Transcript Foreign Direct Investment Prospects for Pakistan

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
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Number of foreign affiliates
2002
2003
Pakistan
2004
India
Malaysia
2005
Sri Lanka
2006
FDI inflow by type
Millions $
Source: Board of Investment.
FDI inflow by industry
100%
90%
12
18
12
80%
70%
21
28
60%
50%
22
40%
30%
20%
10%
0%
31
26
13
17
2004
2008
Source: State Bank of Pakistan Annual Report 2007-2008.
Manufacturing
Oil & Gas
Telecommunications
Financial business
Other services
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
7000
Millions $
6000
5000
4000
3000
2000
1000
0
Note: Data for fiscal year (July-June). FY2010 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 3/4th 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
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
Textile
Finishing
Yarn
Garment
production
FDI
Joint
Venture
potential
now<2%
Need to
upgrade
technology
11.3%
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
60
Percentage of gross foreign investment inflows
50
40
30
20
10
0
2002
2003
2004
Repatriation
2005
2006
Reinvestment
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
4.8
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 mediumterm objective.