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Philosophy of Islam

Term Report
On
Islamic System
Vs
Western System
Submitted to:
Mr. Zeeshan Arshad
Submitted by:
Hassan Javed Mohammad Khan
BBA (H) 6th Semester
Roll # 9
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Foreign Direct Investment in Pakistan

Executive Summary
This report is an attempt to analyze the determinants of Foreign Direct Investment in
Pakistan and the role that it has played. The report gives an overview of the
determinants of Foreign Direct Investment and what are the factors that affect
the inflows in any economy. Comparison is also made with the South Asian
Economies in particular, especially India and China.
The report discusses the various aspects of the Foreign Direct Investment in
Pakistans economy. The investments done in different sectors are highlighted in
detail so that the reader can appreciate the sector that attracts the most foreign
inflows. The role of MNCs and other companies that play in attracting the
foreign investment in Pakistans economy is also subsequently analyzed.
This is followed by an analysis of the data of past 8 years to provide a comparison of
the different trends that the Pakistani economy has to face during the past 8
years. The conclusion looks at the various existing facilities in Pakistan that
exist for attracting foreign Investment and the role that the Government can
play.

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Table of Contents
Executive Summary

Determinants of Foreign Direct Investment

Foreign Direct Investment Outflows

Investment in Pakistans Economy

16

Sector wise Investment in Pakistans Economy

17

Investment Climate in Pakistan

19

Facilities

20

Infrastructure

22

Conditions for Investment

23

Turbulent Times

26

Special Facilities

28

Synopsis

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Acknowledgement

This report is an attempt to analyze the Foreign Direct Investment inflows in Pakistan.
I would like to thank all the members of IBA library at University Campus. All
the persons were especially helpful to me during my research aand gave me
tremendous assistance.

I would also like to thank my Instructor, Mr. Mohammad Naeem, who guided me
throughout this report. Doing a library research in MBR is not an easy task. The
most difficult part is finding the topic and analyzing it. Mr. Mohammad Naeem
assigned me the above mentioned topic and helped me during the entire course
of the assignment. Without his guidance and support,
this report would not have been possible.

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Foreign Direct Investment in Low Income Countries

Foreign direct investment is viewed as a major stimulus to economic growth in


developing countries. Its ability to deal with two major obstacles, namely, shortages
of financial resources and technology and skills, has made it the center of attention for
policy-makers in low-income countries in particular. Only a few of these countries
have been successful in attracting significant FDI flows, however.

Steady Growth of FDI Flows


From the early 1970s, net resource flows to developing countries have followed an
uneven path, but have risen rapidly since 1986 to an unprecedented US$285 bn in
1996. The fluctuating nature of private capital flows has played a key role in this.
Whereas official flows have continued broadly unchanged after a peak in 1989-91,
private capital flows have experienced two waves of explosive growth, the first from
1975 to 1981, dominated by bank lending involving a high proportion of recycled
petro-dollars, the second since 1990, dominated by foreign direct investment.

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In the 1970s, FDI made up only 12% of all financial flows to developing countries.
Between 1981 and 1984 there was a sharp fall in private lending (see figure 1), as
international banks lost confidence in borrowing countries' financial stability
following the debt crisis of 1982. Since the mid-1980s the growing integration of
markets and financial institutions, increased economic liberalization, and rapid
innovation in financial instruments and technologies, especially in terms of computing
and telecommunications, have contributed to a near doubling of private flows. Most
significant has been the steady progression of FDI to a 35% share in 1990-6. Portfolio
equity has also emerged as an important component of global private flows - 13.5% of
total flows in the 1990s in contrast to a mere 1.2% in the 1980s.

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Figure 1: Net Resource Flows to Developing Countries (US$bn)

Notes:
Official Flows: including official grants and loans from bilateral and multilateral organizations.
Foreign Direct Investment: investment made to acquire a lasting management interest, usually at least
10% of voting stock, in an enterprise operating in a country other than that of the investor.
Private Loans and Bonds: loans from private banks and other financial institutions and privately
placed bonds.

