Khalil HamdaniVisiting Professor

Pakistan Institute of Development Economics 7 April 2009

Foreign Direct Investment Prospects for Pakistan

FDI flows to Pakistan

1959 first Bilateral Investment Treaty in world (Germany)

Foreign Investment Act

Export Processing Zones AuthorityBoard of Investment

Foreign exchange guarantees

Import liberalization

Fully open investment regime

Privatization

Pakistan’s economic growth cycle

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

World FDI inflowBillions $

Source: UNCTAD, World Investment Report .

Pakistan in top 10 FDI destinations in Asia

FDI inflows, Billions $Source: UNCTAD, World Investment Report 2008.

FDI inflow and GDPMillions $%

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

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

FDI stock and GDP

Source: UNCTAD, World Investment Report 2008. Note: FDI stock as percent age of gross domestic output.

Millions $%

Foreign presence

0200400600800

100012001400160018002000

2002 2003 2004 2005 2006

Pakistan India Malaysia Sri Lanka

Number of foreign affiliates

FDI inflow by typeMillions $

Source: Board of Investment.

FDI inflow by industry

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

FDI and technology

Note: 2005 data.Source: UNIDO, Industrial Development Report 2009.

Technology

30% is Medium &High-tech

70% of MVA is low techproduction

Source: UNIDO, Industrial Development Report 2009. Note: 2005 data.

A smaller manufacturing base with much less technology content

30%17% 22%

GDP GDP

Note: 2005 data.Source: UNIDO, Industrial Development Report 2009.

FDI inflow by country

Note: three-year moving average. Source: State Bank of Pakistan Annual Report 2007-2008.

World FDI inflows are fallingBillions $

Source: UNCTAD, World Investment Report .

FDI prospects

0

1000

2000

3000

4000

5000

6000

7000 Millions $

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

FDI strategy

1. Address investor confidence2. Target Asian investors3. Target existing investors4. Sustain public investment

1. Investor confidencePolicy framework attractive to FDI Cost of doing business high but

competitive in the regionDomestic 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

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

2. Target Asian investorsFY 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 investorsIndustry

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

Source: UNCTAD.

RegionOf the 7 top TNCs

from South: 6 Asian; 1 Mexican

Of the top 100:78 Asian; 11 African;

11 Latin AmericanOf Fortune Global 500:

55 Asian; 10 Latin American

Target Asian investorsResource sector resilient to global trend

Oil & Gas exploration, coal, alternative energyMarket-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 marketAttract 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.

Need to upgrade technology

Global Value Chain: textiles and garments

YarnRaw

CottonTextil

eFinishing Garment

production

11.3% 16.0%6.9% 54.5%11.3%

Source: Gherzi

Value Added

FDI Joint Venture potentialnow<2%

Need to upgrade skills

Synthetic Fibers

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

0

10

20

30

40

50

60

2002 2003 2004 2005 2006

Repatriation Reinvestment

Percentage of gross foreign investment inflows

Source: State Bank of Pakistan, Foreign Liabilities and Assets and Foreign Direct investment in Pakistan. Note: Repatriation includes divestment.

BACKWARDSUPPLIERS

FORWARDCONSUMERS

TNC

Corporate social responsibility

PRODUCT PRODUCT STEWARDSHIPSTEWARDSHIP

SUPPLY CHAIN SUPPLY CHAIN MANAGEMENTMANAGEMENT

A A A

Creates Shared Value for Company and Society across supply chain

Improved productivityHigher incomes for suppliers Reduced costs for company

Better products for consumers Enlarged market share for company

Example: Nestlé working with dairy farmers to raise milk production

4. Sustain public investment

FY 2005 FY 2006 FY 2007 FY 2008Development expenditure share of GDP

3.8 4.8 4.9 4.0

Education expenditure share of GDP

0.2 0.2 0.3 0.2

Sustain public investmentPriorities: Education,

Infrastructure, HealthIndustrial policy should promote

horizontal competitiveness and avoid:Picking winners (leather, pharmaceuticals etc) is risky

Fiscal incentives can be costly.

SummaryFDI is more than an external resource

inflowFDI 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.