Foreign Direct Investment in Pakistan – An Academic Study

Executive Summary

This report is an attempt to analyze the determinants of Foreign Direct Investment in Pakistan and the role that it has played. The report gives an overview of the determinants of Foreign Direct Investment and what are the factors that affect the inflows in any economy. Comparison is also made with the South Asian Economies in particular, especially India and China.

The report discusses the various aspects of the Foreign Direct Investment in Pakistan’s economy. The investments done in different sectors are highlighted in detail so that the reader can appreciate the sector that attracts the most foreign inflows. The role of MNC’s and other companies that play in attracting the foreign investment in Pakistan’s economy is also subsequently analyzed.

This is followed by an analysis of the data of past 8 years to provide a comparison of the different trends that the Pakistani economy has to face during the past 8 years. The conclusion looks at the various existing facilities in Pakistan that exist for attracting foreign Investment and the role that the Government can play.

   

Foreign Direct Investment in Low Income Countries

Foreign direct investment is viewed as a major stimulus to economic growth in developing countries. Its ability to deal with two major obstacles, namely, shortages of financial resources and technology and skills, has made it the center of attention for policy-makers in low-income countries in particular. Only a few of these countries have been successful in attracting significant FDI flows, however.

Steady Growth of FDI Flows

From the early 1970s, net resource flows to developing countries have followed an uneven path, but have risen rapidly since 1986 to an unprecedented US$285 bn in 1996. The fluctuating nature of private capital flows has played a key role in this. Whereas official flows have continued broadly unchanged after a peak in 1989-91, private capital flows have experienced two waves of explosive growth, the first from 1975 to 1981, dominated by bank lending involving a high proportion of recycled petro-dollars, the second since 1990, dominated by foreign direct investment.

In the 1970s, FDI made up only 12% of all financial flows to developing countries. Between 1981 and 1984 there was a sharp fall in private lending (see figure 1), as international banks lost confidence in borrowing countries’ financial stability following the debt crisis of 1982. Since the mid-1980s the growing integration of markets and financial institutions, increased economic liberalization, and rapid innovation in financial instruments and technologies, especially in terms of computing and telecommunications, have contributed to a near doubling of private flows. Most significant has been the steady progression of FDI to a 35% share in 1990-6. Portfolio equity has also emerged as an important component of global private flows – 13.5% of total flows in the 1990s in contrast to a mere 1.2% in the 1980s.

 

Figure 1: Net Resource Flows to Developing Countries (US$bn)

Notes:
Official Flows: including official grants and loans from bilateral and multilateral organizations.
Foreign Direct Investment: investment made to acquire a lasting management interest, usually at least 10% of voting stock, in an enterprise operating in a country other than that of the investor.
Private Loans and Bonds: loans from private banks and other financial institutions and privately placed bonds.
Portfolio Equity Flows: the sum of country funds, depositary receipts (US or global), and direct purchases of shares by foreign investors.

Sources:
World Bank, World Debt Tables 1988-1996, Global Development Finance 1997

 

FDI To Low-Income Countries

An examination of net private capital flows by income group reveals the fluctuating nature of those to middle-income countries that were severely affected by the debt crisis of 1982, and to a lesser extent by the 1994 Mexican crisis. Low-income countries, on the other hand, have seen a smoother rise in inflows of private capital. Most of them were less affected by the debt crisis, because of their low level of commercial bank loans, due, in part, to their previously closed economies and their lack of suitable financial markets. It was only towards the end of the 1970s that those in Asia in particular began to open their doors wider to foreign capital. Figure 2 shows FDI flows to both middle- and low-income countries were still relatively modest at the beginning of the 1980s, some $US5 bn, and accounting for only 19% of all private capital flows to low-income countries in 1981. By 1996 this figure had risen to 74% (in comparison with 34% for middle-income countries).

