Impact of FDI

7/27/2019 Impact of FDI

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Khadim Ali Shah Bukhari Institute of Technology (KASBIT)

Karachi

The impact of FDI on Pakistan Economy

A Thesis submitted to the department of Finance

In partial fulfillment of the requirements for the degree of

MASTERS OF BUSINESS ADMINISTRATION

(MBA) Finance

Supervised by:

Mr. Rais Ahmed

Submitted By:

Syed Imran Nadeem

ID:

1353


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Abstract

This research paper reveals and discusses the importance of FDI in Pakistan.

According to the research, FDI plays a vital role in Pakistan, and management of

investment can reap great benefits for the economy. The main focus of the research

is on the importance of FDI, its issues in Pakistan and how it can be beneficial for

the economy. FDI has impacted on GDP and growth for the past 30 years

significantly. Reduction of FDI is one of the main reason Pakistan economy is

effected negatively. With the help of FDI Pakistan can make decisions on financial

feasibility of the economy and effectively use those investments to boost employment

opportunities, infrastructure development and technology.


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Acknowledgement

I am very much thankful to Almighty Allah, the most Beneficent and the most

Merciful who gave me courage, & potential to accomplish this report on Impact of

FDI on Pakistan Economy

I am deeply thankful and Indebted to Sir Rais Ahmad my mentor for this report,

for his guidance and knowledge towards the accomplishment of this task. He guided

me at every step in preparing this report and for whom I can confidently say that he

generates interest in me to give my maximum input and I learnt a lot.

I am thankful to coordinator Mr. Ragib who shared his precious time and valuable

information with me, essential for the creation of this report.

I particularly thanks to the people I interviewed, colleagues, and my family

members who have supported me, shared their experiences and provided me with

their valuable advises at every moment of my research to do better and better


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Chapter 1-Introduction

1.1 Background.. ..4

1.2 Statement of Problem4

1.3 Scope of Study.5

1.4 Research Objectives.6

1.5 Methodology.7

1.6 Limitations..8

1.7 Conclusion..9

Chapter 2- Literature Review

2.1International Scenerio..................................................................10

2.2 Regional Scenario........................................................................14

2.3 Conclusion16

Chapter 3- Methodology

3.1.................................................................................................24-26

Chapter 4- Data Analysis, Results/Findings and Discussions

4.1- Different Tests and Results27

4.2 Analysis.28

4.3 Discussions.30

4.4 Conclusion..30

Chapter 5- Conclusion

5.1 Conclusion..31

Chapter 6- Recommendations

6.1 Recommendations34

References.........................................................................................42


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List of tables:

1. First statistical test FDI and GDP of Pakistan242. Second statistical test FDI and growth rate of Pakistan.25


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CHAPTER 1

Introduction:

1.1BackgroundFDI for the developing countries have been significant as they have become an important

part of the external resource inflow since the 1990s. The share of FDI of developing

countries is low but still acts as a catalyst fro growth in those countries. The positive affects

of FDI in a country is mainly increase in employment level, as well increase production

which in turn also boosts exports, while technological advancements are also part of it

(Aaron,1999).

A wide range of companies in Pakistan have foreign capital, out of the 30 thousand 675

have foreign capital. ICI was the first of multinationals to set foot in Pakistan setting up an

ash plant, but now it has diversified and opened up businesses linking to pharmaceuticals,

polyester and chemicals. Other early entrants included uniliver, shell and Phillips.

FDI can also be in a form of subsidiaries and joint ventures, in which foreign companies

have made arrangements with local operators, these include Exxon and Exide battery

manufacturers.

Due to very few regulations multinationals find Pakistan to be a very attractive venue to

invest in. (Moosa,2002)

1.2 Statement of the Problem:

FDI is necessary for any economy to survive and boost its income. Since 2000 economic

turmoil FDI has hit a significant decrease in Pakistan. Investors being more aware of the


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risk now associated with it. The present political unrest and security issues ion Pakistan has

further decreased FDI. In this report we will be discussing the importance of FDI and also

the problems associated with it. We will also be discussing why FDI plays an important role

in Pakistans economy and its development.

1.3 Scope of Study:

It is important to understand why FDI is necessary for Pakistan, the advantages associated

with it is:

1. Exploring new reserves and also Utilization of raw materials2. Introduction of new techniques related to marketing and production3. Technology4. Building of Infrastructure5. Quality of Human capital increases6. Good for competition

FDIs share in developing countries has increased over the past years with 16% in the 90s

to 26% to start of 2000. FDI inflow has increased from $ 0.24 billion to $55 billion in 2007

(ADB, 2008). This increase has also been helped by the welcoming of the Pakistan

government of FDI. With less regulation, low duty on imports of machinery and other

supplies, accompanying with low taxes on income, and also government providing with

monetary and fiscal incentives along with providing better infrastructure has helped

attract FDI. This paper discusses the effect of FDI on Pakistan economy, based on the

teachings of the neo-classical production function where it is seen as an additional input

instrument.


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1.4 Research objective:

Research to find out FDI impacts most on which sector of the Pakistan economy To find out FDIs impact on inflows in current situation.

Does Pakistans economy realizes the positive effect of FDI To determine if G7 economies effect the performance of Pakistan economy In what ways can Pakistan attract more FDI

Key research question/hypothesis

There was a meager rise of 3.4% in exports which in numbers was $13.46 billion to $13.9

billion. Pakistan relies heavily on textile, cotton, leather, and sports good for its exports

revenue. With high import cost FDIs are important for Pakistans economy. The problem

with FDI in recent years is that it is on a decline mainly due to political instability, with law

and order situation also not helping, the global economic downfall and below par

infrastructure. Even with all these problems FDI and remittance still provided a strong

platform for the economy to prosper. The study conceived a significant impact of FDI,

furthermore research will also define how FDI impacts imports and exports along with the

constraints now faced by the Pakistan economy. This study will bring forward results

which the policy makers can use to formulate programs which can propel the Pakistan

economy (ADB,2008).

