foreign direct investment prospects for pakistan

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

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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. - PowerPoint PPT Presentation

TRANSCRIPT

Page 1: Foreign Direct Investment Prospects for Pakistan

Khalil HamdaniVisiting Professor

Pakistan Institute of Development Economics 7 April 2009

Foreign Direct Investment Prospects for Pakistan

Page 2: 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

Page 3: Foreign Direct Investment Prospects for Pakistan

Pakistan’s economic growth cycle

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

Page 4: Foreign Direct Investment Prospects for Pakistan

World FDI inflowBillions $

Source: UNCTAD, World Investment Report .

Page 5: Foreign Direct Investment Prospects for Pakistan

Pakistan in top 10 FDI destinations in Asia

FDI inflows, Billions $

Source: UNCTAD, World Investment Report 2008.

Page 6: Foreign Direct Investment Prospects for Pakistan

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.

Page 7: Foreign Direct Investment Prospects for Pakistan

FDI inflow and capital formation

Source: UNCTAD, World Investment Report 2008.

Note: percent age of gross fixed capital formation.

Page 8: Foreign Direct Investment Prospects for Pakistan

FDI stock and GDP

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

Millions $%

Page 9: Foreign Direct Investment Prospects for Pakistan

Foreign presence

0200400600800

100012001400160018002000

2002 2003 2004 2005 2006

Pakistan India Malaysia Sri Lanka

Number of foreign affiliates

Page 10: Foreign Direct Investment Prospects for Pakistan

FDI inflow by typeMillions $

Source: Board of Investment.

Page 11: Foreign Direct Investment Prospects for Pakistan

FDI inflow by industry

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

Page 12: Foreign Direct Investment Prospects for Pakistan

FDI and technology

Note: 2005 data.

Source: UNIDO, Industrial Development Report 2009.

Page 13: Foreign Direct Investment Prospects for Pakistan

Technology

30% is Medium &High-tech

70% of MVA is low techproduction

Source: UNIDO, Industrial Development Report 2009.

Note: 2005 data.

Page 14: Foreign Direct Investment Prospects for Pakistan

A smaller manufacturing base with much less technology content

30%17% 22%

GDP GDP

Note: 2005 data.

Source: UNIDO, Industrial Development Report 2009.

Page 15: Foreign Direct Investment Prospects for Pakistan

FDI inflow by country

Note: three-year moving average.

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

Page 16: Foreign Direct Investment Prospects for Pakistan

World FDI inflows are fallingBillions $

Source: UNCTAD, World Investment Report .

Page 17: Foreign Direct Investment Prospects for Pakistan

FDI prospects

0

1000

2000

3000

4000

5000

6000

7000 Millions $

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

Page 18: Foreign Direct Investment Prospects for Pakistan

FDI strategy

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

Page 19: Foreign Direct Investment Prospects for Pakistan

1. Investor confidence

Policy 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.

Page 20: Foreign Direct Investment Prospects for Pakistan

Business regulation: best in region

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

Page 21: Foreign Direct Investment Prospects for Pakistan

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.

Page 22: Foreign Direct Investment Prospects for Pakistan

Target Asian investors

Industry 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

Page 23: Foreign Direct Investment Prospects for Pakistan

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.

Page 24: Foreign Direct Investment Prospects for Pakistan

Need to upgrade technology

Global Value Chain: textiles and garments

YarnRaw

Cotton

Textile

Finishing 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

Page 25: Foreign Direct Investment Prospects for Pakistan

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.

Page 26: Foreign Direct Investment Prospects for Pakistan

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.

Page 27: Foreign Direct Investment Prospects for Pakistan

BACKWARD

SUPPLIERS

FORWARD

CONSUMERSTNC

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

Page 28: Foreign Direct Investment Prospects for Pakistan

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 0.2 0.3 0.2

Page 29: Foreign Direct Investment Prospects for Pakistan

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.

Page 30: Foreign Direct Investment Prospects for Pakistan

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.