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Portfolio Equity Flows: the sum of country funds, depositary receipts (US or global), and direct
purchases of shares by foreign investors.
Sources:
World Bank, World Debt Tables 1988-1996, Global Development Finance 1997

FDI To Low-Income Countries


An examination of net private capital flows by income group reveals the fluctuating
nature of those to middle-income countries that were severely affected by the debt
crisis of 1982, and to a lesser extent by the 1994 Mexican crisis. Low-income
countries, on the other hand, have seen a smoother rise in inflows of private capital.
Most of them were less affected by the debt crisis, because of their low level of
commercial bank loans, due, in part, to their previously closed economies and their
lack of suitable financial markets. It was only towards the end of the 1970s that those
in Asia in particular began to open their doors wider to foreign capital. Figure 2 shows
FDI flows to both middle- and low-income countries were still relatively modest at
the beginning of the 1980s, some $US5 bn, and accounting for only 19% of all private

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capital flows to low-income countries in 1981. By 1996 this figure had risen to 74%
(in comparison with 34% for middle-income countries).

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Trends in Direct Foreign Investment in Asian Countries

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Foreign investment in China, in terms of contract value, peaked in 1993, and then fell
in 1994. While recovering 10.4 percent in 1995, it has yet to return to the 1993
level. In investment in the ASEAN region, which recovered strongly in 1994,
there was a decline in investment in the Philippines and Malaysia and record
highs were set in investment in Thailand, Indonesia, and Vietnam in 1995.
Investment in the Asian NIEs was particularly brisk. Investment from Japan,
Europe, and the U.S. grew strongly in the Republic of Korea, Taiwan, and
Singapore - in all of which record highs were recorded. Hong Kong also enjoyed
relatively smooth growth in investment. In Southwest Asia, India saw incoming
foreign investment balloon 42-fold in the five years since its 1991 economic
reforms. Investment also rose sharply in Pakistan (up 2.5-fold in FY1995 from
previous year) and Bangladesh (up 3.3-fold); in both cases, record highs were set.
Investment in Australia climbed 39.0 percent in 1994/1995 compared with the
same period of the previous year due to the assessment by western firms of its
importance as a bridgehead to Asia. Investment in Mongolia held at about the
same level as the previous year. North Korea saw the flow of investment stop

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after the 1993 crisis over its nuclear weapons program and has had zero receipts
in the three years since. On the other hand, foreign investment by ASEAN
countries and the Asian NIEs has been gearing up in earnest. In particular,
ASEAN countries and the Asian NIEs are the largest investors in Vietnam,
Cambodia, Laos and Myanmar (with Taiwan being the biggest investor in
Vietnam, Malaysia the biggest in Cambodia, Thailand the biggest in Laos, and
Singapore the biggest in Myanmar). Taiwanese investment in China fell for the
first time, however.

Determinants of FDI flows


The unpredictability of autonomous FDI flows, in both scale and direction, has
generated a substantial research effort to identify their major determinants. An
extensive literature based generally on three approaches - aggregate econometric
analysis, survey appraisal of foreign investors' opinion, and econometric study at the
industry level - has failed to arrive at a consensus. This can be partly attributed to the
lack of reliable data, particularly at the sectoral level, and to the fact that most

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empirical work has analyzed FDI determinants by pooling of countries that may be
structurally diverse. Table 1 gives details of FDI flows to certain low-income
countries over a period of 10 years from 1986- 1995.

