Geopolitical Decoupling in Global Production Networks

Abstract

This article introduces the concept of geopolitical decoupling in global production networks (GPNs). Geopolitical decoupling is imposed on coupling participants by geopolitical forces that pressure transnational corporations to exit host regions/economies by cutting investment, production, and trade links with host country firms and industries. It also aims to disrupt inside-out trade, investment, and production links of host country firms abroad. The article identifies the basic features of geopolitical decoupling, the central role of states in geopolitical decoupling, the strategic responses of firms to deal with decoupling pressures, and the state strategies to cope with the negative effects of geopolitical decoupling in affected regions/economies. Empirically, the article investigates geopolitical decoupling on the example of the Iranian automotive industry, which experienced three geopolitical decouplings from automotive industry GPNs since 1979. It demonstrates the short- and long-term effects of geopolitical decoupling and recoupling on the Iranian automotive industry in the context of the strategic responses by the state and the political struggles over the nature of the state industrial development policy in Iran.

Key words:

• geopolitics
• decoupling
• global production networks
• transnational corporations
• state
• automotive industry
• Iran

The global production networks (GPNs) concept of strategic coupling describes different ways in which global capital, represented by transnational corporations (TNCs), and regional assets of host economies form mutually beneficial trade, investment, and production linkages. The nature and extent of the potential benefits for host regions vary depending on the mode of strategic coupling (i.e., organic, functional, and structural). The uneven distribution of these benefits among coupling participants contributes to uneven economic development (Coe et al. 2004; Yeung 2009, 2015, 2016; MacKinnon 2012; Coe and Yeung 2015).

Decoupling from GPNs refers to situations in which one of the coupling participants considers an existing strategic coupling as no longer viable economically and pulls out with the goal of improving its economic situation and relative position in GPNs. Decoupling has been conceptualized as a rupture (Coe and Hess 2011), disarticulation (Bair and Werner 2011), or break (Horner 2014) in the linkages between TNCs and host regions through disinvestment, relocations, and factory closures (Bair and Werner 2011; MacKinnon 2012; Werner 2016). Although the interest in decoupling in GPNs has increased (Bair and Werner 2011; Coe and Hess 2011; Horner 2014; Blažek 2016; Weller and Rainnie 2022), it has received much less attention than strategic coupling.

This article contributes to the understanding of decoupling processes in GPNs by introducing the concept of geopolitical decoupling. Geopolitical decoupling is triggered by geopolitical forces that are external to the coupling relationships and negatively affect coupling participants. By focusing on geopolitical decoupling in GPNs, this article investigates the dark side of economic geography by analyzing the processes contributing to uneven economic development (Coe and Hess 2011; Phelps, Atienza, and Arias 2018) through highlighting the importance of geopolitical factors that have so far been neglected in GPN research (Glassman 2011; Coe 2021; Weller and Rainnie 2022).

Empirically, this article examines geopolitical decoupling in the Iranian automotive industry to demonstrate how it affects both host economies and TNCs. Iran was analyzed because it was the most sanctioned country in the world with the most stringent sanctions before 2022 (Farzanegan and Batmanghelidj 2023), and its automotive industry, which was the sixteenth largest vehicle producer in the world in 2022 (Organisation Internationale des Constructeurs d’Automobile [OICA] 2023), has specifically been targeted by economic sanctions that have aimed to decouple it from foreign lead firms and GPNs. To the best of my knowledge, research on the Iranian automotive industry by economic geographers is almost nonexistent because of the difficulties in obtaining relevant data and information, including the impossibility of conducting field research by foreign scholars in Iran. To overcome this obstacle, this article relies on the collection and analysis of secondary data and information (St Martin and Pavlovskaya 2010) from various foreign and Iranian sources, including grey literature (Mahood, Van Eerd, and Irvin 2014).

The detailed account and history of the Iranian automotive industry is beyond the scope of this article and has been done elsewhere (e.g., Alizadeh 2013; Manteghi 2013; Mehri 2017; Razavi and Alaedini 2018), as is the history of the economic sanctions imposed on Iran (e.g., Rivlin 2019; Gheibi 2022). The focus here is on geopolitical decoupling and the strategies of actors, such as states and firms, to cope with geopolitical decoupling. The article is organized as follows: The next section introduces and conceptualizes geopolitical decoupling, including the role of states, strategic responses of firms, and consequences for host regions. The section following introduces the Iranian automotive industry and considers its position in the world automotive industry. The penultimate section investigates geopolitical decouplings from GPNs in the Iranian automotive industry. Finally, the results are summarized and evaluated in the conclusion.

Geopolitical Decoupling in GPNs

The structural mode of strategic coupling, in which TNCs reap greater benefits than host country firms and regional economies because of asymmetrical power relations and external dependence, is more vulnerable to a potential decoupling than organic and functional strategic couplings (MacKinnon 2012; Coe and Yeung 2015; Coe 2021). Two basic types of decoupling have been recognized: structural and strategic (Horner 2014). Structural decoupling, the most common type from the perspective of host regions (e.g., MacKinnon, 2012), is pursued by TNCs as part of their profit-seeking strategies and ultimately is the end result of long-term developments (Weller and Rainnie 2022) that usually manifest abruptly in a host region by the exit of TNCs.

However, decoupling can also be actively pursued as a long-term gradual strategy by host country firms, institutions, and regions, what Coe and Hess (2011) and Horner (2014) label a strategic decoupling. Its goal is to decouple from the structural mode and recouple into the more favorable functional or indigenous strategic coupling (Horner 2014; Coe and Yeung 2015; Yeung 2015). Despite successful examples (Amsden and Chu 2003; Horner 2014; Yeung 2015; Yang and He 2017), long-term strategic decoupling and recoupling has been difficult to achieve in less developed countries and regions, since it requires active strategic industrial and regional policies (Yeung 2015; Chang and Andreoni 2020) that are often absent due to the unfavorable institutional environment (Rodríguez-Pose and Di Cataldo 2015).

In this article, I introduce the concept of geopolitical decoupling, as a third basic type of decoupling in GPNs, which is different from both structural and strategic decoupling (Table 1, Figure 1). Geopolitical decoupling from GPNs is the outcome of geopolitical forces and pressures that are external to the coupling relationship and deliberately seek to break strategic coupling between global lead firms (whether foreign or domestic owned) and host country regions/economies. Therefore, it includes deliberate efforts to disrupt outside-in transactional relationships (e.g., foreign lead firms’ relationships with various actors in host economies) as well as inside-out transactional relationships (e.g., domestic lead firms’ relationships with other actors abroad). As such, it is not strategic for TNCs nor for host country firms, industries, and regions. Typically, it is necessitated because of the imposition of economic sanctions by powerful states, which pressure TNCs to sever foreign direct investment (FDI), production, and trade links in a targeted host economy. TNCs may also come under strong political and public pressure in their home economies and other large markets to decouple from the targeted host economy (Sonnenfeld 2023), which may force them to withdraw to protect their reputations and markets. Geopolitical decoupling is thus a type of forced decoupling, which is triggered by forces and events that are external to coupling participants and largely beyond their control. In addition to geopolitical pressures, other reasons for forced decoupling might include financial crises (e.g., the 2008 financial crisis), natural disasters (e.g., the 2011 earthquake and tsunami in Japan), and pandemics (e.g., the COVID-19 pandemic) (Lund et al. 2020).

Figure 1. Graphical summary of decouplings in GPNs.

Source: Author.

