Pakistan’s FDI challenges amid rapid urbanisation

Country should attract investment through joint ventures, technological collaboration

ISLAMABAD: Foreign direct investment (FDI) is considered a prime determinant of sustained and higher economic growth.

It not only leads to capital inflows, but also involves transfer of advanced technology that improves the technological base of host countries. It allows economies to increase their export share in global market as well.

The experience of Southeast Asian economies proves this assertion. A more relevant example for Pakistan can be that of Bangladesh.

Bangladesh’s technological base has improved markedly due to foreign investment. Pakistani textile investors transferred their operations in droves to Bangladesh during the peak of energy crisis. Subsequently, Bangladesh’s textile exports have grown at a faster pace compared to Pakistan.



Investors of different countries are moving to Bangladesh in order to exploit cheap input cost options available in the country. This kind of FDI is called efficiency-seeking investment.

Though it is a popular belief among policy-makers and academics that Pakistan too provides such cheap options to foreign investors, the country is not receiving this kind of FDI.

Pakistan’s weak contract enforcement and intellectual property rights (IPR), high tariff barriers for the import of key inputs and an ever increasing tax burden are discouraging foreign investors from making efficiency-seeking FDI in Pakistan.

Urbanisation-induced FDI

The only attractive feature of Pakistan’s economy for foreign investors is the country’s swiftly urbanising population. As a result, most of the FDI that Pakistan is receiving is market-seeking.

Growing at an annual pace of 3%, which is the fastest in South Asia, it is expected that by 2025 almost half of the Pakistani population will be living in urban centres.

Urban population with higher average income provides a lucrative market for multinational companies (MNCs) to expand in such areas. Such MNCs can be more aptly described as being transnational corporations (TNCs).

Although the two terms are used interchangeably, the latter can more suitably convey the nature of such corporations. Such TNCs usually operate through their subsidiaries with the sole aim of ensuring sustained revenue growth through worldwide sales. The nature of TNCs, which have expanded to Pakistan over the last two decades, proves this point. Coca-Cola has recently enhanced its operations in Pakistan through its affiliate in Turkey. The content of its advertisement strategy has a broad urban inclination.

This shows that its market strategy is more tended towards wooing Pakistan’s urban population. As a result, Coca-Cola’s share in the cola market of Pakistan has increased markedly. Currently, it is the dominant choice of urban consumers of soft drinks in the country.

Quite a bunch of UAE-based investors have invested in retail and wholesale trade, hotels and modern shopping complexes. Other examples include Germany’s retail giant Metro Cash & Carry and Japan’s Yamaha motorcycle assembly. Foreign banks have also established their branches in urban areas of Pakistan. Such products and services appeal mostly the consumer base of urban centres.



How has Pakistan’s economy benefitted from this kind of FDI? Employment opportunities have increased, local types of cash & carry retail businesses have emerged, Pakistani cola brands have also come up, we are even manufacturing our own motorcycles and domestic investors are also pouring money into shopping complexes.

Such market-seeking FDI is not going to improve Pakistan’s technological base that can put the country on the path of sustained economic growth and provide higher export share in global markets. This kind of FDI also involves a high rate of profit repatriation which puts pressure on Pakistan’s balance of payments.

Solution

Pakistan needs to complement this urbanisation-induced market-seeking FDI with efficiency-seeking investment. This can be achieved through joint ventures or technical collaborations between foreign and local companies in the form of parent-affiliate arrangement.

Pakistan’s technological base will improve through this arrangement. Research has shown that whenever FDI comes outside of this parent-affiliate relationship, the process of technological transfer is minimal. In the past, Pakistan has received FDI of this sort. Mobilink, which can be considered a pioneer in Pakistan’s mobile telephone industry, started as a joint venture between Saif Group, a Pakistani conglomerate, and Motorola Inc. Pakistan’s telecommunication sector is quite technologically on a par with telecommunication sectors in other emerging economies.

Joint ventures and other such collaborations can only be considered a viable option by foreign investors if they are sure that business contracts are upheld, their intellectual property rights are not infringed upon and their profits are not eaten away by high tax rates. These can be considered as soft business infrastructure.

Currently, Pakistan’s performance in soft business infrastructure is very dismal. Improvement in this area can truly turn Pakistan into a cheap input option for foreign investors and promote efficiency-seeking FDI.

The writer is a researcher and works in the development sector of Gilgit

Published in The Express Tribune, July 24^th, 2017.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.