A Study On Repatriation of Profits by Multinationals Versus Value Addition in Pakistan The Good, The Bad and The Ugly Side of The Case - Pleg Rep

Repatriation of profits by Multinationals versus value creation in Pakistan The Good, the bad
and the Ugly side of the case.
A study on Repatriation of profits by Multinationals

versus value Creation in Pakistan: The Good, the bad
Waqar Hassan Randhawa. (MS Finance Scholar)
University Of Management and Technology, Lahore
Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)
Abstract
Globalisation is a phenomena which has become a sin qua non for any country economy. Never
before in human history has the pace of structural change been more pervasive, rapid, and
holistic in its context. The new economy is composed of a trilogy of interactive forces that
include globalization, trade liberalization, and the information technology and communications
revolution. One of the corollary of the globalization is the existence of the Multinational
corporations word wide, this parsimonious syndrome has be coined both atrabilious and panacea
in divergent conceptualities of the argument. According to the economic development model the
investment from abroad can "prime the pump" for less developed nations, setting the stage for an
economic takeoff. Conversely the north south model contends that the MNC hinders rather than
helps the economic development of LDCs. The most fundamental criticism is that MNCs have
tended not to bring in needed capital, but rather to harness existing capital from within those
nations.
The purpose of this study is to test the aforementioned axiom in contextualise climate of
Pakistan MNC milieu by incorporating and comparing the variables of the repatriations made
from 2006-15 relating to 27 sectors in comparison to value creation ( a culmination of Job
creations, Human resources capability development & Corporate social responsibility). The
study was carried out to determine the propensity of the repatriations in comparison to the value
creations. The results of the study shows the repatriations made during this year are far more
excessive than the value creation in the corresponding years
Keywords: Globalistaion, Repatriation of profits, Developing countries, Value creation
A study on Repatriation of profits by Multinationals

versus value creation in Pakistan: The Good, the
bad and the Ugly side of the case.
Introduction
The globalisation phenomena of the 21st Century has morphed the economic, social,
educational, and political landscape in a profound and indelible manner. Never before in human
history has the pace of structural change been more pervasive, rapid, and holistic in its context.
The new economy is composed of a trilogy of interactive forces that include globalization, trade
liberalization, and the information technology and communications revolution. Globalization has
melted national borders, free trade has enhanced economic integration, and the information and
communications revolution has made geography and time irrelevant. Furthermore, the new
economy is built on a culture of innovation. Indeed, the signature mark of the new global
economy is new ideas, new technologies, and new initiatives.
Economic growth and development in the new global economy has been preceded by a
complex structural realignment of investment streams, the clustering of business enterprises, the
transformation of the production process and the adoption of a niche marketing approach (Porter,
1998). Furthermore, it has necessitated the effective integration of state-of-the-art technologies in
the domain of information and communications in order to enhance competitive advantage in the
forum of international trade. All of this has resulted in a fundamental restructuring of economic
society.
The role of innovation as a catalyst that drives the engine of economic growth needs to be
acknowledged as a fundamental postulate of the new global economy. Furthermore, the pivotal
role of a countrys human resources and the unique economic value of its human capital
endowment, reflected in the educational attainment and technical skills of its population, is an
essential prerequisite for empowering the new economy and facilitating the integration of labour
in knowledge based industries(Narula and Dunning 2000). Lifelong learning and the continuous
upgrading of skills as well as the structural reorganization of the work place have become
essential parameters of a countrys contemporary economic profile. The knowledge based
economy is fuelled by technology, human capital, and research and development which
contribute to accelerating levels of productivity and economic performance (OECD, 1996). In
short, the fuel of the new economy is technology and its currency is human capital. The product
of the new economy is knowledge and its market is the virtual marketplace of the internet.
Global opportunities require competitive tax levels, investment in research and development, an
emphasis on education and training, and industrial clusters of excellence all geared towards
worldwide niche markets of the new global economy (OECD, 1997).
The structural transformation of the new global economy has not been confined to economic
parameters. It is equally pervasive in the way we live, learn, work, invest, provide for our health
care, entertain ourselves, exercise our democratic responsibilities, influence the formulation of
public policy and communicate with each other. Public services, banking, education, health care
and electronic commerce are at the forefront of the Information Revolution with the capability of
accessing information, services, and products from around the world almost instantaneously. The
rapidity of change and the magnitude of structural transformation are hallmarks of this economic
structural transformation - a pace of change that is unprecedented in the history of mankind

(Gera and Mang, 1998). The information and communications technology of the 21st Century
has made possible the contraction of time and space. The new information and electronic
capabilities are defining the new parameters and advancing the frontiers of economic
connectivity (Boston Consulting Group, 1998).
Globalization, new phenomena?

