What Does Fdi Mean Exactly Economics Essay

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In the past few decades there has been a substantial increase in the level of FDI worldwide. Mainly due to the rapid level of globalization, liberalization and free trade, more and more countries are now looking to attract foreign direct investments as it is deemed as an important source of external finance and a key to economic development. In the past few years FDI has been the most dominant form of capital flow in the global economy even the developing countries. Although the level of FDI in developing countries is not nearly as high as the level in developed countries it is still quite vital. FDI is a vital source of external resource flows to developing countries and has emerged as a significant part of capital formation in developing countries. Even though the FDI to these countries forms a small percentage of the global FDI (Kumar and Pardhan, 2001), nevertheless it continues to play an important part in the growth of developing countries (Arshad, 2008)

The role of FDI in Pakistan's economy:

Pakistan is a developing country and like any other developing nation it is faced with the dilemmas of high population growth, balance of payments deficit, burden of large external loans, lack of capital, low levels of employment, poor education system. Therefore FDI is very important to Pakistan. It not only benefits from the external finance and capital formation FDI brings in but also from the valuable transfer of technology and managerial skills. Pakistan is a country aiming to achieve an enhanced rate of economic growth and for the purpose of this aim it needs to attract more FDI since it simulates growth more than any other source of capital inflows. Various sectors of the Pakistani economy are in need of FDI like energy, telecommunication, coal. The energy sector specially is in dire need of foreign direct investments. The demand for electricity in Pakistan's is growing larger every day and local suppliers have done poorly to cope with the rising demand. The massive shortfall has affected Pakistan badly with not only the industries being affected but the people also suffering heavily due to constant power outages. Pa

Currently some of the biggest Multinational Corporations are operating in Pakistan in every prominent sector. In the banking industry banks like Standard & Chartered, Barclays have experienced successful operations. In the telecommunication industry companies like Telenor have become one of the fastest growing mobile operator with expanding consumer bases.

Pakistan as an attractive host to FDI:

Over the last few years Pakistan has been marred with continuous political instability, law and order and security problems. The levels of foreign investment has dropped considerably in the last few years mainly due to the reasons stated above. The State Bank of Pakistan reported that net Foreign Direct Investment from the month of July to September of 2012 was just $87 million which is a very poor showing for Pakistan given that the level of net FDI was $263 million in the same period of last year (Express Tribune, 2012) However with all that being said Pakistan still remains a vast land of potential where foreign investors can reap many rewards on their investments. Pakistan's location first of all provides plenty of business opportunities to potential foreign investors. It is located in the heart of Asia and is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced Far Eastern tigers. This strategic advantage alone makes Pakistan a marketplace teeming with possibilities (Board of Investment, 2012).

Pakistan offers very liberal investment policies the proof of which is the operation of over 600 foreign companies in Pakistan. One of the prime reasons why FDI in Pakistan should prove beneficial to investors is its cheap workforce. With the rapid unemployment in Pakistan, people are always looking for jobs and are willing to work as hard as possible. The literacy rate in Pakistan has now improved to 55 percent (CIA World Factbook, 2012) with many people being able to converse in English. Both skilled and unskilled labour is available at cheap rates. Pakistan is an ever growing economy with the level of consumers reaching 170 million and with an expanding middle class. FDI has risen sharply since the 1990s where it was around $300 million to over $3.7 billion in the year 2008-2009. Fiscal deficit has been reduced greatly in recent years and FOREX reserves have increased from $3.22 billion in 2000-01 to $11.6 billion in June 2009 (Board of Investment, 2012). There are various incentives provided by the Pakistan government to attract foreign direct investments such as the ability to invest in any sector of Pakistan, be it telecommunication, oil and gas or transport and government permission is not needed. No sales or withholding tax is levied on any import of machinery or raw materials and the customs duty is very minor. There is no discrimination between local and foreign investors with equal opportunity being provided. Policies such as waving the limit on the amount of equity foreign investors are allowed to hold have been designed to project a positive image of the country.

For an underdeveloped country like Pakistan FDI is vital for its economic growth. Over the past few years the faith of foreign investors has dwindled due to the political instability and acts of terrorism in the country. Pakistan is faced with a high level of unemployment, international debt, a stagnant literacy rate etc. FDI has the ability to boost employment rates as new enterprises set foot in Pakistan. Multinationals Corporations will not only employ a large number of the Pakistani workforce but will also help in their training. FDI is also important to Pakistan since it boosts competition and prevents local firms from having an unfair advantage in the market. This was evident when Mobilink GSM was the primary telecommunication service provider in Pakistan through the 1990s and early 2000s but with the entry of international telecommunication providers such as Warid telecom, Telenor Group and Zong in Pakistan in the mid to late 2000s saw the consumers getting cheaper calling rates which resulted in massive revenues for the Pakistani telecommunication industry. Another motive for Pakistan to attract FDI is that its capital markets are poorly developed meaning they are unable to meet the needs for large scale investment projects. It allows Pakistan to tap into international markets and with the better quality products the increased competition brings about local manufacturers and enterprises can witness great success.

MNC's choosing Pakistan to undertake FDI:

Developing countries like Pakistan provide Multinational Corporations with interesting prospects. Pakistan has a lot to offer in terms of its strategically critical location, lack of local competition which allows Multinational Corporations to thrive better, the availability of cheap labour and trained workforce, various investment opportunities in many different sectors of Pakistan like telecommunication, banking, power and energy sector, oil and gas exploration to name a few. MNC's can reap benefits from Pakistan's drawbacks like the overgrowing population. Pakistan has an ever growing middle class which means the consumer base is always rising and more and more people are accustomed to international goods and services.

MNCs are looking for greater revenues, expansion, and control. With cheap labour which is known to be diligent and hardworking, they stand to generate more revenues and reduce their costs. Pakistan possesses vast natural resources such as coal, limestone, copper, gas supply and salt. A country like Pakistan which needs FDI would allow MNC's to exploit these natural resources to their benefit. In more developed nations they would find it hard to do so since developed nations place a higher priority towards the prevention of natural resource depletion. Pakistan offers a very attractive and liberal investment policy with good tax incentives