Table 1 Basic Types of Decoupling from GPNs

	Strategic Decoupling	Structural Decoupling	Geopolitical Decoupling
Definition	Voluntary decoupling by host country firms, regions, institutions	Voluntary decoupling by TNCs	Externally imposed involuntary decoupling for all coupling partners
Reasons for decoupling	Strategic for host regions: upgrading the position in GPNs via functional upgrading, seeking opportunities for higher value creation, enhancement, and capture	Strategic for TNCs: maintaining or increasing competitiveness and the rate of profit by TNCs	Geopolitical/political reasons strategic neither for host regions/economies/industries, nor for TNCs
Nature of the decoupling process	Gradual and long term	Abrupt at the firm level but the outcome of long-term processes and a decline in profitability	Potentially abrupt at the firm and industry levels
Short-term regional and national impacts in host economies	Potentially positive impact of national industrial policies and regional support policies for the development of local firms	Negative but limited to individual localities and regions through factory closures and job losses	Negative: potentially economy- and industry-wide factory and office closures and job losses
Long-term regional and national impacts in host economies	Potentially positive through recoupling into a more favorable mode of strategic coupling	Mostly negative in the absence of new investment. Neutral in the cases of new investment and structural recoupling	Mostly negative because of economic isolation and the curtailed access to advanced foreign technology. Potentially lower external dependence and higher self-sufficiency
Impacts on TNCs	Negative as their dominant position is gradually undermined in a host region, constraining their value creation and capture	Positive in the long run as the rationalization of production increases the rate of profit	Negative because of lost assets, output, sales, markets, and profits in host economies
Chances for recoupling in the same mode	Low	High	High
Duration of decoupling	Likely to be long term	Likely to be long term	Likely to be short to medium term
Role of the state	Direct or indirect support for decoupling and recoupling in a more beneficial mode of strategic coupling	Mitigation of local and regional impacts through support policies, attracting new foreign investors to the same locality/region	Crucial both in the form of imposing geopolitical decoupling by foreign states and in mitigating its consequences by affected states
Examples	Taiwan's electronics industry (Amsden and Chu 2003), India's pharmaceutical industry (Horner 2014), South Korea's ICT industry (Yeung 2015), China's electronics industry (Yang and He 2017)	Semiconductor industry in Britain (Dawley 2007), garment industry in Mexico (Bair and Werner 2011) and Slovakia (Smith et al. 2014), automotive industry in Australia (Weller and Rainnie 2022; Irving et al. 2022)	Iran's automotive industry, Russia after the 2022 invasion of Ukraine

Source: Author.

The importance of geopolitical decoupling has increased in the world economy with the proliferation of economic sanctions. Between 1989 and 2015, the US imposed economic sanctions on 103 countries, the EU did so on 60, and the UN imposed sanctions on 29 (Weber and Schneider 2022). The use of economic sanctions as a foreign policy instrument of economic coercion, designed to change the behavior of countries considered to be unacceptable (Felbermayr et al. 2020), almost doubled between 2010 and 2019 in what Van Bergeijk (2021, 4) calls “the sanctions tsunami.” The highest level of active economic sanctions since 1950 was reached in 2022 (Syropoulos et al. 2023).

Geopolitical decoupling leads to the sudden and unexpected disengagement of TNCs from host economies, which disconnect local firms from GPNs both inside and outside their home economies. Compared to strategic decoupling, which can take years or decades in the case of entire industries (Amsden and Chu 2003; Horner 2014), the geopolitical decoupling of TNCs and entire industries is usually abrupt. It can be triggered by an unexpected geopolitical event, such as a war (e.g., the Russia–Ukraine war); regime change deemed unacceptable to the international community or a world power (e.g., Cuba and Venezuela); or by the behavior of a country deemed unacceptable by other countries, especially world powers (e.g., Iran and North Korea). While structural decoupling is an outcome of a decreasing rate of profit of less competitive TNCs over time in a host economy, eventually leading to disinvestment (Clark and Wrigley 1997; Benito 2005; Weller and Rainnie 2022), geopolitical decoupling also affects profitable and successful operations.

States and Geopolitical Decoupling

States play a central role in geopolitical decoupling. States are directly involved in GPNs in four distinct ways (Horner 2017): they facilitate the inclusion and operation of firms in GPNs, regulate GPNs on their territories, are directly involved in GPNs through production in state-owned enterprises, and purchase various goods and services from private firms through procurement policies. State regulation is often mandatory and may both facilitate and hinder the operation of GPNs (Gereffi and Lee 2016). States are actively and directly involved in the formation and functioning of GPNs (e.g., Smith et al. 2002; Gereffi and Mayer 2006; Glassman 2011; Smith 2015; Horner 2017), and nation-states are being recognized as “a key actor in GPNs” (Coe, Dicken, and Hess 2008, 282). This recognition of the crucial importance of states builds on political economy approaches (e.g., Jessop 2007), which emphasize the intertwined nature of economic and political processes in constituting GPNs and the central role played by states in GPNs through their various actors and agencies at multiple geographic scales (Levy 2008; Glassman 2011; Smith 2015).

The analysis of geopolitical decoupling extends this approach by considering the role of geopolitical factors in the organization, operation, and disruption of GPNs, and the central role of the state in these processes. While previous research emphasizing the importance of geopolitical factors in GPNs has mostly analyzed the role of favorable geopolitical circumstances for successful economic development in regions such as East Asia (e.g., Glassman 2011; Yeung 2017), this article focuses on the effects of state-driven geopolitical circumstances hindering the operation of GPNs, and on state and firm strategic responses to geopolitical decoupling.

States play the central role in geopolitical decoupling for two fundamental reasons. First, a political decision by foreign states to impose economic sanctions triggers geopolitical decoupling in sanctioned countries. Strong states apply their institutional power over weaker states and TNCs, which includes “the capacity to exercise power to influence the investment and other decisions of lead companies and other firms integrated into GPNs” (Henderson et al. 2002, 450). As such, it is a type of coercive power, which is intentional and conflict oriented (Dallas, Ponte, and Sturgeon 2019). However, seeking geopolitical decoupling through economic sanctions is a risky state strategy because its economic consequences are difficult to predict, and it has numerous unintended side effects for both sanctioning and sanctioned states (Meyer et al. 2023).

Second, states in sanctioned countries resist and strategically respond to geopolitical decoupling. They might set formal rules, regulations, and countermeasures through their various agencies and agents that make decoupling for foreign TNCs more difficult and costlier. These countermeasures tend to increase the direct role of the state in the decoupled economy. Examples include the state regulation of transactions and capital outflow restrictions involving persons and entities from sanctioning states; trade regulations, such as export restrictions on select commodities, and allowing parallel imports without the consent of trademark holders; exit tax and other financial penalties; and temporary seizure of TNC operations (Cleary Gottlieb 2023; Kantchev and Chaudhuri 2023; Solomakhina and Klepalov 2023).

As will be demonstrated in the section “Geopolitical Decouplings from GPNs in the Iranian Automotive Industry,” the role of the state is also central in mitigating impacts of geopolitical decoupling in sanctioned economies through protecting and subsidizing local (domestic) firms and industries. In the case of strategically important industries, these policies aim at decreasing the dependence on foreign technologies, know-how, parts, and components, and increasing domestic competencies and self-sufficiency via state import substitution policies. However, depending on the size of the technological gap, a complete self-sufficiency is usually difficult to achieve without compromising the technological levels and quality of finished products. The state is therefore likely to support a recoupling with TNCs, either from countries not participating in economic sanctions or with original TNCs after economic sanctions are lifted.

Strategic Responses of TNCs to Geopolitical Decoupling

The economic effects of geopolitical decoupling are almost invariably negative and high for TNCs and host countries, regions, and firms (Meyer et al. 2023).¹ Therefore, geopolitical decoupling is unlikely to be permanent or long term. A recoupling is likely when the reasons for geopolitical decoupling cease to exist.

