Contents LETTER OF ACKNOWLEDGEMENT1 EXECUTIVE SUMMARY2 INTRODUCTION3 WHAT IS FDI? 3 CLASSIFICATION OF FDI3 CLASSIFIATION OF A FOREIGN INVESTOR3 IMPORTANCE OF FOREIGN DIRECT INVESTMENT TO A COUNTRY3 INCENTIVES OF FDI4 FDI AND THE CURRENT SITUATION GLOBALLY5 FDI Flow6 FOREIGN DIRECT INVESTMENT IN PAKISTAN7 TRADE TRENDS IN PAKISTAN9 FDI IN PAKISTAN (THE CURRNET SITUATION)9 STRUCTURAL PATTERN OF FDI IN PAKISTAN13 CONCLUSION AND RECCOMENDATIONS14 REFERENCES19 LETTER OF ACKNOWLEDGEMENT It has been a pleasure to be Mr. Sharique Ayubi’s student.
I would like to thank him for giving us the chance to prepare a financial institutions report. His lectures have been very interesting and motivating. I am extremely grateful to him and appreciate his efforts for providing us full support, encouragement and valuable guidance. Sincere regards, SANNA SARWAR (7896) EXECUTIVE SUMMARY This report highlights the importance of FDI in Pakistan. Pakistan has currently been in global limelight due to it’s assistance and support to the American government against the Taliban’s.
But this has coasted the country a lot economically, it’s social structure is almost shaken by the blasts and uncertainty in the country. Like any other economics factor FDI has also been adversely affected especially in the past two years. This report mentions the structural pattern of FDI in Pakistan and gives out some of the possible recommendations to improve FDI inflows. The aim of this report is to make the reader aware of the importance of the Foreign Direct Investment to any country and then specifications has been made to Pakistan.
The facts have been supported by data taken from authentic sources and comparison has been made of FDI inflows over the year. INTRODUCTION WHAT IS FDI? Foreign direct investment (FDI) refers to long term participation by country one country into another country. It is foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization and also usually involves participation in management, joint-venture, transfer of technology and “know-how”.
CLASSIFICATION OF FDI There are two types of FDI: * inward foreign direct investment: investment of foreign capital occurs in local resources ; * Outward foreign direct investment: It is also referred to as “direct investment abroad”. In this case it is the local capital, which is being invested in some foreign resource. These result in a net FDI inflow (positive or negative). Foreign Direct investment may be further classified as: GREEN FILED INVESTMENT and AUQUISITIONS and MERGERS.
Greenfield investments involve the flow of FDI for either building up of new production capacities in the host nation or for expansion of the existent production facilities of the host country. The plus points of this come in form of increased employment opportunities, relatively high wages, R&D activities and capacity enhancement. Multinationals mostly rely on mergers to bring in FDI. FDI flow through acquisitions does not render any long run advantage to the economy of the host nation as under Greenfield investments.
Some other types of foreign direct investment in vogue are termed as Horizontal FDI, Forward Vertical FDI, Vertical FDI and Backward Vertical FDI. CLASSIFIATION OF A FOREIGN INVESTOR A foreign direct investor may be classified in any sector of the economy and could be any one of the following: an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other societal organization; or any combination of the above. IMPORTANCE OF FOREIGN DIRECT INVESTMENT TO A COUNTRY
The Asian currency crisis that erupted in Thailand in July 1997 and has since spread to other countries, particularly Indonesia, Republic of Korea (Korea), and Malaysia, renewed the significance of prudential management of foreign capital flows in developing countries where domestic financial markets are not yet fully developed. The crisis poses many challenges to developing countries, including how to best supervise financial institutions, how to efficiently manage foreign exchange reserves/systems, and how to prudentially manage foreign debt and investments.
From the viewpoint of foreign resource mobilization, these crises highlighted the urgent need to re-examine the optimal combination of foreign capital, i. e. proper composition of concessional public loans, commercial loans, portfolio investment, and foreign direct investment. This underscores the importance of FDI in the developing member countries (DMCs), particularly the group of least developed DMCs where domestic financial markets are fragile and liquidity is limited. The significance of foreign direct investment (FDI) flows is well documented in literature for both the developing and developed countries.
Over the last decade foreign direct investment has grown at least twice as rapidly as trade (Meyer, 2003). As there is shortage of capital in the developing countries, which need capital for their development process, the marginal productivity of capital is higher in these countries. On the other hand investors in the developed world seek high returns for their capital. Hence there is a mutual benefit in the international movement of capital. The ongoing process of integration of the world economy and liberalization of the economies in many developing countries has led to a fierce competition for inward FDI in these countries.
