INFLOW OF FDI IN PAKISTAN

Table of Content:

1. Introduction:.............................................................................................................................3

2. Importance of FDI for Pakistan:...............................................................................................3

3. Reasons for Slow FDI in Pakistan from 2010-2020:...............................................................4

4. Current FDI inflow in Pakistan:...............................................................................................5

5. Conclusion/Recommendations:................................................................................................6
 1. Introduction

This paper will provide a brief description regarding the Foreign Direct Investments in

Pakistan and will evaluate the reasons behind its slow growth rate in past ten years i.e., from

2010-2020. Foreign Direct Investment (FDI) is mainly an investment that is made by any

individual or a firm in one state owns another firm in another country for business interest. It

usually takes place when investors used to build international operations of businesses or acquire

assets of international businesses in foreign state. However, all the economies of the world

heavily depend on FDI especially when it flows from rich state to poor one. The purpose behind

this is that when foreign firm come in the country, they have a power to shake up the existing

industry by brining vast competition for domestic businesses that already exists or even can

create entirely new industries. It has a power to strengthen the local economies by creating new

opportunities for jobs and boost up the tax revenues for governments (CHEN, 2021). This

phenomenon is best explained by “economic theory” as the theory states that FDI is the most

significant factor of economic developments in all countries of world and are mots important for

developing ones. It helps developing countries like Pakistan to increase the flow of goods and

capital and steps up the interaction between regions, states, firms and pushed interconnected

economic activities (Sam, 2018)

2. Importance of FDI for Pakistan

As it has been explained above, FDI is a vital tool that is required for the technological

developments and progression of economy. It plays a crucial role in attaining the socio-economic

goals of a country and Pakistan is among one of those states that are deficient of foreign ventures

and physical capital that could help them to improve the living standards of their people. In this

current state, FDI is considered significant for Pakistan as it can bring different opportunities for
employment for the people of Pakistan and can help them to improve their skills through transfer

of strategical and technological managerial skills and helps in assimilating the domestic

economic with international economy (MAGAZINE, 2019).

Currently, in Pakistan, there are almost 30,000 companies out of which 675 are having

foreign capital. The multinational companies chosen Pakistan for investments even before their

independence. ICI was the first multinational company planted in 1942 and since then it

diversified its businesses activities in sectors i.e., chemicals, pharmaceuticals, fiber and

polyester. Many other multinational companies brought huge FDI in Pakistan that includes Shell,

Philips, Uniliver etc. In addition, various joint ventures and subsidiaries also contributed

effectively in FDI. It was because of the liberal policy of Pakistan that helps them to attract FDI

and has provided an ample time to local industry to become competitive. Since their

independence to 1958, Pakistan had successfully maintained strict control over FDI. In 1980,

they have transformed their trade policies for the purpose of attracting more inward of FDI. They

have reduced the rate of concessions, tariffs and credit facilities that provide a huge benefit to

Pakistan. But their image as a safe haven for FDI received a severe battering in 1998 when

government started to conduct a series of nuclear tests that leads them to face strict sanctions

from international economies (IPRI, 2015).

3. Reasons for Slow FDI in Pakistan from 2010-2020:

It is a fact that Pakistan is a very low-income developing states and FDI is considered

significant for their economic prosperity. It has been identified above that a country has a

significant policy to attract FDI and increase their GDP but still the country is facing a sharp

decline in FDI inflows since 2007 that has disturbed their economy as investors feel hesitant to
invest in Pakistan that mainly includes the reason i.e., political instability, terrorism, shortage of

energy and financial instability.

(Figure 1: FDI inflow in Pakistan)

(Macro Trends,

2021).

The graph clearly indicates a sharp decline of FDI in Pakistan from 2010 to 2018. The

data demonstrates that Pakistan has gone down by 35% or $755 million year over years from

past ten years. The reason behind this is:

Political Instability has significant effect the FDI inflows in country as the political

situation of Pakistan is not good due to dictatorships or because of the political uncertainty that

leads investors to hesitate in investing for long term projects that ultimately results in downfall of

FDI. Terrorism on the other hand results in high security issues, low fiscal resources with poor

prospect for development because of continuing significance of informal economy, regional

security threats and due to difficult business environment. It is because Pakistan is ranking

among the east economies of pro-business in the world by having 108 th place in World Bank

Ease of Doing Business rankings of 2020 (Bano, 2019).

4. Current FDI inflow in Pakistan:

improvement stage since 2018. According to the report by UNCTAD 2020 World Investment,

the inflow of FDI in Pakistan is been increased from US$1.7 billion in 2018 to US$ 2.2. billion

in 2019. This has raised their stock at US$34.8 billion. In 2019-2020, FDI increased by 68.3%

mostly boosted by Chinses investment.

(Figure 2: Increased Inflow of Investments)

(Siddiqui, 2020).

The image indicates the growth of FDI from 2018 to 2019 in Pakistan. The inflow of Chinese is

till the highest one i.e., 696.5 US million due to CPEC project and the telecom industry. US

inflow increased from $43 million to 45 million and similarly from Korea to $43 million etc.

The inflow of FDI increased due to the strict measures taken by the government of Pakistan and

the initiatives like Zarb-e-Azb provides fruitful results to the country. The political uncertainty

also dwindled in the aftermath of 2018 general elections. The government has revolutionized

their industrial sectors that boost up their exports. So, according to the report of UNCTAD, FDI

in Pakistan is flat at $2 billion in 2020 due to their concentration on power generation and

telecom industries.
 (Trading Economics,

2021)

The graph indicates that Pakistan is moving towards a better situation as their inflow of FDI is

improved and reached to 317 US$ million in 2020 and expected to grow further in coming years.

5. Conclusion/Recommendations:

The report concludes that Pakistan has seen a huge decline in FDI inflow in last decade due to

the rise of terrorism, instable political circumstances etc., but after 2018, the situation is moving

towards betterment of country as the inflow of FDI started to rise against due to the strict

measures taken by Government of Khan. However, the government has taken various measures

for economic liberalization to make country attractive for foreign investors. They offer various

incentives for tax in different sectors such as ports, energy, software, electronics and highways

etc. It would be further suggested that government of Pakistan should arrange a set-up for export

zones to encourage FDI. They should work on exemptions for export zones from all provincial,

federal and municipal taxes and duties on machinery, equipment and other material and provide

and access to Export Processing Zone form “one-window” service.

Bano, S. (2019). Why Did FDI Inflows of Pakistan Decline? From the Perspective of Terrorism,

Energy Shortage, Financial Instability, and Political Instability. Emerging Markets

Finance and Trade , 55(1):90-104.

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IPRI. (2015). Foreign Direct Investment (FDI) and Trade Liberalization Policies in Pakistan.

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MAGAZINE, R. (2019). Foreign Direct Investment in Pakistan – An Academic Study. Retrieved

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Sam, A. (2018). What Is Economic Theory;Why It Is Important In Economics. Retrieved from

https://notesread.com/economic-theory/

Siddiqui, S. (2020). FDI continues to fall in Pakistan. Retrieved from

https://tribune.com.pk/story/1847306/2-foreign-direct-investment-continues-fall-pakistan
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https://tradingeconomics.com/pakistan/foreign-direct-investment