June 11, 2007	Monday	Jamadi-ul-Awwal 25, 1428

The report on “The Globalisation of Corporate Finance in Developing Countries “issued by the World Bank on May 29 as part of the Global Development Finance 2007 showed that South Asia attracted $12.9 billion out of $324.7 billion of the foreign direct investment (FDI) that went to developing countries. While India received $8 billion, Pakistan got $3.5 billion.

The bank pinpointed primarily two factors responsible for low FDI inflow into Pakistan — increased political instability and heightened security concerns. Not only the World Bank seems concerned over the deteriorating law and order situation, the G8 Intelligence Wing Report in its “Global Peace Index” has also declared Pakistan as the seventh `most dangerous country’.

The FDI flow at less than one per cent of the total global direct foreign investment is negligible when compared with the opportunities and economic fundamentals of the country. Given the size and dynamism of Pakistan’s economy, the liberal FDI policy, the cheap labour and its proximity to the markets of Gulf and the Central Asia, Pakistan should be seen as a far more attractive destination for foreign investment. Pakistan was among the first few countries in the region to open up the market in early nineties. The foreign investors can virtually invest in any sector except a very few.

Another distinctive characteristic of the foreign investment inflow is that foreigners are not injecting money for establishing new projects but are buying state-run organizations and institutions. The government is attracting foreign investment by selling national strategic assets like “vegetables-vendors” The nation prepares a cake and the government instead of generating employment, sells it to foreigners at discounted prices.

In our case, FDI is not broad-based. It is more or less restricted to three sectors namely telecom, oil and gas and financial sectors. Moreover, foreign investors borrow money from Pakistani banks to acquire these business outfits. With only a few of such concerns left for sale, privatisation will come to an end pretty soon.

FDI posses the some advantages over loans: First, equity financing requires repatriation of profits when they are realised, debt is repaid irrespective of returns on it. Second, payment on FDI can be regulated by the host country while debt payments cannot. Third, much of the FDI consists of re-invested earnings, not all returns are repatriated, as opposed to loans.

The fallout and after-effects of FDI have been debateable from the day one in economic circles. One view is that foreign firms invest abroad in order to capitalise on some specific expertise or technology that domestic firms do not possess. The cost of capital explanation theory, however, suggests that the main enthusiasm for FD is the search of maximum return. FDI is also seen as a means to extend capitalistic control by shifting resources from one country to other. In case of Pakistan, trans-nationals invest in order to consolidate their hold over a large foreign market that is always an integral part of their corporate strategy.

The economic fundamentals of the country have changed considerably but lack of good governance, high cost of doing business, red-tape, cold war with India, political uncertainty, inadequate and under-developed infrastructure, poor law and order situation, rampant corruption and smuggling are the real threats. A stable and peaceful political environment, enforcement of laws and contracts, a trained, skilled and disciplined labour force, critical support services and availability of quality infrastructure are the key factors in making investment choices. Keeping these factors in view, the government needs to improve the environment for investment.