Term Report
On
Islamic System
Vs
Western System
Submitted to:
Mr. Zeeshan Arshad
Submitted by:
Hassan Javed Mohammad Khan
BBA (H) 6th Semester
Roll # 9
Institute of Business Administration
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Executive Summary
This report is an attempt to analyze the determinants of Foreign Direct Investment in
Pakistan and the role that it has played. The report gives an overview of the
determinants of Foreign Direct Investment and what are the factors that affect
the inflows in any economy. Comparison is also made with the South Asian
Economies in particular, especially India and China.
The report discusses the various aspects of the Foreign Direct Investment in
Pakistans economy. The investments done in different sectors are highlighted in
detail so that the reader can appreciate the sector that attracts the most foreign
inflows. The role of MNCs and other companies that play in attracting the
foreign investment in Pakistans economy is also subsequently analyzed.
This is followed by an analysis of the data of past 8 years to provide a comparison of
the different trends that the Pakistani economy has to face during the past 8
years. The conclusion looks at the various existing facilities in Pakistan that
exist for attracting foreign Investment and the role that the Government can
play.
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Table of Contents
Executive Summary
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17
19
Facilities
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Infrastructure
22
23
Turbulent Times
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Special Facilities
28
Synopsis
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Acknowledgement
This report is an attempt to analyze the Foreign Direct Investment inflows in Pakistan.
I would like to thank all the members of IBA library at University Campus. All
the persons were especially helpful to me during my research aand gave me
tremendous assistance.
I would also like to thank my Instructor, Mr. Mohammad Naeem, who guided me
throughout this report. Doing a library research in MBR is not an easy task. The
most difficult part is finding the topic and analyzing it. Mr. Mohammad Naeem
assigned me the above mentioned topic and helped me during the entire course
of the assignment. Without his guidance and support,
this report would not have been possible.
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In the 1970s, FDI made up only 12% of all financial flows to developing countries.
Between 1981 and 1984 there was a sharp fall in private lending (see figure 1), as
international banks lost confidence in borrowing countries' financial stability
following the debt crisis of 1982. Since the mid-1980s the growing integration of
markets and financial institutions, increased economic liberalization, and rapid
innovation in financial instruments and technologies, especially in terms of computing
and telecommunications, have contributed to a near doubling of private flows. Most
significant has been the steady progression of FDI to a 35% share in 1990-6. Portfolio
equity has also emerged as an important component of global private flows - 13.5% of
total flows in the 1990s in contrast to a mere 1.2% in the 1980s.
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Notes:
Official Flows: including official grants and loans from bilateral and multilateral organizations.
Foreign Direct Investment: investment made to acquire a lasting management interest, usually at least
10% of voting stock, in an enterprise operating in a country other than that of the investor.
Private Loans and Bonds: loans from private banks and other financial institutions and privately
placed bonds.
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Portfolio Equity Flows: the sum of country funds, depositary receipts (US or global), and direct
purchases of shares by foreign investors.
Sources:
World Bank, World Debt Tables 1988-1996, Global Development Finance 1997
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capital flows to low-income countries in 1981. By 1996 this figure had risen to 74%
(in comparison with 34% for middle-income countries).
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Foreign investment in China, in terms of contract value, peaked in 1993, and then fell
in 1994. While recovering 10.4 percent in 1995, it has yet to return to the 1993
level. In investment in the ASEAN region, which recovered strongly in 1994,
there was a decline in investment in the Philippines and Malaysia and record
highs were set in investment in Thailand, Indonesia, and Vietnam in 1995.
Investment in the Asian NIEs was particularly brisk. Investment from Japan,
Europe, and the U.S. grew strongly in the Republic of Korea, Taiwan, and
Singapore - in all of which record highs were recorded. Hong Kong also enjoyed
relatively smooth growth in investment. In Southwest Asia, India saw incoming
foreign investment balloon 42-fold in the five years since its 1991 economic
reforms. Investment also rose sharply in Pakistan (up 2.5-fold in FY1995 from
previous year) and Bangladesh (up 3.3-fold); in both cases, record highs were set.
Investment in Australia climbed 39.0 percent in 1994/1995 compared with the
same period of the previous year due to the assessment by western firms of its
importance as a bridgehead to Asia. Investment in Mongolia held at about the
same level as the previous year. North Korea saw the flow of investment stop
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after the 1993 crisis over its nuclear weapons program and has had zero receipts
in the three years since. On the other hand, foreign investment by ASEAN
countries and the Asian NIEs has been gearing up in earnest. In particular,
ASEAN countries and the Asian NIEs are the largest investors in Vietnam,
Cambodia, Laos and Myanmar (with Taiwan being the biggest investor in
Vietnam, Malaysia the biggest in Cambodia, Thailand the biggest in Laos, and
Singapore the biggest in Myanmar). Taiwanese investment in China fell for the
first time, however.