TNCs and their home economies face at least three types of high costs involved. First are sunk costs, which are costs spent by a firm in a locality (region, country) that are unrecoverable in the case of its exit (Clark and Wrigley 1995, 1997). Sunk costs are especially high for capital-intensive, producer-driven GPNs in which TNCs directly own and operate subsidiaries in host economies (Gereffi 2018).² Second are lost future revenues and profits TNCs may have earned in a market they are forced to leave,³ including the lost market share in the host country that may not easily be reclaimed when recoupling takes place after sanctions are lifted because the market was taken over by TNCs from nonsanctioning countries and/or by domestic firms (Lektzian and Biglaiser 2013; Mirkina 2018).⁴ Third are economic losses incurred by TNCs in their home economies because of curtailed exports to sanctioned countries and disrupted imports from sanctioned countries.⁵

TNCs cope with geopolitical pressures to decouple from host economies and their high costs by employing various firm- and industry-specific strategies. Their goal is to mitigate economic losses and manage two types of risk (Coe and Yeung 2015). The first is regulatory risk stemming from policies and regulations imposed on TNCs by sanctioning states and regulatory countermeasures pursued by sanctioned states. The second is product risk in the form of reputation risk in TNCs’ home economies (Meyer and Thein 2014; Aliasghar and Rose 2023; Meyer et al. 2023), which refers to “the possible financial loss that a firm may suffer when its brand reputation is negatively affected” (Meyer and Thein 2014, 167). Management of these risks depends on several variables, such as firm size, economic sector, specific product, and a firm’s home economy, resulting in multitude of firm-level strategic responses (e.g., Jack et al. 2022).⁶ Large TNCs are more likely to decouple from host economies than smaller TNCs because reputation risk increases with firm size (Meyer and Thein 2014). Even in the cases of complete decoupling, some TNCs attempt to mitigate their financial losses through negotiating buyback periods for a potential future recoupling.⁷

Other, especially smaller, TNCs pursue various low-profile strategies allowing them to avoid a complete decoupling and its associated costs. These include selling or transferring equity to local managers or entrepreneurs who then continue operations, justifying continued production by humanitarian exemptions, and other sanctions/decoupling avoidance strategies, such as trading through nonsanctioning countries (Sonnenfeld et al. 2023). The extent of these strategies varies by economic sector. Industries producing goods and services with high reputation risk (e.g., brand-named products, alcohol and tobacco, fast food chains, media, consulting, and law) are more likely to decouple than industries producing generic goods and services with low reputation risk (e.g., raw materials, agricultural commodities, chemicals) (KSE Institute 2023).⁸ Nontangible services with lower sunk costs are more likely to decouple than producer-driven type of industries, which have higher sunk costs in host regions and therefore greater economic costs of decoupling.

TNC decoupling strategies also vary by their home country, since TNCs from sanctioning countries are more likely to decouple than TNCs from nonsanctioning countries.⁹ There are also significant differences in the decoupling strategies among TNCs from sanctioning countries (i.e., whether to decouple or not, how, and to what extent) that reflect differences in their home economy regulatory and reputation risks (Meyer and Thein 2014; Sonnenfeld et al. 2023; KSE Institute 2023).¹⁰

Geopolitical Decoupling and Territorial Development Trajectories

Geopolitical decoupling has uneven regional, sectoral, and temporal effects in decoupled economies because of the targeting of economic sanctions on particular sectors (e.g., finance, oil, automotive industries, fish, agricultural commodities) (Drezner 2011); sectoral differences in the ability of local firms to recouple in alternative GPNs by substituting their investment and trade partners for those from nonsanctioning countries (Habibi 2013); and because of uneven compliance by foreign firms (Alderman 2023). Depending on the sector, the degree of involvement of foreign firms, and the integration of local firms in GPNs, geopolitical decoupling can lead to sharp declines in production, lost revenues, factory closures, job losses, disrupted livelihoods in agricultural-based industries, lost access to foreign technology, and the availability of fewer and lower quality goods on the market compared to the predecoupling period.

In the short run, production sharply declines in the affected firms, industries, services, and agricultural commodities; as foreign TNCs depart, trade is cut, and GPNs are disrupted due to the restricted flow of foreign raw materials and components for production.¹¹ This leads to job cuts and factory and office closures that have negative consequences, especially for the localities and regions that are strongly integrated into GPNs. Examples include world cities, which are large office centers (Friedmann 1986) integrated in global financial networks and trade flows, and have a high share of foreign firms and employment in the service sector (Haberly and Wójcik 2022); regions strategically coupled in GPNs in the structural mode with the high concentration of foreign firms such as in export processing zones (Frick, Rodríguez-Pose, and Wong 2019), supplier parks (Larsson 2002), and clusters of foreign suppliers around foreign assembly plants (Sturgeon, Van Biesebroeck, and Gereffi 2008); regions specialized in extractive industries and exports of raw materials (Bridge 2008); export-oriented agricultural regions (Larch, Luckstead, and Yotov 2021; Mohammadi-Nasrabadi et al. 2023); and border regions with sanctioning countries and with high levels of cross-border FDI (Zemtsov, Barinova, and Mikhailov 2023).¹²

Geopolitical decoupling thus may sharply increase demand uncertainty for local firms depending on the degree of their integration in GPNs. Strategic responses of local firms to a decreased demand for their goods and services vary but usually involve the combination of cost-cutting strategies, such as job cutting, pay freezes, and cuts in fixed/overhead, marketing, and research and development (R&D) costs, with strategies designed to increase efficiency, such as investment in information technologies and R&D, and increased exports to nonsanctioning countries. The extent of these strategies varies based on the sector, size, and age of firms (Argyres, Mahoney, and Nickerson 2019; Cheratian, Goltabar, and Farzanegan 2023).

In the long run, geopolitical decoupling imposed by more developed countries on less developed countries limits technology transfer from more developed countries to less developed countries via FDI spillovers, one of the potentially most important development benefits of FDI (Blomström and Kokko 2001; Görg and Strobl 2001; Dunning and Lundan 2008). As TNCs cut production links and abandon joint technology and R&D projects in host economies (Financial Tribune 2022), access to foreign technology via TNCs by local firms is restricted. As such, geopolitical decoupling contributes to the perpetuation of uneven development in the world economy by slowing the diffusion of modern technologies to decoupled industries, regions, and countries, and by reversing previous output and employment gains driven by integration into GPNs.

In summary, states play the central direct role in geopolitical decoupling from GPNs; state decoupling strategies and firm responses are intertwined; TNCs strategically respond by managing regulatory and reputation risk, resulting in different strategies and outcomes; local firms strategically respond by managing demand uncertainty; and geopolitical decoupling has uneven sectoral and spatial impacts in decoupled countries/regions, which contributes to uneven development.

In the rest of the article, I investigate the concept of geopolitical decoupling on the example of the Iranian automotive industry. First, I briefly introduce the Iranian automotive industry in the context of the automotive industry development in less developed countries with an emphasis on the highly contested nature of the role of the state and technological dependence on Western TNCs in the Iranian automotive industry’s development. Second, I apply conceptual lenses from the first part of the article to analyze three episodes of geopolitical decouplings along with structural couplings and recouplings in the Iranian automotive industry by focusing on state and firm strategic responses to geopolitical decouplings.

Iran’s Automotive Industry

The contemporary automotive industry is a strongly oligopolistic industry, which is controlled by a small number of large TNCs from the automotive industry core that have become increasingly globalized through producing cars and key components in all major markets around the world (Wong 2017). Car makers and key suppliers now control the technology, innovation, and know-how without which less developed countries are unable to develop an internationally competitive automotive industry. Since the 1990s, the growth of the automotive industry has strongly shifted to less developed countries (Humphrey, Lecler, and Salerno 2000), which has been driven by large FDI of mostly core-based assembly firms and their key suppliers (Sturgeon, Van Biesebroeck, and Gereffi 2008; Dicken 2015; Pavlínek 2020). By 2022, 60 million vehicles (70 percent of the world’s total), including 47 million cars (77 percent), were assembled in less developed countries, compared to just 1.8 million (12 percent) and 1.0 million (9 percent) in 1961 (United States Department of Transportation, Bureau of Transportation Statistics 2022; OICA 2023). The three main models of the automotive industry development in less developed countries and its integration into GPNs since the early 1990s, originally identified by Humphrey and Oeter (2000), led to the emergence of the three types of globally important automotive industry peripheries (Table 2).