Foreign Direct Investment Inflows

All
developing
countries
All lowincome
countries
China
Nigeria
India
Pakistan
Angola
Sri Lanka
Ghana
Viet Nam
Bangladesh
Total of
above
countries
% of all lowincome
countries
of which
China
of which the

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

10,100

14,500

21,200

26,000

33,735

41,324

50,367

73,135

87,024

99,670

2,549

3,802

4,675

7,229

4,682

7,229

13,846

31,619

38,410

43,405

1,875
167
118
105
114
30
4
2
2,415

2,314
603
212
129
119
60
5
3
3,445

3,194
377
91
186
131
46
5
8
2
4,040

3,393
1,882
252
210
200
20
15
4
5,976

3,487
598
162
244
-335
43
15
16
3
4,233

4,366
712
141
257
665
48
20
32
1
6,233

11,156
897
151
335
288
123
23
24
4
13,001

27,515
1,345
273
354
302
195
125
25
14
30,148

33,787
1,959
620
422
350
166
233
100
11
37,648

37,500
1,340
1,750
639
400
195
245
150
125
42,344

94.7

90.6

86.4

85.2

90.4

86.3

93.9

95.3

98.0

97.6

73.6

60.9

68.3

48.4

74.5

60.4

80.6

87.0

88.0

86.4

21.2

29.7

18.1

36.8

15.9

26.0

13.3

8.3

10.1

11.2

rest

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Main Low Income Countries Recipients of DFI inflows (US$m)

Factors Influencing the Destination Of Investment


These factors are host-country determinants, rather than industry-specific factors.
I. Size of the market: Econometric studies comparing a cross section of countries
indicate a well-established correlation between FDI and the size of the market
(proxied by the size of GDP) as well as some of its characteristics (for example,
average income levels and growth rates). Some studies found GDP growth rate to
be a significant explanatory variable, while GDP was not, probably indicating that
where the current size of national income is very small, increments may have less
relevance to FDI decisions than growth performance, as an indicator of market
potential. For the majority of low-income countries that fail to attract large FDI
flows, their small domestic markets are often cited as the main deterrent. Given
other economic and political shortcomings, most investors are doubtful about the

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Source: UNCTAD, World Investment Reports 1993-6

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value of installing a factory unless they can achieve a `critical mass' for their
products. Regional integration is often perceived as a positive means of
compensating for small national markets. There is currently no clear evidence of
the degree of this influence on FDI flows. Some investors expect positive
spillover effects from South Africa and are generally optimistic about an East
African free trade area, but the benefits may well be concentrated in the
economically stronger states.

I. Openness: Whilst access to specific markets - judged by their size and growth - is
important, domestic market factors are predictably much less relevant in exportoriented foreign firms.1 A range of surveys suggests a widespread perception that
open economies encourage more foreign investment. One indicator of openness
is the relative size of the export sector, particularly manufacturing exports, are a
significant determinant of FDI flows and there is strong evidence that exports
precede FDI flows. China, in particular, has attracted much foreign investment
1

Taken form the article: Determinants of Foreign Direct Investment

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into the export sector. In Bangladesh, on the other hand, foreign investors have
been attracted to the manufacturing sector by its lack of quota for textiles and
clothing exports to the European Union and US markets. 1 Garment exports, for
example, rose from virtually nil in the 1970s to over one-half of its export
earnings by the early 1990s. In contrast, most low-income SSA economies have
remained more inward-oriented.2

II. Labour costs and productivity: Empirical research has also found relative labour
costs to be statistically significant, particularly for foreign investment in labourintensive industries and for export- oriented subsidiaries. The decision to invest in
China, for example, has been heavily influenced by the prevailing low wage rate.
The rapid growth in FDI to Vietnam has also been attributed primarily to the
availability of low-cost labour. In India, in contrast, labour market rigidities and
relatively high wages in the formal sector have been reported as deterring any
significant inflows into the export sector in particular. However, when the cost of
1

www.lcci.com.pk

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labour is relatively insignificant (when wage rates vary little from country to
country), the skills of the labour force are expected to have an impact on decisions
about FDI location. Productivity levels in sub-Saharan Africa are generally lower
than in low-income Asian countries, and attempts to redress the skill shortage by
importing foreign workers have usually been frustrated by restrictions and delays
in obtaining work permits.1 The lack of engineers and technical staff in these
countries is reported as holding back potential foreign investment, especially in
manufacturing; it lessens the attractiveness of investing in productive sectors.

