Project: 2
MBA 4th
TOPIC: Foreign Direct Investment (FDI) in Pakistan
1. INTRODUCTION
Foreign Direct Investment (FDI) in Pakistan is one of the major external sources of funding to meet obligations of resources gap and goal achievement. FDI has played a vital role in the economic growth of Pakistan. FDI contributed significantly in the human resources development, capital formation, and organizational and managerial skills of the people in the country. Total foreign investment was $ 6.0 billion, of which FDI amounted to $ 4.16 billion in the year 2007. The present research study empirically analyzed the impact of FDI on Pakistani imports and exports through time series data. The study applied the Unit Roots test to check the stationarity of the data series used in the analysis. Cointegration technique was used to analyze the long run relationship among the variables. Error Correction Model was used for further analysis.
The results of the import model showed that FDI positively impacted real demand for imports in the short run and in the long run. In case of one percent increase in FDI; real demand for import would increase by 0.08 percent in the short-run and 0.52 in the long run. The results of export model showed that FDI has negative relation with real exports in the short-run and positive relation in the long run. The export model estimations indicated that with one percent increase in FDI, real export decreased by –0.08 percent in the short-run and increased by 1.62 percent in the long run.
Policies of host countries have an important influence on foreign investment decisions. Host countries can adopt policies of stimulating foreign investment or they can restrict foreign participation in their economies in various ways. Host country policies and policy pronouncements affect the perception of “political risk” by transnational corporations (TNCs)and thereby the amount of investment of these companies.
1.1 Purpose of the Study is to identify the role of forigen direct investment in the economic of Pakistan.
To study the determinants of foreign direct investment to Pakistan and its role on growth of Pakistan.
To analyze the role of international trade in economic growth and what are the distinct effect of import and export on economic growth.
What are the factors which determine international trade of Pakistan and what are the rules of economic growth and foreign direct investment in this respect.
To identify the new sector in which invested foreign direct investment
Avoiding foreign government pressure for local production.
Circumventing trade barriers, hidden and otherwise.
Making the move from domestic export sales to a locally-based national sales office.
Capability to increase total production capacity.
Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc;
A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, “think globally, act locally”, this often used cliché does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SME’s, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SME’s in particular are now focusing on access to markets, access to expertise and most of all access to technology.
1.2 Content of this Study is that Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, In the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privitazation of many industries, has probably been been the most significant catalyst for FDI’s expanded role.
The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global FDI.. Driven by mergers and acquisitions and internationalization of production in a range of industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998 (Source: UNCTAD)
Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition. The truth lies somewhere in the middle.
For small and medium sized companies, FDI represents an opportunity to become more actively involved in international business activities. In the past 15 years, the classic definition of FDI as noted above has changed considerably. This notion of a change in the classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of direct foreign investment is still made in the form of fixtures, machinery, equipment and buildings. Moreover, larger multinational corporations and conglomerates still make the overwhelming percentage of FDI. But, with the advent of the Internet, the increasing role of technology, loosening of direct investment restrictions in many markets and decreasing communication costs means that newer, non-traditional forms of investment will play an important role in the future. Many governments, especially in industrialized and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact. In the United States, the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is responsible for collecting economic data about the economy including information about foreign direct investment flows. Monitoring this data is very helpful in trying to determine the impact of such investments on the overall economy, but is especially helpful in evaluating industry segments. State and local governments watch closely because they want to track their foreign investment attraction programs for successful outcomes
1.3 Problem Statement:
1.3.1. Main problem:
There are many problem faced by foreign direct investment but economic instability is main problem
1.3.2. Sub problem 1
Inflow is less then our outflow.
Political instability.
1.3.3. Sub problem 2
Poor physical and institutional infrastructure unsatisfactory low and order situation.
