FDI: Whose side are we on?

LAHORE: Pakistan’s foreign investment policy needs a revisit as it does not bind investors to export a part of their production as India has through legislation.

When foreign investors aim to capture the domestic market of the host company there is a chance the investing company will not reinvest profits in the host country, meaning there are large capital outflows from the host country. Because of this, many countries have created legislation that restricts foreign direct investment and profit repatriation. We have not done so as India has. In fact we have not subjected foreign investors to export at least 10 percent of their products and services. Our neighbouring country has done so. The exports made by foreign investors cover the outflow of foreign exchange used for repatriation of profits.

India with inflows of $64.4 billion was the third largest recipient of foreign direct investment (FDI) in 2020 (27 percent increase) after China and the United States. FDI in Pakistan was flat at $2 billion in 2020.

The data for India was taken from a research done by MoneyTransfer.com and for Pakistan from UNCTAD's Investment Trends Monitor of January 2021. It showed the FDI was concentrated in power generation and telecom industries. It further revealed the potential attractiveness of Pakistan for investment is lower than India but equal to Sri Lanka and Bangladesh.

Put simply, a foreign direct investment is a financial investment from overseas made by either a company or an individual from one country into another. For the investment to count under this term, the foreign investor (again, either a person or firm) must hold at least 10 percent of the company, where the investment is made, otherwise, it would just be categorised as part of their stock portfolio.

Foreign investment is high in countries where both the investor and the foreign host country can benefit from foreign direct investment. Host country’s incentives encourage FDI for the process to be equally beneficial to both parties. Foreign investment carries both advantages and drawbacks depending upon the policies of the host government and the conduct of the foreign investor. Pakistan unfortunately has gained few advantages from foreign investment but the drawbacks have been substantial.

In countries where the policies reduce the cost of production and services the investors make the host country hub of manufacturing or services to export to other countries. Most of the foreign investment in India comes under this head. In countries where the cost of production remains very high foreign investors commit their resources to supply products and services for domestic consumption against duty protection provided to them from imports. Almost all the foreign investment in Pakistan has been made on these lines.

Some of the advantages for the foreign investors and host country are: diversification of the market, tax incentives, stimulation of the economy, and increased employment opportunities in the host country. For the investors, labour costs are lower and tariff preferences are an added attraction. Most of these advantages are focused on cost-cutting and risk-reduction for organizations, whilst the benefits for the host countries are mostly economic.

In most countries, specific legislation is in place to maximise the advantages and minimise the disadvantages of the practice. However, in countries like Pakistan there are a few drawbacks that still remain, regardless of domestic policies or international agreements. This is happening in Pakistan where a large number of banks were handed over to foreign investors.

In fact Pakistan’s two largest banks are operated by foreign investors and these banks are making hefty profits most of which are repatriated annually. The international food outlets in the country pay the franchise fee per meal to their foreign principals.

The three largest car assemblers are under the control of foreign investors and make huge profits due to duty protection provided by the state. They also send their profits to their countries. Above all, foreign investment in the power sector has devastated our economy. Current Finance Minister has rightly called the power sector as the Achilles heel of our economy.

The guaranteed profits on investments under agreements signed with both domestic and foreign investors are so high the government frequently fails to honour its commitments and defaults. The sovereign default does not go well with other prospective foreign investors.

Another disadvantage of unregulated foreign investment is the displacement of local companies when large corporations enter into the market of a new country. Smaller businesses struggle to keep up and will ultimately be unable to operate at the rate they did prior to the investment. Large Japanese auto companies kept even the small foreign car manufacturers at bay till a special new entrants policy was announced for the sector in 2016. The new auto policy is even more liberal.