1.6 Methodology

Primary data source

The research process was largely based on first hand knowledge relying heavily on

interviews. The interviews were held with financial analysts to find out how they think FDI

impacts on Pakistan economy and how can we boost its inflow. Foreign studies byinstituitions and also studies done by local experts will also be used in this research paper.

1.6.2 Secondary data source:


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For the secondary data we will be using the internet, news letters, RBI bulletins, Human

development reports, CLL surveys and also FCCI reports, through this a wide source of

secondary data can be analyzed.

1.7 Limitations:

Limitations should always be pointed out before conducting any research. The set of

limitations we as researchers will face on the topic of FDI and its impact on Pakistans

economy in the current financial crises will be following:

The amounted of people short listed for interview is 15, which is our sample sizeincluding analysts and experts working in the financial sector but this could be less

due to the unavailability of some of them.

The researches we will be referring too are unfortunately very few as not manyresearches have been taken place in Pakistan.

We will be conducting our research from Karachi only and will not be able to visitother cities so the research base will not be that broad.

Researches available globally are based on economies such as China India US andother European countries.

We lack some of the expert knowledge to interpret the financial data we haveacquired.

Restricted time span of 2 months and low financial budget will be a real constrainton our research (Patterson,2004) .

1.8 Conclusions:

FDI is important for the growth of a countrys economy


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Developing countries benefit from FDI Although there are benefits of FDI, risk is involved too Retail marketing can prosper with FDI Competition increases with more FDI Small scale industries also benefit with FDI The money invested in infrastructure benefits all businesses FDI can bring about new employment opportunities FDI can also help spread the benefits to other supporting industries.

CHAPTER 2Literature Review:

Foreign direct investment plays an important role during global business. It might provide

a firm with new markets and marketing channels access to new technology cheaper

production facilities products skills and financing. For a host country it might provide a

source of new technologies capital processes products organizational technologies and

management skills and as such might provide a strong impetus to economic development.Foreign direct investment has been defined as a company from one country making a

physical investment into building a factory during another country. In recent years given

rapid growth and the change during global investment patterns this definition has been

broadened to include the acquisition of a lasting management interest during a company or

enterprise outside the investing firms home country. As such it might take many forms

such as a direct acquisition of a foreign firm construction of a facility or investment during

a joint venture or strategic alliance with a local firm with attendant input of technology or

licensing of intellectual property. In the past decade Foreign Direct Investment has come

to play a major role during the internationalization of business. Reacting to changes during

technology growing liberalization of the national regulatory framework governing

investment during enterprises and changes during capital markets profound changes have

occurred during the size scope and methods of Foreign Direct Investment. New


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information technology systems decline during global communication costs have made

management of foreign investments far easier than during the past. The sea change during

trade and investment policies and the regulatory environment globally during the past

decade including trade policy and tariff liberalization easing of restrictions on foreign

investment and acquisition during many nations and the deregulation and privatization of

many industries has probably been the most significant catalyst for Foreign Direct

Investments expanded role (Gosh, 1993).

The most profound effect has been seen during developing countries where yearly foreign

direct investment flows have increased from an average of less than $10 billion during the

1970s to a yearly average of less than $20 billion during the 1980s to explode during the

1990s from $26.7billion during 1990 to $179 billion during 1998 and $208 billion during

1999 and now comprise a large portion of global Foreign Direct Investment.. Driven by

mergers and acquisitions and internationalization of production during a range of

industries Foreign Direct Investment into developed countries last year rose to $636 billion

from $481 billion during 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 Foreign Direct Investment note

that multinational conglomerates are able to wield great power over smaller and weaker

economies and might drive out much local competition. The truth lies somewhere during

the middle.

International scenario:

The global Foreign Direct Investment market declined during 2010 due to weak

performance from West Europe and the Middle East while manufacturing investment

grew strongly during emerging markets and North America as per the Foreign Direct

Investment Global Outlook Report 2011 published today by Foreign Direct Investment

Intelligence part of the Financial Times Ltd.


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Foreign Direct Investment a key driver of economic growth and recovery declined again

during 2010 for the second year running with a 16% decline during capital investment and

0.38% decline during project numbers according to the report. The 2 million new direct

jobs created by Foreign Direct Investment projects during 2010 were the lowest recorded

over the past five years.

Despite the decline during global Foreign Direct Investment the manufacturing sector saw

robust growth during 2010 with a 21% increase during project numbers and 25% growth

during new job creation as companies invested during expanded capacity to meet demand

created by the global economic recovery and with the continued attractiveness of emerging

markets for manufacturing investment.

West Europe was the worst performing region for Foreign Direct Investment during 2010

with a 15% decline during project numbers and over 25% decline during capital

investment and new job creation last year. Lackluster economic performance sovereign

debt crises and a continued strong euro weighed heavily on companies' decisions to invest

during the region according to the report.

As the growth divide between West Europe and other key regions of the world economy

widens Foreign Direct Investment has been gravitating to the faster growing economiesduring the East and during the Americas. The eastern half of Europe North America and

Asia-Pacific all saw growth during Foreign Direct Investment project numbers during 2010

and Latin America was the only region to attract a higher volume of capital investment

than the previous year.

Recession-proof considered Brazil and Australia recorded the largest increases during

Foreign Direct Investment during 2010 with companies committing record levels of

projects and capital investment to these countries. Foreign Direct Investment projects

during Brazil increased by 28% during 2010 and during Australia by 39.5% according to

the Global Outlook Report with both countries moving into the top 10 locations in the

world for Foreign Direct Investment.


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While Brazil and Australia with their diversified economies achieved record performance

during attracting investment the Middle East experienced another collapse during Foreign

Direct Investment with capital investment down 45% during 2010 indicating that

commodities and real estate alone are not sufficient to achieve sustained Foreign Direct

Investment and economic development (Gosh,1993).

Foreign investors are facing a fast changing economic and political landscape which will

have a major impact on Foreign Direct Investment during 2011. In Europe the sovereign

debt crisis has been dampening growth and heightening risk during peripheral countries

with spill-over effects on the larger economies while at the same time a resurgent Germany

benefiting from economic growth during other parts of the world has been reinforcing the

strong euro. Foreign Direct Investment into peripheral economies and closely linkedcountries like the UK and Spain has been likely to decline during 2011 while outward

Foreign Direct Investment from Germany expands strongly.