The controls and restrictions over the entry and operations of foreign firms in these countries are now being replaced by selective policies aimed at FDI inflows, like incentives, both fiscal and in kind. The selective policies not only improve the fundamentals of the economy but they aim at attracting more foreign investments in the country. INCENTIVES OF FDI Foreign direct investment incentives may take the following forms: * low corporate tax and income tax rates ; * tax holidays ; * other types of tax concessions ; * preferential tariffs ;special economic zones ; * investment financial subsidies ; soft loan or loan guarantees ; * free land or land subsidies ; * relocation & expatriation subsidies ; * job training & employment subsidies ; * infrastructure subsidies ; * R&D support ; * derogation from regulations (usually for very large projects) ; * a positive effect on economic growth in host countries. * FDI consists of a package of capital, technology, management, and market access. * create economies of scale and linkage effects and raise productivity in manufacturing sectors with comparative advantage * confidence building in an economy leading to foreign trade and investment FDI AND THE CURRENT SITUATION GLOBALLY
The current situation is very different from that of the last financial crisis, which originated in developing Asian countries in 1997 and had a significant negative influence on FDI flows to some of them, such as Indonesia. By contrast, the current crisis began in the developed world, although it is rapidly spreading to developing and transition economies. Developed countries have already been directly hit, while the effects of the crisis on developing economies have so far been indirect in most cases, with varying degrees of severity.
This has affected the patterns of FDI location and FDI flows. Preliminary data for 2008 indicates that for many developed countries, FDI flows have fallen, mainly as a result of the protracted and deepening problems affecting financial institutions and as a result of the liquidity crisis in the money and debt markets. Preliminary estimates show a decline of about 33% from flows in 2007 for this group. Inward FDI may have declined in Finland, Germany, Hungary, Italy, and the United Kingdom (table 1), even when compared with 2006 levels.
Decreased earnings of developed-country transnational corporations (TNCs) and a decline in syndicated bank loans have particularly limited financing for investment. A drop in leveraged buyout transactions also dampened cross-border mergers and acquisitions (M&As), further depressing FDI flows. Cross-border M&A sales in developed countries fell by a similar magnitude (33%) as estimated FDI flows in 2008. In developing and transition economies, preliminary estimates suggest that FDI inflows have been more resilient, though the worst impacts of the global economic crisis had still, at year? end, to be fully transmitted to these countries. The growth rate of FDI inflows to developing countries, while lower than in 2007 (when it exceeded 20%), should still have remained positive for 2008 at an estimated 4%. In the short-term, the negative impacts of the financial and economic crises on FDI are expected to remain dominant and to contribute to a continued fall in overall FDI through 2009. Developing countries will not be accepted — that is, FDI falls in 2009 will be more widespread. However, various positive factors are at work and will trigger, sooner or later, a resurgence of international investment flows.
These factors include investment opportunities based on cheap asset prices and industry restructuring, relatively large amounts of financial resources available in emerging countries and cash-rich oil-exporting countries, quick expansion of new activities such as new energy- and environment-related industries, and the relative resilience of international companies. Hence medium-term FDI prospects are more difficult to assess. Public policies obviously will play a major role in the establishment of favorable conditions for a quick recovery of FDI flows.
Structural reforms aimed at ensuring more stability in the world financial system, prompt and effective economic stimuli by national governments, renewed commitment to an open attitude towards FDI, the implementation of policies aimed at favoring investment and innovation — especially in the fields of environment, new energy sources, and small and medium-sized enterprises — are key issues in this respect. The current crisis thus could turn into a major opportunity for creating new impetus for global FDI. However, this can only occur if policymakers resist calls for more protectionism and other policies that restrict FDI.
FDI Flow Traditional determinants of FDI are still key to attracting the investment. The size and growth of domestic market, geographical proximity and access to key potential markets, including large regional markets, play the key role. At the same time, the existence of created assets is of mounting significance as a magnet for FDI inflows, especially from major transnational corporations (TNCs). | | Global flows of foreign direct investment (FDI) have halved in the last two years, and in the process emerging markets have edged ahead of developed markets as the major destination.
