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Effects of business with US companies on Pakistan’s economy

The contribution of American MNCs in Pakistan has been very significant not just in monetary terms but from qualitative angle as well. There are over 200 American entities operating in Pakistan under various sectors such as banking, energy, FMCG, agriculture and pharmaceuticals etc. A number of these companies are listed on Pakistan Stock Exchange (PSX). Some of the selected US companies are as under:

  1. Logistics (Uber, FedEx, Hertz)
  2. Financial services (CitiBank, JP Morgan, VISA, AIG)
  3. Technology (Oracle, Microsoft, IBM, Teradata, TRG, Nielsen)
  4. Pharma (Abbott, Pfizer, Lilly)
  5. Oil & Energy (Chevron, LMKR)
  6. Food and beverages (Coca Cola, Culligan, McDonald’s, Dunkin Donuts, Pizza Hut)
  7. FMCG (Colgate-Palmolive, P&G, Muller & Phipps, 3M)
  8. Agri & Others (FMC, Cargill)
  9. Education & Apparel (Levi’s, Berlitz, JWT)

Franchising implies that a domestic firm allows its production, sales, marketing, and management strategies to be used in a foreign market in exchange for a periodic payment. Domestic firms engage in joint ventures with foreign firms. A joint venture is a business arrangement between two businesses to produce a particular good, where these firms share expenditures, revenues, and assets. Foreign firms establish new subsidiaries in other countries. The term Foreign Direct Investment (FDI) refers to establishing a new production facility, distribution network, management, and so forth in a foreign country. Parent companies have to transfer funds denominated in foreign currency to the FDI-receiving country. Also, depending on the FDI-receiving country’s restrictions, parent companies may receive income/profits from their foreign operations denominated in foreign currency.

 

In terms of exports from Pakistan, USA has almost 16% market share. However, there’s significant opportunity to enhance this number with the support from US government through a Free Trade Agreement (FTA) going forward. During the last five years, USA remains one of the largest contributors to the Foreign Direct Investment (FDI) in Pakistan. The position is no different in case of worker remittances with almost 14% of the total remittances coming from USA alone. These are high-value remittances and there’s tremendous potential to attract the remittances further from this corridor through offering various tailor-made investment and saving products. Worker remittances remain the most viable short term current account funding solution for Pakistan.

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.

The globalization and regionalization of the international economy have made FDI incentives more interesting and important for national governments, however, the internationalization of capital markets has limited the possibilities to use exchange rate policy as a tool to influence relative competitiveness. The need of the hour is that national decision-makers remain committed to promoting the competitiveness and welfare of their constituencies, and should put more emphasis on those policy instruments that remain at their disposal including FDI incentives without compromising on national foreign exchange reserves.

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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