Foreign Direct Investment

Presented To: Ma’am Bushra Usman

Presented By (BBA-M) 7th Sem : Sara Hanif (33)Sania Khan (26)Zunera Iqbal ()Iqra Babar (03)Mursil Butt (54)Hafiz Umer (34)

Foreign Direct Investment

&

Its impact on Pakistan economy

Foreign Direct Investment

&

Its impact on Pakistan economy

Introduction

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It has become a key component of national development strategies for almost all the countries over the Globe

The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999

Foreign direct investment definition:

Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country.

Here two countries are involved namely: The home country (the country from which the investment originates) The host country (the destination of the investment).

In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country. The foreign direct investor may invest in by any of the following methods:

By incorporating a wholly owned subsidiary or company, by acquiring shares in an associated enterprise

Through a merger or an acquisition of an unrelated enterprise

Participating in an equity joint venture

Who Can Be A Foreign Investor?

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:

An individual; A group of related individuals;

An incorporated or unincorporated entity;

A public company or private company;

A group of related enterprises;

A government body;

An estate (law), trust or other societal organization

Importance of FDI

Home country:The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: Circumventing trade barriers, hidden and otherwise Capability to increase total production capacity

Explore new markets: in case of these countries, their companies get an opportunity to explore newer markets and thereby generate greater customer base

Host countries:

It can contribute to the general development as well as to the poverty reduction objective in a variety of ways. Major benefits to host countries are as follows:

FDI allows transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.

Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.

Profits generated by FDI contribute to corporate tax revenues in the host country. Thus, it contributes not only to the direct source of investment but also to the government revenue.

FDI helps to integrate the host countries economy to the global economy.

Foreign Direct Investment (FDI) and Investment Policy of Pakistan

Under the current Investment Policy of Pakistan, business and service enterprises are divided into 3 main sectors or categories which are as follows:

Manufacturing or Industrial sector Non-Manufacturing Sector

Other sectors

Non-Manufacturing Sector is further categorised into the following:

Service Sector

Infrastructure Sector, and

Social Sector

Whereas other Sectors are categorised as:Tourism

Housing and Construction

How Will Funds Get Into Pakistan And What Will Be The Exit Strategy?

State Bank of Pakistan (SBP) has the authority of supervising remittances coming in and going out of the country

There are no restrictions on INWARD REMITTANCES by SBP, but any OUTWARD REMITTANCES whether be royalty, dividend etc. need to have a prior approval from SBP,

which the authorizing bank would do on the investor’s behalf.

Review of FDI Policy

Early Years 1947

In order to achieve this objective, however, changing types of industrial policies have been implemented in different times with a changing focus on either the private sector or the public sector. Pakistan was basically an agricultural economy upon its independence in 1947. Its industrial capacity was negligible for processing locally produced agricultural raw

material. This made it imperative for succeeding governments to improve the country’s

manufacturing capacity Many Karachi based industrialists and traders brought substantial capital with them that

formed the basis for investment in wide range of industries esp. Textile.

1950s

Faltering economy was converted into one that was beginning to grow & there was a little show in terms of improved living standards by the end of 1950s.

The private sector was the main vehicle for industrial investment during the 1950s and It was gradually realized that agriculture should be given priority and provide the basis for expansion of economy.

For the further growth of industrial sector, the growth of agricultural sector was a prerequisite.

In 1958 martial law by Ayub Kahan ushered new phase of Pak’s economy.

1958-1969

the 1960s and the involvement of the public sector was restricted to three out of 27 basic industries.5 It was also set that in the event of private capital not forthcoming for the development of any particular industry of national importance, the public sector might set up a limited number of standard units.

Public sector participation in industry declined and it was led to private sector. Greater concern for agri. By the late 1960s the economy was largely dominated by the private sector in important

areas like banking, insurance, certain basic industries, and international trade in major commodities.6

The services sector was reserved for local investors. Foreign investment was not allowed in the field of banking, insurance, and commerce.