Table 2 Basic Features of the Automotive Industry Peripheries

	Integrated Peripheries	Protected Autonomous Peripheries	Macroregional Peripheries
Market orientation	Adjacent core countries market	Domestic market	Macroregional market
Degree of foreign control	Very high via FDI	Medium: mixture of foreign-owned and domestic firms, joint ventures	High via FDI
Main reason for FDI	Low production costs for export-oriented production	Market capture: host country market size and access	Market capture: macroregional market size and access
Host country/region market size and demand conditions	Limited or small	Large to very large, large future new demand and market potential	Large to very large at the macroregional scale, medium to large at the national scale, large future new demand and market potential
Trade policies	Free trade agreements within the macroregional market	Various forms of protectionism to support the development of the domestic car industry	Free trade agreements within the macroregional market, tariff protection of the macroregional market
Inclusion in macroregional trade agreements	Yes (USMCA, EU)	Yes, but to a limited extent (AIFTA, EEU)	Yes (AFTA, MERCOSUR)
Protection of the automotive industry	Via nontariff barriers: local content requirements and other TRIMs at the macroregional level, limited or nonexistent national protection due to the membership in regional trade agreements	High level of protection at the national level via various TRIMs, tariffs, and nontariff barriers.	Tariffs on imported cars from outside regional trade agreements plus nontariff barriers (local content requirements and other TRIMs) at the macroregional level. Limited national protection within regional trade agreements
Government policies	Focus on attracting and facilitating FDI via strong investment incentives at the national scale, active participation in bidding wars over large FDI projects, weak support of domestic firms, weak or nonexistent industrial policy	Strong industrial policy supporting the development of domestic firms and domestic automotive industry, transfer of foreign technology to domestic firms via FDI	Focus on attracting and facilitating FDI via strong investment incentives at the national scale, active participation in bidding wars over large FDI projects, active industrial policy, moderate support of domestic firms
Domestic assembly firms	No	Yes	No, except for Malaysia (Proton and Perodua are partially foreign owned).
Domestic technological capabilities	Low	Low to medium but rapidly increasing in China and India	Low
Globalization of domestic firms via outward FDI	Nonexistent or very limited	Low but increasing in the cases of China and India	Nonexistent or very limited
Examples	East-Central Europe, Turkey, Mexico, Morocco	China, India, Russia, Iran	Southeast Asia (AFTA), South America (Mercosur)

Note: USMCA: United States-Mexico-Canada Agreement, AIFTA: ASEAN-India Free Trade Area, EEU: Eurasian Economic Union, AFTA: ASEAN Free Trade Area, MERCOSUR: the Southern Common Market, TRIMs: trade-related investment measures.

Source: Author inspired by the classification of automotive industry in emerging markets by Humphrey and Oeter (2000) and the features of integrated peripheries in Pavlínek (2018, 2020).

Iran represents an example of the growth of the automotive industry in protected autonomous peripheries since the early 1990s and a case of a state-led development strategy with the important participation of foreign TNCs. Other examples include China (Wenten 2020), India (Barnes 2018), and Russia (Traub-Merz 2017; Gurkov and Morley 2021). In this development model, countries strive to develop the indigenous automotive industry with the help of market capture FDI and in combination with tariff and nontariff barriers against imports of finished vehicles. Domestic assembly firms play an important role. The development and growth of the automotive industry depends on large domestic demand, which is necessary for achieving scale economies. The automotive industry growth does not depend on exports to foreign markets and is not macroregionally integrated. If the growth is successful, vehicle exports develop, starting with markets in less developed countries. Governments play an important role by protecting the domestic market against foreign competition and by setting strict conditions under which foreign investors are allowed to invest, leading to the obligated embeddedness (Liu and Dicken 2006), especially in countries with very large domestic markets such as China (Table 2).

The Role of the State in the Iranian Automotive Industry

As in other less developed countries (e.g., Humphrey, Lecler, and Salerno 2000; Dicken 2015), the state, through its various actors and agencies, has played a central role in the development of the Iranian automotive industry. To briefly analyze this role, I am drawing on the strategic relational understanding of the state as a social relation, which Smith (2015, 298) defines as “an understanding of the social construction of state policy frameworks as the outcomes of struggles within the state at different spatial scales and between the institutions of the state and other social formations.”

Similar to other less developed countries (Chang and Andreoni 2020), the state industrial development strategy in Iran has been the outcome of struggles and conflicts among state agents and agencies, economic, religious, and other social groups with contending interests, ideologies, and views of socioeconomic development (e.g., Pesaran 2011). These struggles and conflicts determined the allocation of state resources for industrial development. Three basic groups, typical of less developed countries (Andreoni and Chang 2019), with contrasting visions of industrial development have dominated the political system. Left-wing radical nationalists supported the allocation of state resources for the development of a self-sufficient agriculture at the expense of industrial development and considered reliance on foreign capital, technology, and imports to be detrimental. Right-wing conservatives, who allied with merchants, favored commerce over industrial development and supported liberalized trade, free markets, private enterprises, FDI, and joint ventures with foreign TNCs. Industrial nationalists advocated the development of a self-sufficient, technologically advanced industry with limited ties to Western TNCs. They supported the state ownership of large industrial corporations, private ownership of small firms, and infant industry protection (Mehri 2015a; 2017; Pesaran 2011).

Because of constant political struggles, the power and influence of these three groups over industrial development policy changed over time. The conservatives and national industrialists were influential before 1979. The radical nationalists dominated between 1979 and 1988. The conservatives influenced policies between 1990 and 1992. After 1992, the industrial nationalists, supported by managers of local corporations, came to prominence (Mehri 2017).

Operating in the political system controlled by these three contesting groups, crucial state actors in the Iranian automotive industry include the Ministry of Industry, which is financed and controlled by the parliament; the state Industrial Development and Renovation Organization, which is owned by the Ministry of Industry; and state-controlled Iran Khodro Company (IKCO) and SAIPA automotive corporations, which are directly and indirectly owned by the Industrial Development and Renovation Organization and account for more than 90 percent of the total output.¹³ The Ministry of Industry and Industrial Development and Renovation Organization had organized and managed the Iranian automotive industry by financing its development projects, including the provision of favorable loans for the setting up of private local suppliers, establishing links between TNCs and the Iranian automotive industry, and facilitating the transfer of modern technologies from abroad. IKCO and SAIPA have been responsible for developing local organizational, productive, and technical capacity through the construction of factories and operating R&D centers with the goal of transferring technology and know-how from abroad (Mehri 2015a; 2017).

Technological Dependence on Foreign TNCs Despite Large Vehicle Production

Since the early 1990s, Iran’s vehicle output grew rapidly and reached 1.65 million units in 2011, making Iran the largest carmaker in southwest Asia and the eleventh largest in the world. By 2022, Iran’s position worsened to the sixteenth largest vehicle producer as output fell to less than 1.06 million units (OICA 2023) because of two rounds of geopolitical decoupling triggered by the imposition of Western economic sanctions in 2011 and 2018 (Figure 2, Table 3). The Iranian automotive industry is concentrated in the Tehran metropolitan region, including the main assembly plants of the three largest assemblers IKCO, SAIPA, and Pars Khodro, along with 718 suppliers (60 percent of the Iranian automotive industry total) (Iranian Auto Parts Manufacturers Association 2017).

Figure 2. Vehicle production in Iran, 1970–2022.

Source: Author based on data in OICA (2023), Knoema (2022).

Table 3 The Effects of Geopolitical Decouplings and Recouplings on Vehicle Production in Iran

Coupling/Decoupling/ Recoupling	Period	Changes in Output
Original structural coupling	1960s–1978	Increase from 1,927 vehicles in 1963 to 180,000 in 1977.
Revolution and war geopolitical decoupling	1979–1988	Decline by 97% from 180,000 vehicles in 1977 to 5,000 in 1988.
Postwar structural recoupling	1989–2011	Increase from 5,000 vehicles in 1989 to 1.65 million in 2011.
Post-2011 geopolitical decoupling	2012–15	Decline by 55% from 1.65 million in 2011 to 744,000 in 2013.
Post-2016 structural recoupling	2016–April 2018	Increase from 982,000 in 2015 to 1.52 million in 2017.
Post-2018 geopolitical decoupling	May 2018–	Decline by 46% from 1.52 million in 2017 to 821,000 in 2019.

Sources: Production data from Alizadeh (2013), Razavi and Alaedini (2018), Knoema (2022), OICA (2023).

As a result of this growth, the automotive industry has become one of the most important sectors of the Iranian economy, accounting for 3.5–4 percent of its gross domestic product (Minaee et al. 2021). In 2020, it was directly employing 169,000 workers (79,000 in vehicle assembly and 97,000 in the production of components in 2017) (Statistical Centre of Iran 2021a, 2021b), although the broadly defined parts industry employed around 450,000 workers in 2018 (AL Monitor 2018). Including related industries and indirect employment, the total employment has been estimated up to 1.7 million (Minaee et al. 2021).

