Foreign investment Introduction

FDI has emerged as the most important source of external resource flows to developing countries over the 1990s and has become a significant part of capital formation in the developing countries despite their share in global distribution of FDI continuing to remain small or even declining (Kumar and pardhan,2001).The role of the foreign direct investment (FDI) has been widely recognized as a growthenhancing factor in the developing countries (Arshad, 2008). The effects of FDI in the host economy are normally believed to be increase in the employment, increase in productivity, and increase in exports and, of course, increased pace of transfer of technology. The potential advantages of the FDI on the host economy are as follows

* It facilitates the use and exploitation of local raw materials. * It introduces modern techniques of management and marketing. * It eases the access to new technologies. * Foreign inflows could be used for financing current account deficits. * Finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt). * It increases the stock of human capital via on the job training. * Productivity of FDI is higher than the productivity of domestic investment. * The local enterprises are able to learn by watching if the economic framework is appropriate (Bhagwati, 1994) * It stimulates the investment in R&D (Calvo and Robles, 2003).

v FDI Policy review in Pakistan

Pakistan was basically an agricultural economy upon its independence in 1947. Its industrial capacity was negligible for processing locally produced agricultural raw material; therefore it became imperative for succeeding governments to improve the country's manufacturing capacity by attracting FDI. During the 1960s, government policies were aimed at encouraging the private sector while during the 1970s; the public sector was given the dominant role. In the 1980s, 1990s and onwards till now, the private sector was again assigned a leading role. In order to achieve this objective, various industrial policies have been implemented in different time's i.e. Pakistan adopted liberal market-oriented policies and declared the private sector the engine of economic growth. 100% foreign ownership of capital incentive was announced and the foreign investors started

their businesses. Moreover much more incentives were offered to the Foreign Investor in Pakistan as compared to other Asian countries but inspite of the incentives and favourable polices offered, there was a minor success to attract the foreign investors in Pakistan in the recent years due poor law and order situation and most of packages not able to fetch the desired results as compared to other countries like China, Malaysia, and Thailand etc.

v Factors influencing the flow of FDI

There was very fast growth of FDI in whole world before the Asian crises i.e. FDI reached at $204.2 billion in 1990 to $400.5 billion 1997 and same trend observed till 2007. The following reasons mentioned can affect the investor's decision for making investment in any host country. Current situation of Pakistan regarding each factor is also elaborated to depict why there is little success in attracting FDI. * Political Stability * Law and Order * Economic Strength * Government Economic Policies * Government Bureaucracy * Local Business Environment

* Infrastructure * Labour Force * Quality of Life * Welcoming Attitude

Political Stability
This factor is essential to attract foreign direct investment because it creates confidence for foreign investors (see MIGA 1994). Political turmoil could wipe out overnight even the most lucrative investments and endanger the lives of personnel. Many investors have paid a heavy price for overlooking or ignoring this factor in other parts of the world (Jegathesan 1995). Lack of political stability has been the hallmark of Pakistan during the last twenty years (1988-2008). Three elected governments were dismissed on various charges while four caretaker regimes each remained in power for only 90 days over the last eight years. Such a frequent change in government accompanied by abrupt changes in policies and programs are hardly congenial for foreign investors. Furthermore military takeover is also big problem in Pakistan leading to inconsistent policies.

Law and Order

An unsatisfactory law and order situation keeps prospective foreign investors on the sidelines. Safety of capital and the security for the personnel engaged in the projects are essential ingredients that govern foreign investment. In a recent survey, the International Asset Management Company (IAMC), an affiliate of the British-based Morgan Stanley Asset Management, found that the business environment in Pakistan has deteriorated considerably. The IAMC surveyed 115 leading listed and unlisted companies including multinationals operating in Karachi. The sector covered for the survey included automobiles, banks, chemicals, insurance, energy, textile and apparel, financial services and electrical goods. Some 74% of investors answered that they had no investment plan for years to come in Pakistan due to prevailing political instability and terrorist activities taking place in the region. Unfortunately, Pakistan's law and order situation has remained far from satisfactory in the major growth poles of the country. Notwithstanding attractive incentives offered to foreign investors, this factor has discouraged them to set up their businesses in Pakistan.

Economic Strength
Investors would not want to invest in a country where the economic fundamentals are so weak that it is unpredictable what the government would do next to prop up a sagging economy. Furthermore, foreign investors are unlikely to increase their participation in economies that are expected to remain affected by foreign exchange scarcities for several years into the future (UNCTAD 1985). As compared with the decade of the 1980s, Pakistan's macroeconomic imbalances worsened in the 1990s till now, along with the slowdown of economic activity. The large fiscal deficit has emerged as a major source of macroeconomic imbalances in Pakistan. Pakistan's foreign exchange reserves have also fluctuated in an unpredictable manner. Thus, attractive incentives notwithstanding, the large macroeconomic imbalances and slowing down of economic activity must have discouraged FDI in Pakistan.