 

Trends in Direct Foreign Investment in Asian Countries

Foreign investment in China, in terms of contract value, peaked in 1993, and then fell in 1994. While recovering 10.4 percent in 1995, it has yet to return to the 1993 level. In investment in the ASEAN region, which recovered strongly in 1994, there was a decline in investment in the Philippines and Malaysia and record highs were set in investment in Thailand, Indonesia, and Vietnam in 1995. Investment in the Asian NIEs was particularly brisk. Investment from Japan, Europe, and the U.S. grew strongly in the Republic of Korea, Taiwan, and Singapore – in all of which record highs were recorded. Hong Kong also enjoyed relatively smooth growth in investment. In Southwest Asia, India saw incoming foreign investment balloon 42-fold in the five years since its 1991 economic reforms. Investment also rose sharply in Pakistan (up 2.5-fold in FY1995 from previous year) and Bangladesh (up 3.3-fold); in both cases, record highs were set. Investment in Australia climbed 39.0 percent in 1994/1995 compared with the same period of the previous year due to the assessment by western firms of its importance as a bridgehead to Asia. Investment in Mongolia held at about the same level as the previous year. North Korea saw the flow of investment stop after the 1993 crisis over its nuclear weapons program and has had zero receipts in the three years since. On the other hand, foreign investment by ASEAN countries and the Asian NIEs has been gearing up in earnest. In particular, ASEAN countries and the Asian NIEs are the largest investors in Vietnam, Cambodia, Laos and Myanmar (with Taiwan being the biggest investor in Vietnam, Malaysia the biggest in Cambodia, Thailand the biggest in Laos, and Singapore the biggest in Myanmar). Taiwanese investment in China fell for the first time, however.

 

Determinants of FDI flows

The unpredictability of autonomous FDI flows, in both scale and direction, has generated a substantial research effort to identify their major determinants. An extensive literature based generally on three approaches – aggregate econometric analysis, survey appraisal of foreign investors’ opinion, and econometric study at the industry level – has failed to arrive at a consensus. This can be partly attributed to the lack of reliable data, particularly at the sectoral level, and to the fact that most empirical work has analyzed FDI determinants by pooling of countries that may be structurally diverse. Table 1 gives details of FDI flows to certain low-income countries over a period of 10 years from 1986- 1995.

 

	1986	1987	1988	1989	1990	1991	1992	1993	1994	1995
All developing countries	10,100	14,500	21,200	26,000	33,735	41,324	50,367	73,135	87,024	99,670
All low-income countries	2,549	3,802	4,675	7,229	4,682	7,229	13,846	31,619	38,410	43,405
China	1,875	2,314	3,194	3,393	3,487	4,366	11,156	27,515	33,787	37,500
Nigeria	167	603	377	1,882	598	712	897	1,345	1,959	1,340
India	118	212	91	252	162	141	151	273	620	1,750
Pakistan	105	129	186	210	244	257	335	354	422	639
Angola	114	119	131	200	-335	665	288	302	350	400
Sri Lanka	30	60	46	20	43	48	123	195	166	195
Ghana	4	5	5	15	15	20	23	125	233	245
Viet Nam	–	–	8	4	16	32	24	25	100	150
Bangladesh	2	3	2	–	3	1	4	14	11	125
Total of above countries	2,415	3,445	4,040	5,976	4,233	6,233	13,001	30,148	37,648	42,344
% of all low-income countries	94.7	90.6	86.4	85.2	90.4	86.3	93.9	95.3	98.0	97.6
of which China	73.6	60.9	68.3	48.4	74.5	60.4	80.6	87.0	88.0	86.4
of which the rest	21.2	29.7	18.1	36.8	15.9	26.0	13.3	8.3	10.1	11.2

Main Low Income Countries Recipients of DFI inflows (US$m)

Factors Influencing the Destination Of Investment

These factors are host-country determinants, rather than industry-specific factors.

Source: UNCTAD, World Investment Reports 1993-6

• Size of the market: Econometric studies comparing a cross section of countries indicate a well-established correlation between FDI and the size of the market (proxied by the size of GDP) as well as some of its characteristics (for example, average income levels and growth rates). Some studies found GDP growth rate to be a significant explanatory variable, while GDP was not, probably indicating that where the current size of national income is very small, increments may have less relevance to FDI decisions than growth performance, as an indicator of market potential. For the majority of low-income countries that fail to attract large FDI flows, their small domestic markets are often cited as the main deterrent. Given other economic and political shortcomings, most investors are doubtful about the value of installing a factory unless they can achieve a `critical mass’ for their products. Regional integration is often perceived as a positive means of compensating for small national markets. There is currently no clear evidence of the degree of this influence on FDI flows. Some investors expect positive spillover effects from South Africa and are generally optimistic about an East African free trade area, but the benefits may well be concentrated in the economically stronger states.

