Wednesday, 11 December 2013

Significance and Decline in Foreign Investment in Pakistan


1.     Provision of capital:
       Less developed countries are less developed mainly due to the reason that they face shortage of capital. Same is the case with Pakistan.It is unable to start valuable projects for stimulating economy’s activities. MNC’s bring capital into the country so that it could be used for utilizing country resources efficiently and help in the growth of the economy.
2.     Filling up of saving investment gap
      Foreign direct investment fills the difference between the target  investment and locally mobilized savings. Consequently the country achieves the growth and development targets.

 Stimulating domestic investment:
       Foreign direct investment fills saving investment gap. As this gap fills up increased savings will result into increase domestic investment as well.
4.     Capital formation
      Capital formation refers to increase in capital assets or stocks in economy. When investment increases capital formation occurs which is very important for the rapid growth of economy.
5.     Technology transfer:
       When MNC’s bring capital into the host country they utilize it efficiently by using advanced technology .so transfer of technology, its usage and adaptation becomes easier not only for the particular company but also for domestic investors.
6.     Increase in employment:
      With the foreign workforce MNC’s also provide employment opportunity to  the local people of the host country so that their income and living standard may increase.
7.     Managerial skills and entrepreneurial ability:
    When MNC’s start operating in another country(less developed)  they operate their activities in their own way. So the local employees would have opportunity to learn from their  unique and effective managerial and marketing skills and get benefit from their entrepreneurial abilities.
8.     Learning of local enterprises:         
      It encourages the local enterprises to invest more in development projects. The local entrepreneurs can adopt modern methods of production of goods from the foreign investors.
9.     Access to markets:
      Developed countries have greater and easy access to the international market. So with their help developing countries also get access to these markets and start participating in international trade activities.
10.                        Facilitates the utilization and exploitation of local raw materials:
Due  to shortage of capital, developing countries are not able to fully or efficiently utilize their idle resources but due to the incoming capital and better technology with efficient entrepreneurial skills such countries idle resources would come into use.

11.                        Increase in GDP:
      As GDP is the total final goods and services produced in a year within the geographicalboundaries of the country and it has nothing to do with nationality of its producers so GDP increases with foreign investment.
12.                        Boost in exports:
      Due to foreign direct investment production in the host country increases due to which it becomes able to export the excess production and earn foreign exchange.
13.                        Fills foreign exchange gap:
The FDI brings foreign exchange in the country and fills gap between required foreign exchange and those earned from exports.
14.                        Increases govt. revenue:
      Taxes are the primary source of any country’s revenue. By foreign direct investment revenues of government increases because the government levies tax on projects operated with the private foreign investment.
15.                        Industrialization and development:
With the incoming capital, advanced technology, more investment, capital formation and increased government revenues boost the industrialization process in the economy which leads to the production of quality goods and services.
     16.Stimulates investment in R&D:
      Research and development is important for any country’s development and for raising its nation’s living standard. Foreign direct investment is also utilized in research and development processes which also motivates local investors to participate in this area.

Negative effects:
Although FDI has its own importance for Pakistan’s economy but it has certain negativity for the economy as well.
1.     Suppresses local entrepreneurship
         As mostly foreign investors use superior knowledge and techniques of production so they produce better quality of goods and drive out local competitors.
2.     Concentration to only urban areas
         The foreign investors they usually prefer to invest in urban areas. Consequently the development projects concentrate in urban areas. It increases the imbalance between the rural and urban areas that leads to rural urban migration and increase civic problems in the urban areas.
3.     Influence on govt. policies
         The foreign investors influence the government policies using different tactics in their own favor which may exploit the interests of local investors.
4.     Worse BOP
          If the imported/incoming capital is more expensive and earnings through exports is less, BOP of the country may get worsen.
5.     Inappropriate products:
         As the private foreign investors come through multinational companies, the MNC’s stimulate inappropriate consumption patterns through advertising. They sometimes may also use capital intensive techniques in production of goods and services that may lead to unemployment.
6.     Pollution creation:
          Due to greater foreign direct investment as the process of industrialization boosts up, with finished goods by-products will also produce which will pollute the environment.

Significant deregulation and various incentives/concessions are given
to foreign investors, but Pakistan still faces serious problems as far as implementation of foreign investment policies are concerned. Due to weak policies and inappropriate implementation.
Reasons for decline in FDI:
1.     Global economic recession:
It has caused many developed countries to cut their capital expenditure and reduce FDI. Crisis originated in developed countries are indirectly affecting the FDI flow in our country. FDI flow into our country is less than 1% of its made globally.
2.     Political instability:
Political stability is essential to attract foreign direct investment because it creates confidence for private foreign investors. Unfortunately the political condition in Pakistan is not satisfactory. Frequent changes in government bring changes in policies which make difficult for foreigners to adopt abruptly.

3.     Weak law and order:
Unsatisfactory law and order situation is making investment in Pakistan unattractive for foreigners.  When their capital and the personnel is not safe they won’t consider investing in our country. Our major industrial and commercial center, Karachi is facing chaos. Law and order situation in Punjab and other provinces is also not satisfactory.Terrorists attacks have made the situation even more worsen.

4.     Power, gas and water shortage:
Industries run through power, use of gas is a must and here in Pakistan these resources are not provided in adequate quantity. This is due to inefficiency of the local government. Dams in our country are also not enough to supply the adequate quantity of water to the economy which creates  problem in industries set up and their working.

5.     Inadequate infrastructure:
Pakistan compares unfavorably in infrastructure facilities with other developing countries that have attracted higher levels of foreign investment.Pakistan has only 18% of paved roads in good condition as against 50% in Thailand, 31%in Philippines, and 30% in Indonesia. Pakistan has extensive network of railway but it is also poorly managed. Telecommunication is another bottleneck. There are only 10 telephones per 1,000 persons in Pakistan compared with 31 and 112 in Thailand and Malaysia, respectively.

6.     Untrained labour force:
Pakistan is suffering from the shortage of technically trained and educated labour. Pakistan is at a more serious disadvantaged position in terms of education and health compared with other countries that have attracted FDI at much higher levels. As the labour conditions are not fit so FDI is decreasing in our country.

1.     Limits on profit repatriation
2.     Local partners:
        The host country may insist that the foreign investors take local investors as their partners so as to increase local influence over production and distribution patterns of the foreigners.
3.     Export requirements:
        It may also be binding for the MNC’s that only certain portion of their output is to be exported, major should be supplied in local markets.
4.     Increasing government efficiency:
·        Government should try its best to strengthen law and order situation in the country. It should make strong appropriate policies to attract foreign investors.
·        It should lessen its personal expenditures and pay special attention to infrastructure building.
·        Literacy rate needs to be raised up; more technical institutions should be established to polish the technical skills of the workers.