Government Economic Policies

Investors would not want to invest in a country where the Government economic policies are inconsistent and unpredictable. Pakistan's track record in maintaining consistent economic policies has been poor. The abrupt changes in policies with a change in government as well as a change in policy within the tenure of a government have been quite common. Pressures to raise revenues (for fiscal consideration), and other conflicting objectives have generally led to inconsistencies in investment and industrialization policies, and an ad hoc and changing incentive system. Several instances of change in policy stance in recent years can be identified. For example, with the change in government a drastic change was made in the LahoreIslamabad motorway project. In addition, local government taxes are levied, including a local metropolitan tax, and the Octroi. At the federal and provincial levels, labour taxes have to be paid separately in compliance with labour laws. Foreign investors in Pakistan also have to cope with a complex legal situation. Law based on different legal systems are applied independently. All these factors discussed above are discouraging the foreign investors to invest in Pakistan.

Government Bureaucracy
This could perhaps be the biggest "burden" in any investment environment. It does not matter how efficient the government thinks its investment policy is; what is critical is the perception of businessmen, especially those already in the country. Do businessmen feel that they have the support of government officials in their efforts to set up and operate efficient business units, or do they feel that they have to fight the government to get projects off the ground? The general perception of businessmen in Pakistan is that there exists a large gap between the policies and their implementation. The implementation of policies has been slow and the bureaucracy has not responded to the initiatives with conviction. Such perception about the slow implementation of policies is not at all conducive to attracting FDI. Local Business Environment This covers many factors, including the availability of local lawyers, secretarial services, accountants, architects and building contractors, local consultants, etc.all required both before and during the life of a project. Also, there is the question of the availability of ancillary and supporting industries, their quality, and their cost. Another question would be the availability of suitable joint venture partners, and whether there are lists of potential partners that the investors can choose from. All these conditions are not satisfactory in Pakistan.

Infrastructure
The availability, reliability, and cost of infrastructure facilities (power, telecommunications, and water supplies) are important ingredients for a business environment conducive to foreign investment. Pakistan compares unfavourably in infrastructure facilities with other developing countries that have attracted higher levels of foreign investment. Pakistan has only 18% of paved roads in good condition as against 50% in Thailand, 31% in Philippines, and 30% in Indonesia. Pakistan's extensive but poorly managed railway. Pakistan's amount of electricity produced per capita is higher than Indonesia's (435 kWh as against 233 kWh), but is only a fourth of Malaysia's and one half of Thailand. Furthermore the situation is worse in Pakistan due to load shedding and increasing cost of utilities. Karachi Port is six times more expensive than Dubai port (Jebal Ali), three times more expensive than Colombo port, and twice as expensive as Bombay port. While other ports offer goods container terminal facilities, Karachi port cannot even offer priority berthing for container vessels. There are frequent delays and cancellations of berthing and sailing due to obsolete tugs and pilot boats at Karachi port. Such infrastructure deficiencies have discouraged the flow of FDI in Pakistan.

Labour Force
A technically trained, educated, and disciplined labour force along with a country's labour laws are critical factors in attracting foreign investors. Pakistan has an acute shortage of technically trained and educated labour, especially in middle managerial positions and in engineering, which may have discouraged foreign investors. In particular, Pakistan is at a more serious, disadvantaged position in terms of education and health compared with other developing countries that have attracted FDI at much higher levels. Pakistan's adult illiteracy rate is 62% as against 17% for Malaysia, 16% for Indonesia, 5% for Philippines, and 6% for Thailand. Pakistan's expenditure on education accounts for only 1.1% of total expenditure as against 10% for Indonesia, 15.9% for Philippines, 21.1% for Thailand, and 20.3% for Malaysia (World Bank 1997). It also has by far the worst indicators of public health among the five countries.

Quality of Life
Quality of life along with cultural and social taboos is critical to attract foreign investors. These factors are less conducive to foreign investors in Pakistan who are accustomed to liberal lifestyles. Foreign investors find better conditions in Indonesia and Malaysia (both Muslim countries) in the ASIAN region in terms of social life and quality of life.