As higher-growth economies, emerging markets have proven better than developed markets at attracting FDI during the global downturn–with the notable exception of eastern Europe, which continues to suffer. Surveys underline that, for developed-market companies, FDI tends to pay off handsomely. Global FDI flows are forecast to grow again this year, with emerging Asia in the vanguard, but the volume is unlikely to match 2007’s US$2trn level until 2014. The global economic and financial crisis in 2008-09 had a major impact on foreign direct investment (FDI) flows. After declining in 2008 by 17% to US$1. 2trn from US$2. 08trn in 2007–the high point of a four-year long boom in cross-border mergers and acquisitions (M&A) and FDI flows–global FDI inflows plunged by an estimated 41% to US$1trn in 2009. The fall reflected the sharp reduction in the availability of credit, the deep recession in the developed world and many emerging markets and a large-scale retreat from risk. Flows to emerging markets initially proved resilient to the impact of the global crisis. Inflows into the developed world declined by one third in 2008, whereas flows to emerging markets increased by 11%. In 2009, FDI flows to emerging arkets also declined considerably–by 36%, to an estimated US$532bn. This was by less than the drop in FDI flows to the developed world–by 45% to an estimated US$488bn. Thus in 2009 for the first time ever, emerging markets attracted more FDI than developed countries. Admittedly, the definition of what constitutes an emerging market, or the dividing line between developed countries and emerging markets, is rather arbitrary and the classifications used by the Economist Intelligence Unit, IMF, World Bank and UNCTAD all differ. Figure 1: GLOBAL FDI INFLOWS REGION WISE The figure above shows the Foreign Direct Investment flow region wise.
As it can be seen from the figure that world has faced a major drop in it’s FDI in year 2009 due to the damaging global recession. Global FDI flows are set to return to growth in 2010, in line with the global recovery in output. However, the relatively weak global recovery and continuing financial sector problems mean that the recovery in FDI will be gradual and we are unlikely to see a new surge in FDI any time soon. According to Economist Intelligence Unit forecasts, global FDI inflows in 2014 will still, in US$ terms, be slightly below the peak reached in 2007 but the over all figures are moving towards improvement.
FOREIGN DIRECT INVESTMENT IN PAKISTAN The success of FDI policies can be judged by the size of the inflows of capital. Pakistan has been making efforts to attract FDI and such efforts have been intensified with the advent of deregulation, privatization, and liberalization policies initiated at the end of the 1980s. FDI has been instrumental in the development of the country. The presence of foreign companies in Pakistan predates the inception of country. To quote a few examples, Shell started operations in the area in 1903. Imperial Chemical Industries (ICI) established soda ash manufacturing unit in 1942.
ANZ Grind lays Bank and Standard Chartered Bank was working in these areas before independence. Currently about 250 foreign companies are operating in the country. They have interest in almost each and every sector. These include pharmaceuticals and chemicals, oil and gas exploration and marketing, power generation, food and beverages, automotive assembly, insurance and banking etc. According to a large number of analysts, no foreign company, which entered Pakistan, has ever left the country; rather they have been expanding their operations through expansion and diversification.
Not only was that, even at the time of nationalization, all the foreign investment exempted from the preview of nationalization. Whereas in many countries foreign investment has been the first to be nationalized. Pakistan was among the first few countries in the region to open up the market in early nineties. Now the foreign investors can virtually invest in any sector except a few. Opening up of market and initiation of process of privatization made Pakistan a center of attraction. Foreign investment came in large volume, both as FDI and as portfolio funds.
The FDI inflow to Pakistan in 1992-93 was US$ 307 million and exceeded US$ one billion in 1995-96. However, since then, it has been registering a constant downward trend. But even during this period foreign investment has continued to come in projects like ICI Pakistan’s PTA plant, Engro Pak tank and Engro Asahi polymer — to name a few. According to the chiefs of some of the multinational companies (MNCs) Pakistan still offers unmatchable economic fundamentals but the way the government of Pakistan (GoP) has treated the foreign investors in last two years is a source of serious concern.
Blowing the independent power plants (IPPs) issue out of proportion and unnecessary harassment to employees of these plants and lending institutions (employees of NDFC in particular) has damaged the credibility of GoP. Instead of making WAPDA and KESC financially strong by cutting down the T;D losses, improving their recovery of outstanding dues and making their overall management efficient, IPPs were blamed for all their miseries. They also say that energy sector had introduced Pakistan to global investors. Not only investment in the sector came in but many other sectors received large investment.