Despite the large volume of production and employment, the Iranian automotive industry has essentially been an assembly industry of small, inexpensive, low-quality cars dominated by the semi-knocked down¹⁴ and completely knocked down assembly of outdated Western models under foreign licenses.¹⁵ Most license agreements have restricted the sale of locally produced cars to the Iranian market, thus limiting car exports (Mehri 2017; Abedini and Péridy 2009). The inability to innovate the outdated licensed models reflects the limited technological capabilities of Iranian firms and the structure of demand, which is heavily skewed toward basic cheap cars (Minaee et al. 2021).

Driven by the industrial nationalist agenda, the underlying goal of state policy approaches (Table 4) has been to lower the technological dependence on foreign TNCs with the aim of achieving self-sufficiency by increasing local content and developing domestic technological capabilities. Import substitution policies helped increase the share of domestically produced simple components, but the Iranian automotive industry continues to depend on foreign TNCs in the most technologically advanced parts such as engines and engine parts (Minaee et al. 2021; Razavi and Alaedini 2018). Given the limited local technological capabilities, the only feasible strategy to achieve self-sufficiency in advanced automotive industry technologies is through their transfer from abroad. This explains why the state pursued structural recouplings between the Iranian automotive industry and foreign TNCs after each geopolitical decoupling despite political and ideological differences with the West, while also seeking alternative strategies of technology transfer (Mehri 2015b).

Table 4 State Policies in the Automotive Industry of Iran

Period	State Strategy	Details of State Policy
1969–78: Original coupling	Import substitution	Low tariffs on imports of completely knocked down cars and components (30%), high tariffs on imported cars (new completely finished cars that do not need any additional assembly in Iran) (200–237%), lower for commercial vehicles (20–50%), import content regulations, local production of vehicle bodies and simple parts mandated by the government. Licensing agreements with foreign firms on completely knocked down or semi-knocked down production required a 30% local content, increasing to more than 70% within five years. No specific strategy for the development of the automotive industry. Tariffs on imported parts and components removed in 1974.
1979–88: Revolution and war decoupling	Nationalization, self-sufficiency, import substitution	The automotive industry nationalized and placed under the control of the Industrial Development and Renovation Organization and organized into two large state-owned automotive firms: IKCO and SAIPA. Car imports banned. The Iranian automotive industry converted to military production by the 1985 government decree.
1989–92: Postwar recoupling (phase I)	Liberalization, import substitution, self-sufficiency	Unlimited imports allowed by foreign firms in 1990 that had dealerships in Iran, machinery of closed Talbot factories in Britain purchased from Peugeot to establish eleven large automotive industry companies in Iran. Foreign automakers invited to set up assembly in Iran. Licensing agreements reintroduced. Government-owned banks encouraged to allocate and guarantee long-term credit to large industrial enterprises, including the automotive industry.
1993–2011: Postwar recoupling (phase II)	Import substitution, self-sufficiency	Infant industry protection passed in 1992. 1993 Automobile Law increased the tariff on imported cars to 220%, lower tariffs imposed on cars with local content and on components in 1994. Centralized parts procurement companies affiliated with IKCO and SAIPA established in 1994. Policies to increase local content, private companies encouraged to invest in parts production. Licensing agreements with foreign TNCs preferred but FDI restricted until the mid-2000s after which joint ventures encouraged. Car prices regulated by the state. Foreign exchange allocated to car manufacturers for the purchase of raw materials and components abroad. National car project launched in 1996. Policy of achieving self-sufficiency in vehicle production adopted in 1998 with a focus on components. Twenty-year plan for development of the automotive industry adopted in 2009.
2012–15: First sanctions geopolitical decoupling	Self-sufficiency, import substitution	Measures to counter Western economic sanctions, the exit of TNCs, no access to foreign auto parts and key raw materials. Policies aimed at increasing local content by increasing the local production of parts and components. Mandatory pricing introduced in 2013: car prices set by the government irrespective of production costs.
2014–April 2018: Postsanctions recoupling	Import substitution, self-sufficiency	IKCO and SAIPA encouraged to form joint ventures with foreign TNCs. Foreign firms required to export 30% of local output. Policies aimed at increasing local content: Since March 2018, 40% local content required for all new models made by joint ventures at the start of the production, 70% required in three years. 100% tariffs on imported cars and cars made in joint ventures not meeting the 40% local content requirement. Technology transfer requirement. Car prices set by the government.
May 2018–: Second sanctions geopolitical decoupling	Self-sufficiency, import substitution	Imports of complete cars banned in July 2018. Car prices set by the government. Policies to support local parts manufacturing: $945 million in government support in 2019, $2 billion in 2020 to settle debts of IKCO and SAIPA to auto parts manufacturers and expand production. Look to the East policy to strengthen ties with Chinese and Indian automotive industry firms.

Source: Author based on various publications and news reports.

However, the transfer of Western technology to Iran has been limited for three reasons. First, foreign firms are not keen on actively transferring their core technologies to host country firms because it would undermine their crucial ownership-specific advantage (Hymer 1976; Dunning and Lundan 2008). Second, the absorptive capacity of Iranian manufacturers, one of the basic preconditions for technology transfer from foreign to host country firms (e.g., Ernst and Kim 2002), has been low, although foreign licenses helped Iranian firms develop important capabilities in the automotive industry and encouraged the formation of the local supplier industry (Minaee et al. 2021). Third, each geopolitical decoupling has made access to modern car making technologies extremely difficult for Iranian firms by disrupting their inside-out relationships in addition to the exit of Western TNCs.

Geopolitical Decouplings from GPNs in the Iranian Automotive Industry

Strategic couplings between foreign TNCs and the Iranian automotive industry have been mutually beneficial. They benefited TNCs through access to the potentially large and rapidly growing Iranian market based on new and pent-up demand, while the Iranian automotive industry benefited from access to Western car-making technology via licenses and joint ventures with TNCs. However, compared to other less developed countries that experienced rapid growth of the automotive industry, the Iranian automotive industry had to cope with significant political and geopolitical instability. Three geopolitical events resulted in geopolitical decoupling in the Iranian automotive industry: the Iranian Revolution in 1979, followed by the Iran–Iraq war in the 1980s, and the two waves of Western economic sanctions imposed in 2011 and 2018. Each geopolitical decoupling led to the exit of foreign TNCs and sharp declines in the automotive industry output as imports of completely knocked down and semi-knocked down vehicles and important components were cut. When the external reasons for the geopolitical decoupling passed, the mutual benefits of the strategic coupling led to rapid recoupling. The resumed imports, along with the reinvestments of TNCs, led to the recovery of vehicle output and further growth (Figure 2, Table 3).

Original Structural Coupling and Revolution/War Geopolitical Decoupling (1956–1989)

The state has played a crucial role in the original strategic coupling between foreign and local firms, which developed in the context of struggles of social groups in Iran over economic development in the 1950s and 1960s. By 1960, the state suppressed the opposition of the landowners and merchants toward industrial development and launched the import substitution industrialization, which was financed by oil revenues (Amuzegar 2014), although most of the investment in the Iranian automotive industry was private. Import substitution combined foreign licenses and FDI with heavy protection through trade policies and local content promotion. The state established the Industrial Development and Renovation Organization to support the growth of the Iranian automotive industry in 1967 (Mehri 2017). The strategic coupling began to form with the onset of completely knocked down assembly in joint ventures with Jeep and Fiat in 1956 and the low-volume completely knocked down assembly of additional licensed foreign models by private Iranian firms in the 1960s (Manteghi 2013). However, the growth of local suppliers was curtailed by the removal of tariffs on imported parts in 1974 (Table 4).

By 1978, annual vehicle output grew to 190,000 (Figure 2) and 78 percent of cars, 67 percent of trucks, and 88 percent of buses and minibuses were made under foreign licenses by Iranian firms. The rest was made in joint ventures between foreign automakers and Iranian firms (Alizadeh 2013). Foreign capital in the form of joint ventures with local firms was important in the production of more sophisticated components, such as engines, engine parts, tires, and vehicle glass, for which local firms lacked advanced technology and know-how. Local firms were obligated by the state to manufacture simple parts (e.g., radiators, batteries, upholstery) and vehicle bodies with the goal of increasing local content, which reached 24 percent by 1978 (Mehri 2015a).

