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Foreign Direct Investment and Economic Growth

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Muhammad Ali Khalid

on 15 December 2014

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Transcript of Foreign Direct Investment and Economic Growth

FDI and Economic Growth
1. Abbas Khan

2. Arslan Ashraf

3. Muhammad Ali Khalid

4. Ayaz Sarwar

5. Mareea Najeeb
Group Members
Significance of FDI in Economic Growth
Large Inflows of foreign investment are needed to achieve sustainable high trajectory of economic growth.
FDI represents investment in production facilities, its significance for developing countries is much greater
It is also a means of transferring production technology, skills, innovative capacity, organizational and managerial practices between locations, as well as of accessing international marketing networks.
The greater the supply and distribution links between foreign affiliates and domestic firms, stronger will be the competition
There are several areas though which FDI affects development
employment and incomes
capital formation
structure of markets
technology and skills
fiscal revenues
political cultural and social issues
Global view about FDI in perspective of growing economy
FDI is seen as a source of financing development and of transferring skills, knowledge and technology from rich countries to poor countries
 For poor countries FDI is considered a key source of finance, providing a bundle of benefits like
filling up the saving-investment gap
fills trade gap
superior technology
managerial skills
different tastes and life style
Increasing productivity and employment opportunities

Foreign direct Investment
An investment made by a company or entity based in one country into a company or entity based in another country
An investment abroad usually where the company being invested in is controlled by the foreign Corporation
FDI or FI refers to long term, participation by country A into country B.

Financial Management
Foreign Direct Investment and Economic Growth
Types of Foreign Direct Investment
1. Inward FDI

2. Outward FDI

3. Horizontal FDI

4. Platform FDI

5. Vertical FDI
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:
Housing and Construction
Information Technology
Investment Policy of Pakistan for Manufacturing & Industrial Sector
Foreign 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.

Investment Policy of Pakistan for Non-Manufacturing Sector
Foreign 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 Pakistan
Foreign 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 Pakistan
Foreign Direct Investment in an infrastructure sector is allowed for infrastructure projects which may include development of an Industrial Zone(s).
Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of foreign equity investment in the project shall be 0.30 million dollars.

Investment in Social Sector in Pakistan
Foreign 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.
Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of foreign equity investment in the project shall be 0.30 million dollars.
Horizontal FDI: when Ford builds a Ford factory in Germany that serves the German market. And then builds a separate factory in Brazil that serves the Brazilian market. Little or no cross-shipping across borders.

Vertical FDI: when Ford builds a factory in Spain that makes one model for the entire European market, and then builds another factory in Germany that makes a different model for the entire European market, and then they cross-ship cars.

Agreements on Avoidance of Double Taxation
The Government of Pakistan has signed agreements on Avoidance of Double Taxation with 52 countries.

Investment Agreements
Pakistan has entered into Bilateral Agreements on Promotion and Protection of Investment with 46 countries. These Agreements provide that:
The Contracting Parties shall encourage investments in their respective territories by investors of the other Contracting Parties
Non-discrimination between local investors and foreign investors
Equal/non-discriminatory treatment in case of compensation for losses owing to war, other armed conflicts or a state of national emergency
Free transfer of investments, and income deriving therefrom including profits, dividends, interest income, proceeds of sales or liquidation, repayments of loans, salaries, wages and other compensation, etc.
A dispute settlement mechanism to settle any dispute between the countries with respect to the interpretation of the respective agreement and a dispute settlement procedure to settle any dispute between a host country and an investor of the other country
Advantages of investing in Pakistan
Geo-strategic Location

Trained Workforce 

Investment Policies

Financial Markets

Economic Outlook 

Minimum share of the local (Pakistani) partner in a joint venture will be 60:40 for the service sector.

The FBR will not question as to the source of investment

The facility for contracting foreign private loans is available to all those foreign investors who make investment in the approved sectors.

Hurdles For Attracting FDI In Pakistan
Political instability

Law and order

Government policies are not consistent

Cost of doing business is still high

Energy crisis

Cost of doing business is still high

Energy crisis

Not a world class Infrastructure

How To Attract FDI In Pakistan
Tax concessions/exemptions to particular businesses

Special economic zones develop

Infrastructure development

Research and Development support

Early Entry Advantage

The success of FDI policies can be judged by the size of the inflows of capital.

Pakistan in recent years not been able to attract sufficiently large FDI despite liberalization measures.

A number of factors responsible for low FDI in Pakistan like lack of political stability and unsatisfactory law and order situation.

Inappropriate business environment and inadequate infrastructure facilities have played a major role in discouraging foreign investors to invest in Pakistan.

Multinational corporations prefer to choose a location that is economically and politically stable for their investment.
A country’s political stability is an important consideration for MNC's when choosing the destination for their investment.
A safer and more stable environment will help to minimize the risk for the MNC's.
In the absence of political stability there would be a political turmoil which could wipe out even the most lucrative investments.
It is necessary to maintain stable economic and political environment, promote trained, skilled and disciplined labor force, peace and security, law and order because these factors are crucial for enhancement of FDI in Pakistan.
The changing political system and the unstable government can cause political risks which affect the level of foreign and domestic investment in the country.

Factors affecting FDI
Political Unrest
Ranking of political risk
Trust of investors on political leadership
Feasibility of investment
Roads, ports, railways and telecommunication systems
Obstacle and an opportunity
Rapidly growing economy
Slowly growing economy
Trade restriction
Visa policies
Legal issues

Relationship between FDI & Economic growth
Stabilizing economy

Producing employment opportunities


Increasing foreign reserves

Significance in Pakistan’s perspective
Fluctuating economy

Political unrest

Conflict areas & rehabilitation

Reducing unemployment

Channelizing the talent

Slow economic activities along with inconsistent economic policies have also discouraged foreign investors to increase their participation in Pakistan.

Lack of trained, educated, and disciplined labor force have inhibited business expansion and frightened away productive investment.
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