Political instability during the Middle East and Africa will have a major impact on Foreign

Direct Investment into this region with a sharp decline expected during 2011 during

countries most affected. Combined with the nuclear crisis during Japan Foreign Direct

Investment during coal oil and natural gas and especially during renewable energy has

been likely to grow strongly during 2011 with renewable energy expected to be the fastest

growing sector for Foreign Direct Investment during 2011 and during subsequent years.

With emerging markets expected to receive a growing volume of Foreign Direct Investment

during 2011 during particular China India Brazil Russia Mexico and Indonesia Foreign

Direct Investment Intelligence has been predicting a 6.5% growth during global Foreign

Direct Investment projects during 2011 (Meyer,2003).


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National scenario:

According to the latest data released by the State Bank on 16th April Foreign Direct

Investment fell by 49 percent to only $1.553 billion during July-March 2010 as compared to

$3.041 billion during the same period last year. Portfolio investment also continued to fall

and its net outflow amounted to $182.6 million as against $957.7 million during the

corresponding period of 2008-09 (SBP).

Overall foreign investment comprising Foreign Direct Investment and portfolio investment

thus registered a massive decline of 34.2 percent or $712.7 million to $1.371 billion from

$2.084 billion during the corresponding period of last year. The fall during foreign

investment was shared almost by all the sectors.

The communications sector just received $171 million during the first nine months of the

current fiscal year as against $805 million during the same period last year. Information

technology witnessed an outflow of $91 million during contrast to an inflow of $57 million

during the previous year.

Financial businesses also registered a steep fall. The inflow under this head was only $118

million as against $672 million during July-March 2009. Foreign Direct Investment duringthe oil and gas exploration sector which was traditionally an attractive sector also came

down from $555 million to $520 million during the current year.

The reasons for such a steep decline during foreign investment are not hard to understand.

The country has lost attraction for foreign investors due mainly to poor performance of the

economy the deteriorating law and order situation continued terrorism poor infrastructure

and political instability (SBP).

No investor for instance would like to stake his fortunes on a country where the energy

supply has been so uncertain multinational companies are perceived to have suspicious

motives and even the most secure places might not guarantee safety of one's life. If this


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unfavorable situation continues domestic investors would also lose interest and look for

greener pastures abroad.

It has been unfortunate that these developments are taking place at a time when the growth

rate of the economy has been already very low and poverty and unemployment are on the

rise. The financial meltdown during the developed countries which started from US and

Europe during 2007 and engulfed the entire global financial system has also taken its toll

during the form of reduced Foreign Direct Investment and multiplied the country's

problems.

A rising domestic saving rate could have partly compensated for the shortfall during

Foreign Direct Investment but this too has been not happening due to contraction during

disposable incomes inflationary pressures during the economy and uncertainty about the

future. The richer sections of society are even reported to be shifting their savings abroad.

All of this has been bad news for the country. To tell the truth there are no easy solutions

either to reverse this unfavorable situation. A very conducive environment has to be

created within the country to attract high doses of foreign investment during order to

enhance the productivity of the economy and create more jobs to avoid social upheaval

which has been almost imminent. This of course has been an uphill task when so many

adverse factors are simultaneously working against such a proposition.

Sometimes the government tries to paint a rosy picture about the ground realities through

propaganda and publicity which often proves counterproductive because the judgement of

foreign investors might not be influenced by such tricks.

The fact of the matter has been that it would take a lot of effort tinged with a stroke of luck

to attract the attention of foreign investors to consider the country as a favorable

destination for investment. Such an effort would become all the more difficult after the

expiry of the Stand-By Arrangement with the IMF which at present has been serving as a


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kind of guarantee for sound management of the economy and gives a certain degree of

comfort to foreign investors (Mohsin, 2004).

Regional place of study scenario:

The City District Government Karachi led by City Nazim Mustafa Kamal set out to bring a

lot of foreign direct investment (Foreign Direct Investment) into the city for the year 2007

but like 2006 this year has passed without any of the development projects materializing.

During the last two years the CDGK has signed millions of rupees worth of agreements

with various foreign companies to invest during the city and construct things such as the IT

Tower the Elevated Expressway and desalination plant but not a single project has

materialized to benefit the citizens.

The city Nazim has repeatedly claimed that it was their government which brought such

huge amounts of Foreign Direct Investment to the city but work has not kicked off on a

single project during the year 2007 the year during which the city saw a number of bloody

events.

City government officials had clarified that the May 12 might be scared many foreignersaway from the city as they did not want to invest their capital during a city where no one

has been sure about the next day.

It might also be mentioned that the present CDGK regime had thwarted the previous city

government which failed to bring any foreign direct investment during the city but during

the last two years the situation has been the same when it comes to Karachi and foreign

investment.

During the 27-month period of the current CDGK covering 2006 and 2007 the city

government had signed agreements with a consortium of foreign firms for the construction

of a 47-storey IT Tower and call center a desalination plant at Hawksbay a 24-kilometer


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long Karachi Elevated Expressway a 50-MW power generation plant at Dhabeji a bio-gas

power generation through dung plant at Cattle Colony and for the revamping of

slaughterhouses during Cattle Colony.

These projects were to bring prosperity improve the life style of the common man and

generate around 67 percent of the revenue for the national exchequer. Foreigners either

blame terrorist activities or the policies of the city or provincial governments.

It might also be mentioned that all such projects have to be completed on a BOT (built

operate and transfer) basis and the CDGK has been bound to provide all the facilities

including the provision of land for all the projects.

Conceptualizations:

Depending on the industry sector and type of business a foreign direct investment might be

an attractive and viable option. With rapid globalization of many industries and vertical

integration rapidly taking place on a global level at a minimum a firm needs to keep

abreast of global trends during their industry. From a competitive standpoint it has been

important to be aware of whether a companys competitors are expanding into a foreign

market and how they are doing that. At the same time it also becomes important tomonitor how globalization has been affecting domestic clients. Often it becomes imperative

to follow the expansion of key clients overseas if an active business relationship has been to

be maintained (Athukorala & Menon, 1995).