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empirical work has analyzed FDI determinants by pooling of countries that may be
structurally diverse. Table 1 gives details of FDI flows to certain low-income
countries over a period of 10 years from 1986- 1995.
All
developing
countries
All lowincome
countries
China
Nigeria
India
Pakistan
Angola
Sri Lanka
Ghana
Viet Nam
Bangladesh
Total of
above
countries
% of all lowincome
countries
of which
China
of which the
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
10,100
14,500
21,200
26,000
33,735
41,324
50,367
73,135
87,024
99,670
2,549
3,802
4,675
7,229
4,682
7,229
13,846
31,619
38,410
43,405
1,875
167
118
105
114
30
4
2
2,415
2,314
603
212
129
119
60
5
3
3,445
3,194
377
91
186
131
46
5
8
2
4,040
3,393
1,882
252
210
200
20
15
4
5,976
3,487
598
162
244
-335
43
15
16
3
4,233
4,366
712
141
257
665
48
20
32
1
6,233
11,156
897
151
335
288
123
23
24
4
13,001
27,515
1,345
273
354
302
195
125
25
14
30,148
33,787
1,959
620
422
350
166
233
100
11
37,648
37,500
1,340
1,750
639
400
195
245
150
125
42,344
94.7
90.6
86.4
85.2
90.4
86.3
93.9
95.3
98.0
97.6
73.6
60.9
68.3
48.4
74.5
60.4
80.6
87.0
88.0
86.4
21.2
29.7
18.1
36.8
15.9
26.0
13.3
8.3
10.1
11.2
rest
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value of installing a factory unless they can achieve a `critical mass' for their
products. Regional integration is often perceived as a positive means of
compensating for small national markets. There is currently no clear evidence of
the degree of this influence on FDI flows. Some investors expect positive
spillover effects from South Africa and are generally optimistic about an East
African free trade area, but the benefits may well be concentrated in the
economically stronger states.
I. Openness: Whilst access to specific markets - judged by their size and growth - is
important, domestic market factors are predictably much less relevant in exportoriented foreign firms.1 A range of surveys suggests a widespread perception that
open economies encourage more foreign investment. One indicator of openness
is the relative size of the export sector, particularly manufacturing exports, are a
significant determinant of FDI flows and there is strong evidence that exports
precede FDI flows. China, in particular, has attracted much foreign investment
1
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into the export sector. In Bangladesh, on the other hand, foreign investors have
been attracted to the manufacturing sector by its lack of quota for textiles and
clothing exports to the European Union and US markets. 1 Garment exports, for
example, rose from virtually nil in the 1970s to over one-half of its export
earnings by the early 1990s. In contrast, most low-income SSA economies have
remained more inward-oriented.2
II. Labour costs and productivity: Empirical research has also found relative labour
costs to be statistically significant, particularly for foreign investment in labourintensive industries and for export- oriented subsidiaries. The decision to invest in
China, for example, has been heavily influenced by the prevailing low wage rate.
The rapid growth in FDI to Vietnam has also been attributed primarily to the
availability of low-cost labour. In India, in contrast, labour market rigidities and
relatively high wages in the formal sector have been reported as deterring any
significant inflows into the export sector in particular. However, when the cost of
1
www.lcci.com.pk
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labour is relatively insignificant (when wage rates vary little from country to
country), the skills of the labour force are expected to have an impact on decisions
about FDI location. Productivity levels in sub-Saharan Africa are generally lower
than in low-income Asian countries, and attempts to redress the skill shortage by
importing foreign workers have usually been frustrated by restrictions and delays
in obtaining work permits.1 The lack of engineers and technical staff in these
countries is reported as holding back potential foreign investment, especially in
manufacturing; it lessens the attractiveness of investing in productive sectors.
III. Political Risk: The ranking of political risk among FDI determinants remains
somewhat unclear. Where the host country possesses abundant natural resources,
no further incentive may be required, as is seen in politically unstable countries
such as Nigeria and Angola, where high returns in the extractive industries seem
to compensate for political instability. In general, so long as the foreign company
is confident of being able to operate profitably without undue risk to its capital
1
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and personnel, it will continue to invest. Specific proxy variables (e.g. number of
strikes and riots, work days lost, etc.) have proved significant in some studies; but
these quantitative estimates can capture only some aspects of the qualitative
nature of political risk. Surveys carried out in South Asia and sub-Saharan Africa
appear to indicate that political instability, expressed in terms of crime level, riots,
labour disputes and corruption, is an important factor restraining substantial
foreign investment.