 

1. Openness: Whilst access to specific markets – judged by their size and growth – is important, domestic market factors are predictably much less relevant in export-oriented foreign firms.[1] A range of surveys suggests a widespread perception that ‘open’ economies encourage more foreign investment. One indicator of openness is the relative size of the export sector, particularly manufacturing exports, are a significant determinant of FDI flows and there is strong evidence that exports precede FDI flows. China, in particular, has attracted much foreign investment into the export sector. In Bangladesh, on the other hand, foreign investors have been attracted to the manufacturing sector by its lack of quota for textiles and clothing exports to the European Union and US markets.[2] Garment exports, for example, rose from virtually nil in the 1970s to over one-half of its export earnings by the early 1990s. In contrast, most low-income SSA economies have remained more inward-oriented.[3]

 

1. Labour costs and productivity: Empirical research has also found relative labour costs to be statistically significant, particularly for foreign investment in labour-intensive industries and for export- oriented subsidiaries. The decision to invest in China, for example, has been heavily influenced by the prevailing low wage rate. The rapid growth in FDI to Vietnam has also been attributed primarily to the availability of low-cost labour. In India, in contrast, labour market rigidities and relatively high wages in the formal sector have been reported as deterring any significant inflows into the export sector in particular. However, when the cost of labour is relatively insignificant (when wage rates vary little from country to country), the skills of the labour force are expected to have an impact on decisions about FDI location. Productivity levels in sub-Saharan Africa are generally lower than in low-income Asian countries, and attempts to redress the skill shortage by importing foreign workers have usually been frustrated by restrictions and delays in obtaining work permits.[4] The lack of engineers and technical staff in these countries is reported as holding back potential foreign investment, especially in manufacturing; it lessens the attractiveness of investing in productive sectors.

 

• Political Risk: The ranking of political risk among FDI determinants remains somewhat unclear. Where the host country possesses abundant natural resources, no further incentive may be required, as is seen in politically unstable countries such as Nigeria and Angola, where high returns in the extractive industries seem to compensate for political instability. In general, so long as the foreign company is confident of being able to operate profitably without undue risk to its capital and personnel, it will continue to invest. Specific proxy variables (e.g. number of strikes and riots, work days lost, etc.) have proved significant in some studies; but these quantitative estimates can capture only some aspects of the qualitative nature of political risk. Surveys carried out in South Asia and sub-Saharan Africa appear to indicate that political instability, expressed in terms of crime level, riots, labour disputes and corruption, is an important factor restraining substantial foreign investment.

 

1. Infrastructure
   Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.). Studies in China reveal the extent of transport facilities and the proximity to major ports as having a significant positive effect on the location of FDI within the country. Poor infrastructure can be seen, however, as both an obstacle and an opportunity for foreign investment. For the majority of low-income countries, it is often cited as one of the major constraints.[5] But foreign investors also point to the potential for attracting significant FDI if host governments permit more substantial foreign participation in the infrastructure sector. Recent evidence seems to indicate that, although telecommunications and airlines have attracted FDI flows (e.g. to India and Pakistan), other more basic infrastructure such as road building remains unattractive, reflecting both the low returns and high political risks of such investments.

 

