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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
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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 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.
Business regulation: best in region
Source: World Bank/IFC, Doing Business 2009: Country Profile 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.
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
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
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
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.
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
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
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.
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.