III. Political Risk: The ranking of political risk among FDI determinants remains
somewhat unclear. Where the host country possesses abundant natural resources,
no further incentive may be required, as is seen in politically unstable countries
such as Nigeria and Angola, where high returns in the extractive industries seem
to compensate for political instability. In general, so long as the foreign company
is confident of being able to operate profitably without undue risk to its capital
1

Taken from the article: Pakistan Foreign Investment Policy

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and personnel, it will continue to invest. Specific proxy variables (e.g. number of
strikes and riots, work days lost, etc.) have proved significant in some studies; but
these quantitative estimates can capture only some aspects of the qualitative
nature of political risk. Surveys carried out in South Asia and sub-Saharan Africa
appear to indicate that political instability, expressed in terms of crime level, riots,
labour disputes and corruption, is an important factor restraining substantial
foreign investment.

IV. Infrastructure
Infrastructure covers many dimensions, ranging from roads, ports, railways and
telecommunication systems to institutional development (e.g. accounting, legal
services, etc.). Studies in China reveal the extent of transport facilities and the
proximity to major ports as having a significant positive effect on the location of
FDI within the country. Poor infrastructure can be seen, however, as both an
obstacle and an opportunity for foreign investment. For the majority of low-

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income countries, it is often cited as one of the major constraints. 1 But foreign
investors also point to the potential for attracting significant FDI if host
governments permit more substantial foreign participation in the infrastructure
sector. Recent evidence seems to indicate that, although telecommunications and
airlines have attracted FDI flows (e.g. to India and Pakistan), other more basic
infrastructure such as road building remains unattractive, reflecting both the low
returns and high political risks of such investments.

I.

Incentives and operating conditions: Most of the empirical evidence supports


the notion that specific incentives such as lower taxes have no major impact on
FDI, particularly when they are seen as compensation for continuing comparative
disadvantages. On the other hand, removing restrictions and providing good
business operating conditions are generally believed to have a positive effect. In
China, the open-door policy and enhanced incentives for investing in the special
economic zones contributed to the initial influx of FDI. Further incentives, such as

Excerpt from the article: Critique o the Investment Analysis in Pakistan

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the granting of equal treatment to foreign investors in relation to local counterparts


and the opening up of new markets (e.g. air transport, retailing, banking), have
been reported as important factors in encouraging FDI flows in recent years. The
Indian Government has recently relaxed most of the regulations regarding foreign
investment.1 This is seen as contributing to the increased FDI flows in the last
couple of years. However, the lack of transparency in investment approval
procedures and an extensive bureaucratic system are still deterring foreign
investors; hence the relatively low FDI/GNP ratios. In 1991, Bangladesh and
Pakistan implemented reforms allowing foreign investors to operate with 100%
foreign ownership but still failed to attract significant flows (as a proportion of
GNP) because of political instability and an over-extended bureaucracy. Nigeria,
in contrast, continues to attract foreign investment as an oil-exporting country
despite its erratic and relatively inhospitable policies. With regard to the remaining
low-income countries with small FDI inflows, surveys indicate that the lack of a
clear-cut policy with respect to foreign investment and excessive delays in
1

www.dawn/topstories/fdi/inflows

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approval procedures are amongst the most important deterrents. Although a


number of African countries set up one-stop investment shops during the 1980s
in order to simplify approval procedures, the increased workload created
bottlenecks.
II. Privatization: Though privatization has attracted some foreign investment flows
in recent years, progress is still slow in the majority of low- income countries,
partly because the divestment of state assets is a highly political issue. At a
regional level, 1994 figures show 15% of FDI flows to Latin America as derived
from privatization, but only 8.8% in sub-Saharan Africa and 1.1% in South Asia. 1
A number of structural problems are constraining the process of privatization.
Financial markets in most low- income countries are slow to become competitive;
they are characterised by inefficiencies, lack of depth and transparency and the
absence of regulatory procedures. They continue to be dominated by government
activity and are often protected from competition. Existing stock markets are thin
and illiquid and securitised debt is virtually non-existent. An under-developed
1

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financial sector of this type inhibits privatization and discourages foreign


investors.
For the vast majority of low-income countries, however, FDI is minimal. The
structural weaknesses of these economies, the inefficiencies of their small
markets, their skill shortages and weak technological capabilities, are all
characteristics that depress the prospective profitability of investment. These
factors also make it less worthwhile for potential international investors to incur
the costs of a serious examination of local investment opportunities, thus leading
to informational inefficiencies.