Year of Massive Nationalization (1972-1977)

In 1975 there was another round of nationalization of small-sized agro processing units. The sudden shift toward nationalization of private sector industrial units shattered private

investors’ confidence. At the same time there was also acceleration in the direct investment by the public sector

in new industries ranging from the basic manufacture of steel to the production of garments and breads.

Private sector while during the 1970s, the public sector was given the dominant role.

Importance of FDI Up to date Technology: Foreign direct investment (FDI) provides a major source of

capital which brings with it up-to-date technology. It would be difficult to generate this capital through domestic savings, and even if it were not, it would still be difficult to import the necessary technology from abroad,

Job opportunities: Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life

Educational programmes: Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life.innovation

Trade: Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in PAK both in terms of import and export production. Products of superior quality are manufactured by various industries in PAK due to greater amount of FDI inflows in the country.

FDI POLICY in Pakistan

Pakistan's Investment Policy has been formulated to create an investor-friendly environment, with a focus on further opening up the economy and marketing the potential for direct foreign investment. The essence of the policy is to strengthen Pakistan's competitiveness by improving the policy regime, offering fiscal and tariff relief and providing comprehensive facilitation services.

Previously, only the manufacturing sector was open to foreign investment. Now, the policy regime is much more liberal with most other economic sectors open for foreign investment and with significant efforts at mobilizing domestic financial resources towards long term investment.

The Investment Policy of Pakistan may vary vis-à-vis these different sectors.

Investment Policy of Pakistan for Manufacturing & Industrial SectorForeign investors are allowed to hold 100% equity of industrial projects without permission of the Government. No Government sanction is required for setting up any industry, in terms of field of activity, location, and size, except for the following business sectors:

Arms and Ammunitions, High Explosives, Radioactive Substances, Security Printing, Currency and Mint, Alcoholic beverages or liquors.

Investors are not required to obtain No Objection Certificate (NOC) from the Provincial Governments for locating the project anywhere in the country except in the areas that are notified as negative areas.

Investment Policy of Pakistan for Non-Manufacturing SectorForeign investors are allowed to hold 100% equity of non-manufacturing projects on repatriation basis subject to the terms and conditions indicated against each sub-category stated herein below:

Where registration of a company in Pakistan is required, for a non-manufacturing project, intimation should be given to the State Bank of Pakistan (SBP).

Investment in Service Sector in PakistanForeign Direct Investment in a Service Sector is allowed in any activity subject to obtaining

permission, NOC or license from the concerned agency/agencies and fulfilling the requirements of the respective sectoral policy.

Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of foreign equity investment in the project shall be 0.15 million dollars.

Investment in Infrastructure Sector in PakistanForeign Direct Investment in an infrastructure sector is allowed for infrastructure projects which may include development of an Industrial Zone(s).


Investment in Social Sector in PakistanForeign Direct Investment in the social sector is allowed in the following fields:

Education, Technical/Vocational Training, Human Resource Development (HRD), Hospitals, Medical and Diagnostic Services.


1. Oil and Gas

Oil & Gas FDI in $ Million2005-2006 312.72006-2007 545.12007-2008 634.82008-2009 775.0

Jul 09- Mar10 519.9

2. Financial Business: Financial sector: For a certain time period, the financial sector of Pakistan had been attractive for foreign investors due to its high banking spread, market size, and profitability level. However, in recent times, the failure of the Muslim Commercial Bank (MCB) to takeover Royal Bank of Scotland (RBS) made foreign investors hesitate to invest in Pakistan’s banking sector. According to the report, FDI in the financial sector fell to $86.4 million, as compared to $635 million in the same period of last year.

Financial Business FDI in $ Million2005-2006 329.22006-2007 930.3

2007-2008 1,864.92008-2009 707.4Jul 09- Mar10 118.7

3. Textile : As the result of measures taken under vision 2005,

The fiscal year 2002-03 witnessed tremendous inflow of FDI in textile sector in the coursework of last one year has reached to US$4 billion which has led to improvement in

productivity, both in terms of quality & quantity, in yarn, fabrics, home textiles & clothes, besides generating over 300,000 new jobs.