New market access has been also another major reason to invest during a foreign country.

At some stage export of product or service reaches a critical mass of amount and cost

where foreign production or location begins to be more cost effective. Any decision on

investing has been thus a combination of a number of key factors including:

Assessment of internal resources Competitiveness Market analysis Market expectations.


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The factors that might narrow the gap between Foreign Direct Investment approvals and

actual foreign direct investment inflows are:

Availability of infrastructure during all areas Transparency of processes policies and decision making Stability of policies Acceptance of International Standards including accounting standards Capital account convertibility so that all capital and payments might flow easily

during and out of the economy

Simplification of the regulatory framework during general and tax laws Improvement during bandwidth for internet and data communication Improvement during the enforcement of intellectual property rights Implementation of the WTO agreement full

Conclusion

Internal factors of the host countries also play detrimental role during attracting foreign

investment. The potential natural resources of a country attracting cheap labor for

international manufacturers proximity to markets economical legal and infrastructural

factors and above all political stability plays vital role to motivate investors.

Pakistan needs to significantly boost industrial production due to scarce national savings

and international borrowing. It has been of crucial importance to give high priority to

foreign investment to facilitate economic development therefore it has been an utmost

necessity to mobilize foreign resources into the country.

Despite the massive potential and attractive business opportunities the foreign investors

doing business during Pakistan have major concerns. These are frequent change and

unpredictable policies lack of follow-up for effective implementation of decisions non-

professional approach of government officials corruption the internal law and order


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situation last but not the least the political instability and marketing of religious extremism

by various unrecognized clerics defaming Pakistan to a greater extant internationally.

Internationally it seems "Pakistan has been an unsafe place to live forgets about any

business plan". This image of Pakistan portrayed wrongly by countries that discourage

overseas investors and expatriates.

Uncertainty has been the enemy of investment and nothing produces greater impact than

the prospects of the threats to life and property.

The year 2007 started from the chief justice of Pakistan issue and gaining momentum on

his (CJP) arrival at Karachi on May 12 or Islamabad's Red (Lal) Mosque operation during

June that fueled a series of suicide attacks on security personnel across the country.

The law and order situation could not stabilize and we witnessed another unfortunate

incident of twin-blasts on Ex-prime minister Benazir Bhutto caravan on October 18 2007.

The story does not end here and another incident has been during line to happen and likely

to take shape of a tragedy the Swat incident during which the people witnessed changing of

heaven into hell on October 28 2007. In such an uncertain and politically volatile situation

who has been going to risk their capital.

The rise of violent extremism and fundamentalism during the society has certainly

damaged Pakistan's image during the League of Nations. This has aggravated the decline

of foreign investment during Pakistan.

In many instances foreigners and facilities owned by foreign enterprises have been

attacked. Such an unsatisfactory law and order situation keeps prospective foreign

investors on the sidelines.

Safety of capital and the security for the personnel engaged during their projects are key

ingredients that govern foreign investment. Karachi the commercial capital of the country

which also hosts two active ports of the country has been disturbed during varying degrees.

At the moment fight between two politically strong parties has yielded a wave of terror

among the people during Karachi.

Economic development requires free mobility of labor and capital nationwide. Ironically

ethnic violence ran rampant during Pakistan. There were several incidents of murder and


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kidnapping. And if an individual which belongs to a particular ethnic origin scared to move

and work outside their own district for fear of discrimination then the country suffers from

heavy losses on this ground.

By treating the nation during an equal and fair manner we inform the outside investors

that we as a society will treat them fairly and squarely too and that there will be no

deformations natural or otherwise. The government must remember that globally multi-

ethnic society exists during harmony and so one has to live with all other races and

nationalities. Any sign of discrimination within the country has been a message for outside

investors that they might be discriminated against too and it does not inspire confidence.

Trust has been the whole sum of all political economic socio-cultural and technological

strengths and attractiveness.

In recent years the law and order situation has also worsen during the Punjab province.

However attractive incentives offered to foreign investors but all during vain. The

deterioration of law and order situation played a pivotal role during discouraging them to

set up their businesses during Pakistan. Therefore Pakistan might not achieve

macroeconomic sustainability unless it has a strong political system.

This sense of insecurity about life and property also apprehend domestic entrepreneurs. In

their case however poorly functioning legal and regulatory framework are the problematic

areas. The Pakistani legal system has been very slow time consuming and cumbersome.

Above all it has been not even within the need of our communal system. Foreign investors

have the options to rely on courts and arbitration mechanisms outside the country. These

options are not available to local businesses. These problems need the government's

attention for domestic and foreign investment to increase by significant amount a condition

that must be met for the economy to grow at the rate for which it clearly has the potential.

Pakistan possesses great investment opportunities but it lacks proper marketing of

potential areas for foreign investors. Pakistan due to its geo-strategic location and having

the gap during demand and supply offers profitability to its investors during


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Telecommunication Automobiles Banking & Financial services Oil & Gas Chemicals

Agriculture Dairy & live stocks Fishing Sector Shipbuilding and Repair Insurance Textile

& Apparel and electrical goods etc.

One of the other venues for Pakistan has been to take advantage of its geostrategic location

as it has been surrounded by oil and gas rich countries and might earn millions of dollars

annually by charging transit fee for gas and oil pipelines and international trade that

passes through its territory.

Energy sector has been another potential domain during Pakistan that has been the focal

point of the investors since last many years and even during the current scenario the major

part of the foreign investment has been coming during this sector. Pakistan has diverse

ethnic composition of the country which has not only affected resource distribution but also

affects policy continuity.

Interestingly Pakistan possess 65 percent of its population between the age from 18 to 34

years which shows its potential to drive the economy to new heights and it depends entirely

on the government's policy to nurture its fruit. But Pakistan's uneven record on political

stability and democracy has deprived the country of a long-term vision direction and

continuity of economic policy.

In Geneva on 19 January 2009 Global foreign direct investment (Foreign Direct

Investment) inflows were estimated to fall by 21% during 2008 to an estimated $1.4 trillion

and were estimated to further decline during 2009.