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PAKISTAN'S FOREIGN INVESTMENT POLICY- INTRODUCTION


The Pakistani government has implemented a new investment policy which ensures
that all incentives, concessions and facilities provided to domestic investors for
industrial investment are also available to foreign investors without discrimination.
Pakistan has eliminated its requirement for prior government approval for most
foreign investments. There are no restrictions on the amount of foreign equity in
industrial investments. A number of tax *concessions*, a super tax *rebate*, and a tax
exemption on investment, as well as guaranteed repatriation facilities have been
introduced to accelerate industrial development in the country. While certain
incentives are available to all foreign investors, invetors seeking additional incentives
or concessions specific to their project must be obtain government approval. In recent
years, succesive governments have made efforts to improve Pakistan's investment
climate by cutting red tape and offering incentives to both labour intensive and capital
intensive projects which bring in suitable technology, managerial skills, and

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marketing expertise. Unfortunately, this pro-investment attitude is not always fully


reflected in bereaucratic actions and procedures
PAKISTAN'S FOREIGN INVESTMENT POLICY
The Pakistani government has implemented a new investment policy which ensures
that all incentives, concessions and facilities provided to domestic investors for
industrial investment are also available to foreign investors without discrimination.
Pakistan has eliminated its requirement for prior government approval for most
foreign investments. There are no restrictions on the amount of foreign equity in
industrial investments. A number of tax *concessions*, a super tax *rebate*, and a tax
exemption on investment, as well as guaranteed repatriation facilities have been
introduced to accelerate industrial development in the country. While certain
incentives are available to all foreign investors, invetors seeking additional incentives
or concessions specific to their project must be obtain government approval. In recent
years, succesive governments have made efforts to improve Pakistan's investment
climate by cutting red tape and offering incentives to both labour intensive and capital
intensive projects which bring in suitable technology, managerial skills, and

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marketing expertise. Unfortunately, this pro-investment attitude is not always fully


reflected in bereaucratic actions and procedures.
INVESTMENT OVERVIEW
Foreign private investment is governed by the Foreign Private Investment (Promotion
and Protection) Act of 1976 administered by the Ministry of Industries. This act
proveides security against expropriation and adequate compensation for acquisitions.
It also guarantees to foreign investors the right to repatriate funds up to the amount of
the original investments, profits, and any additional amount resulting from reinvested
profits or appreciation of the investment. National treatment with respect to laws,
rules and regulations relating to importing and exporting of goods is provided. A key
aspect of economuc reform introduced by the government is that government
approval for any project outside the specified list, regardless of its cost and size, is not
required. With some exceptions for national security purposes, foreign firms and
individuals may not take a 100 per cent equity position in projects. Nonresidents may
freely move capital in and out of domestic securities markets, and no longer need
prior approval of the central bank to repatriate profits. Corporate tax rates are being

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lowered under a phased programme. Prior approval from the IPB is required for
setting up an industry from the specified list. Industries on the "specified list" where
investment is restricted include arms and ammunition; security printing, currency and
mint; high explosives; beverages made from imported concentrates; automobiles,
tractors and farm machinery; petroleum blending plants; and radioactive substances.
Manufacture of alcohol (except industrial alcohol) is, however, banned. Foreign
private investment is also prohibited in agricultural land, forestry, irrigation, real
estate (including land, housing and commercial office buildings), radioactive
minerals, insurance, and health. Foreign investment in domestic banks is permitted
only on a non-repatriable capital basis, though dividends may be remitted overseas.
The requirement of obtaining a no objection certifacte (NOC) from the provincial
governments for the location of a project has been a major bottleneck in the past. In
an attempt to facilitate planning by potential investors, the provincial governments
have compiled a list of areas where the establishment of industries is not considered
desirable for any particular reason.