Globalization is not a new concept. It has evolved and mutated over the centuries to reflect the
priorities and ambitions of different generations. The global outreach of nations for geopolitical,
economic, military, and trade benefits has transgressed the centuries and embraced almost every
country in the world. From time immemorial the process of globalization has taken different
forms and proceeded in different directions. The voyages of Odysseus recorded by Homer in The
Odyssey. The Babylonian Empire that stretched over Mesopotamia in western Asia between the
rivers Tigris and Euphrates from 1894 BC to 1595 BC, and again from 625 BC to 539 BC when
its grasp reached as far as Palestine. The conquests of Alexander the Great (356 BC to 323 BC)
who forged an empire that included parts of Europe, Africa, and the Asian continent as far as
India. In the late 3rd century BC, the Romans began their conquest of the Balkan Peninsula in
search of iron, copper, precious metals, crops, and slaves. This marked the beginning of the
Roman Empire, which lasted from 27 BC until 476 AD, and blended unity and diversity across
Sicily, Spain, Macedonia, Greece, Egypt, North Africa, Syria, parts of Asia Minor, Gaul, and
Britain. The Byzantine Empire lasted from 395 AD to 1453 AD and spanned the Middle East,
North Africa, and Spain. The British Empire from 1583 AD to 1931 AD included such a large
collection of countries around the world that it coined the familiar phrase "the sun never sets on
the British Empire".
This short and selective geographical survey of the history of globalization attests to the
permanence of mankinds globalization ambitions. Through the discovery and exploitation of
new found lands, through the military conquest and annexation of adjacent territories, and
through the signing of contemporary multilateral free trade agreements, the process of
globalization has been an uninterrupted continuum in the evolving history of mankind. The
steady progression of globalization has found expression in the geopolitical and economic
ambitions of military, economic, and political superpowers by means of wars, mercantilism,
colonization, political and economic supremacy, and more recently, through international
economic liaisons and multilateral trade agreements. In short, history bears testimony that the
pursuit of globalization was at times accomplished with the power of the sword on the
battlefield, or through a coup detat that sent tanks rumbling down the streets, or more recently
through the stroke of a pen on an international agreement. The contemporary phase of
globalization reveals that it has many dimensions - economic, social, political, cultural, religious,
and environmental (Black, 1998). All of these dimensions are appropriate in a borderless,
globalized world (Passaris, 2002).
Globalization and the Multinational Corporations

A working definition of economic globalization is the global integration of economies through
trade and investment flows, as well as the production of goods and services in order to enhance
international competitiveness. Other capsulated definitions include the process of accelerating

international integration of markets that result in an integrated global market without national
economic borders. More specifically, the economic profile of globalization includes the
development of global corporations and global networks; the widespread internationalization of
all forms of economic activity in production, marketing, consumption, capital, standards and
tastes; a rapid growth in intra-firm and intra-network trade of components and sub-assemblies
and finished products leading to a much higher level of specialization; the development and wide
diffusion of lean production methods and a much greater disaggregation of production; the
migration of labour-intensive, standard-technology production (including components, subassemblies and finished products) to low wage economies; the "brain drain" or migration of
highly educated and skilled labour to countries of advanced information technology; the
successful integration of a multinational and multicultural workforce in order to strategically
deploy the economic and social benefits of diversity; the re-orientation of large-scale production
in high wage economies from economies of scale to economies of scope; the shortening of
product cycles (placing a high premium on innovation, product quality and niche marketing); the
integration of outside financial and other services into the production cycle; and the rapid growth
and diffusion of service and knowledge-intensive activities (both products and processes)
particularly in advanced industrial economies (Passaris, 2002).
One of the corollary of the globalization is the existence of the Multinational corporations word
wide, this parsimonious syndrome has be coined both atrabilious and panacea in divergent
conceptualities of the argument. At the epicenter of globalization has been the multinational
corporation. Globalization, the process of integrating national economies into one global
economy, occurs through four main channels: trade, capital flows, information and people.
Multinational corporations embody all four.
The development of multinational corporations is often regarded as part of a natural progression
in the evolution of enterprise structures in markets and mixed economies that relates to the major
advances which occurred in the fields of technology, marketing organisation and the nature of
oligopolistic competition. (M.J. Taylor and N.J. Thrift, The Geography of Multinationals C,
room Helm, London, 1981). The intimate links between science and technology necessitated
international operation and intricate association of different branches of knowledge. This was
balanced with a massive, large-scale production which again intensified competition. The
development of monopolies ultimately pushed out the upper and middle level industrialists from
operation and their entire network or the innumerable diverse subsidiaries started being
controlled by a few conglomerates ranging from activities of research and processing of raw
material right up to manufacturing and marketing of the finished products. These corporations
essentially keep their headquarters in one country and build factories, manufacture and sell
products simultaneously in different countries. They not only make direct investment in the host
countries but also enter into collaboration with the governments of the latter or private firms
therein or supply or transfer technology or goods in exchange of licensing fees and royalties.
Thus a distinction arose between foreign direct investment and MNCs
In the broad sense MNCs cover all enterprises with control over assets, factories, mines, sales
office and like in two or more countries and are also responsible for most direct investment.
Further, MNCs are not limited to by the function of investment. (S.K. Goel, 'Foreign Private
Capital in India', Peace and Solidarity, Vol. VIII(12), New Delhi, 1977). Dunning argues that
besides investing capital, MNCs organise all the resources under them for promoting activities
like transfer of technology, goods, managerial services, entrepreneurship and related business
practices including marketing restrictions. (J.H. Dunning, 'The Multinational Enterprise: The
Background' in J.H. Dunning ed., The Multinational Enterprise A, llen & Union, London,1 971) .
Vernon puts stress on their extraordinary size, high profitability, heavy use of skilled manpower,
huge expenditure on advertisement and research. (R. Vernon, Sovereignty at Bay: The
Multinational Spread of U.S. Enterprises, Penguin, London, 1971). Because of their size and
especially, for their accumulation of productive knowledge, they can demonstrate comparative
advantages including the ability to attract and deploy high-calibre personnel, world-wide
procurement facilities and marketing networks and a power to obtain larger quantities of capital
and immediate access to the parent company's accumulated and continually expanding store of
research and developments. (P.P. Gabriel, The Multinational Corporations on the Defensive if not
at Bay', Fortune, 1972)
The three levels of activities of the MNCs as suggested by Chandler and Redlich are interlinked
with this spatial framework. Level III (the lowest level) managing the day to day operations;
Level II which arises as a consequence of the separation of the field office from the head office
responsible for the co-ordination of the regional management and Level I consisting of the top
management with the power of goal determination and planning. Level III activities would
spread over the globe according to the pull of manpower, markets and raw materials. Level II
activities, because of their need for white collar workers, communication systems and
information network, would tend to concentrate in large cities of the host countries . Level II
activities will thus be far more geographically concentrated than Level III activities. Level I is
concentrated in core areas as it is more adjacent to the capital markets. People working at this
level would culturally and ethnically be homogenous to a great extent. They are looking after the
ultimate return with a common bond. Applying this scheme, the highest offices of the
multinational corporations would be found located in the largest cities of the parent countries
with Level I activities. The largest cities in the host countries in the underdeveloped world would
be entrusted with Level n activities together with Level III, at times, if other locational factors
satisfy; and Level III activities would be seen to be geographically more mobile, at times, located
at interior centres of the host countries with facilities of spatial extension and cheap labour along
with some basic infrastructure offered by the respective regional governments in anticipation of
some reinvestment. (A.D. Chandler and F. Redlich, 'Recent Development in American Business
Administration and their Conceptualization', Business History Review, March, 1961) In third
world countries Level II and Level III activities are highly influenced by international
demonstration effect and it becomes evident that it is not the technology itself but the
organisation that leads to inequality. ( S. Hymer 'The Multinational Corporation and the Law of
Uneven Development' in J.N. Bhagwati, ed., Economicsa nd WorldO rder,O rient Longman,
Bombay, 1970.)
The distinguishing feature of multinational investment is that headquarters in home countries

