Foreign direct investment (FDI) or foreign investment

Foreign investment refers to the net inflows of investment 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. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and shortterm capital as shown in the balance of payments.
It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign 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.

TYPES OF FOREIGN DIRECT INVESTMENT

By Direction
Inward foreign direct investment Foreign direct investment, which is inward, is a typical form of what is termed as 'inward investment'. Here, investment of foreign capital occurs in local resources. The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of existent regulations, loans on low rates of interest and specific grants. The idea behind this is that, the long run gains from such a funding far outweighs the disadvantage of the income loss incurred in the short run. Flow of Inward FDI may face restrictions from factors like restraint on ownership and disparity in the performance standard. Outward Foreign Direct Investment Foreign direct investment, which is outward, is also referred to as direct investment abroad. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country. Outward FDI flourishes under government backed insurance at risk coverage. of outward FDI to retain government's control over the defense related industrial complex sidy scheme targeted at local businesses

investment funding bodies n Foreign direct investment may be further classified by their set target. The areas here are Greenfield investment and Acquisitions and Mergers.

BY TARGET Greenfield investments involve the flow of FDI for either building up of new production
capacities in the host nation or for expansion of the existent production facilities of the host country. The plus points of this come in form of increased employment opportunities, relatively high wages, R&D activities and capacity enhancement. The flip side comes in the form of declining market share for the domestic firm and repatriation of profits made to a foreign country, which if retained within the country of origin could have led to considerable capital accumulation for the nation. Multinationals mostly rely on mergers to bring in FDI. Until 1997 mergers and acquisitions accounted for around 90% of FDI flow to the US economy. FDI flow through acquisitions does not render any long run advantage to the economy of the host nation as under Greenfield investment.

Mergers and acquisitions

Transfer of existing assets from local firms to foreign firms takes place; primary type of fdi cross borders mergers occurs when the assets and operations from different countries are combined to establish a new legal entity. Cross borders acquisitions occurs when the control of assets and operations is transferred from a local to a foreign company, where local company becomes affiliate of a foreign company

Horizontal fdi
Horizontal fdi occurs when a multinational company undertakes the same production activities to different countries

Vertical Foreign Direct Investment takes two forms:

1. 2. backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production

Anover kind of Foreign Direct Investment

Foreign Direct Investment also include investments which based on the motive behind the investment from the perspective of the investing firm:

Market Seeking
Investments which target at either penetrating new markets or maintaining existing ones. Foreign Direct Investment of this type may also be employed as defensive strategy;it is argued that businesses are more likely to be pushed towards this kind of investment out of fear of losing a market rather than discovering a

new one.This kind of Foreign Direct Investment can be distinguished by the foreign Mergers and Acquisitions in the 1980s by Accounting, Advertising and Law firms.

Resource Seeking
Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. natural resources, anover words - naturally occurring materials such as coal, fertile land, etc., that can be used by man, and cheap labor). This characterizes Foreign Direct Investment into developing countries, for example seeking cheap labor in Eastern Europe and Southeast Asia, or natural resources in the Middle East and Africa.

Efficiency Seeking
Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this kind of Foreign Direct Investment comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Usually, this kind of Foreign Direct Investment is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU

(Source: http://en.wikipedia.org/wiki/Foreign_direct_investment

Methods of foreign direct investment:

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise

Foreign Direct Investment In Pakistan

Here one interesting phenomenon is supposed to be discussed that although the FDI for the poor countries increased but capital flows to the capital market were almost nil or in some countries was negative that shows that financial sector in developing nations really need revolutionary macro changes. Overnight low or zero capital flows towards developing countries is also due to bad credit rating by agencies such as Moody's and S&P etc. Here one thing is very worrisome for Pakistan that the portfolio sector remained in dark in last FY as investors' confidence was shaken after September 11 and especially when Pakistan joined international coalition in a war against terrorism that created law and order disturbance. On the other hand persistent prevailing tension between two nuclear rivals Pakistan and India also shook investors' confidence that ultimately initiated portfolio investment withdrawal and was noted around $10.1 million in last one year.