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Foreign Investment In Pakistan's Economy1

In Pakistan, there are 30,000 companies, out of which 675 have foreign capital. 2 The
multinationals began choosing Pakistan for investment even before independence. ICI
was the first multinational by setting up a soda ash plant in 1942, and, since then, it
has diversified its business/ manufacturing activities in sectors that include,
pharmaceuticals, chemicals, and polyester fiber. Many other multinationals, such as
Unilever, Shell, Philips, Parke Davis, Wellcome, also saw an opportunity early and
have benefited by investing.
In addition to subsidiaries and joint ventures, there are many licensing and technical
support arrangements with local entrepreneurs, some of which have resulted through
direct investment that have now been wholly or partially brought by local
entrepreneurs, for example, Exxon in the fertilizers industry and Exide in the battery
market.

1
2

State Bank of Pakistan Report and Annual Indexes


Foreign Direct Investment Portfolios in Pakistani Economy

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Pakistan has become host to a range of foreign fast food chains in the last two years.
Even 1998 saw the entry of McDonald's. Subway and TGIF in partnership with local
joint venture partners. Prior to this, others like Pizza Hut, KFC, Wimpy's, Nacho
Nana's and Taco Maker had already hit the local market.

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In spite of a regulated economic regime till about six years ago, the multinationals
found Pakistan to be an attractive place for investment. With complete deregulation of
the economy, resulting in no requirement for any investment approvals, multinationals
and other foreign investors find Pakistan a really profitable place in which to invest.
Table 2 illustrates sources of foreign investment in Pakistan in comparison to some
other countries over a 5-year period from 1995-1999.1
The government also opened up the agriculture, service and social sectors to foreign
investment through the 1998 Investment Policy in a bid to attract fresh inflows and
meet WTO requirements of free trade and flows as well. But no major investments
have been made in these areas and analysts say that despite ambitious targets set out
in the 9th five-year plan, few are expected.

Taken from the website: www.lccci. com. The article is entitled Foreign Vision

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Table 3: Foreign Investment in Selected Sectors of Pakistan


Sector
Automobile &

Foreign Companies Present


AEC, C Itoh, Exide, Fiat, General Tyre, Hino, Honda, Lucas, Nissan,

Engineering

Mitsui, Singer, Suzuki, Toyota, Yamaha.

Chemicals &

BASF, Bayer, Beecham, Berger, Boots, British Oxygen, Ciba Geigy,

Pharmaceu Cynamid, Dow Chemicals Pacific, Dupont Far East, Engro, Glaxo,
Hercules, Hoechst, ICI, Johnson & Johnson, Johnson & Nicholson, Merck
ticals
& Co., N.V. Upjohn, Parke Davis, Pfizer, Reckitt & Coleman, Roche,
Rhone Poulenc, Samsong, Sandoz, Smith Kline, Beecham, Squibb/Searle,
Electronic &

Sterling Products, Warner Lambert, Wellcome, Wyeth.


ABB, GEC, Gestetner, IBM, Johnson & Philips, Mitsubishi, NCR, Philips,

Electricals
Transport &

Siemens.
Alcatel, Cable & Wireless, DHL, Ericsspn, Motorolla

Communications
Oil & Gas
Food, Consumer

Caltex, Castrol, Gulf, Lasmo, Shell, Union Texas.


Associated Biscuits, BAT, Brooke Bond, Cargill, Coca Cola, Colgate,

Products &

Eastman Kodak, Gillete, Knorr A.G., Lipton, Nestle, Pepsico, Philips

Packaging
Hotels

Morris, Proctor & Gamble, Tetra Pak, Unilever.


Hilton, Holiday Inn, Marriott, Ramada, Sheraton.