IV. Infrastructure
Infrastructure covers many dimensions, ranging from roads, ports, railways and
telecommunication systems to institutional development (e.g. accounting, legal
services, etc.). Studies in China reveal the extent of transport facilities and the
proximity to major ports as having a significant positive effect on the location of
FDI within the country. Poor infrastructure can be seen, however, as both an
obstacle and an opportunity for foreign investment. For the majority of low-
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income countries, it is often cited as one of the major constraints. 1 But foreign
investors also point to the potential for attracting significant FDI if host
governments permit more substantial foreign participation in the infrastructure
sector. Recent evidence seems to indicate that, although telecommunications and
airlines have attracted FDI flows (e.g. to India and Pakistan), other more basic
infrastructure such as road building remains unattractive, reflecting both the low
returns and high political risks of such investments.
I.
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www.dawn/topstories/fdi/inflows
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lowered under a phased programme. Prior approval from the IPB is required for
setting up an industry from the specified list. Industries on the "specified list" where
investment is restricted include arms and ammunition; security printing, currency and
mint; high explosives; beverages made from imported concentrates; automobiles,
tractors and farm machinery; petroleum blending plants; and radioactive substances.
Manufacture of alcohol (except industrial alcohol) is, however, banned. Foreign
private investment is also prohibited in agricultural land, forestry, irrigation, real
estate (including land, housing and commercial office buildings), radioactive
minerals, insurance, and health. Foreign investment in domestic banks is permitted
only on a non-repatriable capital basis, though dividends may be remitted overseas.
The requirement of obtaining a no objection certifacte (NOC) from the provincial
governments for the location of a project has been a major bottleneck in the past. In
an attempt to facilitate planning by potential investors, the provincial governments
have compiled a list of areas where the establishment of industries is not considered
desirable for any particular reason.
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In Pakistan, there are 30,000 companies, out of which 675 have foreign capital. 2 The
multinationals began choosing Pakistan for investment even before independence. ICI
was the first multinational by setting up a soda ash plant in 1942, and, since then, it
has diversified its business/ manufacturing activities in sectors that include,
pharmaceuticals, chemicals, and polyester fiber. Many other multinationals, such as
Unilever, Shell, Philips, Parke Davis, Wellcome, also saw an opportunity early and
have benefited by investing.
In addition to subsidiaries and joint ventures, there are many licensing and technical
support arrangements with local entrepreneurs, some of which have resulted through
direct investment that have now been wholly or partially brought by local
entrepreneurs, for example, Exxon in the fertilizers industry and Exide in the battery
market.
1
2
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Pakistan has become host to a range of foreign fast food chains in the last two years.
Even 1998 saw the entry of McDonald's. Subway and TGIF in partnership with local
joint venture partners. Prior to this, others like Pizza Hut, KFC, Wimpy's, Nacho
Nana's and Taco Maker had already hit the local market.
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In spite of a regulated economic regime till about six years ago, the multinationals
found Pakistan to be an attractive place for investment. With complete deregulation of
the economy, resulting in no requirement for any investment approvals, multinationals
and other foreign investors find Pakistan a really profitable place in which to invest.
Table 2 illustrates sources of foreign investment in Pakistan in comparison to some
other countries over a 5-year period from 1995-1999.1
The government also opened up the agriculture, service and social sectors to foreign
investment through the 1998 Investment Policy in a bid to attract fresh inflows and
meet WTO requirements of free trade and flows as well. But no major investments
have been made in these areas and analysts say that despite ambitious targets set out
in the 9th five-year plan, few are expected.
Taken from the website: www.lccci. com. The article is entitled Foreign Vision
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Engineering
Chemicals &
Pharmaceu Cynamid, Dow Chemicals Pacific, Dupont Far East, Engro, Glaxo,
Hercules, Hoechst, ICI, Johnson & Johnson, Johnson & Nicholson, Merck
ticals
& Co., N.V. Upjohn, Parke Davis, Pfizer, Reckitt & Coleman, Roche,
Rhone Poulenc, Samsong, Sandoz, Smith Kline, Beecham, Squibb/Searle,
Electronic &
Electricals
Transport &
Siemens.
Alcatel, Cable & Wireless, DHL, Ericsspn, Motorolla
Communications
Oil & Gas
Food, Consumer
Products &
Packaging
Hotels
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Taxation There is little apparent denial of national treatment for foreign firms.