controls business decisions of affiliates in foreign lands in their marketing strategies, production
choices, and investment decisions. And it is this fact that has raised sporadic nationalistic
backlashes and questions. That, and the fact the dimensions are staggering. Foreign direct
investment (FDI) has grown worldwide from about $60 b. in 1982 to $865 bn. in 1999 a flow
nearly as big as the whole economy of China that year. What is new is the scale, scope and pace
of recent MNC growth. One measure: it took 7 years for global foreign direct investment to
double from $200 bn . To reach $400 bn in 1996; it took just another 3 years to reach $800 bn.
MNCs have spun ever more complex webs of investment and trade flows linking national
markets around the world.(Cuervo-Cazurra and Genc 2008)
As a consequence, foreign investment and trade have become inextricably intertwined: some 35 45 percent of global trade is intra - firm. Exports of foreign affiliates in developing countries to
the parent organization abroad account for one - third of all exports from developing countries.
and two - thirds of their exports involve a multinational buyer or seller. These ratios are
probably higher for developing countries, where investments to take advantage of lower labor c
Costs require higher vertical integration. And a much larger share of trade among unrelated
parties originates in MNCs network
Many different factors have affected the volume and distribution of FDI in developing countries
of the world. The main beneficiaries of the major FDI inflows have been the countries with
political stability (Ghurra and Goodwin, 2000; Root and Ahmed, 1979; De Mello, 1995; Cheng
and Kwan, 1999; Schneider and Frey, 1985; Wang and Swain, 1995), favourable policies of tax
and subsidies (De Mello, 1999), existence of good business environment, better administrative
policies and low level of corruption (Loot, 2000; Ghurra and Goodwin, 2000). Moreover, macro
variables such as size of market, physical infrastructure, skilled labour force, trade openness,
inflation, labour cost, productivity and interest rate are also reported as other important factors
affecting FDI in developing countries of the world (Kravis and Lipsey, 1982; W heeler and M
oody, 1992; De Mello, 1997; Lucas, 1993; Wang and Swain, 1995).
In light of these facts, Meyer's perspective paper on the role of MNEs in emerging economies
(Meyer, 2004) He makes two main points in his essay. First, he argues that international business
(IB) scholars pay too much attention to the interests and challenges facing MNEs and not enough
to how MNEs help or hurt developing countries. Meyer's concern may seem passe in an era
when developing countries are courting MNEs, and FDI-screening agencies in these countries
have been turned into FDI promotion agencies (Wells and Wint, 2000). Yet, recurring antiglobalization protests in rich and poor countries remind us that the political foundations of
globalization are shaky (Eden and Lenway, 2001).
Meyer's plea for more research on how MNEs affect developing countries is also consistent
with Vernon's (1998) warning that relations between these parties could turn adversarial,
despite appearances to the contrary.3 Thus Meyer's research agenda has both predictive and
prescriptive value, and he performs a service by restoring this topic to center stage within IB
There is nevertheless a vast IB literature that focuses on causation in the opposite direction - that
is, the impact of host country context and policies on MNE behavior and FDI flows (e.g., Root
and Ahmed, 1978; Guisinger and Associates, 1985; Caves, 1996; Ramamurti, 2001) - and that
too deserves further exploration.
A well developed infrastructure, the quality of the work force, and especially the size of the
foreign market are at least as important as taxes (overviews on the determinants of FDI are
provided by Chakrabarti, 2001; De Mooij and Ederveen, 2003). It has also been cited that Once
a new plant is built in the foreign country the government gains ex post bargaining power due to
sunk costs (Doyle and van Wijnbergen, 1994; Thomas and Worall, 1994; Janeba, 2000).
The Repatriation Phenomena

