The political economy of industrial diversification in a resource-rich country: the case of Iran

ABSTRACT This article examines why Iran, despite reducing its dependence on a single export commodity, remains locked into a pattern of ‘wrong diversification’ – dominated by energy-intensive, rent-based industries rather than capability accumulation and technological upgrading. Using a process-tracing approach that integrates statistical indicators, policy documents and 30 semi-structured interviews with policymakers, managers and experts, the study shows that while export variety has expanded, concentration has deepened and the economic complexity index remains negative, with over half of industrial value added in petrochemicals, steel and non-metallic minerals. Four interrelated dimensions explain this paradox: (i) discourses of self-sufficiency and anti-raw exports that narrowed policy horizons; (ii) fiscal and energy dependence reinforcing rent-intensive sectors; (iii) unstable and discretionary industrial support reproducing institutional inertia; and (iv) sanctions and low foreign direct investment (FDI) restricting integration into global value chains. Situated within the resource-curse, deals-and-development, and path-dependence frameworks, the study conceptualises Iran’s trajectory as a case of ‘wrong diversification’, where variety without complexity, institutional discipline and global learning perpetuates stagnation. Policy implications highlight the need for performance-based support, macroeconomic stability and international technological linkages.