KARACHI, May 11: Whenever terrorists strike to take a toll of innocent human lives, the response from the business and the government is that foreign investment would be hit.
This week, the victims have been the French, whose independent policies have often tended to support the third world.
The question arises: How will persisting security concerns impact and shape the future investment trends?
Currently, the foreign investment is at low levels but is being primarily employed in raising productivity and efficiency by strengthening the existing businesses. This trend is likely to continue despite terrorist attacks.
Even, in more difficult times for the economy, multinationals with long-term commitments, specially in the field of manufacturing, have continued to make investments. Multi-layers of economic sanctions by the west, violence, military coup and political instability, may have prevented large scale investment in new businesses but have not deterred companies in strengthening their existing business.
ICI has made investments to put its production facilities on global economies of scale. Similarly, Pakistan Tobacco has strengthened its business. Expanding or modernization of existing capacity is cheaper than setting up new plants.
Over the years, the fertilizer industry has ploughed its savings into investment for de-bottlenecking their plants. Zafar A. Khan, president Engro Chemicals, like three other players in the fertilizer industry, complain that the new fertilizer policy announced in August is inadequate for investment in new plants. The fertilizer is a capital-intensive industry. For past several years, no new plant has been set up. The industry has grown on expanding its capacities.
Engro is working on a proposal that would increase the Daharki plant’s capacity to 93,000 tons per annum and improve its energy efficiency.
Like textiles, the fertilizer industry has the domestic advantage because of local availability of gas, says Zafar A. Khan.
Oil distribution companies like Shell and Caltex have been making investments. Oil and gas sector is contributing the lion’s share of foreign investment.
Textile industry is being modernized to face global competition. Despite the global recession, regional tension and US war against Taliban and their adverse impact on exports and a stronger rupee since September 11, textile exports have improved marginally in dollar value. If unit prices had not fallen, the earnings would have been much higher.
The perception that Pakistan, China and India would emerge as the three major textile manufacturing centres of the world because of the domestic advantage, opens up opportunities and risks. Policy makers say that the domestic industry could offer equity to US and European textile manufacturers. It is common interest that governs investment proposals and trade relationship. Through joint ventures, local firms can acquire modern technology and expertise and have greater access to these markets.
According to State Bank figures for 1999, the companies incorporated in Pakistan in which foreigners hold interest is 463 against 103 firms/companies incorporated outside Pakistan which operate through their network of branches.
There is clear evidence that foreigners have preferred to invest in a broad range of manufacturing and service industry by acquiring a token, a minority or majority stakes in locally incorporated companies. From these figures, one can see that the preference is for joint ventures or acquisition of stakes in local companies. Leading Japanese companies have a number of joint ventures with big local firms. Scores of textile mills have foreign equity stakes.
In the current environment, the best course for foreigners is to invest through joint ventures. It is not the plants and the machinery that are under threat but the personnel of state whose nationals are target of terror attack. Foreign firms can acquire stakes in firms with good track record and share their profits.
Security concerns deter new businesses but old establishments often continue to grow in not too a congenial environment. The pace of growth is, however, sluggish.
Over the past few years, foreign firms operating in Pakistan have been winding up their business for two reasons: global restructuring of parent companies and inability to manage attractive returns on their investments. Other foreign companies have entered the domestic market. But these investments have not been significant.
Capital has acquired global mobility and Pakistan is no exception. In 1999, foreign interests were liquidated in 111 local companies against 43 new entrants.
It is primarily the nationals of those countries, which have political global reach and ambitions, which are target of terrorist attack. These include American and some European states from where, traditionally, Pakistan has received a major share of investment. Besides, US and Europe are Pakistan’s major trading partners. Trade surplus flow from the commercial with these states.
The commercial relations with the west needs to be strengthened. What the policy makers should not miss is that the regional trade is overtaking the global trade and investments would follow trade. Foreign trade and investment should come from diversified sources.
In fact 9/11 has changed the world. The United States economy, that was labelled as the engine of world economic growth, is bracing for another possible bout of recession as protectionism is taking precedence over globalization. In 5-10 years, China and other East Asian nations plan to forge the world’s largest trading bloc.
Corporate giants with global reach are creating oligopolies, if not monopolies, through mergers, acquisitions and alliances to dominate markets because they are finding their profits shrinking in global competition. They are seeking consolidation rather than expansion. Bulk of foreign investments are shared by rich nations in Europe and USA.
To hit global recession, these giant corporates must recover, consolidate before they can look at markets of the size of Pakistan.
In the fast changing world, the focus of the policy makers should shift to where the opportunities begin to emerge.
TO SUM UP: Investment can be encouraged for strengthening existing businesses, by promoting joint ventures and by diversifying sources of foreign investment to include states that are not target of terrorists and by focussing on regional trade and investment.