1.4 Significant of the Study:
FOREIGN direct investment (FDI) in Pakistan is one of the major external sources of funding to meet obligations of resource gap and goal achievement. The FDI has played a vital role in the economic growth of Pakistan. It contributed significantly to the human resource development, capital formation and organisational and managerial skills of the people of the country. The share of foreign direct investment, flowing into Pakistan, is negligible when compared to the opportunities and economic fundamentals of the country. The inflow into the country is less than one per cent of the total FDI, made globally. The highest Pakistan received was the amount of a little over one billion US dollars in 1995-96.
No doubt, terrorism affects everybody, right from the beggar on the road to the largest or most powerful but this is not the only reason for declining foreign investment in Pakistan. Although the growth of global terrorism is indeed on the minds of some corporate decision makers when contemplating whether or not to invest abroad, it has not, apparently, prevented many of them from deciding to invest in the developing countries.
Therefore, if the country wants to achieve a respectable position among the nations it has to put the economy in order. It has to offer a conductive environment for foreign investors comparable with other countries soliciting the same. No one can deny the fact that the country needs foreign investment.
1.5 Delimitation of the Study:
I have to face many problems and hurdles in conducting my study. B ut after all I learn so much new things. Following are the some major problems that I have to face;
First of all I faced so much problemof loadshedding.
Some time I have to face the problem in internet connection.
The time for conducting this study was very short.
Some time there was no prove was vailable for the truthness of the data
1.6 Definition of the Terms
Investment: In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money.
short-term investment
Funds placed in securities that are expected to be held for one year or less. Examples include marketable securities, commodities, money market instruments, and options. The return on short-term investments may come in the form of financial income (i.e., dividend income, interest income) and/or capital appreciation.
Long term investment
Long term would mean holding a stock position over the weekend. For others, it may mean holding a security for at least 1 year for the purpose of declaring a long-term capital gain, thus saving on taxes.
Investor:
An investor is a person or entity that purchases assets with the objective of receiving a financial return. The assets an investor may buy range widely, but include stocks, bonds, real estate, commodities, and collectibles (e.g. art).
1.7 Assumptions
Folowing are the some factors that have influene the forigen direct investment in pakistan.
. Political instability.
. Unsatisfactory low and order situation
. Poor physical and institutional infrastructure
.Economic instability.
.Energy crises
2-LITERATURE REVIEW:
2.1 Introduction:
After reading all the related data I think that foreign direct investment is an essential element of growth of Pakistan economy. FOREIGN direct investment (FDI) in Pakistan is one of the major external sources of funding to meet obligations of resource gap and goal achievement. The FDI has played a vital role in the economic growth of Pakistan. It contributed significantly to the human resource development, capital formation and organizational and managerial skills of the people of the country.
2.2 Background Discussion
Recent years have seen a sharp change in the attitude of developing countries regarding Foreign Direct Investment (FDI).. The growing balance-of-payments difficulties as well as the decline in confessional aid live forced many developing countries to reassess their stances on FDI and to take substantial unilateral steps to liberalise their inward FDI regimes. In spite of liberalising the inward FDI regime, tempering or removal of obstacles to foreign investors, and according liberal incentives, Pakistan's has been a lacklustre performance in attracting FDI. This paper attempts to find out the reasons why Pakistan has not been able to attract sufficiently large FDI despite liberalisation measures. The analysis identifies a number of factors responsible for low FDI in Pakistan. These include the lack of political stability particularly during the last eight years, and unsatisfactory law and order situation particularly in the, city of Karachi, the largest industrial and commercial centre and the only port of the country. The macroeconomic imbalances and the slowing down of economic activity together with inconsistent economic policies have also discouraged foreign investors to increase their participation in Pakistan.(Ashfaque H Khan 1999)
There is empirical evidence to suggest that (direct) foreign investment is sine qua non for rapid economic progress. It is different from other capital inflows in that finance (foreign exchange) is not the only item involved. It is associated with the transfer of physical capital, technology and managerial skill. These unique characteristics allow direct foreign investment (DFI) to be a catalyst to the creation of new industries in the host country, as well as improvements in overall productivity and export growth. As a result, DFI's impact on growth and structural change can be significant. This catalyst function is the most important contribution DFI can make to a host country. There are two categories. of foreign investment -- direct and portfolio -- the former being more significant for a recipient country because of the new technology and its concomitant linkages. Foreign capital flows to destinations where it is safe, obtains higher return and finds congenial symbiotic environment.
