence of Iran in the World Car Industry: An Estimation of its Export Potential

Abstract

In the past 10 years Iran has been emerging as a major car producer in the world. However, due to delays in economic reforms, Iranian car exports have not increased as much as production. This paper presents a first estimation of the Iranian export potential in the car industry. Based on new theoretical developments of the gravity equation, an empirical bilateral trade model is proposed. It includes sectoral variables (car production, import tariffs), as well as other original variables, such as expectations and hysteresis. We then develop a dataset which includes the 40 major car‐exporting countries in the world, 34 importing countries, a 10‐year time period as well as four car production groups. The model is then estimated by using alternative panel data estimators, such as those of Hausman and Taylor and dynamic estimators as well as transformed variables estimators. Export potential is finally calculated from the residuals of the model. Results show that Iranian current car exports are about 100 times less than their fitted values. This indicates that there is a significant export potential for Iran, especially toward India, China, Russia, as well as smaller neighbours (Turkey, Pakistan, Central Asian countries). As a result, Iran could become the major auto supplier in the Middle East. However, this requires the completion and success of ongoing economic reforms.