Welcoming Attitude
Have immigration and customs officials at the airports and other entry points been fully briefed about the critical role they play in investment promotion efforts? Their attitudes play an important role in foreign investors' decision making. Although the high government officials and business leaders express their enthusiasm in inviting foreign investment, the lack of a cordial environment to accommodate foreigners and foreign investment prevails in Pakistan. The ancillary government agencies and officials seem to have an indifferent and unsympathetic attitude toward foreign investors (Shirouzu 1993). FDI is the major source to increase the capital and also to increase and advanced the technology and managerial skills. The growth rate of FDI is higher than the international trade. FDI growth in developing countries has been rise in recent years. FDI always have a positive effect on the economic growth of the host country. Inflow of FDI has positive impact on the host country's balance of payments but the investors increase imports of goods and send back the profit in their home lands. There is another research says that the impact of FDI on the balance of payments depends on the exchange rate. In the flexible exchange rate, any disturbance to the balance between supply and demand for foreign exchange is corrected by the movement in the exchange rate but in the fixed exchange rate an increase in the demand for foreign exchange by the FDI project will result in reduced surplus or increased deficit in the balance of payments. Inflow of FDI has a bigger positive impact on the export of host country and has negative impact on the imports. So the balance of payments problems will be small. (WTO 1996).

v Conclusion
Foreign direct investment is now perceived in many developing countries as a key source of much needed capital, foreign advanced technology, and managerial skills. Realizing its central importance to economic development, developing countries have taken wide-ranging steps to liberalize their inward FDI regime and have succeeded in attracting substantial amount of FDI. Pakistan stands nowhere close to many other Asian countries in attracting FDI, reasons being political instability, Law & order situation and other being discussed earlier. Thus Pakistan needs to revise its investment policies, maintain political stability, improve infrastructure, and simplify taxation policies, setup institutions for technical education and setup computer labs for making literate with computer. Last but not the least improvement in law and orders situation should be stabilized/ controlled to gain the confidence of the foreign investor as survival of lives and mental harmony is the utmost priority of investors.

v Policy Recommendations
Pakistan should make very strong efforts to attract the FDI as much as possible to the energy sector. The political leadership must take practical steps to improve the law and order situation. Macroeconomic stability plays a major role in boosting the growth of economy (Kim 1993) and restoring foreign investor's confidence on the economy. Large fiscal deficit and foreign reserve situation of Pakistan discourages the foreign investors to invest in Pakistan. In Pakistan permits and some formalities are unnecessarily required at regional, national and local level to start a new business, causing unnecessarily delays in starting the business, hence discouraging foreign investors.

The agencies and authorities should give some relaxations to foreign investors regarding approval and official clearance. The legal situation is bit complicated in Pakistan regarding the business which should be made easy. The laws and regulations should be simplified, updated, modernized and transparent.

Taxes
The tax system of Pakistan is complicated and complex. The indirect and direct taxes are applied on federal, provincial and local levels which is complicated situation for the foreign investor to make the decision about investing in Pakistan. The government should reduce the number of taxes and should simplify the tax laws like UAE. The tariffs of import of machinery and plants are discouraging the investors which should be reduced.

Credit facilities
Due to Asian crises and cash flow problems, foreign companies are facing borrowing problems from local banks as they are unnecessarily complicated and time consuming. There is need to review borrowing policies and laws for investors.

Infrastructure
Infrastructure is the wheel of economy for every country. The availability of reliable and quality services in all areas of infrastructure is major medium of good business environment and to attract the foreign investors. As compare to other developing countries, the infrastructure level of Pakistan is worse; this is discouraging situation for the foreign investors to take part in economic growth of Pakistan. Thus Pakistan has to improve infrastructure and announce short term and long term policies for improving critical factors of infrastructure in short term and others in long term.

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 in consultation with the Overseas Investors Chamber of Commerce and Industry in Pakistan.

Credit Facilities
Foreign firms operating in Pakistan are currently facing cash flow problems as a result of many taxes and the Asian crisis. Firms cannot borrow more than their equity capital which has further aggravated the cash flow problem. There is a need to review this policy.

Train Workforce
A large part of the workforce is not proficient in English, lacking technical knowledge and not computer literate. Thus Government of Pakistan has to announce policy for setting up technical institution and computer labs for possessing a large pool of trained and experienced workforce.

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

Campaign to Depict its Importance as Geo-strategic Location

Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced Far Eastern tigers. This strategic advantage alone makes Pakistan a marketplace teeming with possibilities. Thus there is need to initiate a campaign worldwide about its importance of location.

Investment Policies
Prepare tailor made investment policies that suit investor needs. Policy trends should remain consistent, with liberalization, de-regulation, privatisation, and facilitation being its foremost cornerstones.

Financial Markets
The Government of Pakistan has to take steps for improving capital markets. The Securities and Exchange Commission of Pakistan should improve the regulatory environment of the stock exchanges, corporate bond market and the leasing sector. As previously stock market of country crashed twice due to short selling and other factors which shuddered investors confidence. Federal Board of Revenue should facilitate structural reform in tax and tariffs and simplify them.

Power Sector of Pakistan

There are some factors included in infrastructure telecommunication, water, power paved roads etc. Pakistan hasn't shown any progress in this field as per demand. The gap between supply and demand exists that resulted in severe load-shedding, overloaded infrastructure and power losses which slowed the pace of economic growth. The task force of energy noted the loss of industrial output of 65 workdays in a year due to load shedding (survey report 2008). The government of Pakistan should take concrete steps for looking the investment in power sector and focus to resolve the power shortage problem