Record floods during July-August 2010 lowered agricultural output had contributed to a

jump during inflation and restoration costs strained the limited resources of the

government. Textiles account for most of Pakistan's export earnings but Pakistan's failure

to expand a feasible export base for other manufactures has left the country vulnerable to

dangles during world demand. Thus Foreign Direct Investment reduced to $774 million

during July-November during 2010 it was $1.62 billion depicting a decrease of 846.7

million dollars. Portfolio investments have reached to $311.3 million during July-November

of fiscal year 2010. In 2009 it was 162.9 million dollars.


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In a state distressed with terrorism and many a time being termed a failed state' and most

dangerous country during the world' the last thing one needs has been to have corrupt and

inefficient government. That has been during particular what we are witnessing at the

moment.

Pakistan has a extremely negative image on world because of their media as well as well as

International press so extraordinary measures and policies are required to reduce this

wrong perception about Pakistan. Broadcasting the provincial quarrels and various verbal

spates between the high ups of various political parties during the hosted shows on news

channels only add to the image of an unstable country.

In short domestic political stability the independent press and a fair and impartial

judiciary all needed to be strengthened to bring economic continuity and renewed

confidence. The other areas that are needed to be addressed are good foreign and trade

policies privatization policy tax policy and policy on functioning and market structure.

This will bring foreign investment


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CHAPTER 3

RESEARCH HYPOTHESIS FOR FOREIGN DIRECT INVESTMENT:

Conclusion 1:

The relationship between FDI and Economic Growth is still inconclusive.

Conclusion 2:In the past two decades, the primary source of external funding for developing countries

has been by FDI.

Conclusion 3:

FDI & TNCs do effect the economic growth and other kinds of developments of any

country through three main dimensions; size effects, skill & technology effects and

structural effects.

Hypothesis 1: The growth impact of FDI differs by the country of Origin of FDI.

Hypothesis 2: The impact on economic growth of FDI differs depending on host country

characteristics, including the quality of Institutions, the extent of trade openness and the

stock of human capital.


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Methodology

The methodology will tell us about the research processes which have been used in order to

gather the required information, facts and other relevant material. These methods may

either be quantitative or qualitative.

Sampling

In order to carry out the research, we will have to approach and contact different people

and institutions that have varying levels of knowledge, experience and standing in the

industry. To make the list of the people systematic we carry out sampling.

We shall mainly use the six broad types of sampling.

Random SamplingIn this every individual out of the sample frame has an equal

chance of being picked up for an interview or survey. This is going to make sure that the

results obtained are accurate and bias less.

Snow BallingUsing this method will we reach to other people through our initial

contacts, since contact with higher management staff and government officials may be

difficult we shall reach to them through others only.

Quota Sampling & Stratified SamplingHere the quota is set and then a certain

number of pupils would be chosen for an interview or survey. Quota and Stratified

sampling is used when there is a large number of people who have different levels of

expertise.

All these different types of sampling methods shall be used to connect to the high

ranking government officials who shall help us in obtaining facts about FDI. Banks and

other pupil re

Population

The Pakistani business community and the people involved with the foreign direct

investment and dealings will be in the sample frame, as in the population.


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Sample

Just like population the sample will be from the same community.

Data Collection InstrumentThe aim of this data collection form is to a gather baseline data about a selected group

Of individuals in the workplace, for the purposes of interviewing and survey. The groups

shall be organized into sub groups and people categorized according to different qualities.

Both primary and secondary types of data shall be used in the study. Data before the year

2000 would not be used so as to keep the results and calculations precise and short.

Primary Data Collection

This includes the material gathered, collected and organized by the researcher himself or

herself specifically for the research purpose. In the case of FDI we will shall use interviews

and questionnaires/poll questions. People in banks, trading houses and corporate divisions

of the government will be interviewed and surveyed, and hence material regarding FDI

shall be gathered.

Inn each case the researcher shall personally visit the pupil and take a firsthand account of

what and how FDI has been effecting Pakistan and other nations on general.

Random Sample Survey

Here in the random sample survey everyone within the sample frame has an equal chance

of being picked up for the interview or the survey. Any respondent can be picked and

interviewed.

Interviews

Here in interviews the respondents shall be questioned orally and their feedback taken

down. In some cases the interviews shall be structured while in some cases unstructured.


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Poll Questions

Poll questions will allow us to gather the information which is high on reliability,

objectivity and representative ness.

Open Poll Questions

In open poll questions the questions will not be followed by any choices, the respondent will

be free to answer the question in whatsoever way he wants, elaborate it, add his own

thoughts and ideas and so on. While conducting interviews on FDI, open poll questions will

not only prove to be a useful technique but it shall provide us with more insight and

knowledge of how things effect and matter.

Closed Poll Questions

In an open poll, the question is followed by choices provided by the researcher only. The

respondent will have to choose from a limited number of choices and will mark only one

option out of the others. Close polls will provide an easy and accurate way for us to collect

the data and it will clearly show us the response and inclination of the industry regarding

FDI.

Statistical Tools and Software for Data Analysis

Statistical Analysis

SAS/STATsoftware includes a wide range of statistical analyses, including analysis of

variance, regression analysis, categorical data analysis, multivariate analysis, survival

analysis, psychometric analysis, cluster analysis, and nonparametric analysis.

Statistical Interface

The Analyst Application is a data analysis tool that provides easy access to basic statistical

analyses. The Analyst Application is included with SAS/STAT software on Windows 95,

Windows NT, UNIX workstations, OpenVMS Alpha, OpenVMS VAX, and OS/2.

Exploratory Data Analysis
http://support.sas.com/rnd/app/da/stat.htmlhttp://support.sas.com/rnd/app/da/stat.htmlhttp://support.sas.com/rnd/app/da/stat.htmlhttp://support.sas.com/rnd/app/da/stat.htmlhttp://support.sas.com/rnd/app/da/analyst.htmlhttp://support.sas.com/rnd/app/da/analyst.htmlhttp://support.sas.com/rnd/app/da/insight.htmlhttp://support.sas.com/rnd/app/da/insight.htmlhttp://support.sas.com/rnd/app/da/analyst.htmlhttp://support.sas.com/rnd/app/da/analyst.htmlhttp://support.sas.com/rnd/app/da/stat.htmlhttp://support.sas.com/rnd/app/da/stat.html


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SAS/INSIGHTsoftware is a dynamic tool for visualizing your data to uncover trends, spot

outliers, and gain an understanding you might not derive from other analytical methods.

