The economic fundamentals have not changed really but lack of good governance, adhocisim and deviation from announced polices are the real impediment

Dec 14 - 20, 1998

The share of foreign direct investment (FDI), flowing into Pakistan, is negligible when compared with 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. Under the prevailing circumstances there is a need that economic mangers should take cognizance of the factors which are responsible for pushing the foreign investors away from Pakistan.

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 privatisation. Therefore, there is a need to examine the trend of flow of FDI and to redefine the investment policy of the country.


It is necessary to understand the key factors influencing the flow of FDI globally. According to the United Nations Conference on Trade and Development (UNCTAD) report for 1998, the quantum of annual flow of FDI has reached US$ 450 billion. 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).

According to the UNCTAD secretary general, "The challenge (for governments) is precisely to develop a well balanced and preferably unique combination of determinants of FDI location, and to seek to match those determinants with the strategies, pursued by competitiveness-enhancing TNCs." As the search in foreign countries for 'created assets' become more important to a firm's competitiveness, countries without traditional advantages — natural resources or large domestic markets — can be more competitive in attracting FDI. Costa Rica created the conditions and people-made assets, including skilled labour. This resulted in attracting a US$ 500 million investment for project from Intel Corporation in 1997.

Created assets

Created assets can be tangible like the stock of financial and physical assets such as communication infrastructure or marketing networks, or intangible. The common denominator of intangible in this context is knowledge. The assets sought by TNCs in this context relate to skills attitudes to wealth creation and business culture, capabilities (technological, innovatory, managerial), competencies (to organise income generating assets productively) and relationships (such as those between firms and contacts with government), as well as the stock of information trade marks or goodwill.

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 have 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 differntiation.

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 organisational 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.

The driving force in the continued expansion of global FDI was the growth of large-scale cross-border mergers and acquisitions (M&As) among developed countries. Cross-border M&As involving more than US$ 1 billion announced in 1997 amounted to US$ 161 billion. It should be noted that as recorded in 1997 world FDI did not decline in the wake of the East Asian financial crisis.

FDI quantum

Despite divergent economic performance of individual countries, FDI reached record levels an all major country groupings in 1997. Developed countries invested US$ 359 billion globally — up by 27 per cent over 1996 — and attracted US$ 233 billion inward FDI — 19 per cent higher than previous year. Inflows to developing countries rose at a slower rate than to the developed ones, but were still up by a significant 15 per cent to reach US$ 149 billion; outflows were up 24 per cent to US$ 61 billion. Dramatic increases were registered in Central and Eastern Europe, albeit still at relatively small levels FDI inflows to the region increased by 44 per cent to US$ 19 billion and out flows, more than triple, to US$ 3 billion.

Moreover, FDI grew at a faster rate in 1997 than did other macro-economic indicators such as gross domestic product (GDP), exports or domestic investment, continuing a tendency towards faster growth that began in 80s. The rapid growth of FDI is clearly contributing to the increasing globalisation and integration of economies. Seven per cent of global GDP is now generated by production of foreign affiliates of TNCs. If parent firms were included the proportion would be much higher.

Globalisation is being shaped, among others, by a growing array of bilateral, regional and multilateral economic agreements. The UNCTAD report says that rarely before has there been so much activity undertaken by national governments and international organisations in the realm of investment negotiations. The number of bilateral framework agreements is expanding. The number of bilateral investment agreements stood at over 1,500 by the end of 1997. There were 1,794 double taxation agreements in effect covering 178 countries at the end of the same year.

Trends in Asia

According to the report, important changes are emerging in FDI across the Asian and Pacific region. They are attributable to the current financial crisis, changing approaches by European corporations and critical developments that call into question the sustain ability of China's inward investment boom. FDI into Asia and Pacific reached a formidable US$ 87 billion in 1997 while the outflow from the region rose to US$ 51 billion. More than 90 per cent of the FDI inflows and outflows in 1997 were accounted for by East and South-East Asia, China and Hong Kong. China alone accounted for US$ 48 billion of the inflow and for US$ 28.5 billion of the outflows.

FDI flows to South Asia rose to another record level in 1997 of about US$ 4.4 billion — mostly reflecting a 37 per cent gain in flows to India. While the Indian volume is rising rapidly, it remains less than the FDI flows to much smaller economies such as Chile. India was considered to have potential to secure significant gains in FDI. Flows to the other economies in the region remain low. FDI into Pakistan has stagnated for some years due to administrative bottlenecks and weak economic conditions.


The recent negotiations of new international investment agreements has brought to the fore a number of basic considerations, including:

  • It is necessary to examine the implications and appropriateness of international investment agreements,

  • These agreements are difficult to negotiate, as they cover a range of issues related to production, and the production process as well as social and cultural factors,

  • Effective agreements have to be balanced. This raises the need to take into account the diverse circumstances of countries at different stages of development,

  • The concerns of all people, likely to be affected, need to be taken into account in negotiations; thus representatives of civil society need to be included in the process.

