ISLAMABAD, Jan 14: The cost of capital has strong implication for investment firms and public institutions because of its vulnerability to the fiscal incentives and public actions on part of the government, says a report.

The report, “Measurement of cost of capital for foreign direct investment (FDI) in Pakistan: A Neo-classical approach”, was presented at 18th annual general meeting and conference of Pakistan Society of Development Economists (PSDE) held here on Tuesday. The report has been compiled by assistant professor, Government College of Commerce, Mansehra, Zahir Shah, and associate professor at IBA, Qazi Masood Ahmed.

The researchers said that per unit cost of capital was computed by using the Jorgenson’s model and reflected a strong considerations for its effectiveness as regards inward FDI flows. It is preferred over discount rate and long-term bond yields as it reflects the real price paid for one unit of invested capital.

According to the findings, first the emergence of globalization and a consistently growing environment for international competition in resource utilization needed required elements of acceptance. Changing perceptions, attitudes and competitive outlook do not change the restrictive and protectionist policy stance in favour of liberalized and outward looking policies.

Secondly, the resource gap, declining official inflows and technological advancement can only be achieved by reducing public burden and by the encouragement of private business activities.

Thirdly, empirically significant co-efficient of the cost of capital in most of the studies suggests an effective role of the government in promoting investment. There is further need of the effective and encouraging policies from the public sector to restore the confidence of the investors.

Lastly, strength of the market, reduced costs related risks and sustainable public contracts are the pre-requisites to consistently encourage FDI. The host country, particularly a developing economy, has concerns of spill-over on the domestic economy, a minimization of any socio-economic losses and maximization of other positive gains that are related to inward FDI.