However, despite the state import substitution policies, the Iranian automotive industry was technologically completely dependent on foreign TNCs (Manteghi 2013) and highly dependent on imports of components and 90 percent of raw materials needed for production (Mehri 2017). Even without direct majority ownership control, foreign TNCs controlled the Iranian automotive industry via licenses and minority shareholding. The original strategic coupling was thus typified by highly uneven power relationships and operating in the structural mode, which is characterized by the high degree of external dependence of host country industries and regions on foreign TNCs (Yeung 2009; MacKinnon 2012; Coe and Yeung 2015; Coe 2021).

The 1978–79 Iranian Revolution (Amuzegar 2014) triggered the first geopolitical decoupling of the Iranian automotive industry from Western TNCs. The Iranian state became controlled by the radical nationalists who implemented profound changes in state policies toward the Iranian automotive industry. The state shifted to direct control over the Iranian automotive industry through nationalizing assembly and other large automotive firms, and its management through the Industrial Development and Renovation Organization in 1979 (Manteghi 2013). Small component suppliers remained privately owned. The Iranian automotive industry was reorganized into two state-owned car companies, IKCO (originally established in 1962) and SAIPA (originally established in 1966) (Mehri 2017). FDI was banned by the constitution and foreign TNCs (except for Talbot) left Iran (Razavi and Alaedini 2018). Imports of foreign vehicles were banned (Manteghi 2013). The state preferred public transportation over private car ownership and sharply reduced the funding for vehicle factories except for buses and trucks (Razavi and Alaedini 2018; Minaee et al. 2021).

Iran was sanctioned by the US since early 1980 (Rivlin 2019), and since the automotive industry imports heavily depended on oil export revenues (Manteghi 2013), which sharply declined (Amuzegar 2014), Iranian firms were unable to import foreign components and parts necessary for the assembly of licensed foreign models. By 1980, the output of vehicles declined by 73 percent to 49,000 vehicles compared to 1977. The geopolitical decoupling continued during the 1980–88 Iran–Iraq war. Vehicle production partially recovered to 120,000 vehicles in 1985 because foreign exchange earnings increased due to higher oil prices, allowing for increased imports of foreign components (Manteghi 2013). By 1989, the output collapsed to a mere five thousand units as the 1985 government decree converted the Iranian automotive industry to military production, and local firms were unable to manufacture components necessary for vehicle assembly (Figure 2).

Postwar Structural Recoupling and 2011 Geopolitical Decoupling (1990–2015)

The postwar recoupling of the Iranian automotive industry and foreign TNCs was driven by new state policies and regulations in foreign trade, FDI, license agreements, and credit policies aimed at reviving the Iranian automotive industry (Table 4). These policies resulted from renewed political struggles over the state economic policy. The conflict between the radical and industrial nationalists led to a compromise emphasizing self-sufficiency through increased localization and limited ties to foreign TNCs. This compromise faced strong opposition from the conservatives who used their temporarily increased influence to liberalize trade and lift the ban on imports of foreign cars in 1990. It led to a crisis in the Iranian automotive industry by sharply reducing sales of domestic cars. The crisis allowed the industrial nationalists, supported by high-level managers of large automotive firms, to push through their nationalist industrial policy, including infant industry protection in the form of the 1993 Automobile Law (Table 4) (Mehri 2017).

Licensing agreements with foreign firms were reintroduced despite a fierce opposition by radical nationalists, starting with the 1990 agreement between French Peugeot and IKCO and the 1993 agreement between South Korean KIA and SAIPA. Since the mid-1990s, as the industrial nationalists outmaneuvered the conservatives and radial nationalists, the state further relaxed its FDI policies and invited additional foreign automotive TNCs to set up licensing agreements (e.g., Citroën, Daewoo, Mazda, Chery, Renault, Peugeot, Nissan, Proton, VW, Suzuki, Hyundai) (Manteghi 2013).

However, the licensed assembly of outdated Western models led to a limited technology transfer and restricted opportunities for upgrading and exports in the Iranian automotive industry, perpetuating its continuing technological dependence on foreign TNCs in structural couplings. To break this pattern, the state intensified its efforts to achieve self-sufficiency. In 1996, it embarked on a project to independently develop and produce a national car and engine that could be exported to foreign markets, as emphasized by the 1993 Automotive Law (Mehri 2017; Minaee et al. 2021). With the help of British and German technology providers, IKCO developed the national car (Samand), which was built on the Peugeot 405 platform. IKCO established an R&D center and hired Iranian engineers who were trained by British, German, and Italian technology providers in the design and manufacturing of the car body and interior for several years. The same approach was applied to the development of the national engine that went into production in 2006 (Mehri 2015b).

The Samand was launched in 2001 and assembled until 2022. While successful in developing the national car and engine, the national car project has not developed capabilities in other advanced areas, such as automatic gearboxes, electronics, antilock braking systems, and air bags. Despite a significant increase in absorptive capacity and functional upgrading, IKCO has been unable to fully capitalize on this progress and downgraded back to being mainly the assembler of licensed foreign models after 2003 (Minaee et al. 2021).

In 1998, the state launched a policy encouraging the local production of components. The number of local component suppliers increased from thirty-four in 1988 to nearly eight hundred in 2011, when about 70 percent local content in components was achieved, mostly through systematic reverse engineering (Manteghi 2013; Mehri 2017). However, the share of the value of locally manufactured components was significantly lower despite growing from 21 percent in 2004–5 to 42 percent in 2014–15 (Razavi and Alaedini 2018), suggesting that the Iranian automotive industry manufactured mainly lower value-added simple parts while importing higher value-added, more complex, and technologically sophisticated components.

In the mid-2000s, the state, following intense infighting, started to actively seek joint ventures with foreign firms to assemble cars and make components to address persistent problems with the low quality of vehicles and the need to increase exports. The Industrial Development and Renovation Organization concluded the first joint venture of IKCO and SAIPA with Renault-Nissan in 2005 to assemble the low-cost Logan L90 but without the possibility of its exports (Mehri 2017).

Overall, state policies led to the rapid increase in vehicle imports, growth in licensed production, and the development of the local supplier base. Output increased from 6,000 units in 1990 to 277,985 units in 2000 and peaked at 1.65 million vehicles in 2011 (Figure 2), which ranked Iran eleventh globally in vehicle production (OICA 2023). The Iranian automotive industry recoupled with TNCs in the structural mode, which was typified by the continuing heavy technological dependency on foreign firms.

The postwar structural recoupling ended with the imposition of Western sanctions on Iran in 2011, which were designed to stop its nuclear program (Rivlin 2019). This triggered geopolitical decoupling, which exposed the fragile mode of the post-1990 strategic coupling, which was mostly based on licensing agreements, allowing TNCs to easily break their contractual agreements with Iranian firms. Economic sanctions sharply increased the regulatory risk for most Western TNCs. Despite large financial losses, they were forced to exit Iran and stop their deliveries of completely knocked down kits and car components to Iran. For example, the ban on exports of completely knocked down vehicles to Iran contributed to PSA’s total operating loss of $2.04 billion in 2012 (Automotive Manufacturing Solutions [AMS] 2013). Renault, which did not completely exit, suspended its activities in 2013 and wrote off the entire $680 million value of its Iranian assets (Tehran Times 2015).¹⁶

The assembly of imported completely knocked down cars with low local content was most negatively affected. In the cases of high local content, Iranian automakers continued to assemble licensed Western models because most components were manufactured in Iran.¹⁷ However, the combination of restricted access to credit and foreign exchange rationing imposed by the Iranian government lowered imports of necessary components and raw materials (Razavi 2018), especially after expanded US sanctions targeted the Iranian automotive industry in 2013.¹⁸ Vehicle output more than halved between 2011 and 2013 (Table 3, Figure 2). More than 110 of 1,200 parts suppliers closed their factories in 2012 (Alizadeh 2013), and employment in the Iranian automotive industry declined by 23,075 (Statistical Centre of Iran 2021a). IKCO, the largest Iranian assembly firm, recorded an operating loss of $1.2 billion in 2011 (AMS 2013).