Foreign Investment inflows in Pakistan ($Million)

Greenfield investment
2001-02 2002-03 2002-03 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (Jul-Apr) Total 357.00

622.00 750.00 1,161.00 1,981.00 4,873.20 5,276.60 3,719.90 2,150.80 1,232.1 22,123.60

Privatization proceeds 128.00 176.00 199.00 363.00 1,540.00 266.40 133.20 0.00 0.00 0.00 2,805.60

Total fdi 485.00 768.00 949.00 1,524.00 3,521.00 5,139.00 5,409.00 3,719.00 2,150.80 1,534.1 25,228.10

Private portfolio investment -10.00 22.00 -28.00 153.00 351.00 1,820.00 19.30 -510.30 587.90 302.0 2,706.90

1. Oil and Gas: Pakistan sought proposals from 10 investment banks to advice on a convertible bond sale of Oil & Gas Development Co., the largest stock on the countrys benchmark share index. Inaugurating a two-day Pakistan Exploration Promotion Conference 2009, in Calgary, Alberta, Dr. Asim Hussein, Advisor to the Prime Minister on Petroleum & Natural Resources, said the country offers pretty oil & gas investment opportunities with liberal terms as well as a competitive fiscal regime. Representatives of major oil & gas companies based in Calgary including Shell Canada, EnCana, SNCLavalin, Jura Energy etc participated in the conference. Oil & Gas FDI in $ Million 2005-2006 312.7

2006-2007 2007-2008 2008-2009 Jul 09- Mar10

545.1 634.8 775.0 519.9

2. Financial Business: A five member delegation from Peoples Republic of China headed by Mr. Hui Jinsong of M/s Chengdu, He Hong Investment & Management Co. Ltd., China recently visited Board of Investment to discuss the investment opportunities available in Pakistan, especially in the financial sector. The delegates were informed that the new investment policy of Pakistan allows 100 per cent foreign equity in the major sectors and full repatriation of profits and dividends in all the sectors. Mr. Hui Jinsong appreciated the financial services sector of Pakistan as it has a lot of potential with trained personnel. Chinese companies are ready to make investments in Pakistan including the growing financial sector. Financial Business FDI in $ Million 2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 3. Textile : As the result of measures taken under vision 2005, the fiscal year 2002-03 witnessed tremendous inflow of FDI in textile sector in the coursework of last one year has reached to US$4 billion which has led to improvement in productivity, both in terms of quality & quantity, in yarn, fabrics, home textiles & clothes, besides generating over 300,000 new jobs. Foreign direct investment (FDI) in Pakistans textile & clothing sector declined in the coursework of the fiscal year 2008 ending June, partly due to political turmoil in the country. The slump was blamed on increased costs of raw materials, shortage of energy, high inflation, shortage of expert manpower, together with political turmoil over the past seven months. The country attracted US$30.1m in textile & clothing FDI in the coursework of the year, compared to US$59.4m in the coursework of the earlier year, according to the statistics released by the State Bank of Pakistan (SBP). Textile FDI in $ Million 329.2 930.3 1,864.9 707.4 118.7

2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 4. Trade:

47.0 59.4 30.1 36.9 18.1

Accordingly during early 1980s, the government in Pakistan has initiated market-based economic reform policies. These reforms began to take hold in 1988, and since than the government have gradually liberalized its trade and investment regime by providing generous trade and fiscal incentives to foreign investors through number of tax concessions, credit facilities, and tariff reduction and have also eased foreign exchange controls. In the 1990s, the government further liberalized the policy and opened the sectors of agriculture, telecommunications, energy and insurance to FDI. But, due to rapid political changes and inconsistency in policies the level of FDI remained low compared to other developing countries. Trade FDI in $ Million 2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 5. Construction: Construction sector has also been a major recipient of foreign investment during this decade. Pakistan has started building new ports, highways, roads and bridges and oil-rich Middle East investors have ventured into real estate development and construction of housing units. But the average yearly inflow of FDI in construction, however, fell nine per cent to $87 million during FY08 to FY10 (till March) from $96 million in earlier three years. This has happened mainly because the real estate price bubble burst in Dubai and elsewhere in the UAE, explains an office-bearer of the Association of Builders and Developers. Traditionally, the FDI inflows have come from the US and the UK, Saudi Arabia and the UAE, Norway, Switzerland and Germany and China, Japan and Hong Kong. 118.0 172.1 175.9 166.6 65.1

