Khalil Hamdani

Visiting Professor
Pakistan Institute of Development Economics
7 April 2009
Foreign Direct Investment
Prospects for Pakistan
FDI flows to Pakistan
1959 first Bilateral Investment Treaty in world (Germany)
Foreign Investment Act
Export Processing Zones Authority
Board of Investment
Foreign exchange guarantees
Import liberalization
Fully open investment regime
Privatization
Pakistans 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
Source: UNCTAD, World Investment Report 2008.
Note: percent age of gross fixed capital formation.
FDI stock and GDP
Source: UNCTAD, World Investment Report 2008.
Note: FDI stock as percent age of gross domestic output.
Millions $
%
Foreign presence
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2002 2003 2004 2005 2006
Pakistan India Malaysia Sri Lanka
Number of foreign affiliates
FDI inflow by type
Millions $
Source: Board of Investment.
FDI inflow by industry
13
17
26
31
22
28
21
12
18
12
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2008
Manufacturing
Oil & Gas
Telecommunications
Financial business
Other services
Source: State Bank of Pakistan Annual Report 2007-2008.
FDI and technology
Note: 2005 data.
Source: UNIDO, Industrial Development Report 2009.
Technology
30% is
Medium &
High-tech
70% of
MVA
is low tech
production
Source: UNIDO, Industrial Development Report 2009.
Note: 2005 data.
A smaller manufacturing base
with much less technology
content
30% 17% 22%
GDP GDP
Note: 2005 data.
Source: UNIDO, Industrial Development Report 2009.
FDI inflow by country
Note: three-year moving average.
Source: State Bank of Pakistan Annual Report 2007-2008.
World FDI inflows are falling
Billions $
Source: UNCTAD, World Investment Report .
FDI prospects
0
1000
2000
3000
4000
5000
6000
7000
Millions $
Note: Data for fiscal year (July-June). FY2010 is provisional.
FDI strategy
1. Address investor confidence
2. Target Asian investors
3. Target existing investors
4. 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 3/4th of the respondents (out of 110
firms) are willing to invest in next two years.
However, investor concerns: law & order, political
uncertainty, energy deficiency, high cost of
operations and infrastructure bottlenecks.
Overseas Investors Chamber of Commerce &
Industry (OICCI). Business Perception Survey
2008.
Business regulation: best in
region
Source: World Bank/IFC, Doing Business 2009: Country Profile for Pakistan.
2. Target Asian investors
FY 2008 FY 2009
Note: First eight months of fiscal year.
Source: State Bank of Pakistan, The State of Pakistan's Economy - First Quarterly Report 2008-2009.
Target Asian investors
Industry
Electrical/electronic
equip./ computers: 17
Diversified: 13
Petroleum: 10
Food & beverages: 8
Transportation &
storage: 7
Telecommunications:
6

Source: UNCTAD.
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
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.

Need to
upgrade
technology
Global Value Chain: textiles and
garments
Yarn
Raw
Cotton
Textile

Finishing
Garment
production
11.3%
16.0%
6.9%
54.5%
11.3%
Source: Gherzi
Value Added
FDI
Joint
Venture
potential
now<2%
Need to upgrade skills
Synthetic
Fibers
3. Target existing investors
Encourage reinvestment (horizontal, vertical)
Encourage corporate social responsibility (training,
linkages)
Support services for domestic enterprises
SME finance. 75% SMEs in Gujranwala have never applied
for bank loans.
Tackle bottlenecks (power outages)
62% of Gujranwala manufacturing units do not have own
power generation and shut operations during power
outages. Production time losses average 33 hours per
week. State Bank of Pakistan, SMEs Survey of
Gujranwala District, 2008.
Reinvest more, repatriate less
0
10
20
30
40
50
60
2002 2003 2004 2005 2006
Repatriation Reinvestment
Percentage of gross foreign investment inflows
Source: State Bank of Pakistan, Foreign Liabilities and Assets and Foreign Direct investment in Pakistan.
Note: Repatriation includes divestment.
BACKWARD
SUPPLIERS
FORWARD
CONSUMERS
TNC
Corporate social responsibility
PRODUCT
STEWARDSHIP
SUPPLY CHAIN
MANAGEMENT
A A A
Creates Shared Value for Company and Society across supply chain
Improved productivity
Higher incomes for suppliers
Reduced costs for company
Better products for consumers
Enlarged market share for
company
Example: Nestl working with dairy farmers to raise milk production
4. Sustain public investment
FY 2005 FY 2006 FY 2007 FY 2008
Development
expenditure
share of GDP

3.8 4.8 4.9 4.0
Education
expenditure
share of GDP

0.2 0.2 0.3 0.2
Sustain public investment
Priorities: Education, Infrastructure,
Health
Industrial policy should promote
horizontal competitiveness and avoid:
Picking winners (leather, pharmaceuticals
etc) is risky
Fiscal incentives can be costly.


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 medium-
term objective.