The choice of whether to repatriate earnings from a foreign subsidiary is one of the most
important decisions in multinational financial management. In Dividend Policy Inside the
Multinational Firm (Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. Financial
Management, Vol. 36, No. 1 (Spring, 2007), pp. 5-26) repatriation is examined in three context
namely 1) the taxation of dividend income, 2) domestic financing and investment needs, and 3)
agency problems inside firms. The flows of capital analyzed in this paper consist of payments to
multinational parent firms declared out of the income of foreign subsidiaries .These flows do not
include the repatriation of invested equity. Tax considerations alone would suggest that dividend
policies inside the firm would be irregular and lumpy. But in contrast to these predictions,
dividend repatriation as re quite regular and can be characterized by a process of partial
adjustment that was first described by Lintner( 1956). Multinational firms behave as though they
select target payouts for their foreign affiliates, gradually adjusting payouts over time in response
t o changes in earnings Desai, Foley, and Hines (2001) show that firms pursue dividend payout
policies designed in part to reduce tax obligations. However, further analysis shows that tax
Minimization cannot explain a significant portion of the dividend policies observed inside firms
Sharply distinctive tax treatments across organizational forms are associated with only modest
Differences in dividend policies. Some firms even appear to engage in a variety of tax-penalized
Behavior that involves the simultaneous repatriation o f a dividend and investment of new equity
in the same subsidiary.
Costly external finance may lead parent companies to seek cash dividends from their foreign
Affiliates t o satisfy domestic financing and investment needs. For example, corporations that
pay dividends to common shareholders could fund these payments by triggering repatriations.
Comparing the dividend behavior of affiliates of publicly and privately held parent firms and
Introducing controls for parental dividend payouts indicates that a portion of external dividend
Payments are funded with repatriation from foreign affiliates. Surprisingly only a small
difference exists between the dividend repatriation policies of firms facing public capital market
pressures to pay dividends t o common shareholders and those that do not face such pressures.
Internal agency problems, or the inability to fully monitor foreign managers, can also bring
about distinctive repatriation p policies. Regular dividend payments restrict the financial
discretion of foreign managers, thereby reducing associated agency problems. Conflicts of
interest can arise when ownership is divided, since local owners may influence managers to
undertake transactions at other than market prices.
Previous studies of dividend repatriations emphasize these tax factors.F or example, Hines and
Hubbard (1990) analyze a cross-section of US multinationals using IRS data from 1984, finding
that tax considerations affect the timing of dividend repatriations. Other tax-focused studies of
dividend policy inside the firm, such as Altshuler, Newlon, and Randolph (1995), use repeated
Cross-sections to distinguish effects associated with transitory and permanent changes in tax
costs. Altshuler and Grubert (2003) and Desai, Foley and Hines (2003) note that firms can defer
Repatriation tax liabilities by investing foreign profits in other foreign affiliates rather than
Repatriating profits to domestic parent companies and provide evidence of the proliferation of
Organizational forms that facilitate such deferral. Finally, Desai, Foley and Hines (2001)
calculate the efficiency costs of repatriation taxes using estimates of the responsiveness of
repatriations to taxes in a panel setting.
Because the legislation sometime provides a one-time tax holiday, we expect that firms are more
likely to increase repurchases than dividends. Repurchases are an effective method for
distributing a positive transitory shock to cash flow because they do not imply a commitment t o
make regular distributions (Guaya nd Harford[ 2000],Jagannathan, Stephens,a nd
Weisbach[ 2000]).
In Bringing It Home: A Study of the Incentives Surrounding the Repatriation of Foreign
Earnings under the American Jobs Creation Act of 2004 ( Jennifer Blouin and Linda Krull,
Journal of Accounting Research, Vol. 47, No. 4 (Sep., 2009), pp. 1027-1059) find that firms t hat
repatriate under the legislation have lower investment opportunities an d higher free cash flows
than non-repatriating firm .
Grubert and Mutti (1991), Rousslang (1997), as well as Hines and Rice (1994) show that the pretax profitability of US affiliates is higher in tax havens. This result is consistent with the profitshifting behavior. Other studies focused instead on the instruments of the profit-shifting process.
Grubert (2003), for example, shows that profit shifting results largely from the manipulation of
transfer prices of immaterial goods.
Literature Review
A vast literature explore two distinct conceptual frameworks in order to enable observers of
multinational corporations (MNCs) to understand the evolving political, social, and economic
issues of LDCs. One model, the economic development approach, stresses the positive effects of
involvement of MNCs in LDCs. The second model, the North-South model, emphasizes the
negative impact of MNCs on LDCs. Those who understand these two competing frameworks
will be better equipped to deal with issues affecting MNCs in developing host countries.
The Economic Development Model
The economic development model of W. W. Rostow (1960) suggests that investment from
abroad can "prime the pump" for less developed nations, setting the stage for an economic
takeoff. The process of industrialization has a kind of historical inevitability, with various nations
of the world moving through similar stages and eventually arriving at similar end-points,
although the timing might vary considerably. If a country should undergo industrialization in the
contemporary world, the process might occur more rapidly than it has historically, but it would
not differ structurally.
A long line of economic theorists, from Ricardo (1817/1948), writing in the early 1800s, to
Samuelson (1980) in recent decades, have said that it would be advantageous for any nation to
engage in trade with other nations, to specialize in producing and exporting certain products, and
to import goods that can be produced more efficiently by others. Other observers have pointed to
the desire of many people of Lower Devolping countriesfor modernization, or their hopes that
greater opportunities will become available with MNC investment, or their aspirations for an
increased standard of living for future generations as a result of their nation's incorporation into
the world economy (Eisenstadt, 1966; Inkeles & Smith, 1974; Kahl, 1968; Lerner, 1958;
Smelser, 1963; Stanley, 1972).
In this line of thinking the MNC plays a vital role in the economic development of LDCs. It
provides employment opportunities for indigenous populations, brings in capital, and introduces
advanced technology and managerial skills to the nation.
The North-South Model
The development of underdevelopment, dependencia theory, and the North-South debate-these

