In an era of globalization and trade liberalization, traditional tools of economic development through tariff protection and incentive-based policies, can no more be implemented.

Domestic policies, therefore, must be outward-looking and must in conformity with the multi-lateral and regional developments and discipline. The regional trading groups/blocs are being effectively used as apparatus for trade and investment promotion.

The member-countries of the EU, the NAFTA, the ASEAN and others through their integrated policies, have made sustainable socio-economic progress.

Their macro-economic stability has made them the nerve centre for FDI’s inflows as well as outflows. However, South Asia Association of Regional Cooperation (Saarc) remains an exception.

The volatile character of the region and continued Indo-Pak stand-off has added to the instability. The recent postponement of Saarc summit could be a case in point. This has also nullified the individual effort of member countries to attract foreign investment.

According to the World Investment Report, 2002 of UNCTAD, FDI inflows to the developing countries of Asia (excluding Japan and South Korea) and the Pacific declined from $134 billion in 2000 to $102 billion in 2001.

More than 60 per cent shortfall was witnessed in flows to Hong Kong, China from a record level of $62 billion in 2000.

Meanwhile, the aggregate direct foreign investment in the Saarc region was estimated at $2.03 billion in 2000. India captured the bulk share of $2.3 billion, followed by Pakistan, which secured $308 million; Sri Lanka $ 217 million; Bangladesh $170 million; Nepal $13 million; Maldives $12 million.

The total foreign investment of Saarc countries during the year 2000, constitutes a meagre percentage of 0.24 of the total world foreign investment of $1,271 billions.

It will be recalled that in the current era, FDI has indeed assumed an added importance as a mechanism to spur socio-economic growth primarily because of two factors: first, the foreign aid, emanating from the ideological consideration or based on grouping affiliation has almost ceased to exist in the wake of emergence of Unipolar world and second, loans from world financial institutions are found annexed with unbearable and unrealistic conditionalities.

Therefore, the focus has now shifted from official loans towards foreign direct investment (FDI), although the latter could not be termed as an unmixed blessing either.

It is argued that the growth of indigenous entrepreneurship and technology is impeded by foreign entrepreneurs, who neither adhere to the deletion programme, nor do they cooperate and contribute to the indigenization of resources.

Nevertheless, private investment does have an edge over foreign official loan.

In a world, where technology, management, marketing and finance keep touching over new pinnacles of sophistication and perfection, the developing countries have no option, but to increasingly explore the venue of private foreign direct investment either through joint collaboration or 100 per cent equity participation, as a substitute to foreign loan, both to share the strategic knowledge stream and to make up the deficiency, stemming from the almost missing ingredients of economic growth, namely, capital and modern technology.

The capital inflow is thus lured by the developing countries to add to the size of domestic stock of real capital and consequent acceleration in employment and output as well as removal of economic disparities between leading and lagging areas.

On the other side, the prime motivating force for foreign investing-firm is profitability. Another factor influencing decision to manufacture overseas is rising protectionism among industrialist advanced countries.

To amplify this, it becomes easier for companies to cross national borders and to forge ties of mutual cooperation and division of labour in the world economy.

Global flows: The FDI, which recorded high levels in 2000, declined considerably during the year 2001, as a consequence of recession witnessed in large economies, which combined with the 11th September event, further aggravated the global investment climate.

World inflows of FDI amounted to $735 billion, of which $ 503 billion went to developed economies, $205 billion to developing economies and the remaining $27 billion to the transition economies of CEE.

The shares of developing countries and those of CEE in global FDI inflows reached 28 per cent and 4 per cent respectively in 2001, compared to an average of 18 per cent and 2 per cent in the preceding two years.

The 49 LDCs remain marginal recipients, with only 2 per cent of all FDI to developing countries or 0.5 per cent of the global total.

However, in the preceding year i.e. in 2000, FDI grew by 18 per cent, which is even faster than the world production and trade reaching a record level of $1.3 trillion.

It is interesting to note that the driving force to the global expansion of investment flows are multinational / transnational corporations (TNCs) which are around 60,000 with over 800,000 affiliates abroad.

The FDI inflow to developed countries increased by 21 per cent and amounted to a little over $ 1 trillion. FDI inflow to developing countries also went up, reaching $240 billion.

However, their share in world FDI flows declined for the second year in a row to 19 per cent, compared to the peak of 41 per cent in 1994. The share of developing economies in Asia and Pacific declined by 24 per cent.