Further investment was expected through privatization of WAPDA and KESC and the sale of remaining 64 per cent shares of KAPCO but tussle with IPPs put an end to all this. Still the GoP has not realized the reality and continues to offend the lenders. The steps which have caused serious concerns to multilateral lenders in constant disregard to their submissions. The outcome is that negotiations with lenders are getting tougher. TRADE TRENDS IN PAKISTAN 1947 and 1950’s: Pakistan was basically an agricultural economy upon its independence in 1947. Its industrial capacity was negligible for processing locally produced agricultural raw material.
This made it imperative for succeeding governments to improve the country’s manufacturing capacity. In order to achieve this objective, however, changing types of industrial policies have been implemented in different times with a changing focus on either the private sector or the public sector. 1960 and 1970: During the 1960s, government policies were aimed at encouraging the private sector while during the 1970s; the public sector was given the dominant role. 1980 and 1990: Accordingly during early 1980s, the government in Pakistan has initiated market-based economic reform policies.
This reform began to take hold in 1988, and since than the government has gradually liberalized its trade and investment regime by providing generous trade and fiscal incentives to foreign investors through number of tax concessions, credit facilities, and tariff reduction and has also eased foreign exchange controls. In the 1980s and 1990s, the private sector was again assigned a leading role. Especially during the decade of the 1990s, Pakistan adopted liberal, market-oriented policies and declared the private sector the engine of economic growth.
Moreover, Pakistan has also offered an attractive package of incentives to foreign investors. In the 1990s, the government further liberalized the policy and opened the sectors of agriculture, telecommunications, energy and insurance to FDI. But, due to rapid political changes and inconsistency in policies the level of FDI remained low compared to other developing countries. Nevertheless, the time series data on FDI inflows and stocks has shown remarkable progress over time particularly during the reform period of the 90’s. FDI IN PAKISTAN (THE CURRNET SITUATION) Pakistan belongs to least developed group of developing member countries.
The size of its financial market is very small and its foreign exchange and debt position is precarious. Over the last two years, foreign exchange reserves in Pakistan have remained at less than $1. 3 billion and were recorded as $14,812 million in March 2010, which was equivalent to only less than 4-5 weeks of imports of goods. Pakistan’s total debt (external as well as internal) has also increased to $119. 9 billion, roughly 57. 6% of GDP. These detoriations increase the need for attracting FDI into Pakistan. FDI is a significant long-term commitment and a part of the host economy itself.
In the difficult circumstances described above, Pakistan’s policy on foreign capital mobilization must attach priority to (i) official multilateral assistance; (ii) official bilateral assistance; and (iii) FDI, given its very limited absorptive capacity for portfolio investment and commercial bank loans. However, concessional long-term development assistance, both multilateral and bilateral, will become increasingly scarce due to domestic financial constraints in major donors, such as Japan, Norway, Saudi Arabia and Pakistan’s increased competition with other least developed countries such as Bangladesh, Mongolia, Sri Lanka, and Viet Nam.
Multilateral development organizations including the Asian Development Bank will focus on poverty alleviation and soft sectors (i. e. , agriculture, rural development, education, environment, poverty, and health), while the hard sectors (manufacturing and large-scale physical infrastructure) are expected to be invested in by the private sector and foreign investors as well as the Government of Pakistan (GOP). Figure 2: PAKISTAN IN TOP 10 FDI DESTINATIONS IN ASIA Despite an increased number of FDI projects into Pakistan in 2009 when compared with 2008, the country has seen a significant fall in capital investment.
Table 1: FOREIGN INVESTMENT INFLOWS IN PAKISTAN ($ MILLION) YEAR| Greenfield Investment| Privatization Proceeds| Total FDI | Private Portfolio Investment| 2001-02| 357| 128| 485| -10| 2002-03| 622| 176| 798| 22| 2003-04| 750| 199| 949| -28| 2004-05| 1161| 363| 1524. 00| 153| 2005-06| 1981| 1540| 3521. 00| 351| 2006-07| 4873. 20| 266| 5139. 6| 1820| 2007-08| 5019. 60| 133. 2| 5152. 8| 19. 3| 2008-09| 3719. 90| ——| 3179. 9| -510. 3| JULY-FEB-10| 1319. 30| ——| 1319. 3. | 343. 5| TOTAL| 19803. 00| 2805. 2| 22068. 6| 2160. 5| The table above shows the FDI inflows in Pakistan for the past decade till the current year i. . 2010. It is observed that there has been increasing trend in the total FDI from FY 2001-02 to FY 200-07, this is due to the the then governments open policies towards trade and USA military activities against Afghanistan due to which the American army had to establish their military camps in the country. As soon as the democratic government of PPP under president Zardari took over, FDI has been fall substantially since then by 38. 2%(from 5152. 8 to 3179. 9) and has been falling since then. In 2008, with a total of 28 inbound Greenfield projects, the country received $3. 6bn; however, despite having 33 ventures to date, investment has dropped by 85. 37% for 2009, according to data from FDI Markets. This is in line with a reduced number of manufacturing projects and an increase in the number of business services schemes, which are typically less capital intensive. Recent investors include logistics company DHL, which is to open its first specialist fashion and apparel centre in Pakistan to support the country’s garment export industry, offering a range of bespoke and consultancy services to help firms manage the product flow further upstream in their supply chains.