are some of the labels applied to this body of critical thinking. Briefly, the basic idea is that those
countries that are now in the process of economic development may never make it to a level of
development comparable to that achieved by the United States, the more prosperous European
nations, and Japan (Beckford, 1971; Bornschier & Ballmer-Cao, 1978; Cardoso & Faletto, 1979;
Evans, 1979; Frank, 1969; Stewart, 1977; Vernon, 1977; Wallerstein, 1974).
According to this school of thought, the MNC hinders rather than helps the economic
development of LDCs. The most fundamental criticism is that MNCs have tended not to bring in
needed capital, but rather to harness existing capital from within those nations. For example,
Pinto and Knakel (1973) have shown that between 1960 and 1968 profit remittances by MNCs to
the United States from Latin America exceeded new investment by $6.7 billion. Thus,
investment previously available for locally owned and managed business enterprises is diverted
to MNCs based in the developed nations. Instead of profits being retained in the Lower
Devolping countriesand perhaps reinvested there, they now tend to flow back to the home
country of the MNC or to whatever country the MNC judges most opportune for investment.
After having welcomed the MNC, often providing it with tax benefits and subsidies of various
types, the LDC finds itself in a double bind vis-a vis the repatriation of profits. It can either allow
the MNC to export its profits, thereby draining the nation of potential investment capital, or it
can restrict the repatriation of profits. In the latter case, the MNC must reinvest a significant part
of its profits in the LDC, in which event a substantial portion of the productive capacity of the
country eventually could become subject to foreign ownership.
In the 1970s MNCs by their behavior provided ample fuel for their critics' fire. ITT got involved
in Chilean politics in the early 1970s (Sethi, 1974). The oil companies followed the dictates of
the OPEC nations in the 1973-1974 periods (Sampson, 1975; Tanzer, 1969, 1974). Bechtel
cooperated with the demands of Arab countries to blacklist subcontractors that had Jewish
connections (Sethi, 1982). Nestle continued to use aggressive marketing practices to promote the
use of infant formula in Third World countries (Post & Baer, 1980).
Proponents of the North-South model therefore have had ample justification for their argument
that MNC investment does not provide the benefits for Lower Developing countries outlined by
Rostow. Implicit in their argument is the LDC's inability to protect itself from exploitation.
Exploitation was seen as inevitable because of the MNC's economic motives, which require it to
reinvest profits where the economic climate is most favorable. In addition, the above mentioned
well-publicized cases of socially irresponsible behavior by MNCs gave little reassurance to
North-South proponents that the problem of exploitation could be resolved in such a way as to
create benefits for the LDC promised by the Rostow model.
A considerable body of research has developed that supports this basic idea. Chase-Dunn (1975)
has used panel regression analysis to analyze the effect of investment dependence (penetration of
the LDC's economy by foreign capital) for 38 nations from 1950 to 1970. He concludes, "The
hypothesis that investment dependence retards economic development is strongly supported"
(1975, pp. 733-734).
However, foreign investment had positive effects on the particular section of the economy in
which it was invested, for example, mining. Why, then, was overall economic development
retarded? Partially because the increased opportunities and wealth created by the MNCs went
disproportionately to narrow segments of the populations of the Low Developed Countries.
Elites benefitted, but the poverty of the mass of people was only exacerbated. Greater inequality
resulted in countries with high MNC investment than in countries with less MNC investment
(Bornschier & Ballmer-Cao, 1978; Evans & Timberlake, 1980; Szymanski, 1976). This
inequality appears to result both from the benefits coming to the elites of the Low Developing
Countries through the opportunities made available by the MNCs and from the tendency of the
masses to abandon agriculture and native crafts and flock to cities in search of a better life.
Unemployment becomes endemic, bureaucracies grow in response to political pressure, and
there comes to be a disproportionate percentage of the labor force performing poorly paid service
jobs for the elite (Bornschier, Chase-Dunn, & Rubinson, 1978; Evans & Timberlake, 1980).
From this viewpoint the contribution of the MNC to the economic systems of Lower Developing
countries is positive. Economic development is a nearly universal goal, and to restrict the
activities of MNCs in Lower Developing countries is to frustrate the desires of their people to
become more modern. Proponents of this viewpoint sometimes charge their critics with creating
a romantic view of traditional life while overlooking the poverty, illness, and misery of those
people left out of the economic mainstream in Lower Developing countries (Naipul, 1977).
This perspective holds that the primary moral and ethical responsibility of the MNC is to invest
capital throughout various nations, resulting in economic growth and in the countries of the
world becoming integrated into an international business network. Some business leaders have
said that these interconnections can serve to mediate political conflict and promote peace among
nations (Maisonrouge, 1974).
Lower Developing countries are becoming increasingly sophisticated in their interactions with
MNCs, which in turn have to keep up with the evolving values, expectations, requirements, and
demands. Few nations of the world have attempted to opt out of the international economy, but
many if not most of the Lower Developing countries are strengthening the conditions they
impose on MNCs. Yet policymakers in Lower Developing countries tend to realize that overly
restrictive legislation aimed at controlling MNCs may have undesirable effects, such as blocking
the transfer of technology (Mowlana, 1975), cutting off international markets for domestically
produced goods, and in the end blocking the economic development so desperately needed (Lall
& Streeten, 1977; Todaro, 1977). So their aim becomes not to block MNC investment, but rather
to direct it so that enhanced internal economic activity substitutes for the undesirable effects
documented by researchers such as Chase-Dunn (1975), Ehrensaft (1971), Evans and Timberlake
(1980), Frank (1969), and Singer (1971).
The capacity of the MNC to adapt to host country requirements may be more extensive than
policymakers and theorists have anticipated, particularly with the use of wholly owned
subsidiaries (Das, 1981; Doz & Prahalad, 1980).
Other cases illustrate the unanticipated effects that can result from a host country's uncritical
adoption of the North-South model. For example, the copper mines of Zambia and Zaire were
nationalized during the 1970s. Now production of copper is nearly nonexistent. Reprivatization
is the new policy in Zaire as the country attempts to encourage MNCs to re-enter the country,
bringing the needed capital, managerial expertise, and access to world markets (Schafer, 1983).
Researchers, policymakers, and managers who are involved in MNCs should keep both the
economic development model and the North-South model in mind when dealing with LDCs.
Data show that MNCs have both positive and negative effects on LDCs. Those MNCs that fail to
acknowledge the complex, sometimes helpful and sometimes harmful, effects they have on
Lower Devolping countriesare inviting conflict and even contempt on the part of policymakers
of LDCs. Those who are involved in MNCs must understand both models in order to deal more
effectively with the competing values, hopes, dreams, frustrations, and fears of Lower Devolping
countriesand their peoples.
Multinationals in Pakistan.
The situation in Pakistan is not quite different from that in most third world countries where
MNCs face accusations of promoting a new kind of colonialism. However, these massive
corporations do bring in essential foreign investment. These global companies also boost the
economy and provide employment on a large scale. Infrastructure development and transfer of
technology are also increased by their actions.
The MNCs in Pakistan at present are creating employment and playing their vibrant part in the
economy. MNCs are operating in the country in a large variety of sectors. Multinational
Companies or Multinational Corporations in Pakistan exist in the country in various forms, some
have set up franchises, others operate through holding companies and some are fully
incorporated in the country. Apart from infrastructure development, MNCs in Pakistan contribute
a significant part to the national exchequer and other key economic indicators. The Figures for
2014- USA based companies lead with $190 m, followed by UK based firms $122 m. Other
countries have brought in investment Holland, UAE, Switzerland, Singapore, Hong Kong.
Much of the multinational corporations operating in sectors of chemical, pharmaceuticals,
,tobacco , edible and fat oil , consumer electronics , footwear , tyre tubes , beverages and mining
hold equal to more than 50% of the equity. Some of other MNCs are present with less than 50
and more than 20 % equity.
Pakistan allows 100% foreign ownership of businesses and unrestricted repatriation of profits to
encourage investment in the country. The repatriation of profits can be in the form of either
dividends or liquidation of foreign holding. In 2013-14, profit repatriation amounted to $1.2
billion, up 12.6% from the repatriation of a little over $1 billion recorded in 2012-13. Pakistan
received direct investment from sources based in foreign countries amounting to $545.4 million
in the first seven months of 2014-15. This equals 63.4% of the funds that foreign companies
