FDI/FPI patterns in Paksitan

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THESIS REPORT
ON
“FDI AND FPI PATTERNS IN PAKISTAN”
Session 2012-2014
Neelam Asad
G1S12MCOM0010
Section “A”
MASTERS OF COMMERCE
Punjab College of Commerce
University of Central Punjab
Lahore, Pakistan

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“FDI AND FPI PATTERNS IN PAKISTAN”
A THESIS SUBMITTED TO
THE PUNJAB COLLEGE OF COMMERCE
(UNIVERSITY OF CENTRAL PUNJAB)
IN FULFILLMENT OF THE REQUIRMENT
FOR THE DEGREE
MASTERS IN COMMERCE (ACCOUNTING AND FINANCE)
BY
Neelam Asad
MASTERS OF COMMERCE
PUNJAB COLLEGE OF COMMERCE
UNIVERSITY OF CENTRAL PUNJAB

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RESEARCH COMPLETION CERTIFICATE
Certified that the research work contained in this thesis titled “FDI and FPI patterns in
Pakistan”, has been carried out and completed by Neelam Asad. G1S12MCOM0010 under
my supervision during her Masters of Commerce
Principal Date:
Punjab College of Commerce
University of Central Punjab Research Supervisor:
Lahore, Pakistan

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CERTIFICATE OF EXAMINERS
Certified that the quantum and quality of the research work contained in the thesis titled,
"FDI and FPI patterns in Pakistan” adequate for the award of degree of Masters of
Commerce.
Internal Examiner External Examiner
Signature: Signature:
Name: Name:
Date: Date:
Principal
Signature:
Name:
Date:

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DECLARATION
I, Neelam Asad Registration No. G1S12MCOM0010, student of Masters of Commerce
during the session of 2012-2014, hereby declare that the matter printed in the dissertation
titled “ FDI and FPI patterns in Pakistan”, is my own work and has not been printed,
published and submitted as research work in any form in any university, research institute etc.
in Pakistan or abroad.
Signature:
Name: Neelam Asad
Registration: G1S12MCOM0010

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DEDICATION
This thesis is dedicated to my parents, who have raised me to be the person I am today. You
have been with me every step of the way, through good times and bad. Thank you for all the
unconditional love, guidance, and support that you have given me, helping me to succeed and
instilling in me the confidence that I am capable of doing anything I put my mind to. Thank
you for everything.

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ACKNOWLEDGEMENT
I acknowledge that, it is an excellent while working on thesis research study. As it is a
biggest target to do work on the corporate sector.
From the formative stages of this thesis, to the final draft, I owe an immense debt of gratitude
to my supervisor, Prof. Rehan Ahmad. His sage advice, insightful criticisms, and patient
encouragement aided the writing of this thesis in innumerable ways. I would also like to
thank my teachers; those steadfast supports of this project was greatly needed and deeply
appreciated. I also want to thank my all friends to be being so corporative while I was doing
this research report.

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Table of Contents
CHAPTER 1 ............................................................................................................................. 8
Abstract ........................................................................................................................................
Introduction .............................................................................................................................................
CHAPTER 2 ........................................................................................................................... 10
Mandate........................................................................................................................................
Research questions .................................................................................................................................
Objective..................................................................................................................................................
Significance of study .............................................................................................................................
CHAPTER 3 ........................................................................................................................... 11
Literature review ....................................................................................................................................
Trends of FDI/FPI in Pakistan .............................................................................................................
CHAPTER 4 ........................................................................................................................... 18
Methodology ...........................................................................................................................................
CHAPTER 5 ........................................................................................................................... 20
Philosophical discussion ........................................................................................................................
FDI in Pakistan under Dictatorship and Democracy .........................................................................
CHAPTER 6 ........................................................................................................................... 29
Discussion ...............................................................................................................................................
CHAPTER 7 ........................................................................................................................... 35
Conclusion ...............................................................................................................................................
CHAPTER 8 ........................................................................................................................... 36
Recommendation ....................................................................................................................................
CHAPTER 9 ........................................................................................................................... 37
Bibliography ............................................................................................................................... 37
CHAPTER 10 ......................................................................................................................... 43
Attachments ............................................................................................................................................