The 2011 geopolitical decoupling also disrupted the inside-out relationships of Iranian firms. Iranian automotive industry’s ability to access foreign technology for its development was restricted, and its ability to expand on foreign markets in nonsanctioning countries was undermined. As geopolitical decoupling sharply increased the demand uncertainty for Iranian automotive firms, it forced them to adopt severe cost-cutting strategies, negatively affecting their overseas operations. IKCO set up a low-volume assembly in Syria, Iraq, Senegal, and Venezuela in the late 2000s, but these projects were halted due to the lack of investment and operating capital, since IKCO’s output halved following the 2011 decoupling (Alizadeh 2013; Razavi and Alaedini 2018). SAIPA, which purchased the right to manufacture the Pride from KIA, established the low-volume production of the Pride in Venezuela in 2005 and in Syria in 2006. However, the increased demand uncertainty, and cost-cutting measures caused by geopolitical decoupling forced SAIPA to halt both projects in 2015 (Manteghi 2013; Tehran Times 2023).

The state strategically responded to geopolitical decoupling with a further push for self-sufficiency in parts and components and setting the car prices for most cars (cheaper than $10,000), irrespective of production costs, through its Competition Council in 2013. The mandatory pricing, which increased the direct role of the state in the Iranian automotive industry, has been strongly resisted by automakers, parts manufacturers, and even the Ministry of Industry (Razavi and Alaedini 2018) because prices set by the state resulted in large economic losses in the Iranian automotive industry, since it did not consider the high rates of inflation, increased costs of inputs, the worsening exchange rate, and wage pressures (Khodrocar 2022a, 2022b).¹⁹

Post-2016 Structural Recoupling and 2018 Geopolitical Decoupling

Following a July 2015 agreement between Iran and Western countries, Western sanctions on Iran were lifted on January 16, 2016. Almost immediately, both the Iranian automotive industry and the state actively sought the recoupling with TNCs. Western TNCs were, once again, attracted by the large future potential of the Iranian market, which was estimated to grow to two million or more vehicles per year by the early 2020s (Henry 2016). They were committed to a long-term strategic coupling with the Iranian automotive industry (Tehran Times 2017b), despite the large losses suffered during previous geopolitical decouplings.

The state strategy was to recouple in a more advantageous strategic coupling than in the one achieved in the 1990s and 2000s by seeking FDI in joint ventures instead of licensing agreements. The state hoped that increased sunk costs of TNCs in Iran would lower the risk of a potential future geopolitical decoupling. In joint venture agreements, the state mandated local content, the transfer of technology and R&D capabilities by negotiating the establishment of R&D centers, and exports of 30 percent of assembled vehicles to regional markets. The state also used the recoupling to strengthen the import substitution and self-sufficiency policy by continuing to protect the domestic market, while the increased access to foreign technologies was to speed up their localization in Iran (Table 4) (Tehran Times 2015; Henry 2016; Razavi and Alaedini 2018).

French PSA announced a $436 million investment in a joint venture with IKCO to assemble two hundred thousand Peugeot cars in Iran on January 28, 2016 (AMS 2016). Renault announced joint ventures with IKCO and SAIPA by the end of February to make five hundred thousand cars (Henry 2016), while PSA announced a $330 million joint venture with SAIPA to assemble Citroën models in October 2016 (Tredway 2016). Renault and PSA alone committed $1.15 billion in investment in 2016. Renault expanded its planned investment in 2017 to build a $746 million assembly factory (further expanded to $944 million in 2018) in a joint venture with IKCO and SAIPA (Tehran Times 2018). The six joint ventures with automakers established by August 2017 and additional joint ventures with foreign component suppliers suggest a rapid recoupling, leading to a significant growth in output (Table 3, Figure 2) (Tehran Times 2017a; Henry 2018). The strategic recoupling was taking place once again in the structural mode because of the continuing strong dependence of the Iranian automotive industry on foreign technologies and capital.

However, the recoupling was interrupted before being fully formed by the reimposition of US sanctions on Iran in November 2018 (Janeba 2023). By resorting to extraterritorial sanctions that specifically targeted the Iranian automotive industry, the US exerted stronger institutional power over global lead firms than previously, sharply increasing their regulatory risk, and triggering rapid geopolitical decoupling from the Iranian automotive industry at the expense of high financial losses. For example, PSA abandoned the assembly of the Peugeot 301, which started in July 2018 in a 50 percent–50 percent joint venture with IKCO ($451 million investment) (Henry 2019). PSA sold 445,000 cars in Iran in 2017, and its exit from the Iranian market represented a 9.6 percent drop in its global vehicle sales in 2018. Renault had to give up the planned output of 500,000 cars in Iran (Sigal 2022). In Iran, the decoupling of Western TNCs caused sharp declines in production (Table 3, Figure 2), leading to 40,000 layoffs in the supplier industry (Tehran Times 2020b).

The state strategically responded with new countermeasures and rules, such as the increased protection of the domestic market, subsidies for both car makers and suppliers to weather the sharp drop in production, and accelerated efforts to achieve self-sufficiency, which reportedly reached 80 percent in the manufacturing of auto parts in 2019 (Table 4) (Tehran Times 2020a). It launched a $952 million R&D “program for the promotion of domestic production” to develop the manufacturing of high-tech components, machinery, and equipment in 2019 (Fallahi 2020). The state has also actively supported attempts to couple with Chinese and Indian automakers through its Look to the East policy (AL Monitor 2023); exports of semi-knocked down kits to Syria, Iraq, Venezuela, Senegal, and Azerbaijan (Islamic Republic News Agency 2021; Tehran Times 2023); and car exports to Russia to capitalize on the exit of Western automakers from the Russian market in 2022 (Financial Tribune 2023).

Despite increased local content, the Iranian automotive industry continues to depend on foreign firms for the supply of modern technologies and sophisticated components (Halili 2020). Achieving complete manufacturing self-sufficiency in the Iranian automotive industry is unlikely for two reasons. First, the technological gap behind the modern automotive industry will necessitate the transfer of technologies from abroad. Second, the low-volume local production of many parts is more expensive than imports (Khodrocar 2021). Therefore, when the geopolitical situation changes, a structural recoupling between TNCs and the Iranian automotive industry is likely.

Conclusion

This article has heeded the calls to consider the importance of geopolitical factors more seriously in GPN analysis (Glassman 2011; Yeung 2017; Coe 2021; Weller and Rainnie 2022) by introducing the concept of geopolitical decoupling in GPNs as an example of the negative role of geopolitical forces in the organization and restructuring of GPNs. It defined and analyzed geopolitical decoupling as a distinct type of decoupling that differs from strategic and structural decoupling. Geopolitical decoupling has been conceptualized as involuntary decoupling, which is triggered by geopolitical circumstances, and is intentionally imposed on the strategic coupling relationship by powerful states through the application of their coercive power. Its intention is to break trade, investment, and production outside-in and inside-out linkages within existing strategic couplings. Geopolitical decoupling has been characterized as being usually abrupt with negative economic consequences for coupling participants. As such, it is unlikely to be long term because the economic benefits of a disrupted strategic coupling are likely to lead to its renewal when the external pressure and original causes of the geopolitical decoupling are mitigated.

The approach to geopolitical decoupling developed in this article highlights the central role of states in geopolitical decoupling by drawing on political–economic approaches and on the strategic relational understanding of the state as a social relation. By emphasizing the direct role of states in organizing, operating, restructuring, and breaking GPNs, this approach underlines the importance of states as key strategic actors in the operation of GPNs (Glassman 2011; Smith 2015; Horner 2017). By drawing on the GPN perspective, the article has considered strategic responses of TNCs to geopolitical decoupling based on their management of regulatory and reputation risk, strategic responses of local firms based on their management of uncertainty, and strategic responses of states to resist geopolitical decoupling and mitigate its impacts. Overall, there is a great variation in the strategic responses of key actors to geopolitical decoupling as well as in sectoral and spatial impacts of geopolitical decoupling in decoupled regions and countries.

Drawing on this conceptual approach to geopolitical decoupling, the empirical case study revealed short- and long-term negative consequences of geopolitical decoupling in the Iranian automotive industry. These were mitigated by heavily contested state strategies that helped sustain the Iranian automotive industry, albeit at lower levels of output and at the expense of the manufacturing of low-quality outdated vehicles. Despite the long-term efforts of the state to achieve technological self-sufficiency, repeated cycles of geopolitical decoupling and recoupling contributed to a long-term dependent and weak position of the Iranian automotive industry in the automotive industry international division of labor. The experience of the Iranian automotive industry illustrates how long-term conscious state strategies to lower the technological dependence on foreign TNCs can be undermined by an unfavorable geopolitical situation. A favorable geopolitical position of a country in the international system is thus one of the preconditions for its industries and firms to successfully decouple from the structural coupling and recouple in a more favorable strategic coupling.