Foreign direct investment (FDI) in Pakistan’s textile & clothing sector declined in the coursework of the fiscal year 2008 ending June, partly due to political turmoil in the country.

The slump was blamed on increased costs of raw materials, shortage of energy, high inflation, shortage of expert manpower, together with political turmoil over the past seven months.

The country attracted US$36.9m in textile & clothing FDI in the coursework of the year, compared to US$18.1m in the coursework of the earlier year, according to the statistics released by the State Bank of Pakistan (SBP).

Textile FDI in $ Million2005-2006 47.02006-2007 59.42007-2008 30.12008-2009 36.9Jul 09- Mar10 18.1

4. Trade: The government have gradually liberalized its trade and investment regime by providing generous trade and fiscal incentives to foreign investors through number of tax concessions, credit facilities, and tariff reduction and have also eased foreign exchange controls. But, due to rapid political changes and inconsistency in policies the level of FDI remained low compared to other developing countries.

Trade FDI in $ Million2005-2006 118.02006-2007 172.12007-2008 175.92008-2009 166.6Jul 09- Mar10 65.1

5. Construction:

Construction sector has also been a major recipient of foreign investment during this decade. Pakistan has started building new ports, highways, roads and bridges and oil-rich Middle East investors have ventured into real estate development and construction of housing units.

But the average yearly inflow of FDI in construction, however, fell nine per cent to $87 million during FY08 to FY10 (till March) from $96 million in earlier three years.

“This has happened mainly because the real estate price bubble burst in Dubai and elsewhere in the UAE,” explains an office-bearer of the Association of Builders and

Developers.

Traditionally, the FDI inflows have come from the US and the UK, Saudi Arabia and the UAE, Norway, Switzerland and Germany and China, Japan and Hong Kong.

Slump in the macro-economy, decline in exports of cement, and the energy saga were the main reasons for declining ratios of FDI in the cement and construction sector.

The Housing and Construction sector has also been declared as an Industry. It has also been placed under priority industries of the investment policy.

Construction FDI in $ Million2007-2008 89.02008-2009 93.4Jul 09- Mar10 77.7

6. Power:

But the pace of FDI inflows in power generation has not picked up as yet. The Asian Development Bank is also planning investment in this sector.

“You cannot attract investment in manufacturing without offering a well-built infrastructure and assurance of continuous energy supplies,”

Power sector: The government is trying its level best to attract more inflows of FDI in the power sector. Most recently, some private companies signed a memorandum of understanding (MOU) for investing in the power sector. The delay in rental power projects badly hit the confidence of foreign investors.

Power FDI in $ Million2005-2006 320.62006-2007 193.42007-2008 70.32008-2009 130.6Jul 09- Mar10 38.2

9. Communication (IT Telecom):

The post-recession trend also shows a gradual shift in investment choices while financial business, IT and telecom and oil and gas sectors continue to attract the bulk of FDI.

Between FY08 and FY10 (till March) Pakistan received roughly $2.7 billion in financial business, almost as much in IT and telecom and $1.9 billion in oil and gas exploration and processing.

The foreign direct investment (FDI) in Pakistan’s telecom sector has fallen by more than 50 per cent this year as compared to the corresponding period, according to the Pakistan Telecommunication Authority’s annual report 2009-10. The report says there has been subsequent decline in the FDI since cellular companies kicked off their operation here in 2005.

Telecom sector attracted over $6.3 billion FDI in last 5 years which is an encouraging response by the investor towards Pakistan telecom sector policies. UAE, Norway and USA remained the major sources of FDI during last five years. Out of the total $6.3 billion FDI in

the sector, UAE invested in the PTA annual report another wave of FDI is expected after the launch of 3G services by Pakistan.