Dubai Islamic Bank has also opened 10 new branches in Pakistan, extending its network to 35 branches, covering 15 major cities. FDI in Pakistan is one of the major external sources of funding to meet obligations of resource gap and goal achievement. The FDI has played a vital role in the economic growth of Pakistan. It contributed significantly to the human resource development, capital formation and organizational and managerial skills of the people of the country.
The share of foreign direct investment, flowing into Pakistan, is negligible when compared to the opportunities and economic fundamentals of the country. The inflow into the country is less than one per cent of the total FDI, made globally. The highest Pakistan received was the amount of a little over one billion US dollars in 1995-96. Ever since it has been experiencing a declining trend. No doubt, terrorism affects everybody, right from the beggar on the road to the largest or most powerful but this is not the only reason for declining foreign investment in Pakistan.
Although the growth of global terrorism is indeed on the minds of some corporate decision makers when contemplating whether or not to invest abroad, it has not, apparently, prevented many of them to deciding to invest in the developing countries. Therefore, if the country wants to achieve a respectable position among the nations it has to put the economy in order. It has to offer a conductive environment for foreign investors comparable with other countries soliciting the same. No one can deny the fact that the country needs foreign investment. Table 2: COUNTRY WISE FDI INFLOWS IN PAKISTAN ($MILLION)
COUNTRIES| 2000-01| 2001-02| 2002-03| 2003-04| 2004-05| 2005-06| 2006-07| 2007-08| 2008-09| July-Feb 10| USA| 92. 7| 326. 4| 211. 5| 238. 4| 325. 9| 516. 7| 913. 1| 13609. 3| 869. 9| 411. 1| UK| 90. 5| 30. 3| 219. 4| 64. 6| 181. 5| 244| 860. 1| 460. 2| 263. 4| 130. 9| UAE| 5. 2| 21. 5| 119. 7| 134. 6| 367. 5| 1424. 5| 661. 5| 589. 2| 178. 1| 128. 5| JAPAN| 9. 1| 6. 4| 14. 1| 15. 1| 45. 2| 57| 64. 4| 131. 2| 74. 3| 11| HONG KONG| 3. 6| 2. 8| 5. 6| 6. 3| 32. 3| 24| 32. 6| 339. 8| 156. 1| (55)| SWIZERTLAND| 3. 6| 7. 4| 3. 1| 205. 3| 137. 5| 170. 6| 174. 7| 169. 3| 227. 3| 50. 1| SAUDI ARABIA| 56. 6| 1. 3| 43. | 7. 2| 18. 4| 277. 8| 103. 5| 46. 2| (92. 3)| 30. 4| GERMANY| 15. 5| 11. 2| 3. 7| 7. 0| 13. 1| 28. 6| 78. 9| 69. 6| 76. 9| 39. 2| KOREA(SOUTH)| 3. 7| 0. 4| 0. 2| 1. 0| 1. 4| 1. 6| 1. 5| 1. 2| 2. 3| 1. 5| NORWAY| —| 0. 1| 0. 3| 146. 6| 31. 4| 252. 6| 25. 1| 274. 9| 101. 1| 0. 6| CHINA| 41. 9| 0. 3| 3. 0| 14. 3| 0. 4| 1. 7| 712. 0| 13. 7| 101. 4| (9. 1)| OTHERS| —| 76. 6| 173. 9| 108. 6| 369. 3| 521. 9| 1512. 2| 2005. 2| 1964. 2| 5806| TOTAL| 322. 4| 484. 7| 798. 0| 949. 0| 1523. 9| 3521. 0| 5139. 6| 5409. 8| 3719. 9| 1319. 3| PRIVATE PROCEEDS| —| (127. 4)| (176. 0)| (198. 8)| (363. 0)| (1540. 3)| (266. )| (133. 2)| 0| 0| FDI EXCLUDIND PRIVATE PROCEEDS| 322. 4| 357. 3| 622. 0| 750. 2| 1160. 9| 1480. 7| 4873. 2| 5276. 6| 3719. 9| 1319. 3| The table above shows the inflow of FDI in Pakistan by some of the major countries. It should be noted that FDI inflow by USA over the years has increased till 2007-08 after which it has dropped to $869. 9 million 2008-09 and reduced to half of that of 2008-09 in 2010(i. e. 411. 1) while the other countries have fluctuating trend over the whole period. But if we look at the figures of last three years, many of the countries have a decreasing trend of FDI inflow in Pakistan.
