Like other developing countries, foreign investment in Pakistan is widely considered an important vehicle for its economic growth. Pakistan provides numerous opportunities with attractive returns for multinational companies (MNCs); fully protects foreign investment under the law and has also signed double taxation treaties with various countries to give benefits to foreign investors. The legal framework for foreign investment is provided through “Foreign Private Investment (promotion and protection) Act, 1976″, and the “Protection of Economic Reform Act, 1992”. Most of the existing MNCs are satisfied with the concessions and regulations especially related to the repatriation of dividends, whereas such benefits are not available even in India.
Few MNCs came to Pakistan immediately after independence in 1947 such as Unilever, today all the cellular and auto companies being in operations in Pakistan are foreign companies. Cellular companies paid the high fee to Government of Pakistan a couple of years back for obtaining the license of 3G and 4G, which shows multinational corporation’s confidence in the country. Currently, MNCs are operating in Pakistan’s telecom and IT, electronics, auto, banking and insurance, food and beverages and energy sectors.
So far Pakistan has benefited from the following modes of foreign investment through MNCs:-
1. Agreement with local firms for sale of products: this is one of the most common modes of participation of foreign companies in Pakistan where a local partner through agreement imports and sells goods in Pakistan. We see such trend particularly in sale of cell phones, consumer products, auto parts, and electronics. This mode of the contribution of MNCs is not a preferred option because it put stress on cash outflows of the country and imbalances the current account.
2. Setting up of subsidiaries: Pakistan has always allowed multinational companies to open their offices and install their manufacturing facilities in Pakistan. Local corporate laws allow multinational firms to expatriate dividends through banking channel freely, this single concession gives international investors enough confidence to invest in the country. We see such investments in the power and energy sector of Pakistan where a number of multinational companies have invested and remitting millions of dollars annually as dividends.
3. Foreign collaboration or joint ventures: Local business houses are interested to enter into joint venture arrangements with foreign companies and intend to produce their products here in Pakistan. We see this trend in the auto sector of Pakistan; components are imported and vehicles are assembled in Pakistan. As a matter of fact, until today, even small parts are being imported, which should be manufactured in Pakistan.
In the late fifties, US government evaluated and declared Pakistan as a potential country for investment with a view to getting its support against USSR (former Russia). Resultantly, Pakistan got investments from US, UK, and Japan where all the big names invested in almost every sector. On one side, governments of that time were supportive and on other foreign companies were excited to invest in Pakistan hence Pakistan availed the opportunity to its maximum. But, post 2001 Afghan war, Pakistan didn’t avail full advantage of its corporation with the US, where it should have asked for investment in the manufacturing sector rather than the free flow of dollars to NGOs and in the service sector, which eventually evaporated in a few years’ time. Some of the big banks like HSBC, Barclays, and Deutsche Bank came in that period, made good profits and exited without any reason and attributed their exit to their strategic realignment. No one at the government level realized but the exit of such European banks has increased the cost of doing business in Pakistan because other European and US banks now charge a high fee for the opening of a letter of credit and for providing other services as required by an importer/ exporter. Somehow, Pakistan couldn’t get serious investment from US, UK, Europe or the Middle East in all these years till 2013. Later, China moved forward and offered to fund projects in the power and infrastructure sectors. Pakistan had no option but to avail that offer and hence China Pakistan Economic Corridor (CPEC) started with full force. The share of power and construction sector in Pakistan’s annual Foreign Direct Investment (FDI) inflow was negligible in 2008 but combined share is of 60 percent of total FDI in 2018.
As per a recent report, despite a challenging and unstable environment, an estimated amount of US$ 2.7 billion was invested in Pakistan in 2017, which was 20 percent higher than the previous year and was mainly in the energy, chemicals and telecom sector. Ten years ago, China’s share in Pakistan’s annual inflow of FDI was almost negligible whereas today China’s share has soared to 66 percent, according to the monthly FDI data released by the State Bank of Pakistan.
Dutch dairy giant Royal FrieslandCampina N.V. acquired the controlling stake of 51 percent of Engro Foods and Turkey’s Arcelik purchased the majority stake in Dawlance Electronics. Both the transactions were of over a couple of hundred million dollars, which clearly shows keen interest of foreign companies in Pakistan. Recently, FFC has also appointed an international financial consulting firm for the sale of their dairy business to a Chinese group.
MNCs have not only played a key role in shaping Pakistan’s economy but has also shown the ability to influence the economy, politics, and cultural values. MNCs in Pakistan is not only the source of benefits but are of also the concern for some segments. Recently we have seen a tussle between MNCs and small, medium size enterprises (SMEs) of Pakistan. As MNCs are cash-rich companies and come with full force with the backing of their respective governments whereas local investors being in pursuit of growth in business usually enter into a one-sided contract with MNCs. MNCs offer low margins to local partner while selling goods at significantly higher prices with good profit margins. Moreover, sometimes we see criticism on the role of MNC because of certain additional advantages being offered to them. A lot of concern is shown on CPEC, few concerns are obviously legitimate but most of the points currently we hear against CPEC are baseless and are being raised without substance. It is therefore important for the government to provide a level playing field to every investor, be it a local or a foreign.
It is difficult to have GDP growth unless participation of the multinational companies in the economic activities. MNCs are making profits in Pakistan, whereas in return, Pakistan is getting a lot of benefits from the managerial skills, financial resources, and international reputation of international firms. Pakistan’s human resource is being trained, companies implementing high corporate governance standards and best practices and international environmental and social standards are being adopted. These aspects are being replicated by local business now, which will have a far-reaching impact on the development of the corporate culture of Pakistan.
The poor rating of the country, 147 out of 190 countries, in the World Bank’s Ease of Doing Business needs to be improved on priority. Pakistan is presently looking for foreign investment in cement plants, naphtha cracker plants, and in the sectors of power production, engineering, chemical, information technology, and others.
We don’t see the transfer of modern high technology in Pakistan that should be a pre-condition to invest or to do a business in Pakistan. The government should make it a pre-condition for all the MNCs to bring in technology and manufacturing facilities in Pakistan, otherwise, Pakistan will always keep struggling with its import bill and current account deficit. Because of changing economic conditions, it is important now to start manufacturing components in Pakistan instead of importing of components. In addition, Pakistan should form a special policy framework to attract more and more foreign investors as they would bring in foreign investment, create employment opportunities and help transfer of the technology. Pakistan currently attracts low FDI, which is less than one percent of its GDP against the norm of three percent in the regional countries. Encouraging aspect is that most of the foreign businesses operating in Pakistan are interested to increase their stakes in various ongoing ventures. Therefore, the current government should take some bold steps to put the economy back on solid growth in line with the potential of the country. It is important to take measures to boost confidence through policy announcements on matters relating to taxation and debt management and should also improve ease of doing business in Pakistan.