Due to satisfaction of the investor Pakistan enable to have 19th position out of 175 countries in securing investors

Comparative Analysis with IndiaPakistan Telecom Authority Chairman Dr Mohammad Yasin said on Friday that Pakistan’s telecommunication sector was growing faster, even more rapidly than that of India with over 63 per cent tele density, encouraging the foreign direct investment (FDI

“Look, India is lagging far behind Pakistan with 37 per cent tele-density as compared to 63.5 per cent in Pakistan. Our FDI policy is much more liberal than that of India to attract more investment in Pakistan’s telecom sector,” he added.

The main reasons of decline in FDI were lack of foreign investors’ interest in the telecommunication sector, low confidence in the country, limited prospects of market expansion, and last but not the least, slowdown in the privatization drive.

Communication (IT Telecom) FDI in $ Million

2005-2006 1,937.7

2006-2007 1,898.7

2007-2008 1,626.8

2008-2009 879.1

Jul 09- Mar10 171.0

10. TOURISM

Tourism is another area which has been suffering from negligence since long. In order to

inject life in this sector, the government has declared it as an industry.

In Pakistan tourism has a huge growth potential with high returns and revenue for the

investors. Hotels and other tourism projects hold great promise and rewards for the

investors:

Eras

The 1980s

After the dismal performance of the industrial sector following the 1972 nationalization, a change occurred in September 1978 in the government’s approach toward the role of the public and private sectors.

The role of the public sector was restricted to consolidating existing enterprises, and further investment in this sector was strictly restricted.

In 1984 the industrial policy statement was published that not only accorded equal importance to the public and private sectors but also encouraged the private sector to come forward.

Specifically, FDI was discouraged by:

Significant public ownership, strict industrial licensing, and price controls by the GOP; The inefficient financial sector with mostly public ownership, directed credits, and

segmented markets A noncompetitive and distorting trade regime with import licensing, bans, and high

tariffs.

Pakistan began to implement a more liberal foreign investment policy as part of its overall economic reform program toward the end of the 1980s. Accordingly, a new industrial policy package was introduced in 1989 based on the recognition of the primacy of the private sector. A Board of Investment (BOI), attached to the Prime Minister's Secretariat, was set up to help generate opportunities for FDI and provide investment services. A “one-window facility” was established to overcome difficulties in setting up new industries.

The 1990s

Originally, each foreign investment was subject to separate authorization, but this requirement was eliminated in May 1991. In general, no special registration was required for FDI, and the same rules and regulations were applied to FDI as to domestic investors.

All investors, whether domestic or foreign, were required to obtain a No Objection Certificate (NOC) from the relevant provincial government for location of their projects.

Thus, the physical location of the investment was effectively controlled by the provincial governments, which was considered a major bottleneck in speedy industrialization.

One of the most important measures taken recently by the government affecting FDI has been the liberalization of the foreign exchange regime.

Residents and non-resident Pakistanis and foreigners are now allowed to bring in, possess, and take out foreign currency, and to open accounts and hold certificates on foreign currency.

To further liberalize the foreign exchange regime, the Pakistani rupee has been made convertible effective 1 July 1994. The ceiling earlier imposed on contracting foreign loans has been abolished. Permission of the Federal Government or the SBP would not be required regarding interest rate or payment period of foreign loans not guaranteed by the Government of Pakistan.

A number of fiscal incentives include a three-year tax holiday to all industries throughout Pakistan set up between 1 December 1990 and 30 June 1995. Investments in delineated rural areas, industrial zones, and less developed areas enjoy five and eight years tax holiday

respectively, together with special custom duty and sales tax concessions. The import policy has also been liberalized considerably, and the maximum tariff rate has been reduced from 225% in 1986/1987 to 45% in 1996/1997.

Special industrial zones (SIZs) have been set up to attract foreign investment in export-oriented industries. Apart from foreign investors, Pakistanis working abroad are also eligible to invest in SIZs. The government is responsible for providing the necessary infrastructure and utility services in the SIZs.