1. Incentives and operating conditions: Most of the empirical evidence supports the notion that specific incentives such as lower taxes have no major impact on FDI, particularly when they are seen as compensation for continuing comparative disadvantages. On the other hand, removing restrictions and providing good business operating conditions are generally believed to have a positive effect. In China, the ‘open-door’ policy and enhanced incentives for investing in the special economic zones contributed to the initial influx of FDI. Further incentives, such as the granting of equal treatment to foreign investors in relation to local counterparts and the opening up of new markets (e.g. air transport, retailing, banking), have been reported as important factors in encouraging FDI flows in recent years. The Indian Government has recently relaxed most of the regulations regarding foreign investment.[6] This is seen as contributing to the increased FDI flows in the last couple of years. However, the lack of transparency in investment approval procedures and an extensive bureaucratic system are still deterring foreign investors; hence the relatively low FDI/GNP ratios. In 1991, Bangladesh and Pakistan implemented reforms allowing foreign investors to operate with 100% foreign ownership but still failed to attract significant flows (as a proportion of GNP) because of political instability and an over-extended bureaucracy. Nigeria, in contrast, continues to attract foreign investment as an oil-exporting country despite its erratic and relatively inhospitable policies. With regard to the remaining low-income countries with small FDI inflows, surveys indicate that the lack of a clear-cut policy with respect to foreign investment and excessive delays in approval procedures are amongst the most important deterrents. Although a number of African countries set up ‘one-stop investment shops’ during the 1980s in order to simplify approval procedures, the increased workload created bottlenecks.
2. Privatization: Though privatization has attracted some foreign investment flows in recent years, progress is still slow in the majority of low- income countries, partly because the divestment of state assets is a highly political issue. At a regional level, 1994 figures show 15% of FDI flows to Latin America as derived from privatization, but only 8.8% in sub-Saharan Africa and 1.1% in South Asia.[7] A number of structural problems are constraining the process of privatization. Financial markets in most low- income countries are slow to become competitive; they are characterised by inefficiencies, lack of depth and transparency and the absence of regulatory procedures. They continue to be dominated by government activity and are often protected from competition. Existing stock markets are thin and illiquid and securitised debt is virtually non-existent. An under-developed financial sector of this type inhibits privatization and discourages foreign investors.

 

For the vast majority of low-income countries, however, FDI is minimal. The structural weaknesses of these economies, the inefficiencies of their small markets, their skill shortages and weak technological capabilities, are all characteristics that depress the prospective profitability of investment. These factors also make it less worthwhile for potential international investors to incur the costs of a serious examination of local investment opportunities, thus leading to informational inefficiencies.

 

PAKISTAN’S FOREIGN INVESTMENT POLICY- INTRODUCTION

The Pakistani government has implemented a new investment policy which ensures that all incentives, concessions and facilities provided to domestic investors for industrial investment are also available to foreign investors without discrimination. Pakistan has eliminated its requirement for prior government approval for most foreign investments. There are no restrictions on the amount of foreign equity in industrial investments. A number of tax *concessions*, a super tax *rebate*, and a tax exemption on investment, as well as guaranteed repatriation facilities have been introduced to accelerate industrial development in the country. While certain incentives are available to all foreign investors, invetors seeking additional incentives or concessions specific to their project must be obtain government approval. In recent years, succesive governments have made efforts to improve Pakistan’s investment climate by cutting red tape and offering incentives to both labour intensive and capital intensive projects which bring in suitable technology, managerial skills, and marketing expertise. Unfortunately, this pro-investment attitude is not always fully reflected in bereaucratic actions and procedures

PAKISTAN’S FOREIGN INVESTMENT POLICY

The Pakistani government has implemented a new investment policy which ensures that all incentives, concessions and facilities provided to domestic investors for industrial investment are also available to foreign investors without discrimination. Pakistan has eliminated its requirement for prior government approval for most foreign investments. There are no restrictions on the amount of foreign equity in industrial investments. A number of tax *concessions*, a super tax *rebate*, and a tax exemption on investment, as well as guaranteed repatriation facilities have been introduced to accelerate industrial development in the country. While certain incentives are available to all foreign investors, invetors seeking additional incentives or concessions specific to their project must be obtain government approval. In recent years, succesive governments have made efforts to improve Pakistan’s investment climate by cutting red tape and offering incentives to both labour intensive and capital intensive projects which bring in suitable technology, managerial skills, and marketing expertise. Unfortunately, this pro-investment attitude is not always fully reflected in bereaucratic actions and procedures.

INVESTMENT OVERVIEW

Foreign private investment is governed by the Foreign Private Investment (Promotion and Protection) Act of 1976 administered by the Ministry of Industries. This act proveides security against expropriation and adequate compensation for acquisitions. It also guarantees to foreign investors the right to repatriate funds up to the amount of the original investments, profits, and any additional amount resulting from reinvested profits or appreciation of the investment. National treatment with respect to laws, rules and regulations relating to importing and exporting of goods is provided. A key aspect of economuc reform introduced by the government is that government approval for any project outside the specified list, regardless of its cost and size, is not required. With some exceptions for national security purposes, foreign firms and individuals may not take a 100 per cent equity position in projects. Nonresidents may freely move capital in and out of domestic securities markets, and no longer need prior approval of the central bank to repatriate profits. Corporate tax rates are being lowered under a phased programme. Prior approval from the IPB is required for setting up an industry from the specified list. Industries on the “specified list” where investment is restricted include arms and ammunition; security printing, currency and mint; high explosives; beverages made from imported concentrates; automobiles, tractors and farm machinery; petroleum blending plants; and radioactive substances. Manufacture of alcohol (except industrial alcohol) is, however, banned. Foreign private investment is also prohibited in agricultural land, forestry, irrigation, real estate (including land, housing and commercial office buildings), radioactive minerals, insurance, and health. Foreign investment in domestic banks is permitted only on a non-repatriable capital basis, though dividends may be remitted overseas. The requirement of obtaining a no objection certifacte (NOC) from the provincial governments for the location of a project has been a major bottleneck in the past. In an attempt to facilitate planning by potential investors, the provincial governments have compiled a list of areas where the establishment of industries is not considered desirable for any particular reason.