But going forward Italy, Australia, Turkey, South Korea, Russia, Malaysia, Kuwait, Bahrain, Oman and Iran, or at least some of these countries, would be amongst our top foreign investors, a BOI official said. His optimism was based on the growing interest these countries have lately shown in investing in Pakistans economy. Foreigners are looking for investment opportunities not only in oil and gas, power generation, trade, transport, chemicals and construction sectors but also in agriculture and food processing, livestock and dairy development, freight forwarding, entertainment and retailing. Construction FDI in $ Million 2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 6. Power: The three other sectors trade, transport and chemicals are now getting more of foreign investment than before. But the pace of FDI inflows in power generation has not picked up as yet. Officials of Pakistans Board of Investment say there has been a shift in the FDI pattern which can be attributed to sectoral growth in line with the national requirements. While the origin-wise changes in inflows reflect how foreign investors of some countries perceive business growth prospects in Pakistan and whether their own business plans fit into the fast-changing state-to-state relationships. For example, both Chinese and American investors are now out to make more investment in Pakistan as both countries have strategic stakes here, said one official. The dialogue between the US and Pakistan beginning this month is expected to hammer out details of likely US investment in the energy sector. The Asian Development Bank is also planning investment in this sector. Power FDI in $ Million 2005-2006 2006-2007 2007-2008 320.6 193.4 70.3 89.5 157.1 89.0 93.4 77.7

2008-2009 Jul 09- Mar10 7. Chemical:

130.6 38.2

Foreign investment in chemicals averaged around $77 million a year during this period, up from $53 million per year in the earlier three years, showing an annual average growth rate of more than 45 per cent. Foreign as well as local investments in chemical sector have increased over the years as production facilities of fertilizers, pesticides, caustic soda and soda ash and paints and varnishes continue to expand. Chemical FDI in $ Million 2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 8. Transport: With renewed focus to revamp its transport sector for sustainable economic growth, the country attracted FDI inflows at a faster pace. Average annual inflow quadrupled to $86 million for three years i.e. FY08-FY10 (till March) from below $20 million between FY05 and FY07. Transport FDI in $ Million 2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 18.4 30.2 74.2 93.2 90.1 312.7 545.1 634.8 775.0 519.9

9. Communication (IT Telecom): The post-recession trend also shows a gradual shift in investment choices while financial business, IT and telecom and oil and gas sectors continue to attract the bulk of FDI. Between FY08 and FY10 (till March)

Pakistan received roughly $2.7 billion in financial business, almost as much in IT and telecom and $1.9 billion in oil and gas exploration and processing. Communication (IT Telecom) FDI in $ Million 2005-2006 2006-2007 2007-2008 2008-2009 Jul 09- Mar10 10. Chemical: According to official claims, the country is aiming to obtain US$7 billion in foreign direct investment within the current financial year. The government is planning road shows in Middle East and Europe to inform investors of the many opportunities for investment in the country in manufacturing as well as infrastructure projects. In this regard, the Privatization Commission has already published its priority list for the year 2007 saleout. The inflow of foreign direct investment (FDI) also went up significantly during the first two months of the current fiscal year. During July-August 2006-07, FDI reached $375.4 million against $230.8 million during the corresponding period last year, showing a rise of 63 per cent. Pakistan had received record FDI of about $ 1,540.3 million during 2005-06, including privatization proceeds. Experts believe that high portfolio investments would improve the countrys image abroad and the higher FDI is proof that the country has potential for foreign investment. Comparative analysis Of the FDI inflows to Pakistan in 2004-05 and 2005-06, the communication sector had the largest share with $517 million or 34 per cent. This was followed by financial business 17.7 per cent, oil, gas and petrochemical 14.3 per cent, power 4.8 per cent, trade 3.4 per cent, chemicals 3.3 per cent and others 22.5 per cent. Recently, the government also established an Investors Relations Desk in the Ministry of Finance to keep foreign investors updated on Pakistans economy. As per their statistics, Pakistan exhibited an increase of 37.7 per cent in terms of total investment in the first two months of the current fiscal year against the same period last year. Chemical FDI in $ Million 2005-2006 1,540.3 1,937.7 1,898.7 1,626.8 879.1 171.0

