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Tuesday, 4 February 2020

Foreign direct Investment (FDI)


Foreign direct Investment

FDI is a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. The source for data on FDI flows is the International Direct Investment Database of the organization for economic Co-operation and Development (OECD), which has defined FDI as:

“a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a last interest in an enterprise (the direct investment enterprise) that is resident in an economy other thatn that of the direct investor… The “lasting Interest” is evidenced when the direct investor owns at least 10% of the voting power of the direct investment enterprise.” (OECD, 2008)
Foreign direct investment (FDI) has been recognized as an important resource for economic development. Many people argue that the flows of FDI could fill the gap between desired investment and domestically mobilized saving (Tordaro and smith), 2003, Hayami, 2001). It also may increase tax and improve management, technology, as well as labor skills in host countries (Tordaro and smith), 2003, Hayami, 2001). Additionally, FDI may help the host country to break out the various cycle of underdevelopment (Hayami, 2001).
       Many cholars widely believe that the benefits accrued from FDI may include the acquisition of new technology, employment creation, human capital development, contribution to international trade integration, enhancing domestic investment, and increase tax revenue generated by FDI (Jenkins and Thomas, 2002; World Bank, 2000).All of these benefits are expected to contribute to higher economic and employment growth which is an effective tool for achieving improvement in the reduction of poverty. However, the impacts of FDI on poverty depend on many factors market, the economic environment, and the investment itself (Mayne, 1997).



Broadly, foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans”. In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable.
As a part of national accounts of a country, and in regard to the GDP equation Y=C+I+G+(X-M) [consumption + Domestic investment + Government spending + ( exports – imports)], I is investment plus foreign investment, FDI is defined as the net inflows of investment(inflows minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, join- venture transfer of technology and enterprise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and “stock of foreign and direct investment “, which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movements.

(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 economics. 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 organization and managerial skills, and transfer of technology, promoting 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 scare resources and limited skilled manpower, due to strategic motives by the affiliates of multinational corporations (MNCs) or the technological gap between local and foreign firms. There were also other costs associated with inflow of FDI such 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 internet transaction, and host countries government policies.
Many factors made Pakistan an attractive place for foreign investment. Firstly, the Pakistanis economy showed responsiveness and potential capacity to meet exogenous shocks and minimize risk 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 begin to flow once again the subsequent event included. Afghanistan war; the attack on Indian’s parliament (2001) that led to mobilizations of Indians 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 provided a large market for consumers goods, a growing middle class with adequate and purchasing power, and provision of low-cost labor, which reduces the cost of production and its strategic geographical location in central and South East Asia.
Thirdly Pakistan has a word – 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 a also a strategic consideration for increasing FDI in Pakistan having implications for global security. (Hussain, 2003)
Pakistan also undertook wide- ranging structural reforms in various sectors of the economy and pursued sound macroeconomic policies for the last seven years. Pakistan has now emerged as a favorite destination for foreign investors, both increased to $6.0 billion, which was almost 48 percent higher than last year in the same period. Within total foreign investment, foreign direct investment (FDI) amounted to $4.16 billion, which was 37 percent   higher than last year (GOP, 2006-07).  Important areas of FDI were telecom, energy (oil and gas, power, petroleum refineries), banking and finance, food and beverages. These four groups accounted for over 80 percent of FDI inflows (GOP, 2006-07).other areas , for instance ,textile ,chemicals and petro-chemicals , automobiles, construction and trade, were also attracting FDI. Nearly 78 percent of FDI came from five countries.
Pakistan’s equity market was also attracting huge portfolio investment had created brisk activity in stock market (as Karachi stock exchange (KSE) of Pakistan). The magnitude of foreign investment reflected condenses of global investors on the current and future prospects of Pakistan’s economy (GOP, 2006-07). The target of exports in 2006-07 was at $18.6 billion or 12.9 percent higher than last year.


During the current fiscal year, exports increased only by 3.4 percent, rising from $13.46 billion to $ 13.9 billion Pakistan exports were mainly consisted of few items namely; cotton, leather, rice, synthetic textiles and sports goods. Imports target was set to decline by 2.1 percent in 2006-o7 to $28.0 billion from last year’s level of $ 28.6 billion (GOP 2006-07).


The FDI inter alia was constrained by a number of factors namely, political instability, law and order, economic environment and no proper infrastructure, the instability in stock markets and regulatory regime. Nevertheless, FDI and foreign remittances provided a strong base to improve the economic situation of the country. The envisaged a significant addition to the empirical estimation of the impact of foreign direct investment on Pakistan economy. The objective of this paper is to analyze the impact FDI on imports, exports and identity the constrains confronting foreign investment. The results of the study provide the policy markers with a firm basis to formulate appropriate programs leading to the development of Pakistan economy. During the last decade, Pakistan is playing an important role in

Pakistan ‘economic growth came to a near halt at around 2.00 percent in fiscal year 2009, not only as a result of the global financial crisis =, but also because of internal issues. These included a war on terror launched by security forces in the North West Frontier province (NWFP) and the Federally Administrated Tribal Areas (FATA) bordering on Afghanistan, and the resultant displacement of some three million people from their homes. Both the war on terror and the rehabilitation of the internally displaced persons (IDPs) consumed a big chunk of the resources, thus widening the fiscal deficit and halting economic growth. Pakistan has suffered more than any other country due to the war on terror. 
With the thread of terrorism, normal business requires more time extra security. Thus, terrorism leads to a general slowdown in economic activity. Moreover, the terrorists have challenged the writ of the government by creating chaos and uncern conditions that have tarnished the soft image of Pakistan. According to analysis of international economics, the soft image likes a cashable commodity, as it is an important source for attracting foreign direct investment (FDI). The FDI fell to $463 million during the first quarter as against $1.116 billion during the same period the previous year, a decline of 58.5 percent. The frequent incidents of terrorism have given a bad name to Pakistan in the worlds and international markets. Terrorism has damaged the economy, polity and society of Pakistan, on multiple levels.
Against this background and estimating the cost of terrorism is an extremely difficult exercise. Moreover, the absence of primary data makes the task even more challenging. The present duty should thus be treated as an attempt at filling the knowledge gap in this area, encouraging more sophisticated analysis for better framework, and conflict cost estimates. The paper focuses on the economic cost of terrorism in Pakistan in a multi-dimensional perspective. While highlighting the impact of terrorism on GDP growth, it also takes into account the impact on FDI and tourism, along with the social sector.

Terrorism has both direct and indirect costs for the economy. The direct costs include human casualties, “collateral damage” to the and interruption of economic activities. The indirect costs include the decline in investment, inability to proceed with development work, loss of production time, increase in unemployment and the high cost of supporting and rehabilitating the displacement persons. With expanding insurgency in the tribal belt and increasing acts of terrorism acts of terrorism in Pakistan, the direct and indirect costs are growing exponentially. According to the Economic Survey, Pakistan has been the worst victim o has significantly lost the momentum of economic growth since 2007. The annual report by the institute of Public Policy of Beacon House National University estimates the cost of the war on terror in Pakistan to be $ 31.4 billion since 2004-2005, far in excess of assistance of $1.7 billion annually. A clearer picture can be seen in the following table. 


Table: 2 Cost of conflict to Pakistan (Rs. billion)

Cost
2004-2005
2005-2006
2006-2007
2007-2008
20018-2009
Direct Cost
67.103
78.060
82.499
108.527
114.033
Indirect cost
192.000
222.720
278.400
375.840
563.760
Total Cost
259.103
300.780
360.899
484.367
677.793


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