As stated above, significant liberalization of its investment regime since 1991, has made India an attractive place for foreign direct and portfolio investment. However, it is still lagging behind China.

During the year 2002, FDI in India was estimated at about $4.5 billion, whereas in China, it was within the vicinity of $45 billion. Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration and processing, and mining.

Bangladesh continues to attract foreign investment. It has done successfully in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles and pharmaceuticals.

Traditional industry in Maldives consists of boat building and handicrafts, while modern industry is limited to five garment factories, a bottling plant, and a few enterprises in the capital producing pvc pipe, soap, furniture etc. According to the World Bank Report, Bhutan is classified among ‘low income economies’ with GNP of $399 million and GNP per capita US 510 in 1999. It falls among the world’s poorest countries.

All these countries, barring of course India, predominantly depend on import of capital goods and machinery and do not have strong technological and engineering base and have not made much headway in telecommunication sector either.

Pakistan: Pakistan attaches greatest importance to the inflow of foreign direct investment and has a very attractive package to offer, but due to political instability in the region and poor perception of Pakistan abroad, it could not induce sizable investment, in spite of being a land of opportunities. Earlier, the saturation of investment in power sector, the East Asian financial crises of 1997, economic sanctions and freezing of foreign currency accounts of May 1998, the IPP and the HUBCO issues acted as the major deterrent. During the last three years, government has succeeded in removing some of the constraints. The foreign direct investment was targeted at $ 600 million in the preceding fiscal year. However, due to the event of September 11 and its aftermath, the net foreign investment stood at over $ 350 million.

Such investment in recent years has gone more to power / electricity. It was primarily because of the fact that the terms and conditions were found most favourable for the investors. In 1998-99, the FDI in power was estimated to $131.4 million, which has now considerably reduced to about $33.6 million. During the last fiscal year, the largest foreign investment of $268.28 million was in the oil and gas exploration. The engineering sector did not attract worthwhile investment. The FDI in the communication sector during the preceding year was $12.7 million, out of which $6.1 million was in the telecommunication sector.

The total FDI during the year July-June 2000 was $484.7 million and in 2000-01 it was $322.4 million.

An invigorated and integrated engineering industry is indeed an essential pre-requisite for every country to build a strong economic base. Unfortunately, barring India, no country in the region has been able to make headway in the engineering sector.

Pakistan’s domestic engineering industry has an import substitution component to the extent of about 25 per cent and for the remaining 75 per cent, dependence on imports continues to persist.

It could be evidenced from the fact that while the country’s exports of engineering goods is $270 million annually, its imports are about $2 billion.

The government has now announced “Engineering Vision” which would require an investment of $10 to $ 12 billion, within 10 years. It is hoped that the new strategy would enhance exports of engineering goods by $5 billion and create 2 million job opportunities within next 10 years.

In fact, the engineering sector was ignored in the past.Resultantly, its growth was very low as compared to other Asian countries. South Korea’s first Five-Year Economic Development Plan, 1962-1966, which was a model of Pakistan’s five-year plan, successfully developed its industrial structure.

Since December ‘99, South Korea has emerged to be the 6th largest steel producer in the world and by ‘96, it was ranked the fifth largest automobile manufacturer in the world with a production of 2.81 million vehicles annually.

Pakistan has, however, a relatively better record in the automobile sector. The government has placed the promotion of telecommunication and IT amongst the top most priorities, in view of paramount importance of this sector for the country of the Third World.

Special incentives have been given to the private sector and immense efforts made for infrastructure enhancement. Unofficial estimates indicate that the sector has a potential of absorbing investment of up to $15 billion over the next five years.

The improved foreign exchange reserve does provide a positive signal to the investors, as it will ensure repatriation of their profit and dividends. A democratic set-up has been installed. it is, however, apprehended that the continuity of the policies, initiated so far, would be in jeopardy in view of the commitment of religious parties for the enforcement of Islamic economic order and interest-free banking.

A multinational corporation would like to invest not only to meet the domestic requirement, but also to export from the host countries. Pakistan has not established itself as a promising exporting country.

On the external front, Pakistan is still struggling to improve its image and perception. The Commonwealth has not yet restored its membership and the aftermath of the US-Afghan war, India-Pak stand-off and US-Iraq war are the factors which vitiate the investment climate. The political stability, combined with consistency and predictability in economic policies and forward-looking posture of the economy could ensure the inflow of FDI in a big way.