Pak B2B Trade - Articles : Page 2

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Foreign Direct Investment

(A catalyst for economic development)

Foreign Direct Investment (FDI) plays an instrumental role in the development of any country. Pakistan, with its liberal FDI regulatory regime, is an attractive destinationand needs to direct investments towards high priority sectors.

Foreign Direct Investment (FDI) brings about transfer of technology and experience, generates employment and revenue, provides high quality products to consumers, strengthens linkages, broadens the industrial base and increases exports. In recent years Pakistan has liberalized its trade and investment regime in order to enhance foreign inflows. It has relaxed governmental controls and offers a number of financial and trade incentives like tax concessions and tariff reductions. Through privatization and deregulation, Pakistan has opened its economy. There are laws to protect FDI, such as freedom to bring, hold and take away foreign currency from Pakistan in any form, fiscal incentives provided by the government, full protection for privatized enterprises level playing field for foreign and local investors and so on.
The investment policy makes all economic sectors including the service sector open to FDI. Foreign equity up to 100 % is allowed. No Government sanction is required for setting up an industry, except in the case of sectors related to national security.
Under the deregulation policy, government controls on business activity are being relaxed. To avoid double taxation on income earned by foreign investors, Pakistan has concluded agreements with 51 countries, which includes most of the developed economies. The country’s escalating growth rate has been one major factor in attracting investment by a large number of investors and leading companies of the world.
Currently, over 250 foreign companies are operating in Pakistan. They are interested in many sectors including pharmaceuticals and chemicals, telecommunications, oil & gas exploration and marketing, power generation, food and beverages, automotive assembly, insurance and banking etc.
Communications along with financial businesses have been the major attraction for foreign investors in Pakistan followed by the energy sector (oil & gas, petroleum refining and power), trade, cement, personal services and important equipment (automobiles).
The telecom sector has emerged as the largest recipient of FDI. Telecom companies have invested over US$ 2,000 million dollars in 2007.
It is expected that this trend of investment may continue in the next few years because huge potential still exists in the Pakistani market and all companies intend to capture a greater share by expanding their infrastructure across the country.
Total FDI inflows into Pakistan from 1995-96 to 2005-06 amount to US$ 10.93 billion, which comes to US$ 994 million a year. The FDI level has improved during the last four financial years primarily because of consistent economic policies of the government. In 2005-06, FDI crossed the US$ 3 billion mark for the first time as the total FDI was registered at US$ 3.52 billion. However in FY 2007-08, sectors with the potential to give a substantial boost to the national economy had a week inflow. In this year , total FDI to Pakistan increased by only 0.3 percent to US$ 5.15 billion. In the corresponding period of FY2006-07, it was US$ 5.14 billion.
The only sectors that showed higher growth in FDI as compared to the previous year, were IT, software and hardware development.
57% of FDI comes from three countries, which includes the United States, United Arab Emirates and the United Kingdom. The level of investment is still far below the desired level. Good governess, investors’ friendly policies of the state country’s positive image abroad, proper infrastructure, and less cost of doing business are pre-requisites for attracting FDI. The country must adopt measures to improve its image abroad. It must also works towards bringing copyright legislation in line with international intellectual property laws. So far Pakistan has not been able to curb piracy. This increases the cost of doing business in Pakistan.
Moreover, there is a need to bring changes in the composition of FDI from the service sector to manufacturing and goods sectors. Pakistan should try and attract more investment in sectors like agriculture that provide employment to a large number of Pakistanis. The major, traditional contributors to FDI (communication, financial services, energy and trade) have so far not contributed much to employment generation.
Pakistan should formulate policies to attract FDI in small-scale industries, which have the potential to grow and enhance exports of the country. In the social sector, education and health need to be given top priority. Improvement in education will stimulate human resource development.
A major of FDI should be dedicated to broadening our industrial base and bringing in modern technology. It is predicted that Pakistan’s future economic development largely depends on its progress in attracting more FDI. Foreign investment will also play a crucial role in further providing macroeconomic stability.

By Noman Haider

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