 

Foreign Investment In Pakistan’s Economy[8]

 

In Pakistan, there are 30,000 companies, out of which 675 have foreign capital.[9] The multinationals began choosing Pakistan for investment even before independence. ICI was the first multinational by setting up a soda ash plant in 1942, and, since then, it has diversified its business/ manufacturing activities in sectors that include, pharmaceuticals, chemicals, and polyester fiber. Many other multinationals, such as Unilever, Shell, Philips, Parke Davis, Wellcome, also saw an opportunity early and have benefited by investing.

In addition to subsidiaries and joint ventures, there are many licensing and technical support arrangements with local entrepreneurs, some of which have resulted through direct investment that have now been wholly or partially brought by local entrepreneurs, for example, Exxon in the fertilizers industry and Exide in the battery market.

Pakistan has become host to a range of foreign fast food chains in the last two years. Even 1998 saw the entry of McDonald’s. Subway and TGIF in partnership with local joint venture partners. Prior to this, others like Pizza Hut, KFC, Wimpy’s, Nacho Nana’s and Taco Maker had already hit the local market.

 

In spite of a regulated economic regime till about six years ago, the multinationals found Pakistan to be an attractive place for investment. With complete deregulation of the economy, resulting in no requirement for any investment approvals, multinationals and other foreign investors find Pakistan a really profitable place in which to invest. Table 2 illustrates sources of foreign investment in Pakistan in comparison to some other countries over a 5-year period from 1995-1999.[10]

The government also opened up the agriculture, service and social sectors to foreign investment through the 1998 Investment Policy in a bid to attract fresh inflows and meet WTO requirements of free trade and flows as well. But no major investments have been made in these areas and analysts say that despite ambitious targets set out in the 9th five-year plan, few are expected.

 

 

Table 3: Foreign Investment in Selected Sectors of Pakistan

Sector	Foreign Companies Present
Automobile & Engineering	AEC, C Itoh, Exide, Fiat, General Tyre, Hino, Honda, Lucas, Nissan, Mitsui, Singer, Suzuki, Toyota, Yamaha.
Chemicals & Pharmaceuticals	BASF, Bayer, Beecham, Berger, Boots, British Oxygen, Ciba Geigy, Cynamid, Dow Chemicals Pacific, Dupont Far East, Engro, Glaxo, Hercules, Hoechst, ICI, Johnson & Johnson, Johnson & Nicholson, Merck & Co., N.V. Upjohn, Parke Davis, Pfizer, Reckitt & Coleman, Roche, Rhone Poulenc, Samsong, Sandoz, Smith Kline, Beecham, Squibb/Searle, Sterling Products, Warner Lambert, Wellcome, Wyeth.
Electronic & Electricals	ABB, GEC, Gestetner, IBM, Johnson & Philips, Mitsubishi, NCR, Philips, Siemens.
Transport & Communications	Alcatel, Cable & Wireless, DHL, Ericsspn, Motorolla
Oil & Gas	Caltex, Castrol, Gulf, Lasmo, Shell, Union Texas.
Food, Consumer Products & Packaging	Associated Biscuits, BAT, Brooke Bond, Cargill, Coca Cola, Colgate, Eastman Kodak, Gillete, Knorr A.G., Lipton, Nestle, Pepsico, Philips Morris, Proctor & Gamble, Tetra Pak, Unilever.
Hotels	Hilton, Holiday Inn, Marriott, Ramada, Sheraton.

