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The Importance Of FDI In Pakistan

Paper Type: Free Essay Subject: Economics
Wordcount: 2543 words Published: 16th May 2017

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Foreign Direct Investment or FDI happens when a home country decides to invest directly in a host country in order to benefit from the services provided to produce or market goods (Hill, 2009). FDI occurs when the investors are said to have the possession of the 10% interest or more than that in a foreign business venture (Feenstra 1998). A firm is regarded as a Multinational Enterprise or MNE when it successfully commences with the FDI.

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The importance of foreign direct investment (FDI) is well acknowledged in literature for both the developing and developed countries (Hill, 20009: Lal, 1975: Giroud, 2003). Over the period of last ten years foreign direct investment have shown twofold growth as rapidly as trade (Meyer, 2003). Developing countries require capital for the improvement of their industrial and economical sector whereas on the other hand developed countries are seeking to benefit from the high productivity factor on investing in developing countries, thus making FDI a process having joint impact on the development of both the industries .The process of liberalization of world economies in many industrially deprived countries has markedly increased the market competitiveness in terms of the inward flow of FDI. The enforcement of selective trade policies over foreign operations are designed to attract more foreign investors in the developing countries (Aqeel & Nishat, 2004).

Investments are made in sectors where the home country have a relative advantage over the host country in terms of market and economy so that the investing firm could increase their marginal productivity factor. According to Zakaria (2008) ‘foreign investment consists of a package of capital, technology management, and market access’. In other words foreign ventures bring along with them the tools required for the development of the economical and technological environment of the country. FDI helps in facilitating access to foreign markets and provides the local labour with the training and knowledge required to enhance their skills. Foreign trade and production is also influenced by the inward flow of FDI in the host country. Positive impacts of FDI are recorded on the export industry of the host country as foreign firms have that experience and knowledge which could help them to take immediate actions in response to the fluctuating demands and needs of the globalized business industry. Whereas negative impacts of FDI are seen on the import industry of the host country (Zhang, 1999). Domestic firms may find themselves in a very complex situation due to the invasion of foreign investors in the local market, sudden increase in the cost of factors of production can prove to be disadvantageous for the local investors and the local production of goods that were imported earlier could be a negative point for the investors in the import industry (Agosin and Mayer (2000).

FDI can produce a positive impact on the entire economy depending on the technological background of the region. Foreign firms can contribute in the development of the technological skills of the local labour provided the technological sector of the home country is advanced than that of the host country. The process of learning new technological skills could be beneficial for both the parties. Economic fundamentals greatly influence the investing decision of foreign firms (Liu, 2007). The attractiveness of the region could be enhanced by improving the quality of local organizations, manpower and infrastructure. A well educated and skilled labour force is one of the location advantages that host countries can provide to attract and maintain inflow of FDI (Lee & Houde, 2000) .Globalization has integrated in almost every practice in international market. According to a definition globalization is described as ‘the intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa’ (Giddens, 1990). The increasingly high demands of globalization and the shift in the economical conditions of many developing countries increase the competition among the host countries to catch the attention of foreign investors. Besides these factors government policies can also influence the inflow of FDI in the region (Brewer, 1993).

Foreign direct investments could help make the local production of goods cost-effective by the increasing demand created by investors, and once the process of production is established it can encourage more local investors to come forward and make themselves an active part of this new and exciting venture. Exporting goods to foreign industries by MNEs will encourage domestic organizations to become exporters. According to a study FDI has found to have a constructive effect on growth of the region, provided the level of human capital in the host country is adequately high (Borensztein et al, 1998). The approach of the host countries towards foreign investors have definitely contributed in the growth of the industrial, technological and socio-economical sectors of the region.

Importance of Foreign Direct Investment

in Pakistan

The government of Pakistan first introduced changes in its trade policies to attract foreign direct investments in early 1980s. These modifications in the trade policies of Pakistan were aimed to attract the inward flow of FDI in the country. Concessions in trades tax, tariff reductions and credit facilities made Pakistan a beneficial region for foreign investors where the plus point was the currency exchange rate which was an obvious trade advantage for the investors. The investors were further granted with more incentives and protection according to the policy reforms introduced in 1990s which helped the country to develop its different sectors including the telecom sector of the country. Political conditions of Pakistan which have always been at its worst affected the inward flow of FDI in the region because new ruling parties brought about new changes in the policies (Khan & Kim, 1999). According to Hong and his colleagues (1999) there is a strong connection between political conditions of a nation and FDI. Due to the political insecurity in Pakistan researchers have concluded that there are four main kinds of political threats associated with the inwards flow of FDI in countries like Pakistan. These risks include operational risks associated with foreign as well as local business operations and marginal productivity factor from the investment, transfer risks interrelated to trade and the ownership threat having an impact on the rights that the investor possess over his assets (Singh & Jun, 1995)

Foreign direct investment (FDI) is an essential tool required for the progression of the economical and technological development of Pakistan. FDI plays a crucial role in attaining the country’s socio-economic goals. Pakistan is counted amongst the countries that are deficient of physical capital and foreign ventures could help to improve the overall living standard in the country. FDI brings along different employment opportunities for the people of Pakistan and helps them to improve their skills through transfer of technological and strategic managerial skills, and help in assimilating the domestic economy with the global economy.