repatriated as profits/dividends over the same period. Net foreign direct investment (FDI) in
January remained $16.3 million, which is 23.7% of the profit repatriation during the same month.
Net FDI in 2013-14 was $1.6 billion, which is $0.4 billion less than the profit repatriation
recorded in the same year. A major portion of total repatriation recorded in July-January came
from the payment of profit on FDI as opposed to foreign portfolio investment (FPI). Out of the
total repatriation of $859.6 million, profits on FDI constituted about 82.2%, or $706.9 million,
during the first seven months of the current fiscal year.
Financial businesses repatriated the largest amount to their stakeholders in foreign countries in
July-January. With the payment of $160.3 million profits, the year-on-year change in the
repatriated amount for financial businesses was almost flat. The repatriated profits of the
telecommunication sector were $158.2 million, up more than seven times compared with the
similar period of the preceding fiscal year. Repatriations from the oil and gas exploration sector
were $74.9 million, up 27.3% from the comparable period of 2013-14, when they totalled $58.8
million. The thermal sectors share in the repatriated profits in July-January was $70.8 million,
down 21.5% from the corresponding figure in the comparable period of 2013-14. Other sectors
that recorded relatively substantial repatriations were food ($70.3 million), petroleum refining
($53.8 million) and cement ($44.7 million).
Foreign investors earned more in Pakistan during 2009 but investors have shifted their entire
profits abroad instead of reinvesting a part of their income in the country. The foreign direct
investment fell sharply in 2009 due to a weak economy and prevailing terrorism in the country
which barred possible investors to remain away from a market of 180 million people.
Pakistan could not attract even 0.5 per cent of total foreign direct investment in 2009. Instead it
fell by 53 per cent in the last eight months to just $1.3 billion. During 2009, total global FDI was
about $1.3 trillion. Though, it was lower than last year, it was still a big amount to heat up the
global economy. The government claims that Pakistan is still attractive for foreign investment,
but its share in the FDI is falling and is negligible as compared to its neighbours India and China.
China attracted $90.2 billion FDI in 2009 while India received about $21 billion.
According to some investment analyst multinational companies, of which a majority of the
shares are held by foreigners, shifted back most of their income of 2009 in the form of 100 per
cent dividends, and this was done despite liquidity crunch in the country of operation. The MNCs
preferred not to invest in Pakistan by announcing higher than last years dividends. This clearly
shows that foreign investors are cautious in Pakistan and they see little investment opportunity.
Currently Pakistan is facing energy crisis which provides an opportunity to foreign investors to
make money out of power projects, especially in the wake of record low economic growth in
most of the developed economies due to financial turmoil which began in 2007. Developed
economies have lost attraction for liquid money as interest rate is in the range of 0.2 per cent to
one per cent. Bankers said the interest rate in the US is almost zero. The situation of low interest
rate will prevail until the full recovery of developed economies which means liquidity needs to
earn profit from the countries, like China, India and Pakistan,
For all the hue and cry by foreign investors in the industrial sector, successive governments have
continued to claim that Pakistan has kept the investment policies for foreigners as liberal as they
can be. Foreign investors are permitted to hold 100 per cent of the equity in industrial projects
without any permission from the government; official sanction is not required for setting up any
industry (field of activity), location and size, except in some sensitive cases. And the country
places no restrictions on the full repatriation of investment, profits and dividends.
Cumulatively, corporate earnings grew 24 per cent YoY and 27 per cent quarter-on-quarter
(QoQ), despite a general slowdown in economic activity. Foreign companies got a fair share of
the earnings growth in the first quarter of the current fiscal year. Data gathered by this scribe
from a sample of listed companies in various sectors, with principal stake of foreign
shareholders, proves the point. Abbott Laboratories profit for 3Q (July-September) amounted to
Rs615 million, up from Rs490 million in the same time last year; the company disbursed an
interim cash dividend of 30 per cent. The Standard Chartered Bank in Pakistan earned a profit of
Rs7.360 billion in July-September; up from Rs4.498 billion in the same time last year; the bank
paid an interim cash dividend of 10 per cent.
Pakistan Oilfields Limited earned Rs3.607 billion in the quarter, up from Rs2.566 billion QoQ;
the company paid a fabulous cash dividend of 450 per cent. And Pak Suzuki Motor Company
returned a profit amounting to Rs371 million for the quarter under review, jumping out of a loss
of Rs193 million in the same period last year.
Telecom operators and Internet broadband companies have sent a profit of $32.5 million to their
homelands in the first four months of financial year 2015-16 with a double-digit growth of 26%.
The revenue-earning situation has been reported earlier as Mobilink and Telenor recorded growth
of 7 and 10% respectively. The growth was mainly because of the continuous increase in the data
services after the launch of 3G services on their networks. Mobilink and Telenors collective
share in overall subscribers base stands at 70 million out of 122 million, whereas their
subscribers using 3G service increased to 11.8 million out of 20 million subscribers of 3G/4G
technologies. Hence, their financial numbers largely paint the almost the overall state of
economy of the telecom sector.
Previously, the repatriation of dividends of the telecom sector stood at $23.9 million in the
similar period of 2014, however it closed the financial year of 2014-15 with outstanding numbers
of $254 million. The significant growth in dividends repatriation was witnessed due to handsome
inflows of FDI in this particular sector.
While the huge profits and dividends repatriated by foreign majority stakeholders in large
multinational companies to their parents abroad may sound alarming, some proponents of the
contending argument, says it is only fair that in a free-market economy, all investors, including
foreigners, should have the right to free movement of their share of profit and dividends. They
argue that the increase in the outflow of profit and dividends suggests that the economy is
improving and industrial activity is gradually picking up pace.
However, the major outflow during the quarter under review was seen in FDI, with about 86 per
cent of the cumulative repatriated amount sent from profit earned on FDI. During the quarter,
foreign investors sent around $174.6 million aboard on account of return on FDI, compared to
$114.8 million repatriated in the first quarter of the previous fiscal year, representing a higher
take-home income of $59.8 million. In 1QFY14, the repatriated amount on FPI stood at $27.3
million, representing a sizeable increase from $16.4 million in transfers in the corresponding
period of the last fiscal year.
A cursory glance reveals that around 13 sectors out of 36 saw increases in the repatriation of
profit and dividends. The major outflow was recorded from the power sector, from where foreign
investors repatriated $58 million in the first quarter of FY14. It was followed by the financial
sector, which witnessed overseas transfers of $48.3 million on account of profit and dividends.
Yet, foreign investors in some of the sectors have been at a loss. During the quarter, foreign
majority equity holders in several sectors did not earn enough to send returns from investment
back home. These included tobacco, sugar, paper and pulp, leather, rubber, petroleum refining,
mining, cosmetics, ceramics, electronics, tourism, information technology and social services
sectors.
The overall profit repatriation of multinational companies and foreign investors recorded at $134
million in the period of July-October 2015 as compared with $344 million in the corresponding
period of 2014. The inflows of foreign direct investment (FDI) remained lower then the
outflows. Between July and March of current fiscal, the country received $710 million of FDI,
while
repatriation
of
profits
of
the
foreign
investors
crossed
$1billion
mark.
Energy, telecommunications and financial sectors firms sent back major their profits and
dividends.
This phenomenon is counter argued by the some by citing the job creation, human resource
development and the corporate social responsibility carried out by these conglomerates which in
some instances exceed that total budgeted activity of localized industry operating in the same
sector. Moreover it has been said that the major state of the art industrial contraptions and high
quality standards which have been established in private and public sector were permeating from
the conglomerate initiatives in this country. Thus value creations outweigh any the pessimist
deliberations of MNC remitting a hefty share of the economy
Research Question
Is there statistically strong evidence to support and suggest that Reparations made in these years
are greater than the value creations generated by them in the same years?
Hypothesis
Ho= There is no strong statistical evidence to support and suggest that the Reparations made in
these years are greater than the value creations generated by them in the same years. (Mu=0)
H1= There is a strong statistical evidence to support and suggest that Reparations made in these
years are greater than the value creations generated by them in the same years. (Mu >0)
Ho= d =0, (d= R- v )