 

Investment Climate in Pakistan[11]

Openness to Foreign Investment

Considering the openness of the investment regime, foreign investment activity to date has been relatively modest and in 1996-97 registered a substantial drop in new FDI. Possible reasons for this include inadequate infrastructure, lack of ideal foreign investment environment, perceptions of political instability, law and order difficulties, policy inconsistencies, and resistance to the new policies by some elements of the bureaucracy who have not yet fully adjusted to the new, open economic environment. Besides law and order problems, there is a need for continuity in economic policies, legal protection to foreign investment and upholding the sanctity of Agreements. Pakistan needs to follow procedures that instill confidence in foreign investors that contractual obligations are honored.  A succession of investment promotion agencies, recently the Pakistan Investment Board and its successor, the Board of Investment (BOI), have lacked the bureaucratic authority or the continuity of leadership needed to be effective.

 

Liberalization, Privatization And Deregulation – As part of an integrated investment promotion strategy, the GOP undertook during 1990 a comprehensive program of radical economic reforms including liberalization, privatization and deregulation to bring the economy into a fully market-oriented system.  This was aimed at capturing the potential of the private sector in all areas of economic activity.  The privatization process has been redesigned to make it more transparent.  Power generation, telecommunication, highway construction, port development and operations, oil and gas, services/infrastructure, social and agriculture sectors, have now been opened to foreign investment.

 

Legal Framework – Pakistan’s legal framework and economic strategy do not discriminate against potential foreign investors, but enforcement of contracts can be difficult given the inefficiency of the courts. Foreign investment is generally subject to the same rules as domestic investment, with the exception of certain sensitive areas such as defense production, banking, and broadcasting.

Regulatory System – Enforcement of the competition law in Pakistan is under the jurisdiction of the Monopoly Control Authority, an independent regulatory authority that lacks enforcement muscle.  In the 1970s it was notable more for its good research than its enforcement efforts.  Pakistan formerly had a relatively high degree of industrial concentration, with widespread licensing procedures restricting entry and serving as vehicles for creating monopolies and oligopolies. The end of the licensing regimes, the decline in bureaucratic controls, and the liberalizing trend of the last five years have reduced industrial concentration by bringing down barriers to entry. Certain industries remain relatively concentrated, but for industry-specific rather than systemic reasons.

 

Taxation – There is little apparent denial of national treatment for foreign firms.  There is also no evidence of statutory derogation of national treatment.  In fact, the Foreign Private Investment (Promotion and Protection) Act, 1976, specifically provides that foreign investment shall not be subject to more taxation on income than investment made in similar circumstances by Pakistani citizens.  In practice, the issue of extension of national treatment is tested on a case-by-case basis, but apart from sensitive industries, national treatment appears to be the norm. However, the new Investment Policy provides equal investment opportunities for both domestic and foreign investors.

 

Conversion and Transfer Policies – Pakistan has a liberal foreign exchange regime with few restrictions on holding foreign exchange and bringing it in or out of the country. There are no limits on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or payments for imported inputs. The average delay period currently in effect for remitting investment returns such as dividends, return on capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels is only a week to ten days. It is also possible to remit funds through a legal parallel market by using Foreign Exchange Bearer Certificates (FEBCs), which may be purchased in the secondary market.

 

Capital Outflow Policy – Pakistan has no restrictions on capital outflow.  Those seeking to transfer funds out of the country need only comply with the procedures administered by the State Bank.  This liberalized approach to capital outflow is part of Pakistan’s effort to integrate itself into global capital markets.  Although specific statistics are not available, there is very little outgoing foreign direct investment (FDI).

 

Institutional Promotion of Investment – One hurdle to investment in Pakistan had been a bewildering series of approvals, permits, and licenses required from various levels of government in order to launch a project.  Successive institutional entities have attempted to ease that process for prospective investors by functioning as a ‘one-window’ interface between the investors and the relevant Pakistani authorities, and the situation is improving with special efforts by BOI.

 

Performance Requirements – Government policies strongly favor investment proposals that have large export or value addition and local content components, but amounts are negotiable.  The local content policy, known as the ‘deletion policy’, requires that all investments based on local assembly of imported parts, and that wish to enjoy favorable tax rates accorded to new investments, have a ‘deletion program’ to raise local content.  The Ministry of Industries monitors the deletion schedule closely and must approve any deviation.