This is due to the political instability and the terrorism upheavals that has framed Pakistan as one of the riskiest countries in terms of investment STRUCTURAL PATTERN OF FDI IN PAKISTAN FDI in Pakistan consists primarily of three elements, namely, cash brought in; capital equipment brought in, and re-invested earnings. The structure of the sources of financing FDI in Pakistan has undergone a noticeable change. Though all the components of FDI exhibit considerable fluctuations over time, the item labeled capital equipment brought in has remained substantially low .
Though the major share of FDI in Pakistan comprised cash brought in (on average 55. 7% over the last 25 years). The share of capital equipment brought in remained low, on average, over the last 25 years but it has made considerable improvement during the post reform period. In particular, its share jumped to 55. 7% in 1990’S mainly due to the equipment brought in for Hubcap Power Plant. Re-invested earnings contributed slightly less than one third to FDI over the last 25 years but its share has declined to 23% during the post reform period.
Having examined the trends and structural pattern of FDI, it is worthwhile to review its overall sectoral distribution pattern. The analysis of sectoral distribution of FDI may reflect two things: on the one hand, it may reflect the preferential treatment given by the government to certain sectors while encouraging FDI, and on the other hand, it may also indicate the foreign investors’ own preferences. Table 3: SECTOR WISE FDI INFLOW ($ MILLION) SECTOR| 2000-01| 2001-02| 2002-03| 2003-04| 2004-05| 2005-06| 2006-07| 2007-08| 2008-09| JULY-FEB 10| OIL AND GAS| 80. 7| 268. 2| 186. 8| 202. 4| 193. 8| 312. 7| 545. 1| 634. 8| 775. 0| 398. | FINANCIAL BUSINESS| (34. 9)| 3. 6| 207. 4| 242. 1| 269. 4| 329. 2| 930. 3| 1864. 9| 707. 4| 86. 5| TEXTILE| 4. 6| 18. 5| 26. 1| 35. 4| 39. 3| 47. 0| 59. 4| 30. 1| 36. 9| 15. 6| TRADE| 13. 2| 34. 2| 39. 1| 35. 6| 52. 1| 118. 0| 172. 1| 175. 9| 166. 6| 48. 9| CONSTRUCTION| 12. 5| 12. 8| 17. 6| 32. 0| 42. 7| 89. 5| 157. 1| 89. 0| 93. 4| 72. 1| POWER| 39. 9| 36. 4| 32. 8| (14. 2)| 73. 4| 320. 6| 193. 4| 70. 3| 130. 6| 115. 8| CHEMICAL| 20. 3| 10. 6| 86. 1| 15. 3| 51. 0| 62. 9| 46. 1| 79. 3| 74. 3| 77. 2| TRANSPORT| 45. 2| 21. 4| 87. 4| 8. 8| 10. 6| 18. 4| 30. 2| 74. 2| 93. 2| 76. 4| COMMUNICATION(IT AND TELECOM)| N/A| 12. | 24. 3| 221. 9| 517. 6| 1937. 7| 1898. 7| 1626. 8| 879. 1| 111. 3| OTHERS| 140. 9| 66. 2| 90. 4| 170. 1| 274. 0| 285. 0| 1107. 2| 764. 5| 763. 4| 316. 8| TOTAL| 322. 4| 484. 7| 798. 0| 949. 4| 1523. 9| 3521. 0| 5139. 6| 5409. 8| 3719. 9| 1319. 3| PRIVITISATION PROCEEDS| -| (127. 4)| (176. 0)| (198. 8)| (363. 0)| (1540)| (266. 4)| 133. 2| 0. 0| 0. 0| FDI EXCLUDING PRIVITIZATION PROCEEDS| 322. 4| 357. 3| 622. 0| 750. 6| 1160. 9| 1980. 7| 4873. 2| 5276. 2| 3719. 9| 1319. 3| During the period from 2004 to 2007 the bulk of the FDI has come in the oil and gas, transport and communication, and banking sectors.