In November 1997, the government issued the New Investment Policy which includes major policy initiatives. In the past, foreign investment was restricted to the manufacturing sector. Now foreign investment is allowed in sectors like agriculture and services, which constitute above three fourths of gross national product. The main objective of the new policy is to enhance the level of foreign investment in the fields of industrial base expansion, infrastructure and software development, electronics, engineering, agro-food, value-added textile, tourism, and construction industries.

Types of Foreign Direct InvestmentTypes of Foreign Direct Investment can be broadly categorized on the basis of

1. By Direction2. By Target3. By Motive

1. BY DIRECTION

Inward Investment: Inward investment means the investment when foreign capital is invested in local resources. Inward investment is encouraged by tax breaks, subsidies, grants etc. by the Govt.

Outward Investment: Outward investment is the investment when local capital is invested in foreign resources means investment in imports and exports from a foreign commodity country. Outward Investment is discouraged by tax disincentive, subsidies for local businesses and Government policies for the support of nationalization of the industries.

2. BY TARGET

Greenfield investment : Direct investment in new facilities or the expansion of existing facilities; Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. However, it often does this by crowding out local industry; multinationals are able to produce goods more cheaply (because of advanced technology and efficient processes) and uses up resources (labor, intermediate goods, etc).

Mergers and Acquisitions: Mergers and Acquisitions are the primary type of FDI, in which transfer of existing assets from local firms to foreign firms takes place.

Horizontal FDI: Horizontal FDI occurs when the foreign investor undertakes investment in the same industry abroad as it operates in at home.

Vertical FDI : Vertical FDI occurs when the multinational acquires a stake in a foreign firm that either uses its output or provides its input. The primary activity of the foreign firm usually precedes or succeeds that of the parent company.

3. MOTIVE

FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:

Resource-Seeking: Investments which seek to acquire factors of production those are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources).

Market-Seeking: Investments which aim at either penetrating new markets or maintaining existing ones.

Efficiency-Seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership.It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.

Structural Pattern of FDIFDI in Pakistan consists primarily of three elements, namely,

Cash brought in Capital equipment brought in Re-invested earnings

The structure of the sources of financing FDI in Pakistan has undergone a noticeable change. Though all the components of FDI exhibit considerable fluctuations over time but the major share of FDI in Pakistan is comprised of cash brought in (above 50% over the last 20 years).

Trends of Foreign Direct Investment in Pakistan

The inflow of FDI in Pakistan over the last decade has remained very fluctuating as we can see from the table the FDI increases from 322.5 Million $ to 5152.8 Million $ from FY2001 to FY2008 and than again decreases to 2150.8 Million $ in FY2010

Than afterwards the inflow of FDI in Pakistan shows a decreasing trend. The main reasons for this decrease are weakening macro economic fundamentals e.g. power crises and poor law and order situation in the country.

Determinants of FDIMajor factors of FDI are as follow:

YearsForeign Direct Investment

2005 1524

2006 3521

2007 5139.6

2008 5152.8

2009 3179.9

2010 2150.8

1. Market size: One of the most important determinants of foreign direct investment is the size as well as the growth prospects of the economy of the country where the foreign direct investment is being made. It is normally assumed that if the country has a big market, it can grow quickly from an economic point of view. Market size is generally measured by Gross Domestic Product (GDP), GDP per capita income and size of the middle class population.

2. Labor cost: This depends on the availability and cost of inputs, the efficiency at which

these are turned into outputs, and the costs of moving from production to marketing. It is

generally assumed that a foreign investment would invest in host country if costs (wages) of

producing in that country are lower that in the home country and if productivity is higher.

Low costs are so important that firms began investing in less developed countries simply to

take advantage of the cheaper labor. In order to maximize profits, production will be located

where costs are the lowest:

3. Human Capital: Higher level of human capital is a good indicator of the availability of skilled workers, which can significantly boost the FDI. The increased role of host country governments in upgrading human resources through educational and training programs is a major motivator for firms.