H1= d > 0, (d= R- v )
d= Difference between the mean of the Repatriations and value Creations
R= Mean of Repatriations
v = Mean of the Value creations
Data
An array of data from 29 sectors of Multinationals companies existing in Pakistan spreading over
a periods of 2006-2014 was collected in paternity of two dimensions. The repatriations made by
these Multinationals companies outside Pakistan were compared with value creation generated
by these Multinationals companies in Pakistan.
The Multinational Sectors covered in our study are categorized as follow
Food and Personal care products
Food Packaging
Beverages
Tobacco & Cigarettes
Paper & Pulp
Rubber and Rubber Products
Chemicals
Petro Chemicals
Petroleum Refining
Oil & Gas Explorations
Pharmaceuticals & OTC Products
Cosmetics
Fertilizers
Cement
Ceramics
Machinery Other than Electrical
Electrical Machinery
Electronics
Transport Equipment (Automobiles)

Power
Trade
Transport
Storage Facilities
Communications
Financial Business
Personal Services
Others
The repatriation figure is the accumulated repatriation of that sector remitted to its parent
companys destination over these years. The value creation dimension is the culmination of three
parameters namely Job creation, Human resource development and corporate social
responsibility. Job creation variable includes the job creation of that particular MNC sector in
term of annualized wages and related benefits. The human resource development variable
encapsulated the amount expensed over the employees for training and development pertaining
to both hard and soft skills in a particular sector for the period of one year. The corporate social
responsibility includes the annual expenditure on the philanthropic activities relating to the
betterment of society and environment. Combing these three we have a consolidated figure of
Value Creation.
Methodology
In order to establish the comparability of the both variables, the paired sample T test is being
applied to this scenario for comparing the means of the two oxymoronic dispositions and thus
substantiating the axiom we seek to explain in the pursuit of this study. Our null hypothesis
presumes that the mean of the reparations and the value creation is the same, implicating that the
repatriations during the observed periods are less or equal to the value creations generated by the
multinationals. Our alternative hypothesis refers to the statement that the means of repatriation is
greater than zero, signifying that the repatriations remitted during these years are more than the
value creations engendered by the multinationals during these periods
Result and Analysis of the Paired T Test