FDI in Pakistan

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 Grindlays Bank and Standard Chartered Bank were 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 that, even at the time of nationalisation, all the foreign investment was exempted from the preview of nationalisation. Whereas in many countries foreign investment has been the first to be nationalised.

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 privatisation 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 Paktank 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) have 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 privatisation 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 realised 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 is getting tougher.

Current financial crisis

While some of the analysts hold the current financial crisis responsible for the down turn of economy, many do not agree with this. They say that the current situation is more like force majoure. The fear of default came only because disbursement of funds from multilateral lenders was suspended. Once the flow resumes the situation will be averted. They also say that the lenders will not allow Pakistan to commit default because: "Pakistan has been prompt and current on all its debt serving obligations and no lender wants to penalise its customer, if it faces any problem. That is the reason that grace period for making payments has been extended." These lenders are still trying to workout a bailout package but the GoP has to come at terms. The only thing these lenders are worried about is the ability of Pakistan to meet its debt serving obligations. Therefore, they want Pakistan to agree to enhance revenue collection, expand and diversify export base, make the exchange rate more realistic. Since energy sector suffers from huge intercorporate debt they want GoP to rationalise tariffs of electricity and gas. Due to inefficiency of state-owned WAPDA and KESC, their privatisation is being perused

Apart from the IPPs muddle the other complaint of foreign investors is inconsistency in GoP policies and delaying tactics. In this regard the point of view of multinational pharmaceutical manufacturers needs immediate attention. The GoP has agreed on a formula to revise the price of 'controlled' medicines, ensuring annual price adjustment. But they were not allowed any price increase since November 1996. This has been affecting their profit margins but more importantly resulted in postponing of BMR and expansion programmes.

Since the parent companies have options to invest anywhere in the world, their decisions to expand are based on the profit margins of the specific unit. Due to inconsistency of GoP policies the proposals of expansion by Pakistani operations of MNCs were not allowed by their headquarters. This on the one hand has deprived the country from potential FDI and on the other hand will cause shortage of quality medicine in the country.

Some analysts say that establishment of a number of automotive assembly units in the country — having production capacity more than the demand has been responsible for high price of cars in the country. The capacity utilisation in the sector is less than 50 per cent which is responsible for the higher cost of production.

Some local investors complain that MNCs draws their strength because they have invested in the sectors enjoying the highest protection and some of these sectors have been insured minimum rate of return on equity by the GoP. However, one may say that the availability of these incentives does not bar local investors to enter these sectors, therefore, the MNCs should not be blamed for enjoying unprecedented incentives. They further say that textile sector had enjoyed complete protection for nearly 50 years but had failed to deliver any positive results. Therefore, availability of incentives or no incentives is not a criteria. It is the management outlook which makes a sector attractive for investment.


As the rituals for a bailout package are being performed, it has become evident that the GoP has to play a key role in attracting new investment. First the local entrepreneurs have to be convinced that the conditions are conducive for investment in the country. The statement of an ex-country manger of Citibank must not be ignored. Once he had said "Even if the GoP spends millions of dollars in arranging investment conferences to tell the foreign investors about the incentives being offered no one will give it much attention. Any foreign investors will look only at the sort of profit being made by overseas companies operating in the country to make a decision." Another chief executive once said: "Give me the worst policy I am still willing to work in Pakistan but the only assurance I need is the implementation of policy in letter and spirit. I do not want over night changes as it distorts all my plans."

Saying that the current problem of Pakistan is similar to the crisis faced by other Asian countries is incorrect. Similarly the remedies for Pakistan are different from those needed for the other Asian countries. The GoP has to redefine its objectives, formulate the policies accordingly and then implement these policies in letter and spirit. Most of the leading TNCs and MNCs are already in operation in Pakistan. Foreign investors are still ready to participate in the process of privatisation but demand even-playing field.

In an era of competition between countries to attract FDI, the growing focus on policies as determinants of FDI decisions by corporations leads to a number of sticking consequences and challenges for governments of host countries. These are:

  • The expansion of number of policies that investors view as constituting a good investment climate,

  • Greater demands of the effectiveness of investment policies,

  • Emergence of new policy areas that cut across traditional policies such as those affecting the production of created assets — from special people skills to technological innovation — that TNCs are increasingly seeking,

  • The mounting realisation that an effective national FDI policy framework requires an understanding of determinants of TNCs decisions, including the broader long-term strategies of TNCs.


Pakistan does not only have an enviable track record of economic growth in sixties but still it has the potential to repeat the past. It still enjoys incomparable economic fundamentals. The country has often come out with pro-investment policies. However, the adhocisim, and poor implementation of policies — driven by pressure groups — have been distorting the system. The post economic sanction era is the best example of this muddle. If the country wants to achieve a respectable position among the nations it has to put the economy in order. No one can deny the fact that the country needs foreign investment. If the foreign investment is required then Pakistan has to offer conducive environment for foreign investors — comparable with other countries — soliciting the same.