Over the period of years a remarkable progress has been seen in the inward flow of FDI in Pakistan. The increment in the inflow of FDI was first noticed during 90s it was the time when the government of Pakistan made appropriate changes to its trade policies (see Figure1) and then onwards FDI flow has continued to increase in the region. Dunning’s Eclectic Paradigm (2000) proposes that the reasons behind a foreign venture are based on the advantages associated with the location of the region and market failure (OLI framework) of the host country. For example cost of production, knowledge, technological resources, market size, low wage skilled labour, currency exchange rates are few of the advantages correlated with the flow of FDI in developing countries like Pakistan. According to Nishat and Anjum (1998), law and order in the region, political stability, availability of skilled manpower and flexibility in the policies of the government attracted foreign financiers in Pakistan.

FDI Inflow

In US$ million


Source: Board of Investment

Introduction of technology systems, rapid decrease in global communication costs have made management of foreign investments far easier than before. Low budget inputs, high productivity factor and high interest rates make developing countries a favourable region for foreign investments (Aqeel & Nishat, 2004). Current exceptional changes in investment policies including trade policies and tariff liberalizations, flexibility of restrictions on foreign investment and deregulation & privatization of many local industries, has possibly been the most important invitational channel for FDI (Afza &Khan 2009). The disadvantages of FDI are completely overshadowed by the over all advantages brought in the region by foreign investors (Bonaglia & Goldstein, 2006). Improvement in living standards and potential economic growth are few from the list of advantages associated with FDI.

Significance of Foreign Direct Investment in the Telecommunication Sector of Pakistan

Enforcement of selective policies suggests that the government of Pakistan is keen to open the gates of the local market to the foreign investors for the development and growth of the country. Introduction of different types of incentives including tax reduction policies, fiscal incentives and protection against all kinds of threats associated with the political conditions of Pakistan has once again attracted the inflow of FDI in the region. To a great extent foreign direct investments are responsible for the socio-economic development of Pakistan. Proper measures taken by the government for the privatization, deregulation and liberalization of the telecommunication division of Pakistan has made this sector very attractive for the foreign investments. Modern technologies, outstanding marketing tactics, more job opportunities and new skills in the region were brought by the foreign investors in the telecommunication sector of Pakistan (Hashim et al, 2009).

Today telecommunication sector is Pakistan’s fastest growing sector and Pakistan Telecommunication Authorities (PTA) has played a significant role in creating investment friendly environment for the foreign investors. PTA together with the support from the government has been successful in improving the socio-economic conditions of the country through FDI. PTA’s fair and transparent policy of awarding licenses has made a positive impact on foreign investors which has resulted in huge investments over the past years. The foreign investment has created an atmosphere of rivalry in the mobile sector and the tariffs have reduced significantly with better telecom services (Hashim et al, 2009).

Since foreign investors found out that it is a learnt it valuable opportunity to invest in Pakistan and particularly in the telecom sector, over the period of last 4 years telecom companies have invested over US $ 8 billion in Pakistan. The investments made in the cellular mobile division of Pakistan over the period of 2006-07 have been estimated over US $ 2.7 billion (Economic Survey of Pakistan, 2006-2007: 2008-2009). FDI has made a drastic impact on the economical condition of Pakistan particularly over the period of last 5 years when the political conditions were more stable.

Pakistan Cellular Mobile Industry has witnessed growth of over 170% in 2006 & 80% in 2007 with fierce competition (PTA, 2007). The telecom sector of Pakistan has prospered very rapidly in the recent years. Overall net addition of subscriber base, technological developments and invasion of Foreign Direct Investment (FDI) are indications for the growth of telecom sector of Pakistan.

Telecom is an important sector of economy contributing about 3 percent in the national GDP. Pakistan telecom sector has become a role model for other sectors in reshaping economic destiny of the people. According to the latest figures compiled by Pakistan Telecommunication Authority (PTA), the government collected almost Rs. 55 billion from telecommunication division in the form of taxes during (July-Dec09). The sum of revenues from telecom sector in 2007-08 reached Rs. 279 billion where total investment remained at US $ 3.1 billion of which cellular mobile sector make up US$ 2.3 billion (PTA, 2009).

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Reason for Choice

Being an international business student I always wanted to study the business world both at national and international level. The reason behind choosing this topic is to explore the impact of foreign direct investments of the booming industry of telecommunication. Today telecom services sector is Pakistan’s fastest growing sector Foreign Direct Investment played a crucial in the development of the economic prosperity of Pakistan. Before the invasion of foreign investors in the telecommunication sector of Pakistan it was almost impossible for a middle class member of a society to afford cellular phone services but after the foreign influence this new technology was made available to almost every member of the society. Low tariffs and associated advantages made the sector more attractive to buyers. On the other hand government’s relaxing investment-related policies for its telecom industry helped the region to boost up the inflow of FDI. The difference between nature of policies in early 90s and in 2000 onwards is reflected in the difference in the level of foreign direct investment in telecom industry, especially cellular phone sector of Pakistan. On comparison with other developing countries Pakistan is far behind in attracting the foreign investors, the need is to improve the educational and physical infrastructure of the country.

This research will present a critical analysis of the FDI in the telecommunication sector of Pakistan and its impact on the country’s technological, industrial and economical aspects

Aims and Objectives of the Research

The aim of this research is to investigate the role of foreign direct investment in the telecommunication industry of business

The objectives of this research are:

To investigate the impact of foreign direct investment in telecom sector on the economic conditions of Pakistan.

To analyse the impact of foreign direct investment in telecom sector on the technological environment of Pakistan.

To analyse the role played by the foreign direct investment in creating the job opportunities in the region.


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