There is empirical evidence to suggest that (direct) foreign investment is sine qua non for rapid economic progress. It is different from other capital inflows in that finance (foreign exchange) is not the only item involved. It is associated with the transfer of physical capital, technology and managerial skill. These unique characteristics allow direct foreign investment (DFI) to be a catalyst to the creation of new industries in the host country, as well as improvements in overall productivity and export growth. As a result, DFI's impact on growth and structural change can be significant. This catalyst function is the most important contribution DFI can make to a host country. There are two categories. of foreign investment -- direct and portfolio -- the former being more significant for a recipient country because of the new technology and its concomitant linkages
(Asad S Hasan 2002)
Pakistan has like other developing countries sought the way out of economic malaise through industrialization. Barring the first few years of the process and the eighties, the industrialization efforts has been very regressively implemented. Investment allocative decisions taken by strongly entrenched bureaucracy have shown distinct disadvantages. The illusion that an industrial society is a desirable one is predominant in the less developed countries (LDC's). Those with a high population need a sector which can absorb large employment. Policy makers take it upon themselves to undertake measures to accelerate industrialization.
Governments of the day consider that they have a duty of care towards their countrymen and the nation. Although most of them have laudable objectives, the actual action seems to fall short. We have seen in this country the result of volatile policies which have retarded industrial progress and increased uncertainty. We have also seen policies that have been based on rhetoric and moral injunctions, clearly the advocacy of these policies have meant insurmountable hurdles in actual implementation. Some policies have been such that governments have been unable to see them through resulting in considerable loss of time, effort and financial loss.(Zaheer Zahid nov 1, 1992)
The Government of Pakistan assigns a vital role to private foreign investment in the development of its economy. The Government is actively pursuing a policy of encouraging foreign investment in setting up new industrial units. As a tangible evidence of recognition to the necessity of foreign investment and broad-scale participation in Pakistan's industrial progress the Government has granted concession, incentives and exemptions to foreign entrepreneurs which are competitive by all standards with those offered by most of the developing countries. The Government welcomes foreign investment and has consistently followed liberal policy towards it. The attitude of the Government towards foreign investment is quite flexible in matters like the ratio and quantum of foreign equity, irrespective of the size of the project, and is completely free in the choice of industry, repatriation of capital and profits, and employment of foreign nationals etc. and for all intents now the local and foreign investors are treated at par and thus can set up any industry anywhere in the country.(Mahmoob Ahmad . july 1997)
Like other developing countries, Pakistan inherited a pre-dominantly rural economy with little industrial activities on the eve of independence. As a result, recourse to inflow of foreign investment was inevitable. The industrial policies of 1948, 1959 and 1984 highlighted the role of foreign investment and the Government encouraged this inflow with various concessions and facilities. The objectives of industrial policies pursued from time to time were expansion in industrial production, export and employment, training of technical personnel and ultimately the improvement of standard of living of the people. Maximum emphasis was laid on private enterprises in the development of the economic resources of the country barring brief interregnum of the first half of 1970s.(Hussain syed Habeeb. Oct 1, 1990)
KARACHI, April 15 (Reuters) - Net foreign investment in Pakistan fell 35.9 percent to $2.08 billion in the first nine months of the 2008/09 fiscal year compared with $3.25 billion in the same period last year, the central bank said on Wednesday.
Foreign private investment fell 19.5 percent to $2.62 billion in the July to March period, compared with $3.26 billion the previous year, the State Bank of Pakistan said.
Out of total foreign investment, foreign direct investment was down 8 percent to $3.04 billion, compared with $3.31 billion in the year-earlier period.
There was an outflow of $957.5 million from July to March this year compared with an outflow of $53.1 million in the same period last year.
There have been outflows from the stock market because of political uncertainty, and economic and security worries.
