Need to attract FDI

December 29, 2018

Finance Minister Asad Umar lately told a foreign investors’ advocacy body that the government was interested in attracting FDI in export projects and/or import substitution projects in Pakistan, instead of continuing to attract the investment in consumer goods sector. The minister also urged the body for technology transfer into Pakistan along with FDIs. The shift in the policy towards attracting FDI in new sectors would help the government narrow down the current account deficit and lower burden on the country’s foreign currency reserves, he assured. Foreign direct investment (FDI) continues to plummet in the country.  Cumulatively in the first four months (July-October) of the current fiscal year, 2019, the foreign direct investment decreased 46% to $600.7 million compared with $1.1 billion made in the same period last year, according to the central bank data. The overall benefits of foreign direct investment (FDI) for the economy of a developing country like Pakistan are well-known. FDI prompts technology spillovers, assists human capital formation, contributes to trade integration, helps generate a more competitive business climate and enhances enterprise development. It can also boost productivity, raise investment in research and development and lead to better-paying and more stable jobs in host countries. Among all its benefits, however, it is FDI’s spillover potential i.e. the productivity gain resulting from the diffusion of knowledge and technology from foreign investors to local firms and workers that is perhaps the most valuable input to long-run growth and development. Moreover, beyond the strictly economic benefits, FDI can also support in the improvement of environment and social condition in the host country by relocating cleaner technology and directing to more socially responsible corporate policies. Though the benefits of FDI are real, they do not come about automatically. For garnering the optimal benefits, the host governments must formulate and implement the right policies and create an investment-friendly climate which encourages domestic as well as foreign investment, provides incentives for innovation and improvements of skills and contributes to a competitive business climate. Still, when inviting FDI, governments often downplay the value of the business climate and tend to accord more priority to market size, availability of natural resources and costs. Nonetheless, the challenge for policy makers is not about securing substantial amounts of FDI activity per se, but rather in maximizing the linkages and positive spillovers that can be derived from foreign investors. For attracting foreign direct investment and optimizing it, greater policy transparency, especially through increasing information flows, is essential for boosting investor confidence. Finally, policies to attract FDI should not be prepared in isolation.  They need to be well-integrated in national plans as FDI cuts across nearly all aspects of development. This will require proper coordination of all concerned government agencies, ministries and the private sector.

Government need to be well-integrated in national plans as FDI cuts across nearly all aspects of development.