Investment Climate in Pakistan1

Article entitled: Pakistan, the Country Outlook and major components

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Openness to Foreign Investment


Considering the openness of the investment regime, foreign investment activity to
date has been relatively modest and in 1996-97 registered a substantial drop in new
FDI. Possible reasons for this include inadequate infrastructure, lack of ideal foreign
investment environment, perceptions of political instability, law and order difficulties,
policy inconsistencies, and resistance to the new policies by some elements of the
bureaucracy who have not yet fully adjusted to the new, open economic environment.
Besides law and order problems, there is a need for continuity in economic policies,
legal protection to foreign investment and upholding the sanctity of Agreements.
Pakistan needs to follow procedures that instill confidence in foreign investors that
contractual obligations are honored. A succession of investment promotion agencies,
recently the Pakistan Investment Board and its successor, the Board of Investment
(BOI), have lacked the bureaucratic authority or the continuity of leadership needed to
be effective.

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Liberalization, Privatization And Deregulation As part of an integrated


investment promotion strategy, the GOP undertook during 1990 a comprehensive
program of radical economic reforms including liberalization, privatization and
deregulation to bring the economy into a fully market-oriented system. This was
aimed at capturing the potential of the private sector in all areas of economic activity.
The privatization process has been redesigned to make it more transparent. Power
generation, telecommunication, highway construction, port development and
operations, oil and gas, services/infrastructure, social and agriculture sectors, have
now been opened to foreign investment.

Legal Framework Pakistan's legal framework and economic strategy do not


discriminate against potential foreign investors, but enforcement of contracts can be
difficult given the inefficiency of the courts. Foreign investment is generally subject
to the same rules as domestic investment, with the exception of certain sensitive areas
such as defense production, banking, and broadcasting.

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Regulatory System Enforcement of the competition law in Pakistan is under the


jurisdiction of the Monopoly Control Authority, an independent regulatory authority
that lacks enforcement muscle. In the 1970s it was notable more for its good research
than its enforcement efforts.

Pakistan formerly had a relatively high degree of

industrial concentration, with widespread licensing procedures restricting entry and


serving as vehicles for creating monopolies and oligopolies. The end of the licensing
regimes, the decline in bureaucratic controls, and the liberalizing trend of the last five
years have reduced industrial concentration by bringing down barriers to entry.
Certain industries remain relatively concentrated, but for industry-specific rather than
systemic reasons.

Taxation There is little apparent denial of national treatment for foreign firms.
There is also no evidence of statutory derogation of national treatment. In fact, the
Foreign Private Investment (Promotion and Protection) Act, 1976, specifically
provides that foreign investment shall not be subject to more taxation on income than
investment made in similar circumstances by Pakistani citizens. In practice, the issue

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of extension of national treatment is tested on a case-by-case basis, but apart from


sensitive industries, national treatment appears to be the norm. However, the new
Investment Policy provides equal investment opportunities for both domestic and
foreign investors.

Conversion and Transfer Policies Pakistan has a liberal foreign exchange regime
with few restrictions on holding foreign exchange and bringing it in or out of the
country. There are no limits on the inflow or outflow of funds for remittances of
profits, debt service, capital, capital gains, returns on intellectual property, or
payments for imported inputs. The average delay period currently in effect for
remitting investment returns such as dividends, return on capital, interest and
principal on private foreign debt, lease payments, royalties and management fees
through normal, legal channels is only a week to ten days. It is also possible to remit
funds through a legal parallel market by using Foreign Exchange Bearer Certificates
(FEBCs), which may be purchased in the secondary market.

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Capital Outflow Policy Pakistan has no restrictions on capital outflow. Those


seeking to transfer funds out of the country need only comply with the procedures
administered by the State Bank. This liberalized approach to capital outflow is part of
Pakistan's effort to integrate itself into global capital markets. Although specific
statistics are not available, there is very little outgoing foreign direct investment
(FDI).