Foreign investors also lost confidence and sold shares when stock market authorities placed a floor under the main index in August following sharp falls.(Sahar ahmad 2002)
Extracts from Foreign Business Collaborations in Pakistan. The experiences of Canada, Japan the U.K. and the U.S.
The report has based prospects for foreign investment mainly on the incentives provided by the government. But the constraints it has listed are based on field studies and experiences of those who have already made investment in Pakistan which need attention not only of the government agencies, but also of the local businessmen themselves who are to serve as catalysts for foreign investment.
Pakistani Businessmen(Lashkar M I. Nov 1,1992)
The number of companies incorporated in Pakistan in which foreigners held interest have increased from 27 to 448, with almost forty new entrants in the year 1989. The branches of foreign firms and companies have also increased to 142. The number of partnerships remain small at about half a dozen. The total foreign investment in Pakistan which stood at nearly rupees three billion in the early 70's increased to rupees eight billion in 1990. In the last decade it has increased from rupees eight billion to rupees forty billion. In US dollar terms the total foreign investments are about dollars two billion in 1990 compared to dollars six hundred million in 1971. Almost forty per cent of this investment is owned by firms or companies registered or incorporated outside Pakistan, and sixty per cent joint stock companies incorporated in Pakistan having foreign participants.(Zahid Zaheer Nov ,1992)
2.3 First Sub Problem Diiscussion Heading
After reading all the above articles I found many problems that are concern with the applicable of forigen direct investment in pakistan. The major and most common problem the continuously ignorance of the importance of forigen direct investment in pakistan.
2.3.1 Hypothesis:
Hypothesis is a testable statement, you will prove or reject to your study. After discussing all the theory of the role of forigen direct investment in pakistan I put my statement in the two following ways:
Null Hypothesis: Government polices may affect the trend of foreign direct investment.
Alternative Hypothesis: Government polices may affect the trend of foreign direct investment.
2.4 Conclusion:
The Government of Pakistan assigns a vital role to private foreign investment in the development of its economy. The Government is actively pursuing a policy of encouraging foreign investment in setting up new industrial units. As a tangible evidence of recognition to the necessity of foreign investment and broad-scale participation in Pakistan's industrial progress the Government has granted concession, incentives and exemptions to foreign entrepreneurs which are competitive by all standards with those offered by most of the developing countries. The Government welcomes foreign investment and has consistently followed liberal policy towards it. The attitude of the Government towards foreign investment is quite flexible in matters like the ratio and quantum of foreign equity, irrespective of the size of the project, and is completely free in the choice of industry, repatriation of capital and profits, and employment of foreign nationals etc. and for all intents now the local and foreign investors are treated at par and thus can set up any industry anywhere in the country
2.5 Objective of the Study:
I have conducted this study on the role of the forigen direct investment in pakistan . I have selected this topic due to many reasons. The purpose of this study is as following
To find out the solution of the problem that why the importance of the forigen direct investment in pakistan is continuously ignored.
No proper research was done on this issue.
This study will give the positive direction to the business man, government agencies and to general public.
I also want the causes for fact-way.
2.6 SWOT Analysis
SWOT Analysis is one of the most useful tools, which can be used in forigen direct investment in pakistan . SWOT Analysis is not hard to use, but it can produce really great results, which can be immediately presented and it helps to sort out the ideas of the group.
S.W.O.T. is a tool used to understand an organization's:
Strengths:
Due to increase in foreign direct investment productivity level should be
Increased.
Due to increase in foreign direct investment our economy should become
Stable.
Due to increase in foreign direct investment the worth of different companies
In the market should be increased.
Weaknesses:
Due to decrease in foreign direct investment economic crises in the country
Should be increased.
Due to decrease in foreign direct investment our economy should be.
Disturbed.
Due to decrease in foreign direct investment our inflow is less then our out
Flow and our country should stand on the stage of liquidation and our
Balance of payment should be decrease.
Opportunities:
If the weaknesses should be removed they will become our opportunities.
Threats:
Economy should be disturbed.
World wide slump should be in the country due to decrease in foreign
direct investment.
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