There is also no evidence of statutory derogation of national treatment. In fact, the
Foreign Private Investment (Promotion and Protection) Act, 1976, specifically
provides that foreign investment shall not be subject to more taxation on income than
investment made in similar circumstances by Pakistani citizens. In practice, the issue
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Conversion and Transfer Policies Pakistan has a liberal foreign exchange regime
with few restrictions on holding foreign exchange and bringing it in or out of the
country. There are no limits on the inflow or outflow of funds for remittances of
profits, debt service, capital, capital gains, returns on intellectual property, or
payments for imported inputs. The average delay period currently in effect for
remitting investment returns such as dividends, return on capital, interest and
principal on private foreign debt, lease payments, royalties and management fees
through normal, legal channels is only a week to ten days. It is also possible to remit
funds through a legal parallel market by using Foreign Exchange Bearer Certificates
(FEBCs), which may be purchased in the secondary market.
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amounts are negotiable. The local content policy, known as the deletion policy,
requires that all investments based on local assembly of imported parts, and that wish
to enjoy favorable tax rates accorded to new investments, have a deletion program to
raise local content. The Ministry of Industries monitors the deletion schedule closely
and must approve any deviation.
Environmental Impact Statements takes 90 days and may lead to approval, rejection,
or request for modification. Each province also has its own environmental protection
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Pakistan received 3.18 billion dollars in FDI during the five-year period from 1993 to
1998 and according to the Secretary-General at the Overseas Investors Chamber of
Commerce and Industry, Pakistan attracts an average of 700-800 million dollars a
year in the form of FDI. During the period 1995-98 Pakistan attracted $2.2 billion in
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FDI and analysts describe 1995-96 as the single best year for foreign direct
investment when $1.1 billion flowed in from abroad on account of Hubco's large
investment.
The decline ever since has been attributed, in the most part, to the reduced inflows in
the power sector which is the greatest contributor making up 36% of the total foreign
investment in Pakistan. The financial sector comes in next with a 15.5% contribution
followed by the food and beverages industry with a 7.6% share in the total.
Another blow to confidence came when the government froze foreign currency
accounts in May last year following the nuclear tests. Sanctions were one thing. But
the freezing of 11 billion dollars of government guaranteed bank accounts was really
the nail in the FDI coffin. During 1998, corporate profits of most leading
multinational companies in Pakistan declined substantially.
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Bibliography
The following sites were visited and used for the purpose of
c o n d u c t i n g t h e l i b r a r y r e s e a r c h o n F o r e i g n D i r e c t I n v e s t me n t i n
P a k i s t a n s e c o n o m y. Th e s i t e s a d d r e s s e s a r e p r o v i d e d w i t h t h e n a me
of the article, the name of the author where relevant and the date of
t h e publication of the article:
w w w.l c c i . c o m/ p k . Th e a r t i c l e i d s t i t l e d : F o r e i g n v i s i o n o f
P a k i s t a n 2 0 1 0 b y r e s e a r c h a n a l ys t M r. M o h a m ma d Ah s a n , d a t e d
1 2 t h N o v e mb e r 1 9 9 9
w w w.f i n a n c i a l t i me s . c o m / p k
Foreign
I n v e s t me n t
in
P a k i s t a n s
e c o n o m y b y S t e f a n Wag ys t yl , N o v e mb e r 2 8 t h , 1 9 9 4
w w w.e p b . c o m . I n c e n t i v e s f o r E x p o r t e r s , 1 5 t h , Au g u s t 2 0 0 0
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w w.e r c . c o m. I n d e x o n C o u n t r ys e c o n o mi c r e p o r t s , P u b l i s h e d b y
t h e U .S d e p a r t me n t o f s t a t e o n F e b u r a r y 1 9 9 4
w w w.u n c t a d . c o m/ p a k i s t a n . F o r i e g n D i r e c t I n v e s t me n t f l o w o 3 r d
w o r l d c o u n t r i e s s l u mp s b y M o h a mm e d I l ya s , O c t 3 , 2 0 0 0
w w w.c l a . c o m/ p k . C o u n t r y C o mm e r c i a l g u i d e s F Y 1 9 9 9 P a k i s t a n
b y Ayu b Ah me d .
w w w.d a w n . c o m .
F o r e i g n I n v e s t me n t c o n t i n u e s t o f l e e P a k i s t a n b y
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. w w w.i l o . c o m / p k . I mp a c t
of globalisation
F o r e i g n D i r e c t I n v e s t me n t
w w w.s o f i . c h / .
S o u r c e s o f F o r e i g n D i r e c t I n v e s t m e n t I N P a k i s t a n s
e c o n o m y, 3 r d M a y 1 9 9 9 .
w w w.w o r l d b a n k . o r g .
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