However, Productivity levels in sub-Saharan Africa are generally lower than in low-income

Asian countries. The lack of engineers and technical staff in these countries is reported as

holding back potential foreign investment, especially in manufacturing; it lessens the

attractiveness of investing in productive sectors.

4. Political Stability : Political instability and the frequent occurrences of disorder ‘create an

unfavourable business climate which seriously erodes the risk-averse foreign investors'

confidence in the local investment climate and thereby repels FDI away.

Political instability, expressed in terms of crime level, riots, labor disputes and corruption, is

an important factor restraining substantial foreign investment.

5. Openness: The ratio of trade to GDP is often used as a measure of openness of a country

and is also often interpreted as a measure of trade restrictions. An open country gives

confidence to investors. Trade performance can be measured by export and import ratios.

Open x = Ratio of Exports on GDP And

Open m= Ratio of Imports on GDP

A widespread perception that `open' economies encourage more foreign investment. One

indicator of openness is the relative size of the export sector. China, in particular, has

attracted much foreign investment into the export sector.

6. Infrastructure: Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.). Poor infrastructure can be seen, however, as both an obstacle and an opportunity for foreign investment. Recent evidence seems to indicate that, although telecommunications and airlines have attracted FDI flows (e.g. to India and Pakistan), other more basic infrastructure such as road-building remains unattractive, reflecting both the low returns and high political risks of such investments. Bad roads, delays in shipments of goods at ports and unreliable means of communication are the disincentives.

7. Government Policies : To attract investment, favorable government policies and regulations are essential. In developed economies, patent, trademark, and copyright laws protect intellectual property rights of MNEs. This is not the case in developing countries where property rights abuse is rampant due to poor enforcement of property rights laws.

Developing countries tend to offer incentives (such as accelerated depreciation, grants, or

subsidized land) in order to raise their appeal to investors and compete with developed

countries for investment.

The corporate tax rates (as measured by TAX) of the host country represent another factor

which foreign direct investors would consider and higher these tax levels of the host country

would be expected to deter potential FDI.

8. Presence of Natural Resources :Not only is the price and quality of natural resources important, but the availability of local opportunities for upgrading the quality of resource inputs and the processing and transportation of their outputs are also important. Natural resources are exogenous economic factors that may help a country attract higher levels of FDI that are independent of political institutions and government policies. We therefore include the share of minerals and oil in total exports to capture the availability of natural resource endowments.

Political Risk & Foreign investment

Investors might become exposed to a range of political risks when investing in a foreign country.

Political risk refers to the potential losses to foreign investors from adverse political developments in the host country.

Classification of political riskDepending on how firms or investors might be affected by an incidence, political risk can be classified into 3 categories:

Country specific risks (Macro risks): These affect MNCs at the project and corporate level and originate at the country level.

They include:

1) Transfer risk, which arise from uncertainty about cross-border flows of capital payments and know-how, blocked funds, withholding taxes on dividend and interest payments, etc.

2) Operational risks, these are associated with uncertainty about the host country’s policies affecting the local operations of MNCs e.g. unexpected changes in environmental polices etc.

3) Cultural & institutional risks, related to ownership structure, human resource norms, minimum wage laws, religious heritage, nepotism and corruption, intellectual property rights, and protectionism.

Firm specific risk (Micro risks)

These affect the MNC at the project/corporation level probable due to the conflict between the activities/goals of firm and those of the host country as evidenced by existing regulations.

Three types:

1) Interest rate and Foreign exchange risks: These arise from fluctuation in host country’s interest rate or currency vis-à-vis home currency.

2) Business risks: arise from factors affecting cash flows and profitability of the firm, such as change in taxation laws, or local disputes with trade unions or suppliers, etc.

3) Governance & Control risks: arise from uncertainty about the host country’s policy regarding ownership, and control of local operation, restriction on access to local credit facilities etc.