You can explore data through a variety of interactive graphs and analyses linked across

multiple windows as well as describe data distributions and fit explanatory models.

Matrix Programming Language

SAS/IMLsoftware provides a powerful and flexible matrix programming language in a

dynamic, interactive environment for programmers, statisticians, and researchers. You can

use the SAS System for data manipulation and statistical analysis, then employ the

SAS/IML matrix language for more specialized analyses and exploration.

Matrix Programming Interface

SAS/IML

Studio is a graphical user interface and extension of SAS/IML software that

enables you to explore data interactively using standard statistical graphics and tables.

SAS/IML Studio provides an integrated development environment for writing, debugging,

and executing SAS/IML programs. SAS/IML Studio also implements the IMLPlus

programming language, which is an enhanced version of the IML programming language.

IMLPlus provides new language features such as the ability to call SAS procedures and

external C/Fortran/Java functions. SAS/IML Studio also provides the capability to

interface with the R language. SAS/IML Studio requires a PC running the Microsoft

Windows operating system.

Data Analysis Methodology

Data analysis methodology shall be done while keeping in view the software used.

Sample Characteristics

The pupil in the sample shall be related to the government so that they have a complete

know how of FDI or they shall be a part of a MNC or else company so that they are eligible

enough to help us with our cause.

Demographics of Respondents

The respondents shall only belong from Karachi, Lahore and Islamabad since these three

are the only cities in the country which have majority of the business community residing
http://support.sas.com/rnd/app/da/insight.htmlhttp://support.sas.com/rnd/app/da/insight.htmlhttp://support.sas.com/rnd/app/da/insight.htmlhttp://support.sas.com/rnd/app/da/iml.htmlhttp://support.sas.com/rnd/app/da/iml.htmlhttp://support.sas.com/rnd/app/da/iml.htmlhttp://support.sas.com/rnd/app/da/iml.htmlhttp://support.sas.com/rnd/app/studio/studio.htmlhttp://support.sas.com/rnd/app/studio/studio.htmlhttp://support.sas.com/rnd/app/studio/studio.htmlhttp://support.sas.com/rnd/app/studio/studio.htmlhttp://support.sas.com/rnd/app/studio/studio.htmlhttp://support.sas.com/rnd/app/studio/studio.htmlhttp://support.sas.com/rnd/app/da/iml.htmlhttp://support.sas.com/rnd/app/da/iml.htmlhttp://support.sas.com/rnd/app/da/insight.html


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in them. Apart from them a few foreigners who have invested in the country and live

abroad shall also be contacted and interviewed.

Conclusion

All the methods, tools and software mentioned above will be employed in our research

about FDI.

CHAPTER 4DATA ANALYSIS, RESULTS/FINDINGS AND

DISCUSSIONS

Different Tests & Results

Ho There is no impact of FDI over GDP

Ha There is an impact of FDI over GDP

Regression Analysis

Regression Statistics

Multiple R 0.048704

R Square 0.002372Adjusted RSquare -0.01513

Standard Error 1783534

Observations 59

ANOVA

df SS MS FSignificance

F

Regression 1 4.31E+11 4.31E+11 0.135528 0.714131

Residual 57 1.81E+14 3.18E+12

Total 58 1.82E+14


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CoefficientsStandard

Error t Stat P-value Lower 95%Upper95%

Intercept 864333 358509.1 2.41091 0.019159 146431 1582235

2.89 146.7672 398.6704 0.368142 0.714131 -651.556 945.0908

FDI GDP

1980

137.53

51,736

1981

164.16

55,048

1982

400.6

266,571

1983

534.18

284,667

1984

568.05

295,977

1985607.26

321,751

1986

623.56

342,224

1987

599.07

362,110

1988

769.14

385,416

1989

559.72

403,948

1990

548.07

422,484

1991

149.59446,005

1992

27.14

480,413

1993

74.19

491,325

1994

68.43

513,635

1995

23.13

534,861

1996

22.79

570,157

1997

57.17

579,865

1998

36.32

600,125

1999

102.14

625,233

2000

45.72

649,656


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2001

228.02

3,632,091

2002

937.34

3,745,118

2003

377.93

3,922,104

2004

406.124,215,582

2005

490.42

4,593,230

2006

689.43

4,860,476

2007

688.62

5,191,710

2008

614.48

5,565,375

2009

1353.65

5,767,536

2010

1867.13

6,018,865

Analysis:

With the statistics we proved Ha correct, as there is a significance impact of FDI on GDP .

Ho there is no relationship between FDI and output growth in Pakistani economyHa there is a significant relationship between FDI and output growth in Pakistani economy

Regression Analysis

Regression Statistics

Multiple R 0.282277191

R Square 0.079680413

Adjusted R Square 0.022160438

Standard Error 50.21874548

Observations 18

ANOVA

Df SS MS F Significance F

Regression 1 3493.531077 3493.531077 1.385265098 0.25641939

Residual 16 40350.75837 2521.922398

Total 17 43844.28944

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%


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Intercept 16.34079996 15.29649541 1.068270837 0.30125168 -16.08632151 48.76792143

216.2 0.008962272 0.00761468 1.176972853 0.25641939 -0.007180129 0.025104673

Year

FDI (inMillionUS$)

AnnualGrowth

Rate

1989-90 216.2 0

1990-91 246 13.78

1991-92 335.1 36.22

1992-93 306.4 8.56

1993-94 354.1 15.57

1994-95 442.4 24.94

1995-96 1101.7 149.03

1996-97 682.1 38.09

1997-98 601.3 11.85

1998-99 472.3 21.45

1999-00 469.9

0.51

2000-01 322.5 31.37

2001-02 484.7 50.29

2002-03 798 64.64

2003-04 949.4 18.97

2004-05 1524 60.52

2005-06 3521 131.04

2006-07 5139.6 45.97

2007-08 5152.8 0.26

Source: State Bank ofPakistan.

