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Foreign Direct Investment Prospects for Pakistan. Khalil Hamdani Visiting Professor Pakistan Institute of Development Economics 7 April 2009. FDI flows to Pakistan. 1959 first Bilateral Investment Treaty in world (Germany). Privatization. Fully open investment regime.

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foreign direct investment prospects for pakistan

Foreign Direct Investment Prospects for Pakistan

Khalil Hamdani

Visiting Professor

Pakistan Institute of Development Economics

7 April 2009

fdi flows to pakistan
FDI flows to Pakistan

1959 first Bilateral Investment Treaty in world (Germany)

Privatization

Fully open investment regime

Import liberalization

Foreign exchange guarantees

Board of Investment

Export Processing Zones Authority

Foreign Investment Act

pakistan s economic growth cycle
Pakistan’s economic growth cycle

Source: State Bank of Pakistan Annual Report 2007-2008.

world fdi inflow
World FDI inflow

Billions $

Source: UNCTAD, World Investment Report .

pakistan in top 10 fdi destinations in asia
Pakistan in top 10 FDI destinations in Asia

FDI inflows, Billions $

Source: UNCTAD, World Investment Report 2008.

fdi inflow and gdp
FDI inflow and GDP

%

Millions $

Source: State Bank of Pakistan. See Table 2 in M.R. Khan, “Foreign Direct Investment and Economic Growth:

The Role of Domestic Financial Sector”, PIDE Working Papers 2007:18.

fdi inflow and capital formation
FDI inflow and capital formation

Note: percent age of gross fixed capital formation.

Source: UNCTAD, World Investment Report 2008.

fdi stock and gdp
FDI stock and GDP

Millions $

%

Note: FDI stock as percent age of gross domestic output.

Source: UNCTAD, World Investment Report 2008.

foreign presence
Foreign presence

Number of foreign affiliates

fdi inflow by type
FDI inflow by type

Millions $

Source: Board of Investment.

fdi inflow by industry
FDI inflow by industry

Source: State Bank of Pakistan Annual Report 2007-2008.

fdi and technology
FDI and technology

Note: 2005 data.

Source: UNIDO, Industrial Development Report 2009.

technology
Technology

30% is Medium &

High-tech

70% of MVA

is low tech

production

Note: 2005 data.

Source: UNIDO, Industrial Development Report 2009.

a smaller manufacturing base with much less technology content
A smaller manufacturing base with much less technology content

17%

30%

22%

GDP

GDP

Note: 2005 data.

Source: UNIDO, Industrial Development Report 2009.

fdi inflow by country
FDI inflow by country

Note: three-year moving average.

Source: State Bank of Pakistan Annual Report 2007-2008.

world fdi inflows are falling
World FDI inflows are falling

Billions $

Source: UNCTAD, World Investment Report .

fdi prospects
FDI prospects

trend

Note: Data for fiscal year (July-June). FY2010 is provisional.

fdi strategy
FDI strategy
  • Address investor confidence
  • Target Asian investors
  • Target existing investors
  • Sustain public investment
1 investor confidence
1. Investor confidence

Policy framework attractive to FDI

Cost of doing business high but competitive in the region

Domestic private sector uncertain

  • More than 3/4th of the respondents (out of 110 firms) are willing to invest in next two years. However, investor concerns: law & order, political uncertainty, energy deficiency, high cost of operations and infrastructure bottlenecks.” Overseas Investors’ Chamber of Commerce & Industry (OICCI). Business Perception Survey 2008.
business regulation best in region
Business regulation: best in region

Source: World Bank/IFC, Doing Business 2009: Country Profile for Pakistan.

2 target asian investors
2. Target Asian investors

FY 2008

FY 2009

Note: First eight months of fiscal year.

Source: State Bank of Pakistan, The State of Pakistan's Economy - First Quarterly Report 2008-2009.

target asian investors
Industry

Electrical/electronic equip./ computers: 17

Diversified: 13

Petroleum: 10

Food & beverages: 8

Transportation & storage: 7

Telecommunications: 6

Target Asian investors

Region

  • Of the 7 top TNCs from South:
    • 6 Asian; 1 Mexican
  • Of the top 100:
    • 78 Asian; 11 African; 11 Latin American
  • Of Fortune Global 500:
    • 55 Asian; 10 Latin American

Source: UNCTAD.

target asian investors1
Target Asian investors
  • Resource sector resilient to global trend
    • Oil & Gas exploration, coal, alternative energy
  • Market-seeking investment resilient to global trend
    • Manufacturing, services
  • Industrial zones compensate for high operating costs
    • China
  • Privatization (but avoid fire sales)
  • Export-oriented FDI in medium-term
    • Regional market
    • Attract technology transfer
      • PIDE research shows that firms in manufacturing have improved efficiency but have been slow to adopt new technologies.
      • Need to link up with global value chains.
global value chain textiles and garments
Global Value Chain: textiles and garments

Synthetic

Fibers

Finishing

Garment production

Raw

Cotton

Textile

Yarn

FDI Joint Venture potential

now<2%

Need to upgrade technology

16.0%

54.5%

11.3%

11.3%

6.9%

Value Added

Need to upgrade skills

Source: Gherzi

3 target existing investors
3. Target existing investors
  • Encourage reinvestment (horizontal, vertical)
  • Encourage corporate social responsibility (training, linkages)
  • Support services for domestic enterprises
    • SME finance. 75% SMEs in Gujranwala have never applied for bank loans.
  • Tackle bottlenecks (power outages)
    • 62% of Gujranwala manufacturing units do not have own power generation and shut operations during power outages. Production time losses average 33 hours per week. State Bank of Pakistan, SMEs’ Survey of Gujranwala District, 2008.
reinvest more repatriate less
Reinvest more, repatriate less

Percentage of gross foreign investment inflows

Note: Repatriation includes divestment.

Source: State Bank of Pakistan, Foreign Liabilities and Assets and Foreign Direct investment in Pakistan.

corporate social responsibility

BACKWARD

FORWARD

SUPPLIERS

CONSUMERS

Corporate social responsibility

TNC

A

A

A

SUPPLY CHAIN MANAGEMENT

PRODUCT STEWARDSHIP

Improved productivity

Higher incomes for suppliers Reduced costs for company

Better products for consumers

Enlarged market share for company

Creates Shared Value for Company and Society across supply chain

Example: Nestlé working with dairy farmers to raise milk production

sustain public investment
Sustain public investment
  • Priorities: Education, Infrastructure, Health
  • Industrial policy should promote horizontal competitiveness and avoid:
    • Picking winners (leather, pharmaceuticals etc) is risky
    • Fiscal incentives can be costly.
summary
Summary
  • FDI is more than an external resource inflow
  • FDI can modernize industry and better integrate the economy into international production.
  • Market-seeking FDI is viable in current global recession.
  • Export-oriented FDI is a desirable medium-term objective.