Institutional Promotion of Investment One hurdle to investment in Pakistan had


been a bewildering series of approvals, permits, and licenses required from various
levels of government in order to launch a project. Successive institutional entities
have attempted to ease that process for prospective investors by functioning as a onewindow interface between the investors and the relevant Pakistani authorities, and the
situation is improving with special efforts by BOI.

Performance Requirements Government policies strongly favor investment


proposals that have large export or value addition and local content components, but

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amounts are negotiable. The local content policy, known as the deletion policy,
requires that all investments based on local assembly of imported parts, and that wish
to enjoy favorable tax rates accorded to new investments, have a deletion program to
raise local content. The Ministry of Industries monitors the deletion schedule closely
and must approve any deviation.

Environmental Protection The Pakistan Environmental Protection Agency (PEPA)


is responsible for enforcing the laws related to the protection of the environment. To
date, PEPA has developed standards for municipal and liquid industrial effluent and
waste, industrial gaseous emissions, motor vehicle exhaust and noise and air
pollutants. Public sector projects that are likely to adversely affect the environment
are required to file with PEPA a detailed Environmental Impact Statement when the
project is in the planning stage; other projects may be required to file short
descriptions of their effects on the environment.

The review process for

Environmental Impact Statements takes 90 days and may lead to approval, rejection,
or request for modification. Each province also has its own environmental protection

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agency; provincial Directorates of Industry may refer a project to the provincial


agency when there are concerns about environmental impact.

Turbulent Times for Foreign Direct Investment in Pakistan


Pakistan's image as a safe haven for foreign investment received a severe battering
during 1998 when the government conducted a series of nuclear tests in May and was
immediately hit with international economic sanctions soon after. Although there was
a partial lifting of sanctions on the part of the US early in 1999, the newly acquired
nuclear status resulted in a sharp escalation of economic woes and foreign investors
backed off. But some analysts say that the Pakistan government's prolonged row with
independent power producers (IPPs) was a much greater damaging factor.

Pakistan received 3.18 billion dollars in FDI during the five-year period from 1993 to
1998 and according to the Secretary-General at the Overseas Investors Chamber of
Commerce and Industry, Pakistan attracts an average of 700-800 million dollars a
year in the form of FDI. During the period 1995-98 Pakistan attracted $2.2 billion in

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FDI and analysts describe 1995-96 as the single best year for foreign direct
investment when $1.1 billion flowed in from abroad on account of Hubco's large
investment.

The decline ever since has been attributed, in the most part, to the reduced inflows in
the power sector which is the greatest contributor making up 36% of the total foreign
investment in Pakistan. The financial sector comes in next with a 15.5% contribution
followed by the food and beverages industry with a 7.6% share in the total.

Another blow to confidence came when the government froze foreign currency
accounts in May last year following the nuclear tests. Sanctions were one thing. But
the freezing of 11 billion dollars of government guaranteed bank accounts was really
the nail in the FDI coffin. During 1998, corporate profits of most leading
multinational companies in Pakistan declined substantially.

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Bibliography
The following sites were visited and used for the purpose of
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P a k i s t a n s e c o n o m y. Th e s i t e s a d d r e s s e s a r e p r o v i d e d w i t h t h e n a me
of the article, the name of the author where relevant and the date of
t h e publication of the article:

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w w w.e p b . c o m . I n c e n t i v e s f o r E x p o r t e r s , 1 5 t h , Au g u s t 2 0 0 0

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w w w.b r e c o r d e r.c o m/ f d i . N e w s p a p e r h e a d i n g a b o u t t h e e ffe c t o f


b l a s t s a n d t h e d e c r e a s e I f o r e i g n d i r e c t i n v e s t m e n t i n P a k i s t a n s
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. w w w.i l o . c o m / p k . I mp a c t

of globalisation

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F o r e i g n D i r e c t I n v e s t me n t

w w w.s o f i . c h / .

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e c o n o m y, 3 r d M a y 1 9 9 9 .

w w w.w o r l d b a n k . o r g .

Pakistan and the Flow of Foreign Direct

Investment. 22nd May 1999.

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