Analysis:

We through our statistics have proved that Ha is correct, proving the relationship between

growth and FDI.

Discussions

Looking at the Statistics the significance of FDI again has proved important as it impacts

on both growth and GDP positively with its increase. For the past 30 years we have seen

our theory proven right as results shown by our statistical tests prove the Ha in both cases

is correct.

Conclusion

The data is synchronized and is analyzed according to the modern methodology and the

requirements of the software used. In the end all the analysis have been compiled and


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evaluated against the results and hence the final tabulated and theoretical result published.

In both cases Ha is proven right with tests conducted. If Pakistan wants to prosper

economy wise then FDI will play a very important role.


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Chapter 5

Conclusion:

Our Research proves that there is significant relation between FDI and GDP, with increase

in FDI it helps GDP grow as well. The growth In terms of all goods and service produced in

the country over the year is effected positively. We will conclude our research with the how

we have gone by defining the FDI and its effects and what can be done to improve it in the

future.

In lay mans term Foreign Direct Investment (FDI) refers to the investment made in a

foreign country by an investor. In most modern and developing countries FDI is seen as an

important source of funding, advanced technology alongside other hard and soft skills. FDI

gives any country and firm with a unique opportunity to interact and gain an increased

level of exposure in terms of industry and the international market. Although there may be

different types of FDI, their effects are almost the same.

Compared to other Asian nations such as Singapore and India, Pakistan is much far

behind in terms of attracting Foreign Direct Investment dude to various reasons. Political

upheaval, irregular electrical supply, lack of security and other major issues have made

Pakistan lag behind in attracting Foreign Direct Investment in addition to the declining

economy. The Government will have to revamp its policies and plan a completely different

strategy in order to gain back the lost Foreign Direct Investment back in the country. The

industry needs to be stabilized; the government will need to provide high level security and

other actions which shall bring Foreign Direct Investment. Primary and Secondary

methods of data collection were used in order to collect information related to the local

industry. The data collected from the print and the live interviews of pupil helped us to

understand the current market situation and an overall impact and level of Foreign DirectInvestment in the country.


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The Graph above shows the rate of FDI in Pakistan from 19702010. This graph gives us

a clear picture of what the current market situation is.

After a though study and research a few points were found which showed that Foreign

Direct Investment is one of the most important factors which effect the growth of a

countrys economy. Developing countries may greatly benefit from FDI dude to various

reasons. FDI can boost the economy and employment, help the retail industry, increase the

competition and give a reason for the supporting industry to improve and expand. In a

nutshell Foreign Direct Investment is essential for growth and the increasing presence of a

country in the global and emerging markets.

To make the final conclusion I would like to add some recommendation which may help to

revive the FDI in this country. The government should make strong efforts to attract as

much FDI as they can especially in the foreign exchange sectors, this will decrease the

unfavorable balance of payments. Political stability and satisfactory law and order

situation is imperative in order to attract investors. Recently, Pakistan has been shown as


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one of the worlds most corrupt and dangerous country in the global media, we should try

to enhance our image as being a friendly nation and should use the media to show the

brighter side of the country and end the misconceptions being shown on international

media. The authorities should streamline the administrative procedures regarding

approval and official clearances. Foreign investors in Pakistan have to cope with a complex

legal situation, this method should be made simpler and transparent so that the foreigners

can understand and pass through it easily.

The tax collection system is very complex and highly unorganized, that needs to be

changed. The level of taxes levied on foreign investments and multinational cooperations

need to be reduced so that at least more people look at Pakistan as an option. Foreign firms

operating in Pakistan are currently facing cash flow problems as a result taxes and the

Asian crisis. That these firms cannot borrow more than their equity capital has further

aggravated the cash flow problem. There is a need to review this policy.

Anti-monopoly Restrictions; The existing monopoly control laws that benchmark the

concentration of economic power to an unrealistically low limit of Rs 300 million for assets

discourage capital formation.

The monopoly control authority must review the limit in consultation with the Overseas

Investors Chamber of Commerce and Industry in Pakistan. The availability of better

quality and more reliable services in all areas of infrastructure are key ingredients of a

business environment conducive to foreign investment. Other than this, building trust and

a rapport of confidence between the host and the foreign country will lead to a better and

increasing FDI.


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Chapter 6

Recommendations:

In the light of current situation and in order to improve and enhance the investment

climate and increase FDI situation, the following recommendations must be taken into

consideration:

1. To continue working towards attaining a stable macroeconomic environment.

2. To ensure that legislation has a unambiguous and unique interpretation.

3. To catalyze the implementation of new laws and corrections to existing legislation.

4. To ameliorate and improve the business climate.

5. To take evaluates to combat bureaucracy, corruption issues and red tape, includingestablishing a powerful, independent supervisory authority.

6. To stimulate the participation of the private sector, increase the pace of applicationof privatization programmers and work on changing negative cultural perceptions

and concept of privatization.

Foreign direct investment is now perceived in many developing countries as a key source of

much needed capital, foreign advanced technology, and managerial skills. Realizing its

central importance to economic development, these developing countries have taken wide-

ranging steps to liberalize their inward FDI regime and have succeeded in attracting

substantial amount of FDI.


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Before the financial crisis, the Asian countries emerged as the largest FDI recipients with

an estimated $87 billion of inflows in 1997, with East and Southeast Asian countries

accounting for more than 90 percent.

South Asian countries, however, lagged behind considerably compared with their other

fellow Asian countries. Pakistan stands nowhere close to many other Asian countries in

attracting FDI.

Another major problem facing Pakistan is massive FDI on the power sector following the

1994 power policy. It has invited considerable criticism based on its serious balance of

payments implications. The new power policy has resulted in an overcapacity in the power

sector under subsequent industrial stagnation. Massive inflows of FDI also gave rise to a

huge amount of recurring foreign exchange cost to cover fixed and variable foreign

currency expenses. Further, it involves the problem of large cash outflows by IPPs for debt

repayments, dividend payments, and fuel payments. With terms and conditions stated in

the power policy and the various assumptions made in calculating the balance of payments

implications, Pakistan is likely to experience.

