Ebook Economic Evaluation Of Foreign Direct Investment In Pakistan
In recent decades under the changing modes of international transactions and cross-border mobilization of production factors, foreign direct investment (FDI) attracted great attention not only in developing countries but also in developed countries. The open FDI regime forced the host countries to adopt greater deregulation policies and reliance on market forces in their economies. Most developing countries such as Pakistan now considered FDI as the major external source of funding to meet obligations of resources gap and economic growth, however it is difficult to measure economic effects with precision. Nevertheless, various empirical studies showed a significant role of inward FDI in economic growth of the developing countries, through its contribution in human resources, capital formation, enhancing of organizational and managerial skills, and transfer of technology, promoting exports and imports and the network effect of marketing. The other positive spillover effect was that the presence of foreign firm helps expand infrastructure facilities, which makes it easier and profitable for local firms to crowd-in (Lemi, 2004).
The negative impacts occur with competition over scarce resources and limited skilled manpower, due to strategic motives by the affiliates of Multinational Corporations (MNCs) or the high technological gap between local and foreign firms. There were also other costs associated with inflow of FDI such as restrictive business practices by foreign firms, profit repatriation and forgone tax in the case of tax holidays. The net welfare effects also differed by the nature of FDI, motives behind internal transactions, and host countries government policies.
Many factors made Pakistan an attractive place for foreign investments. Firstly, the Pakistanis economy showed responsiveness and potential capacity to meet exogenous shocks and minimize risks in response to various major regional and global events, for instance, the nuclear blast (1998), the bombing against French technicians in Karachi (2001); 9/11, 2001 which placed Pakistan in the frontline again and aid from Washington began to flow once again. The subsequent events included: Afghanistan war; the attack on India’s Parliament (2001) that led to mobilization of Indian troops, the 2003 war in Iraq, Karachi Stock Exchange (KSE) crisis and severe earthquake (2005). Thus, foreign investors were assured that they could carry out business in a stable and certain environment.
Secondly, Pakistan has a population of more than 150 million (IFS, 2005) which provides a large market for consumer goods, a growing middle class with adequate purchasing power, and provision of low-cost labour, which reduces the cost of production and its strategic geographical location in Central and South East Asia.
Thirdly, Pakistan has a world-class physical infrastructure, which was necessary for investment. The country inherited strong institutions from the British, and provided adequate communication infrastructure for foreign investors. Finally, there was also a strategic consideration for increasing FDI in Pakistan having implications for global security (Hussain, 2003).
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