These three areas have accounted for 71 percent of the FDI . The rise of 9. 3 percent in Foreign Direct Investment (FDI) is attributed to inflows in three sectors, namely, mining, quarrying and oil ; gas; transport ; communication and finance. The decline could be the result of inhospitable environment, global shocks such as world trade shrinking to 3. 5% from 6. 2% and loss of jobs of 30-50 million in 2009. Also the decline could be due to global financial crises, uncertainty in global demand and economic activity due which we are facing cutbacks and detoriating economic environment. CONCLUSION AND RECCOMENDATIONS
Conclusively, As Pakistan plans to double its exports in next two years, the country needs massive investment, both local and foreign, to broaden the industrial and services base to produce exportable surpluses and to cut down imports. In order to accelerate the rate of GDP growth, the country needs investment in large size industrial units. Along with this Pakistan has to attract foreign investment through privatization. Therefore, there is a need to examine the trend of flow of FDI and to redefine the investment policy of the country. More than 3/ 4th of the respondents (out of 110 firms) are willing to invest in next two years.
The UNCTAD report points out that the existence of pro-investment climate is a must. The choice of countries for the investors is now greater than ever. Thus factors beyond the existence of a pro-FDI regime have become more significant. Policies used internationally to influence FDI and its location has been expanded to embrace new strategies. As increasing number of countries have put similarly liberal policies in place, so their existence has become a minimum requirement. This is no longer a significant point of differentiation. Therefore, the countries, soliciting FDI, are now striving to promote other policies.
These include macro-economic policies, pro-investment fiscal policies and exchange rate policies. The policy measures also include corporate organizational issues more explicitly to meet the evolving needs of TNCs as well as those of domestic firms. Important changes are emerging in FDI across the Asian and Pacific region. European TNCs, having largely neglected Asia until recently, are now taking an active interest in the region. The current financial crisis provides some immediate opportunities to these firms. The financial crisis has curbed the capacity of many Asian TNCs to invest elsewhere in the region.
Increasing FDI flows to the region are being directed to services sector, notably banking, insurance and telecommunications. Foreign direct investment is now perceived in many developing countries as a key source of much needed capital, foreign advanced technology, and managerial skills. Realizing its central importance to economic development, these developing countries have taken wide-ranging steps to liberalize their inward FDI regime and have succeeded in attracting substantial amount of FDI. Important policy lessons can be drawn from Pakistan’s experience for other developing countries.
First, FDI is not necessarily beneficial to developing countries in the short term if an improper FDI policy is implemented. Second, developing economies should accord their short-term priority to inviting FDI to the foreign-exchange-earning sector, or at least, both the foreign-exchange-earning sector and other sectors simultaneously. International development organizations, including the Asian Development Bank, must consider this need in their operations particularly build-own-transfer type operations that involve the participation of foreign private investors. General Recommendations
First of all, Pakistan should make stronger efforts to attract as much FDI as possible to the foreign exchange sectors in the short term. Taking into account unfavorable balance of payments prospects, it should refrain from attracting any further massive FDI in the nonforeign-exchange-earning sectors for some years in the future. Political stability and satisfactory law and order are likewise critical to attract FDI. .The country’s political leadership must take practical steps to improve the law and order situation particularly in the major “growth poles” of the country including Karachi.
Macroeconomic stability plays a key role in boosting economic growth (see Kim 1993) and restoring foreign investors’ confidence on the economy. In an environment of large fiscal deficit and precarious foreign exchange reserves position, foreign investors are unlikely to increase their participation. Pakistan’s fiscal situation and foreign exchange reserves position will remain under considerable strain for some time making the macroeconomic environment less conducive for foreign investors. Some drastic and far-reaching measures are needed to reduce the fiscal deficit on the one hand and raise foreign exchange reserves on the other.
The international press and media coverage Pakistan has received in recent years is not at all conducive to attracting foreign investors. News items on Pakistan being one of the most corrupt countries in the world, its bomb detonations, and its use of child labor will hardly encourage foreign investors to undertake initiatives in Pakistan. Inconsistent economic policies discourage foreign investors in undertaking projects of medium to long-run duration. Several recent examples of inconsistent economic policies pursued by Pakistan have sent wrong signals to foreign investors.