However, the analysis also suggests that due to unintended side effects of geopolitical decoupling, some of its long-term development consequences may run contrary to the original intended geopolitical goals of powerful states. Depending on the success of state policies, a decoupled industry might avoid some of the pitfalls of increased integration in GPNs via structural strategic coupling, such as increased dependency on external actors because “certain global forces … reinforce the core–periphery structure through which developing countries have to manoeuvre as they integrate into the world economy” Wade (2018, 541). In the long run, the decoupled economy might benefit from industrial, education, and technology policies pursued by the state to sustain its decoupled industries because as Chang and Andreoni (2020, 332) contend, “[I]ndustrial policy is most successful when it combines measures to help firms produce more (e.g., trade protection, subsidies, state-led restructuring of failing enterprises, export promotion) with measures to help them acquire and generate new knowledge.”

As we could see in the case of the Iranian automotive industry, a sanctioned state is likely to allocate substantial investment that would not have been otherwise made to ensure the survival and development of a decoupled industry. Despite being less technologically advanced and competitive than in more developed countries, this might gradually lead to the emergence of an increasingly self-sufficient and less dependent domestic industry with increased local value added and R&D capabilities, which is more resilient to the effects of future geopolitical decoupling. An increased self-sufficiency and higher local content might ultimately benefit local and regional economies in the long run via greater value creation and capture, job creation, and regional economic development.

In addition to the geopolitical decoupling of Western TNCs from the Russian economy in 2022, other examples of negative developmental effects of geopolitical decoupling include the oil industry of Venezuela (Rodríguez 2022) and the long-standing US economic embargo on Cuba (Gordon 2016). It is likely that geopolitical decoupling triggered by the imposition of economic sanctions will continue to be important in the future due to the escalating geopolitical competition in the increasingly multipolar world (e.g., Hufbauer and Jung 2020). An intensification of the geopolitical competition between the US and China (e.g., Kim 2019; Beckley and Brands 2022), the two largest world economies, might lead to geopolitical decoupling in the future. It would disrupt countless GPNs, triggering restructuring of GPNs on a massive scale, with profound global economic and development implications.

This article has demonstrated that geopolitical decoupling contributes to uneven development by restricting the diffusion of technology from more developed countries to less developed countries and by undermining regional development gains based on the integration of regions in less developed countries to GPNs. Given its overall importance, geopolitical decoupling from GPNs deserves greater attention by economic geographers in their analyses of processes contributing to the perpetuation of uneven economic development.

Acknowledgments

I wish to thank three anonymous referees for their comments on an earlier version of this article. This work was supported by the Czech Science Foundation [Grant Number 23-07819S].

Notes

1 Geopolitical decoupling in Iran in 2018 cost Western TNCs billions of dollars in lost trade and investment deals in the automotive, aircraft, energy, and pharmaceutical industries. It also resulted in high economic losses for local firms (Motevalli 2017; Koenig and Charlton 2018). Due to geopolitical decoupling, Western TNCs reported more than $59 billion in losses four months following the 2022 invasion of Ukraine by Russia (Maloney and Gryta 2022).

2 More than four hundred foreign automotive firms departed Russia leaving behind assets worth billions of dollars between February 24 and May 16, 2022 (Automotive News Europe 2022b).

3 By exiting Russia in 2022, Renault lost 18 percent of its worldwide sales (Renault sold 480,000 vehicles in Russia in 2021) (Automotive News Europe 2022c; Sigal 2022).

4 Chinese automakers increased their market share in Iran following the geopolitical decoupling of Western firms (Gibbs 2017) as they did in Russia (Automotive News Europe 2022a), where the market share of Chinese vehicles increased from 9.6 percent in January 2022 to 31.3 percent in November 2022 (Stolyarov 2022).

5 French PSA sold 458,000 cars in Iran in 2011 that were assembled locally from imported completely knocked down kits, making Iran PSA’s second largest export market for completely knocked down vehicles (Automotive Manufacturing Solutions [AMS] 2013). Following the imposition of 2011 economic sanctions on Iran, these exports were banned, negatively affecting the output of PSA factories and workers that manufactured them. In completely knocked down assembly, the cars are imported completely disassembled from the home plant and assembled locally with the use of locally manufactured components.

6 Sonnenfeld et al. (2023) classified post-2021 TNC decoupling strategies in Russia as follows: a complete decoupling involving an exit and divestment (13 percent of all foreign firms and 22 percent of workers employed by all foreign firms in Russia as of January 2023); a temporary decoupling, which includes a suspension of all operations but without divestment and exit (9 percent, 13 percent); scaling back substantive but not all operations (14 percent, 19 percent); pausing new investments but continuing substantive operations (16 percent, 24 percent); continuing full operations and facing consequences (49 percent, 22 percent).

7 For example, the buyback options negotiated in Russia in 2022 by Western car companies and other TNCs, including Renault (six years), Mercedes-Benz (six years), Nissan (six years), Ford (five years), Mazda (three years), Henkel (ten years), and McDonalds (fifteen years).

8 As of July 2023, the percentage of foreign firms that exited or planned to leave Russia exceeded 60 percent in sport, media, gaming, consulting and law, online services, and alcohol and tobacco. On the contrary, more than 50 percent of foreign firms staying were in metals and mining, pharmaceutical and health, electronics, manufacturing, agriculture, industrial equipment, food and beverages, chemical, and construction and architecture industries (KSE Institute 2023).

9 As of July 2023, more than 70 percent of firms headquartered in Ireland, Lithuania, Finland, Ukraine, Sweden, and Norway announced the intention to leave or have already exited Russia compared to 5 percent or less headquartered in China, India, Turkey, and the United Arab Emirates (KSE Institute 2023).

10 As of July 2023, a high percentage of firms not decoupling from Russia were from sanctioning EU countries, including Hungary (68 percent), Austria (66 percent), Italy (62 percent), and Germany (56 percent) (KSE Institute 2023).

11 Due to geopolitical decoupling, car output decreased by 67 percent in Russia in 2022 (Reuters 2023). Production drops in the Iranian automotive industry are shown in the section “Geopolitical Decouplings from GPNs in the Iranian Automotive Industry.”

12 In Iran, thousands of jobs were lost, and hundreds of automotive industry factories were affected; many of them closed, following geopolitical decouplings triggered by the 2011 and 2018 economic sanctions. In Russia, 258 foreign TNCs that left between March 2022 and August 2023 employed 419,000 workers, and an additional 323 TNCs that announced exit employed 390,000 workers (KSE Institute 2023). Not all these jobs have been lost, however, since in many cases production has continued under new owners.

13 Between March 21, 2021, and March 20, 2022, IKCO produced 451,121 vehicles (52 percent of the total), SAIPA 304,533 (35 percent), and Pars Khodro, which is controlled by SAPIA (51 percent of shares), 109,838 (12.7 percent) (Tehran Times 2022).

14 In semi-knocked down assembly, the cars are imported disassembled into several basic parts and then assembled in an assembly plant in the host economy.

15 The Hillman Hunter licensed to IKCO by the British Talbot in 1967 was locally manufactured as the Peykan until 2005. The 1980s Peugeot 405, licensed to IKCO in 1990, was assembled until 2022, twenty-five years after its production stopped in Europe. The Kia Pride, licensed to SAIPA in 1993, was based on a 1980s model and was manufactured without significant upgrading in Iran until 2020.

16 Economic sanctions were partially lifted in November 2013, allowing Renault to resume exports of completely knocked down kits and sell 36,300 cars in Iran in 2014, down from 108,000 in 2012 (Tehran Times 2015).

17 For example, the Peugeot 405 reached the local content of 93 percent and the Kia Pride reached 87 percent (Henry 2019).

18 Executive Order 13645, 78 Fed. Reg. 33945 (June 3, 2013).

19 IKCO and SAIPA accumulated $28.3 billion in losses by October 2022, and owed $10.9 billion to parts manufacturers and an undisclosed sum to Iranian banks (Khodrocar 2022b).