Year Debt Payments Dividend Payments Fuel Payments Total BOP Impact

First, FDI has not necessarily beneficial to developing countries in the short term if an

improper FDI policy has been implemented. Second, developing economies must accord

their short-term priority to inviting FDI to the foreign-exchange-earning sector, or at least,

both the foreign-exchange-earning sector and other sectors simultaneously. International

development organizations, including the Asian Development Bank, must consider this

need in their operations particularly build-own-transfer type operations that involve the

participation of foreign private investors.

Policy Recommendations

General Recommendations


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First of all, Pakistan must make stronger efforts to attract as much FDI as possible to the

foreign exchange sectors in the short term. Taking into account unfavorable balance of

payments prospects, it must refrain from attracting any further massive FDI in the non

foreign-exchange-earning sectors for some years in the future. Political stability and

satisfactory law and order are likewise critical to attract FDI.

The international press and media coverage Pakistan has received in recent years was not

at all conducive to attracting foreign investors. News items on Pakistan being one of the

most corrupt countries in the world, its bomb detonations, and its use of child labor will

hardly encourage foreign investors to undertake initiatives in Pakistan. The countrys

political leadership must take practical steps to improve the law and order situation

particularly in the major growth poles of the country including Karachi. Macroeconomic

stability plays a key role in boosting economic growth and restoring foreign investors

confidence on the economy. In an environment of large fiscal deficit and precarious foreign

exchange reserves position, foreign investors are unlikely to increase their participation.

Pakistans fiscal situation and foreign exchange reserves position will remain under

considerable strain for some time making the macroeconomic environment less conducive

for foreign investors. Some drastic and far-reaching measures are needed to reduce the

fiscal deficit on the one hand and raise foreign exchange reserves on the other. Inconsistent

economic policies discourage foreign investors in undertaking projects of medium to long-

run duration. Several recent examples of inconsistent economic policies pursued by

Pakistan have sent wrong signals to foreign investors.

There has been a strong perception among foreign investors that the pro-business policies

and inducements used to attract prospective new investors are somehow lost in the reality

they encounter when they actually begin to set up and operate their business in Pakistan.

Although the intriguing investment approval requirement has been removed, numerous

permits and clearances from different government agencies at national, regional, and local

levels are still applied to foreign investors, causing delays to complete the process. The

authorities must streamline administrative procedures regarding approval and official


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clearances. Foreign investors in Pakistan have to cope with a complex legal situation. Law

based on different legal systems are applied independently and it is often not obvious which

one will take precedence. The legal situation is even further complicated by the fact that

government agencies are empowered to introduce certain changes through administrative

orders and SROs. The laws and regulations must be simplified, updated, modernized,

made more transparent, and their discretionary application must be discouraged.

Specific Recommendations

Taxes

Payment of taxes and contributions in Pakistan is complex and cumbersome. In addition to

corporate income taxes, a large number of indirect taxes are levied at the federal,

provincial, and local levels. Basically, separate collection of taxes and contributions have

forced enterprises to face unnecessary, cumbersome, and costly administrative procedures,

and to deal with a large number of collecting agencies at all three levels of government.

There is an urgent need to reduce the number of taxes and contributions; streamline tax

regulations and administrative procedures; and most importantly reduce the contact of

foreign firms with a large number of tax and contributions-collecting agencies. The

presence of such a large number of taxes and collecting agencies may breed corruption,

which adds to the cost of production. Import tariffs on plant and machinery have

discouraged investment, more so in Pakistan where capital is scarce and cost of borrowing

is high. Because of this high cost, manufacturers are discouraged to modernize and the

quality of local industry products is restricted against international competition. There is a

need to examine tariffs of plant and machinery with a view to substantially reducing them.

Credit Facilities

Foreign firms functioning in Pakistan are currently facing cash flow problems as a result of

many taxes and the Asian crisis. That operating firms cannot borrow more than their

equity capital has further aggravated the cash flow problem. There is a need to review this

policy.


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Anti-monopoly Restrictions

The existing monopoly control laws that benchmark the concentration of economic power

to an unrealistically low limit of Rs 300 million for assets discourage capital formation.

The monopoly control authority must review the limit in consultation with the Overseas

Investors Chamber of Commerce and Industry in Pakistan.

Labor Laws

Over enhance protective labor laws do not encourage productivity and frighten away much

needed productive investment. There is a dire need to rationalize the labor laws and

multiple levies on employment that inhibit business expansion and job creation.

Infrastructure:

The accessibility of better quality and more reliable services in all areas of infrastructure

are key ingredients of a business environment conducive to foreign investment. In most

institutional infrastructure services, Pakistan is highly deficient as compared with many

developing countries that have attracted higher levels of foreign investment. If Pakistan

wants to catch up gradually with the development of the economies of East and Southeast

Asia, it will have to investment more in the areas of education and physical infrastructure.On the education front, the government must identify the nature of skills critical to

sustained industrial growth, and formulate strategies, policies, and programs that could

facilitate the enhancement of these skills.

In telecoms, the government must expedite the privatization of PTC. In the railway and

road sector, government must engage the private sector in leases, concessions, and build

operate- transfer (BOT) type contracts. The high cargo handling costs at the Karachi port

need to be controlled. Dredging of shipping channels to accommodate large vessels,

lowering labor costs, upgrading port handling equipment, and improving documentary

procedures need urgent attention.


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Confidence-building Measure:

The close business concern between the private and public sector is essential to build

confidence. In this respect, it is recommended that a forum be established where the

private and public sectors could sit together to discuss business promotion-related issues.

The forum must be composed of the prime minister, all the presidents of the national

chambers, top businessmen/industrialists, top bankers, as well as heads of overseas

chambers of commerce and relevant ministries' secretaries and ministers. The forum may

meet regularly to review the economic situation of the country. The problem faced by the

business community can be discussed and decisions could be taken immediately. This kind

of partnership between the government and private sector will help restore market.

Hence these can be incorporated in order to enhance and improve the situation of the state

of foreign investment.


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Documents

Impact of FDI