2006-2007 2007-2008 2008-2009 Jul 09- Mar10

266.4 133.2 0.0 0.0

11. Others sectors Foreign investment on a reportable basis is now allowed in the Service, Infrastructure, Social and Agriculture Sectors subject to the conditions indicated against each. They will have to simply register their company with Security Exchange Commission of Pakistan under the Companies Ordinance, 1984 and to inform the State Bank of Pakistan provided the relevant conditionalitys are fulfilled. (a) Services Sector FDI in Service Sector is allowed in any activity subject to condition that services which require prior permission/NOC or license from the concerned agencies will continue to get the same treatment until and unless de-regulated by such agencies and will be subject to provisions of respective sectoral policies. (b) Infrastructure Sector Infrastructure Projects, including the development of Industrial Zones. The amount of foreign equity investment in the company/project shall be at least US$ 0.3 million. 100% foreign equity is allowed on a reportable basis. (c)Tourism Tourism has been given the status of Industry in accordance with Ministry of Industries and Production Circular No. 1-129/99-INV-IV dated 2nd August, 1999. It has been placed under priority Industries i.e. Category C of the Investment Policy.

Advantages of Foreign Direct Investment

In the global economy today, we see many developing countries competing for foreign direct investment. FDI is said to be an important factor for spurring the development of a nation. Lets take a look at some advantages of foreign direct investment to a host country:

Integration into global economy A developing country, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market. Technology advancement FDI can introduce world-level technology and technical know-how and processes to developing countries. Foreign expertise can be an important factor in upgrading the existing technical processes in a host country. For example, the civilian nuclear

deal between India and the United States would lead to transfer of nuclear energy know-how between the two countries and allow India to upgrade its civilian nuclear facilities.

Increased competition - As FDI brings in advances in technology and processes, it increases the competition in the domestic economy of the developing country, which has attracted the FDI. Other companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector. Improved human resources Employees of a host country in which there is an FDI get exposure to globally valued skills. The training and skills upgradation can enhance the value of the human resources of the host country. Revenue To Government: Profit Generated Fdi Contributes To Corporate Tax Revenues In Host Country

The advantages of foreign direct investment to the investor includes access to a larger market in the host country, ability to tap the potential of a cheap and skilled labour, making use of resources in the host country and pursuing growth goals by diversification and optimising costs

Disadvantages of Foreign Direct Investment

FDI is not an unmixed blessing. Governments in developing countries haveto be very careful while deciding the magnitude, pattern and conditions of private foreign investment. Possible adverse implications of foreigninvestment are the following: 1. When foreign investment is competitive with home investment,profits in domestic industries fall, leading to fall in domestic savings. 2. Contribution of foreign firms to public revenue through corporatetaxes is comparatively less because of liberal tax concessions, investmenT allowances, disguised public subsidies and tariff protection provided by the host government. 3. Foreign firms reinforce dualistic socio-economic structure andincrease income inequalities. They create a small number of highly paidmodern sector executives. They divert resources away from prioritysectors to the manufacture of sophisticated products for the consumption of the local elite. As they are located in urban areas, they createimbalances between rural and urban opportunities, accelerating flow of rural population to urban areas 4. Foreign firms stimulate inappropriate consumption patterns throughexcessive advertising and monop olistic market power. The productsmade by multinationals for the domestic market are not necessarily lowin price and high in quality. Their technology is generally capital-intensive which does not suit the needs of a labour-surplus economy.

5. Foreign firms able to extract sizeable economic and politicalconcessions from competing governments of developing countries.Consequently, private profits of these companies may exceed socialbenefits 6. Continual outflow of profits is too large in many cases, puttingpressure on foreign exchange reserves. Foreign investors are veryparticular about profit repatriation facilities.