There is a strong perception among foreign investors that the probusiness policies and inducements used to attract prospective new investors are somehow lost in the reality they encounter when they actually begin to set up and operate their business in Pakistan. The legal situation is even further complicated by the fact that government agencies are empowered to introduce certain changes through administrative orders and SROs. The laws and regulations should be simplified, updated, modernized, made more transparent, and their discretionary application must be discouraged. Specific Recommendations
TAX: Payment of taxes and contributions in Pakistan is complex and cumbersome. . Essentially, separate collection of taxes and contributions have forced enterprises to face unnecessary, cumbersome, and costly administrative procedures, and to deal with a large number of collecting agencies at all three levels of government. There is an urgent need to reduce the number of taxes and contributions; streamline tax regulations and administrative procedures; and most importantly reduce the contact of foreign firms with a large number of tax and contributions-collecting agencies.
The existence of such a large number of taxes and collecting agencies may breed corruption, which adds to the cost of production. Import tariffs on plant and machinery have discouraged investment, more so in Pakistan where capital is scarce and cost of borrowing is high. Because of this high cost, manufacturers are discouraged to modernize and the quality of local industry products is restricted against international competition. There is a need to examine tariffs of plant and machinery with a view to substantially reducing them. CREDIT FACILITY:
Foreign firms operating in Pakistan are currently facing cash flow problems as a result of many taxes and the world recession. That these firms cannot borrow more than their equity capital has further aggravated the cash flow problem. There is a need to review this policy. INFRASTRUCTURE: The availability of better quality and more reliable services in all areas of infrastructure are key ingredients of a business environment conducive to foreign investment. In most infrastructure services, Pakistan is highly deficient as compared with many developing countries that have attracted higher levels of foreign investment.
If Pakistan wants to catch up gradually with the development of the economies of East and Southeast Asia, it will have to investment more in the areas of education and physical infrastructure. On the education front, the government should identify the nature of skills critical to sustained industrial growth, and formulate strategies, policies, and programs that could facilitate the enhancement of these skills. Policy makers should provide conducive and friendly environment to foreign investors to attract more FDI.
Foreign investor should be given more incentives for the transfer of technology to host country. This would lubricate the local enterprises. For Pakistan import-substitution policy related FDI may prove good. SUGGESTED FDI STRATEGY: 1. Address investor confidence Policy framework is attractive to FDI but cost of doing business high but competitive in the region. Domestic private sector uncertain which shakes the confidence level of the foreign investors. Figure 3 EASE OF DOING BUSINESS IN PAKISTAN 2. Target Asian investors
Resource sector is resilient to global trend therefore Oil & Gas exploration, coal, alternative energy is needed. Market-seeking investment is resilient to global trend. Manufacturing, services carry cheaper labor costs. Moreover, Industrial zones compensate for high operating costs. Privatization should be undertaken (but avoid fire sales). Export-oriented FDI in medium-term should be adopted. targeting the regional market. Attract technology transfer. PIDE research shows that firms in manufacturing have improved efficiency but have been slow to adopt new technologies.
There is a need to link up with global value chains. 3. Target existing investors Encourage reinvestment (horizontal, vertical). Encourage corporate social responsibility (training, Linkages). Support services for domestic enterprises. 4. Sustain public investment Priorities should be given to education, infrastructure, health etc. At the end, one must know that, FDI is more than an external resource inflow. FDI can modernize industry and better integrate the economy into international production. Market-seeking FDI is viable in current global recession. -X-THANK YOU –X- REFERENCES http://www. adb. org/Documents/EDRC/Reports/ER066. pdf * http://www. doingbusiness. org/ExploreEconomies/? economyid=147 * http://www. pide. org. pk/pdf/highlights/FDI. pdf * http://www. pakistaneconomist. com/issue1999/issue49/cover. htm * http://www. finance. gov. pk * http://www. finance. gov. pk/admin/images/survey/chapters/01-Growth09. pdf ——————————————– [ 2 ]. PAKISTANS FICAL YEAR RUNS FROM 1ST JULY TILL 30TH JUNE [ 3 ]. SOURCE: STATE BANK OF PAKISTAN [ 4 ]. Source: World Bank/IFC, Doing Business 2009: Country Profile for Pakistan.