PROBLEMS & PROSPECTS OF FDI IN PAKISTAN

PROF. SAEED AHMAD SIDDIQUI
(feedback@pgeconomist.com)

Mar 26 - Apr 1, 20
12

Foreign Direct Investment (FDI) refers to the long-term participation of country A in country B (here Pakistan). This participation is done generally in management or joint ventures or technology or expertise. FDI is classified into two: inward foreign direct investment and outward foreign direct investment. Net FDI (inward - outward) is shown either positive or negative.

FDI is the measure of productive resources ownership like factories, mines, and land etc. Increase in FDI is the indication of expansion in economic globalization.

During recent years, attitude towards FDI has radically been changed in underdeveloped economies like Pakistan. Ever increasing deficit in balance of payments and decrease in concessional aid have compelled Pakistan to reassess its policy concerning to FDI for liberalizing inward FDI through unilateral measures so that foreign investors may be motivated to invest in Pakistan. To achieve this objective, bottlenecks to FDI in Pakistan will have to remove.

The question of paramount importance is that why Pakistan, despite adopting liberal investment policy, could not attract the foreign direct investment substantially and what can positively be done in this regard?

Analysis reveals that there are various factors behind this pessimistic scene of foreign direct investment due to which it has been and is being retarded in Pakistan.

CAUSES & SUGGESTIONS FOR IMPROVEMENT:

1. POLITICAL INSTABILITY: Over the last eight years, political instability in the country and unsatisfactory law and order situation especially in Karachi city, which is the business and industrial hub, have distorted the sociopolitical scene. In the prevailing circumstances, no foreign company or individual would dare to stake their capital.

The government particularly the government of Sindh should take the necessary measures to make the law and order situation congenial and peaceful because it is the basic attraction for investments.

2. SLOW PACE: Macroeconomic imbalances and slow economic activity coupled with defective economic policies have discouraged FDI in Pakistan. Combination of the three economic evils make economic environment, which is not proved to be favorable for investment activities.

This pessimistic situation may be improved by making economic policies stable and consistent so that foreign investors may be motivated to invest in Pakistan.

3. BUREAUCRACY: Slow bureaucratic process and unsuitable business environment has also been one of the causes. Bureaucrats of Pakistan play the negative role through delaying the proceedings of business and trade papers.

The government should bring the investment activity out of this vicious and slow circle so that the foreign investor may have the clear and expediting business environment.

4. UNSOUND ECONOMIC BASE: Infrastructural facilities are also not sufficient. Infrastructural facilities like transport, communication, and energy are not available as required. Infrastructure is the backbone of investment activities.

Therefore, the government should pay its attention towards making the infrastructure sound.

5. SHORTAGE OF SKILLED MANPOWER: Foreign investors require trained and skilled manpower, which should be available within the country of investment. Obviously, the foreign investor would come with complex division of labor, sophisticated raw materials, and modern techniques of production therefore educated and trained manpower would be required which is not available in Pakistan in required number.

The government should make the suitable arrangements for education and training so that experienced, educated, trained, and disciplined manpower may be made available.

6. UNFAVORABLE LABOR LAWS: Labor laws are complicated and overprotective in Pakistan due to which foreign investors hesitate to invest here. These laws make the local workers lethargic, inefficient and work-avoiders due to which foreign investment is discouraged.

The labor laws, therefore, need to be revised and converted more favorable for foreign investors because the foreign investors do not come to serve Pakistan but make profits.

7. SOCIO CULTURAL TABOOS: Cultural and social taboos as well as quality of life are also not favorable for FDI in Pakistan. Therefore, they must be changed positively.

8. NEGATIVE ATTITUDE: The government agencies and officials, by temperament, also do not welcome the foreign investors due to which foreign investors become cautious to bring their capital in Pakistan.

Different media like press, seminars, discussions, and dialogues can play the crucial role in changing this biased attitude positively.

9. BOTTLENECKS FOR NEW ASSETS: Newly created assets play a crucial role in the development of an economy. There are various bottlenecks in the way of production of assets in Pakistan.

Since these bottlenecks have been created because of the defective investment policy therefore the government of Pakistan should eliminate such aspects from the policy.

SUGGESTIVE MEASURES: The following measures can be suggested for boosting the foreign direct investment in Pakistan:

i. The foreign investors should be provided with the opportunities for coproduction with the local participants as joint ventures, joint marketing arrangements and licensing etc.

ii. Taxes curtail the margin of profits of business man/producer and therefore rate of corporate income tax in Pakistan should be lowered down so that the foreign investors may be attracted.

iii. Tax concessions/exemptions should be allowed in special business/trade which will boost foreign investment through the lust of increase in profits.

iv. The government should establish special zones for the foreign investors so that competition with local investors may be minimized.

v. Early entry advantage should be provided to the foreign investors who take early initiative to enter for investment. Early entry advantages may be given in the form of special concessions to the new entrants.

vi. If repatriation of capital or profits made tight, foreign investors would become reserved for investment. Therefore, liberal repatriation policy should be adopted for foreign investors.

vii. Presently, the share of local partner in joint venture is 60:40 which should be raised to 100 percent for a limited period.

viii. Sometimes, foreign investor, due to some reasons, does not want to disclose the source of investment. If the declaration of source of investment is insisted, the investor would hesitate to invest. Therefore, federal board of revenue (FBR) should not question about the source of investment.

ix. The government of Pakistan, without prior permission, should allow the foreign investors to invest on the bases of 100 percent equity.

x. Condition of acquiring 'No Objection Certificate' from the government should not be imposed on foreign investor.

xi. In addition to the manufacturing sector, investment should be allowed in service, social and infrastructural sectors.

xii. Foreign controlled manufacturing concerns should be facilitated to borrow from the local market.

xiii. The foreign investors come to Pakistan with their capital and technology not to serve but earn profits. Why would they come if this objective is not achieved. It is, therefore, required that full repatriation of capital gain, dividend and profits should be permitted.

xiv. If trade protective barriers visible or invisible are there, foreign investors hesitate to invest. It is, therefore, required that the government of Pakistan should remove such barriers so that the foreign investor may be provided motivation to invest in Pakistan.

xv. Increase in volume of production decreases the cost through fall in fixed cost. Freedom should be provided to the foreign investors to expand their production capacity.

xvi. Training should be provided to the local workers in the lines of production in which the foreign investors show their interest so that they may find the required work force within the country.