The paired T test result in the first matrix labeled as T sample Statistics show the mean of the
yearly repatriations and the corresponding value creations .
Eyeballing the finding it Is not
difficult to infer that the means and the standard deviations in each year for the repatriations
exceed in a greater proportion to the means and standard deviation of the value creation,
signifying that the repatriations ipso facto are greater than the value creations.
Viewing the Sample correlation table exhibit a strong correlation between the two variables, with
a maximum correlation occurring in the year 2014 (89%) and a minimum correlation of (65%) in
the 2006. This being established, the actual purpose of this study is to statistically substantiate
our axiom for which the findings of the paired sample test in context of the paired differences
observed during the test.
Examining the paired difference results there seem to be mixed trend in the observations tested.
Out of the ten observations in our data , six show a statistical significant assurance that the
reparations during these years are greater than the value creations generated by the Multinational
firms, while four of the observation tend to side with the axiom that the repatriations in these
four given years are equal or less to the value creation.
Summarizing the finding we have concluded in the above paired difference year wise we state
them down :
Years
Hypothesis Accepted
2006
H1= d > 0
2007
H1= d > 0
2008
H1= d > 0
2009
H1= d > 0
2010
H1= d > 0
2011
H1= d > 0
2012
Ho= d =0
Implication
There is a strong statistical
evidence to support and
suggest that Reparations made
in these years are greater than
the value creations generated
by them in the same years.
There is no strong statistical
2013
Ho= d =0
2014
Ho= d =0
2015
Ho= d =0
suggest that the Reparations

made in these years are greater
than the value creations
generated by them in the same
years.
years.
years.
years.
The above findings although not precluded from further more investigative study with a larger
sample size marginally seem more tilted toward the axiom that the repatriations remitted during
these year is far more than the value creation, albeit there have been confuting instances where it
is observed that the said repatriations were less than and equal to the value creations instilled by
these corporations in our country. Tough it could be argued that the weightage of these instances
is marginally less than the contesting axiom.
Conclusion
International trade seems to be a plausible economic respite when the host country and the
foreign country equally benefit from the said contention. Pakistan seems to be on the lesser of
the equal side of the equation with the evident repatriation exceeding the value creation during
these years.
It could be counter argued that repatriation stems from the profitability of the
country as a whole with a globally accepted syndrome of No Profit, No Dividend and that the
continuing presences of these MNCs not only harness and bolster the current gloomy economic
scenario but also augment the social environmental endeavors carried out by them, which are
hardly exhibited to a such obtrusive level. But it is pertinent to mention here that most of the
MNCs drive their profitability from the larger economies of scale and transfer pricing, which
seems rarely a level playing field for local industry. Thus giving these MNCs a preemptive edge
of local manufacturers and distributors which ultimately leads to oligopolistic status.
With this heavy stash of profits, the multinational corporation are routing their profits on their
sole discretion, causing a sizeable dent to the GNP of the country. Examining these facts we can
relate to the north south model which seem more appropriate to fit in the prevailing scenario.
In all fairness, the Pakistan economic and trade regulatory authorities should cogitate in
collaboration with this corporation an equitable system of repatriation which ensure a win win
situation for both stakeholders.

A Study On Repatriation of Profits by Multinationals Versus Value Addition in Pakistan The Good, The Bad and The Ugly Side of The Case - Pleg Rep

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Repatriation of profits by Multinationals versus value creation in Pakistan The Good, the bad

and the Ugly side of the case.

A study on Repatriation of profits by Multinationals

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

A study on Repatriation of profits by Multinationals

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

structural transformation - a pace of change that is unprecedented in the history of mankind

Globalization, new phenomena?

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Globalization and the Multinational Corporations

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international competitiveness. Other capsulated definitions include the process of accelerating

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

The distinguishing feature of multinational investment is that headquarters in home countries

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

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Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

The development of underdevelopment, dependencia theory, and the North-South debate-these

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Ho= d =0, (d= R- v )

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

The Multinational Sectors covered in our study are categorized as follow

Food and Personal care products

Tobacco & Cigarettes

Paper & Pulp

Rubber and Rubber Products

Oil & Gas Explorations

Pharmaceuticals & OTC Products

Machinery Other than Electrical

Transport Equipment (Automobiles)

Result and Analysis of the Paired T Test

Eyeballing the finding it Is not

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

suggest that the Reparations

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

Waqar Hassan Randhawa -15009096010. (MS Finance Scholar)

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