CONSISTENT ECONOMIC POLICIES RESULT IN FDI INCREASE

MANZOOR HUSSAIN MEMON*
Sep 8 - 14, 2008

Foreign direct investment (FDI) is defined as the source of acquisition of managerial control by business enterprises of foreign countries over a business activity in a host country. FDI brings the most needed capital fund, advance production technique, higher managerial skills, advertising and market expertise and global links. It contributes to human resource development, technological transfer and international trade. The changing perception and more attractive policies of the host developing nation have changed the destination of FDI flows from industrially developed country to high growth develop centre. In recent decades, FDI has received great attention as a growth enhancing component of the developed countries, and developing countries in particular. Over the last one decade foreign direct investment has grown at least twice as rapidly as world trade and remains as the largest form of capital inflow in the developing countries.

Pakistan starts receiving the inflows in the form of FDI every after two years of its inception in 1947. However, due to inappropriate regulatory policies, the amount of FDI was at its minimal and not significant until 1991. Since 1988, the inflow starts increasing; takes off with a high pace in 90s, and further heightens with a record in the 60 years history of Pakistan, in the last five years. This was mainly due to the adoption of the market oriented policies in early 80s to attract the private investors to come forward, which take hold in the late 80s. However the pace of FDI inflows to Pakistan has remained slower as compared with other developing countries in Asia. The countries including China, Thailand, Malaysia, Hong Kong, Indonesia and India were successful in attracting considerable FDI with a high pace in the last one decade.

The development of new market oriented policies to some extent gave free hand for inward foreign direct investment, with the same regulations as for the domestic investors with some limitations. There were also waivers of conditions for the government approval except few industries. Such policies of the government over the years have improved the situation of FDI in Pakistan.

The consistent market-oriented economic policy resulted in the record increase in the FDI in Pakistan. The country's macro-economy has also been managed better than under the previous administrations during the period. Despite numerous reforms in the policies to attract the foreign investors, Pakistan is unable to attract significant FDI in the country. This is mainly due to non-availability and volatility of number of factors which are the main components of the attracting FDI beside the spur policies. The political Chaos and instability, poor law and order situation, lack of infrastructure, underprivileged investment climate; vulnerable economic policies; low quality of human resources are the main reasons of low FDI in Pakistan relative to other countries in Asian region.

INWARD INFLOWS (MILLION US $)

REGION, COUNTRY

70S

80S

90S

2000-06

World

24365.1348

93878.071

403802.306

917685.205

Developed Countries

18443.618

73290.1958

280452.585

632200.728

(75.6)

(78)

(69.4)

(68.8)

Developing Countries

5921.59

20580.0952

118184.973

255648.276

(24.3)

(21.9)

(29.2)

(27.8)

Asia

1902.141

11677.405

69061.5636

159036.704

(4.4)

(12.43)

(17.1)

(17.33)

South Asia

62.883

238.48

2350.180

9038.03

(0.25)

(0.25)

(0.58)

(0.98)

India

45.46

104.753

1516.569

6905

(0.18)

(0.11)

(0.37)

(0.75)

Pakistan

28.34

94.58

475.76

1377.285

(0.11)

(0.10)

(0.11)

(0.15)

Source: UNCTAD, WIR(2007)
Figues in Paranthesis is the share in world total

The increasing trend of FDI inflow in the developing countries reflects the sustained economic growth and continuing liberalization and privatization policies adopted by these countries. The South Asian countries have lagged behind considerably as compared with other Asian countries. In view of the developments in the East and South-East Asian Countries, Pakistan stands nowhere in attracting FDI, on an average (2000-06) accounting for 0.15 percent of world FDI, less than one percent of Developing Countries (0.53) and Asian country (0.86) FDI, and 15.23 percent of South Asian Countries FDI.

The US has been the single largest investor since 1984-85, accounting for 25.4% (FY07: 18%) of the total FDI in FY08, followed by Malaysia 12.7%, UAE 11.4% (FY07: 13%), UK 8.9% (FY07: 17 %), Hong Kong 6.6% (FY07: 1 %), Norway 5.3%, Switzerland 3.3%, Oman 2.7%. It is important to note that there are significant variations in the share of FDI by major contributing countries, mainly due to uncertain economic condition of Pakistan's economy.

Despite of the above fact, the considerable FDI in Pakistan is based on three reasons. First, Pakistan is a potential large domestic market. The population crossed 160 millions, whose purchasing ability rises due to the recent steady economic growth. Second, potentiality of Pakistani entrepreneurs, however the educational indicators are as bad as the Sub-Sahara regions: the adult literacy rate is only about 45 percent, while university graduates are in short supply. Nevertheless, the private sector's entrepreneurship is notable in that even SMEs are making international business transactions actively. Third, the geo-political importance of Pakistan, after the 9/11 terrorist attach, the country has become geo-politically important in the world economy. The neighboring two countries, China and India, have achieved rapid economic growth, and the relationship between Pakistan and these two countries becomes ever more intimate. The geographical contiguity with the Central Asian Republics, open the avenues for the foreign investors for extending their outreach in to the countries of the region.

FDI can also stimulate human resources development through investment in education and training. This not only enhances the stock of human capital but also increases the productivity of labor and other important factors of production. FDI can also be a large source for Pakistan to support the balance of payment. There is also a need to further liberalize its trade and investment regime by providing more generous trade and fiscal incentives to foreign investors through number of tax concessions, credit facilities, and tariff reduction. It is envisaged that Pakistan's capacity to progress on economic development will depend on her performance in attracting FDI.

* Manzoor H. Memon is a Senior Manager (Lead Economist) in JCR-VIS Credit Rating Co Ltd., An Affiliate of Japan Credit Rating Agency, Ltd.