 

Environmental Protection – The Pakistan Environmental Protection Agency (PEPA) is responsible for enforcing the laws related to the protection of the environment. To date, PEPA has developed standards for municipal and liquid industrial effluent and waste, industrial gaseous emissions, motor vehicle exhaust and noise and air pollutants. Public sector projects that are likely to adversely affect the environment are required to file with PEPA a detailed Environmental Impact Statement when the project is in the planning stage; other projects may be required to file short descriptions of their effects on the environment.  The review process for Environmental Impact Statements takes 90 days and may lead to approval, rejection, or request for modification.  Each province also has its own environmental protection agency; provincial Directorates of Industry may refer a project to the provincial agency when there are concerns about environmental impact.

 

Turbulent Times for Foreign Direct Investment in Pakistan

Pakistan’s image as a safe haven for foreign investment received a severe battering during 1998 when the government conducted a series of nuclear tests in May and was immediately hit with international economic sanctions soon after. Although there was a partial lifting of sanctions on the part of the US early in 1999, the newly acquired nuclear status resulted in a sharp escalation of economic woes and foreign investors backed off. But some analysts say that the Pakistan government’s prolonged row with independent power producers (IPPs) was a much greater damaging factor.

 

Pakistan received 3.18 billion dollars in FDI during the five-year period from 1993 to 1998 and according to the Secretary-General at the Overseas Investors Chamber of Commerce and Industry, Pakistan attracts an average of 700-800 million dollars a year in the form of FDI. During the period 1995-98 Pakistan attracted $2.2 billion in FDI and analysts describe 1995-96 as the single best year for foreign direct investment when $1.1 billion flowed in from abroad on account of Hubco’s large investment.
The decline ever since has been attributed, in the most part, to the reduced inflows in the power sector which is the greatest contributor making up 36% of the total foreign investment in Pakistan. The financial sector comes in next with a 15.5% contribution followed by the food and beverages industry with a 7.6% share in the total.

 

Another blow to confidence came when the government froze foreign currency accounts in May last year following the nuclear tests. Sanctions were one thing. But the freezing of 11 billion dollars of government guaranteed bank accounts was really the nail in the FDI coffin. During 1998, corporate profits of most leading multinational companies in Pakistan declined substantially.

 

Bibliography

The following sites were visited and used for the purpose of conducting the library research on Foreign Direct Investment in Pakistan’s economy. The sites addresses are provided with the name of the article, the name of the author where relevant and the date of the publication of the article:

 

• lcci.com/pk. The article ids titled : Foreign vision of Pakistan 2010 by research analyst Mr. Mohammad Ahsan , dated 12^th November 1999

 

• financialtimes.com/pk Foreign Investment in Pakistan’s economy by Stefan Wagystyl, November 28^th, 1994

 

 

• epb.com. Incentives for Exporters,15th, August 2000
• brecorder.com/fdi. Newspaper heading about the effect of blasts and the decrease I foreign direct investment in Pakistan’s economy, 14^th June,1999

 

• erc.com. Index on Country’s economic reports, Published by the U.S department of state on Feburary 1994

 

• unctad.com/pakistan.Foriegn Direct Investment flow o 3^rd world countries slumps by Mohammed Ilyas, Oct 3, 2000

 

• cla.com. Country Commercial guides FY 1999 Pakistan by Ayub Ahmed.

 

• dawn.com. Foreign Investment continues to flee Pakistan by Naween Mangi, Oct 3 2000

 

• .ilo.com. Impact of globalisation and the results for Foreign Direct Investment

 

• sofi.ch/. Sources of Foreign Direct Investment IN Pakistan’s economy, 3^rd May 1999.

 

• worldbank.org. Pakistan and the Flow of Foreign Direct Investment. 22^nd May 1999.

[1] Taken form the article: Determinants of Foreign Direct Investment

[2] www.lcci.com.pk

[4] Taken from the article: Pakistan Foreign Investment Policy

[5] Excerpt from the article: Critique o the Investment Analysis in Pakistan

[6] www.dawn/topstories/fdi/inflows

[8] State Bank of Pakistan Report and Annual Indexes

[9] Foreign Direct Investment Portfolios in Pakistani Economy

[10] Taken from the website: http://www.lcci.com.pk. com. The article is entitled Foreign Vision

[11] Article entitled: Pakistan, the Country Outlook and major components

 

 

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