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Removal of constraints will rope in FDI from MNCs

Most countries have liberalized their policies to attract investments from foreign multinational corporations (MNCs). On the expectation that foreign MNCs will raise employment, exports, or tax revenue, or that some of the knowledge brought by the foreign companies may spill over to the host country’s domestic firms, governments across the world have lowered various entry barriers and opened up new sectors to foreign investment. An increasing number of host governments also provide various forms of investment incentives to encourage foreign owned companies to invest in their jurisdiction. These include financial incentives such as tax holidays and lower taxes for foreign investors, financial incentives such as grants and preferential loans to MNCs, as well as measures like market preferences, infrastructure and sometimes even monopoly rights.

However, evidence shows that incentives alone are not the primary drivers of investment and potential investors’ first look for policy stability, security and overall business environment. In fact, investment incentives if not designed carefully, can end up costing more than the benefits that they achieve, and have inadvertent consequences like tax evasion and rent seeking. Currently, Pakistan is at 65th place with respect to the FDI received at the global level. It must shift its focus from aid and loan reliance to economic investment packages for the foreign investors in the form of repatriation of profits, dividends and capital gains. Also, FDI is coming from a handful of countries, which indicates that a lot needs to be done to make the country attractive for international investors.

There is no doubt that the country’s potential is under-utilized at the moment but there are several constraints which are still persisting and hindering the development aspects.

Following corrective measures must be taken to eliminate the persistent constraints:

  1. Pakistan should initiate and encourage co-production programs where foreign company partners with the local company having the same specialization to manufacture goods. This extends confidence to investors and safeguards their investment whereas it strengthens and encourages employment and business prospects within the country. Whereas, if a company wants to enter the market with 100% equity, it should not be discouraged either.
  2. Pakistan must lower its tax brackets as it diminishes the profit margins, which makes the market unattractive for FDI.
  3. As compared to the fast-paced Western life, bureaucratic process in Pakistan are time consuming which becomes worrisome for the investors. One window operation and simpler processes must be introduced to encourage the foreign investors belonging to the public and private sector.
  4. Various schemes pertaining to the ‘first mover advantage’ must be introduced in the shape of special concessions.
  5. The government authorities must place greater emphasis on providing training and improving the quality of life so that the loopholes can be eliminated.
  6. Pakistan is an attractive hub for manufacturing sector; however, the investors should also be encouraged to invest in the services, infrastructural and social sectors.
  7. Pakistan’s image as an investment location should be enhanced through development of Special Economic Zones (SEZs).

 

Pakistan has emerged as one of the global top 10 improvers last year as our position in the ‘Doing Business’ global rankings improved to 144 out of 190 economies as a result of the reforms announced by the government. Pakistan had announced a three-year road map to improve its global ranking on doing business. Being consistent with that, Pakistan completed three reforms in the past year in registering property, getting credit and trading across borders. This is a vital improvement as the progress in business will have healthy effects on the economy and it would attract much more foreign investment in the country as well. Pakistan is an investor-friendly country and provides a sound investment business destination for both local and foreign investors. The improvements discussed above provide important building blocks for a more efficient business environment that would encourage local businessmen a lot.

The need of the hour is to reevaluate the investment strategies with specific emphasis on attracting FDI in export-oriented segments that will help in improving value-added exports and will pave way for export-led growth. Pakistan is lagging behind in technology and value-added products due to inflow of FDI in a handful of sectors. The government should guarantee that inward Foreign Direct Investment (FDI) should play an important role in enabling technology transfer to the country, access to innovative and larger foreign markets, capital growth, modernization and human resource progress, instead of concentrating on FDI in certain profitable sectors only.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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