Foreign Direct Investment Prospects for Pakistan Khalil Hamdani

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 Import liberalization Foreign exchange guarantees Board of Investment Export Processing Zones Authority Foreign Investment Act

Pakistan’s economic growth cycle Source: State Bank of Pakistan Annual Report 2007 -2008.

World FDI inflow Billions $ 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 GDP % Millions $ 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 Note: percent age of gross fixed capital formation. Source: UNCTAD, World Investment Report 2008.

FDI stock and GDP % Note: FDI stock as percent age of gross domestic output. Source: UNCTAD, World Investment Report 2008. Millions $

Foreign presence Number of foreign affiliates

FDI inflow by type Millions $ Source: Board of Investment.

FDI inflow by industry 100% 90% 18 12 80% 70% 21 60% 50% 22 40% 30% 20% 10% 0% 12 26 Manufacturing 28 Oil & Gas Telecommunications Financial business 31 Other services 13 17 2004 2008 Source: State Bank of Pakistan Annual Report 2007 -2008.

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

Technology 70% of MVA is low tech production Note: 2005 data. Source: UNIDO, Industrial Development Report 2009. 30% is Medium & High-tech

A smaller manufacturing base with much less technology content 17% 30% GDP Note: 2005 data. Source: UNIDO, Industrial Development Report 2009. 22% GDP

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

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

FDI prospects tren d Note: Data for fiscal year (July-June). FY 2010 is provisional.

FDI strategy 1. 2. 3. 4. Address investor confidence Target Asian investors Target existing investors Sustain public investment

1. Investor confidence Policy framework attractive to FDI Cost of doing business high but competitive in the region Domestic private sector uncertain More than 3/4 th 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 Region Of the 7 top TNCs from South: 6 Asian; 1 Mexican Of the top 100: 78 Asian; 11 African; 11 Latin American Of Fortune Global 500: 55 Asian; 10 Latin American Source: UNCTAD. Industry Electrical/electronic equip. / computers: 17 Diversified: 13 Petroleum: 10 Food & beverages: 8 Transportation & storage: 7 Telecommunications: 6

Target Asian investors Resource sector resilient to global trend Oil & Gas exploration, coal, alternative energy Market-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 market Attract 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.

Global Value Chain: textiles and garments Synthetic Fibers Raw Cotton Yarn Textile Finishing Garment production FDI Joint Venture potential now<2% Need to upgrade technology 11. 3% 6. 9% 16. 0% 54. 5% Value Added Need to upgrade skills Source: Gherzi

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

Corporate social responsibility BACKWARD FORWARD TNC SUPPLIERS SUPPLY CHAIN MANAGEMENT Improved productivity Higher incomes for suppliers Reduced costs for company A A CONSUMERS A PRODUCT STEWARDSHIP Better products for consumers Enlarged market share for company Creates Shared Value for Company and Society across supply chain 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. 9 4. 0 Education expenditure share of GDP 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.

Summary FDI is more than an external resource inflow FDI 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 mediumterm objective.