Global specific risks

These too affect the MNCs at the project or corporate level but originate at the global level. Examples: Terrorism

Anti-globalization movements Environmental concerns Poverty Cyber attacks

Predicting Country-Specific RiskIn order to assess country specific risks, one needs to assess political & economic stability of a country in terms of;

Evidence of turmoil or dissatisfaction Indicators of economic stability Trends in cultural and religious activities

Data can be assembled by; Monitoring the local media (local newspapers, radio & TV broadcasts. publications of diplomatic sources Contact other businesses who have had recent experience in the host country Examine reports of the ratings agencies

Predicting Firm specific risksIn order to assess firm specific risks one should assess the effect of political change on activities of a specific firm.

Possible areas of conflict; Impact of firm’s activity on the economy Sharing or non-sharing of ownership and control with local interests Impact on a host country’s balance of payments Influence on the foreign exchange value of the host country’s currency Use of domestic versus foreign executives and workers Exploitation of national resources.

Predicting Global Specific Risks

More difficult to predict than the other two types Sometimes impossible, e.g. Sept. 11th Sometimes possible e.g.

• US IRAQ invasion

• US AFGHANISTAN invasion

Assess the following by: Type of terrorist threats Their location Potential targets

Some of the common FDI incentives are low corporate tax and income tax rates in Pakistan cheap labour in Pakistan Minimum share of the local (Pakistani) partner in a joint venture will be 60:40 for the

service sector. However, 100% foreign equity can be owned for first 5 years. The FBR (Federal Board of Revenue) will not question as to the source of investment BOI’s (Board of Investment) approval is not required for foreign companies to open a

bank account.

Current year 2010Pakistan's FDI sees big drop in first 11 months

The Foreign direct investment ( FDI) in Pakistan dropped by 39 per cent to 2.03 billion U.S. dollars during the first 11 months of the current fiscal year ( July 2009 to June 2010) from 3.33 billion in the same period of last year, economists said Wednesday.

There was an outflow of 133.8 million of portfolio investment during these 11 months, which was, however, much lower than the outflow of 1.103 billion in the same period last year, said a report in the Daily Times.

Total foreign investment registered a fall of 14.8 per cent to 1. 876 billion from 2.227 billion during the first 11 months, mostly concentrated in the services sector and little invested in the manufacturing sector.

This trend is harmful for the country in the long run because these investments create few jobs, but generate handsome profits in the country, which is then sent abroad, said an economist.

In a breakdown, oil and gas exploration sector attracted 653.9 million FDI, telecommunications 378.7 million, financial business 153.8 million, transport 115.5 million,

construction 95.5 million, food industry 71.9 million

The economist said that most of these sectors are not labor- intensive and, therefore, do not contribute significantly to job creation efforts of the government. He said it was necessary for the government to improve infrastructure and ensure elimination of energy shortages in order to attract substantial foreign investment in the manufacturing sector.

The United States, with an investment of 521.8 million dollars, continued to be the largest source of foreign investment for Pakistan.

Policy Recommendations

General Recommendations: First of all, Pakistan should 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 should refrain from attracting any further massive FDI in the no foreign-exchange-earning sectors for some years in the future. Political stability and satisfactory law and order are likewise critical to attract FDI. The laws and regulations should 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. Inaddition to corporate income taxes, a large number of indirect taxes are levied at the federal, provincial, and local levels. Separate collection of taxes and contributions hasforced enterprises to face unnecessary and costly administrative procedures. The existence of such a large number of taxes and collecting agencies may breed corruption, which adds to the cost of production

Credit Facilities Foreign firms operating in Pakistan are currently facing cash flow problems as a result of many taxes and the Asian crisis. That these firms cannot borrow more than their equity. 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

Labor Laws Overprotective labor laws do not encourage productivity and frighten away much needed productive investment. There is a need to rationalize the labor laws and multiple levies on employment that inhibit business expansion and job creation.

Confidence-building Measure: The close partnership between the private and public sector is essential to build confidence it is recommended that a forum be established where the private and public sectors could sit together to discuss business promotion-related issues.