Every country needs and encourages foreign investment for several reasons. The capital inflow is needed by the developing countries not only to add to the size of domestic stock of real capital and consequent acceleration in employment and output but also to reduce the economic disparities between leading and lagging areas. Besides increasing the pool of investible funds, FDI helps the country in technology acquisition and its penetration which not only increases the productivity of the resources bur also improves the quality of the finished products. This improvement in the quality boosts the exports potential and prospects of the country receiving further foreign investment.
Foreign investors invariably bring new techniques of production which improves the management and technical skills of the personnel involved in that industry and then its further diffusion to other sectors and industries through demonstration effect. Last but not the least is the overall improvement in the tastes of the general public and the high standards they expect from their local manufacturers.
Foreign investment can come into a country through two sources-officially by the multilateral institutions or bilateral agreements for investment for mega projects or social sector development. Second and major source is private foreign investment which again has two forms- portfolio investment (bank deposits or stock/bond purchased by the foreigners or expatriate) and direct investment (in manufacturing or services sector singly or through private joint venture).
For attracting foreign portfolio investment a country does not need to offer any extraordinary incentives because this type of investment depends upon the rates of interest offered by banks and financial institutions or the yield on bonds. Here macroeconomic stability plays the crucial role. On the other hand for attracting foreign direct investment, the hardcore investment there is three prerequisites for attracting foreign direct investment
- Profitability-which comes from easy availability of resources at competitive rates or strong consumer base for a product. Here Pakistan can offer three-mineral resources, its burgeoning young population which is information technology and commerce savvy population and rapidly expanding middle classes, estimated to be 60 million by the Asian Development Bank, has lured many MNCs. However Pakistani labour is neither cheap nor skilled
- Incentives-fiscal and non-fiscal incentives which could beat those offered by other countries are the most attractive. But the problem is that these type of fiscal and non-fiscal incentives are now standard all over the world.
- Environment-backup investment friendly environment-flexible, disciplined and skilled manpower, political stability with guarantees of policy stability and continuity, efficient and effective administrative set up which can ensure security of life, safety of investment and contract implementation of contracts and speedy dispute resolution, society that accepts and welcomes foreigners and is not racial, relatively stable currency which is not pegged bur not too much volatile, banking and financial institutions that have liquidity to lend and are not crowded out by heavy government borrowing.
Pakistan has been in receipt of FDI in the past but now there are three issues which need attention of the policy makers in the country;
- Foreign Direct Investment (FDI) inflows into Pakistan have been drying up over the past few years. After hitting an all-time peak of $5.4 billion in 2007-08, net FDI sank to a low of $824 million in FY12, before recovering moderately. According to UNCTAD, total outward FDI in 2013 amounted to $1.45 trillion globally out of which the share of developing countries was $778bn. Of this, Pakistan managed to attract a meagre 0.17 % — far below its weight in terms of GDP in global comparison. In a highly competitive environment, Pakistan is one among hundred and fifty countries which are competing for foreign investment
- Another worrying aspect is the composition of private foreign investment. Most of it is portfolio investment which is highly volatile and moves out of the country much faster than it comes and leaves when a country is already under stress, compounding the crises. Rest of the private foreign direct investment is in consumer goods industries and services; worse in fast food and beverages/cosmetics manufacturing.
- More troubling than the fall in incoming FDI is the pick-up in outflow of FDI from the country. In fact, the decline in overall FDI in the recent past has been caused as much by higher outflows as by sharply lower inflows. The worrying conclusion: not only is Pakistan failing to attract new FDI from the world, but it is failing to retain part of its existing FDI stock of around $29bn.
Pakistan attaches greatest importance to the inflow of foreign direct investment and has a very attractive package to offer, but due to political instability in the region and poor perception of Pakistan abroad, it could not induce sizeable investment, in spite of being a land of opportunities. During the last three years, we have been successful removing some of the constraints. The improved foreign exchange reserves do provide a positive signal to the investors, as it will ensure repatriation of their profit and dividends. A democratic set up has been installed. The political stability, combined with constancy and predictability in economic policies and forward looking posture of the economy could ensure the inflow of FDI in a big way. The requirements for increased investment are familiar; these are
- Encourage domestic investors to invest in Pakistan rather than abroad. However important foreign capital is, it is unlikely to come to Pakistan unless local investor is convinced of making investments.
- Pakistan’s Diaspora is second most important group to target for investing in Pakistan by giving them two guarantees- security of life and speedy dispute resolution mechanism-the most troubling aspects for their decision making
- Third group to target is those MNCs which are already operating in Pakistan. We must encourage them to expand their businesses in the country as it will give best signal to those who have reservations about the profitability or environment for investment in Pakistan
- Although there are constitutional guarantees for protection of foreign investment, yet these need to be reinforced by getting a unanimous resolution in both the parliaments to increase the confidence level of the foreign investors.
- Consistency and predictability of policies is one of the persistent complaints about the policy formulation and implementation process in Pakistan. An investor needs ironclad guarantees in this respect before committing millions of dollars in a venture.
- Whether attracting foreign investment or encouraging locals to invest, there is a need to build and maintain our infrastructure. As stated earlier ,most of Pakistan’s physical infrastructure — transport, energy, irrigation — is in dilapidated condition. Economic growth and investment will continue to be constrained without modern infrastructure.