1. Foreign Direct Investment Prospects for Pakistan
Khalil Hamdani
Visiting Professor
Pakistan Institute of Development Economics
7 April 2009

2. 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
Early investors were ICI, Glaxo, Phizer
Foreign Investment Act

3. Pakistan’s economic growth cycle
Close correlation between investment and GDP. Growth in investment leads growth in trend GDP. For most years the trend growth rate in GDP has been above 5 per cent. However, investment growth has been significantly less. The investment growth cycle was driven by private sector in the early years, then by the public sector investments in the 1970s, which slowed in the 1980s. Structural adjustment and policy liberalization in 1990s, brought a shift back to the private sector. Privatization in 1990s onwards, began to attract FDI.
Source: State Bank of Pakistan Annual Report

4. World FDI inflow
Billions $
Source: UNCTAD, World Investment Report .

5. Pakistan in top 10 FDI destinations in Asia
FDI inflows, Billions $
Source: UNCTAD, World Investment Report 2008.

6. 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.

7. FDI inflow and capital formation
Note: percent age of gross fixed capital formation.
Source: UNCTAD, World Investment Report 2008.

8. FDI stock and GDP Millions $ %
Note: FDI stock as percent age of gross domestic output.
Source: UNCTAD, World Investment Report 2008.

9. Foreign presence
Number of foreign affiliates

10. FDI inflow by type Millions $
In 2006, the privatization of PTL attracted FDI from UAE in an acquisition valued at $2.6 billion , the fourth largest South-South M&A in 2006.
Source: Board of Investment.

11. FDI inflow by industry
The composition of FDI has changed over time. In early years, dominant sectors were manufacturing (30%), mining (28%) and trade (24%), comprising on average 82 percent of FDI in Now, financial business services, telecommunications and oil & gas exploration account for 71 percent of FDI.
Source: State Bank of Pakistan Annual Report

12. FDI and technology
The overall manufacturing sector grew on average by 10.61% in real terms during The textile sectors are the lowest growing sectors in terms of nominal and real growth rate. Manufacturing industries experienced an overall positive TFP growth of 0.9% during The worst performer in terms of total factor productivity growth is the textile sector which includes spinning, composite and weaving. Total factor productivity of the textile sector decreased on average by -0.80%, -0.20% and -1.2% in the composite, spinning and weaving sectors respectively. It suggests that manufacturing sub sectors are lacking in terms of technological adoption.
Note: 2005 data.
Source: UNIDO, Industrial Development Report 2009.

13. Technology 30% is Medium & High-tech 70% of MVA is low tech production
Note: 2005 data.
Source: UNIDO, Industrial Development Report 2009.

14. A smaller manufacturing base with much less technology content
17%
30%
22%
GDP
GDP
Note: 2005 data.
Source: UNIDO, Industrial Development Report 2009.

15. FDI inflow by country
Traditional sources still dominate even with inflows from region.
Note: three-year moving average.
Source: State Bank of Pakistan Annual Report

16. World FDI inflows are falling
Billions $
Source: UNCTAD, World Investment Report .

17. FDI prospects
trend
Note: Data for fiscal year (July-June). FY2010 is provisional.

18. FDI strategy
Address investor confidence
Target Asian investors
Target existing investors
Sustain public investment

19. 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.

20. Business regulation: best in region
Sri Lanka ranks 102.
Source: World Bank/IFC, Doing Business 2009: Country Profile for Pakistan.

21. 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

22. 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
Industry
Electrical/electronic equip./ computers: 17
Diversified: 13
Petroleum: 10
Food & beverages: 8
Transportation & storage: 7
Telecommunications: 6
Source: UNCTAD.

23. 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.
Abdul Raheman, Talat Afza, Abdul Qayyum, and Mahmood Ahmed Bodla, “Estimating Total Factor Productivity and its Components: Evidence from Major Manufacturing Industries of Pakistan”, 2008.

24. 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

25. 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.

26. Reinvest more, repatriate less
Percentage of gross foreign investment inflows
Foreign firms earn profits which they can reinvest or repatriate.
Note: Repatriation includes divestment.
Source: State Bank of Pakistan, Foreign Liabilities and Assets and Foreign Direct investment in Pakistan.

27. Corporate social responsibility
TNC
BACKWARD
SUPPLIERS
FORWARD
CONSUMERS 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

28. 4. Sustain public investment
FY 2005
FY 2006
FY 2007
FY 2008
Development expenditure share of GDP
3.8
4.8
4.9
4.0
Education expenditure share of GDP
0.2
0.3

29. 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.

30. 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.