THE foreign direct investment (FDI), a catalyst for the economic growth, has been a pressing need of the capital deficient economies of the developing world. It is a good cholesterol and is considered to be the mothers’ milk for the nascent and emerging economies.
One view is that foreign firms invest abroad in order to capitalize on some specific expertise or technology that domestic firms do not possess. The cost of capital explanation, however, suggests that the main enthusiasm for FDI is the movement of resources in search of maximum return.
FDI is thus seen as a means to extend capital control rather than as a means to shift resources from one country to other. Its flows into Pakistan seems to fit predominantly in corporate strategy by multinationals in order to consolidate a large foreign market.
FDI is thought to posses advantages over loans. First, equity financing requires payments only when investment earns a profit. While debt requires payment irrespective of return. Second, payment on FDI can be regulated by the host country while debt payments are out of its control. Third, much of the FDI consists of re-invested earnings, not all returns are repatriated, as opposed to loans.
What foreign investors want is to expand their operations in which they invest, seeking low taxes, high profits, if not immediately, at least in near future. But according to one study, tax holidays, fiscal concession, subsidies and import tariff protection are the wrong means to promote investment if the goal is to develop competitive and efficient industries.
A stable political and economic 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 for potential investors in making investment choices.
Global foreign direct investment (FDI) flows in 2004 are estimated to have risen by six per cent to $612 billion. As in 2003, however, flows to developed countries slumped, but that decline was offset by rising inflows into developing countries and central and eastern Europe . “This increase is good news for developing countries, which now account for an estimated 42 per cent of world FDI inflows, compared to 27 per cent during 2001-2003.
FDI inflows to Africa account for only three per cent of global FDI flows. Their inflow into Asia reached $166 billion, a 55 per cent increase over 2003. Improved economic performance, a more favourable policy environment and higher corporate profitability are key factors behind this performance. However, FDI flows to the various regions remain unevenly distributed, dominated by a few countries. China and Korea still account for the lion’s share of FDI attracted by Asia.
FDI flows to Latin America in 2004 rose for the first time in five years, up 37 per cent to$69 billion. Following the temporary decline to $27 billion in 2003, FDI inflows to Central and Eastern Europe (CEE) rebounded last year, reaching a record high of $36 billion. The trend is indicated in the Table.
The share of FDI flowing into Pakistan is negligible when compared with the opportunities and economic fundamentals of the country. The inflow into the country is less than one per cent of the total global FDI. The highest, Pakistan received for the first time was the amount of a little over $1 billion in 1995-96. In the past two years, FDI including privatization proceeds, have been around $1 billion, now targeted at $3.5 billion for current fiscal. Of the targeted amount, the bulk would be a major chunk of sale proceeds of PTCL (sold for $2.6 billion).
Given the size and dynamism of Pakistan economy, liberal FDI policy, the cheap labour force and its proximity to the markets of gulf and 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. Now the foreign investors can virtually invest in any sector except a very few.
The economic fundamentals have changed but lack of good governance, high cost of business, red tapism, cold war with India, political uncertainty, inadequate infrastructure, poor law and order situation, corruption, smuggling are the real impediments.
Traditional determinants of FDI are still relevant in attracting investment. The size and growth of domestic market, geographical proximity and access to key potential markets, including large regional markets, play a key role.
East European countries due to their geographical, ethnic and historical ties are in a better position to attract foreign investors and the countries of East Asia and Latin America are also strong candidates. India has also emerged since 1991 as a big contender for foreign investment. There is some concern that other South Asian countries including Pakistan and Africa will be left behind in this race unless corrective measures are taken and mindsets change.
Pakistan should bring economic stability through firm exchange rates, adequate foreign exchange reserves, price stability, favourable and fair return on investment.