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CHAPTER 1
ABSTRACT
This is an investigative study to find out relationship between different types of government
(Dictatorship & Democracy) and foreign direct investment / foreign portfolio investment
patterns in Pakistan. The result shows that foreign investment in Pakistan has increased under
dictatorship governments and declined under democratic governments. But it is believed that
a country can achieve high foreign inflows if it is democratic. Because democratic
government serves collective interests and is considered to be business friendly.
KEYWORDS: FDI, FPI, Dictatorship, Democracy
INTRODUCTION
Capital inflow plays significant role in economic growth especially in developing countries.
Capital inflows involve FDI (foreign direct investment), which are in fixed assets and it’s for
long term and FPI (foreign portfolio investment) which are in stock market, equity and bonds
and it’s for short term. Direct investment and portfolio investment differs in terms of control;
in case of FDI the investors have managerial involvement and direct control on their
investing capital while in case of FPI they have no managerial involvement and control.
Direct investment is considered to be one of the most famous types of investment. Foreign
investments are preferred because it creates employment opportunities, enhance products,
increases productivity, create competition among local firms and bring advance technology in
host country (Kobrin 2005; Le and Ataullah 2006). Many developing countries face the
problem of saving and investment gap and this gap can be filled by FDI. Location specific
advantages also attract foreign investment in the host country. Therefore investors look for
efficiency of resources to get maximum output ( M.Ayub & Umie Habiba, 2013).
From 1970’s to the mid of 1980’s the FDI inflows to Pakistan was still at modest. In 1984 the
first step towards to the liberalization of FDI policy was taken by giving equal plank to
private and public sectors (anwar, 2006). In 1990’s Government of Pakistan reduced tariff
and start giving tax incentives and fiscal benefits to attract foreign investors (Aqeel and
nishat, 2004). The process of liberalization and privatization helped accelerate the FDI

inflows from $110 million to $711 million in 1987 to 1997 respectively (Le, 2002), but
Pakistan is not successful in gaining consistent FDI as compared to India and China (Le and
Ataullah, 2006).
In 2008 FDI reached to $ 5.4 billion which is 443% higher than 2004. Pakistan is the world’s
6th most populated country with 190 million people (infoplease, 2013), have sufficient stock
of natural resources and investment provisions but it’s still unattractive for FDI inflows.
Since 2007 FDI is at decreasing trend and the reason behind this decline is global financial
crisis (SBP, 2009) the failure of government to augment macro-economic situation, energy
sector and arrogant approach towards international investors (Chandran, 2012).
Foreign portfolio investment plays significant role in the economic development of a country.
FPI improves liquidity position of an economy that helps to improve foreign reserves which
ultimately result in stabilized exchange rate. The inflow of portfolio investment affects the
credit side and outflow affect the debit side of Balance of Payment account of a country. So
FPI can be helpful to reduce deficit Balance of Payment. The countries where poor
governance environment exist there tend to be less FPI inflows, because that countries lack
mutual trust, reliable public information and less transparent operations of companies
(Huang, 2003).
FPI came in Pakistan in early 1990’s when Government of Pakistan started implementing
liberalization policies. Pakistan was among the first emerging economies to open up its stock
markets to foreign investors. But unfortunately due to underdevelopment of overall financial
system, lack of liquidity in the security market and presence of enormous information
(Asymmetric Information), FPI has not played key role in economic growth and development
of Pakistan. FPI reach the peak level of $1000 million in 1994 however according to (Khan,
1996) this increase is because of $862 million sale of PTC vouchers. Then in 2006-2007 FPI
was $1820.4 million showing 517.8% increase as compared to $351.5 million in 2005-2006.
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CHAPTER 2
MANDATE:
To find out what is the relationship between different types of government and FDI/FPI
patterns in Pakistan.
RESEARCH QUESTIONS:
 Is there is any relationship between type of government (Dictatorship / Democracy) and
Foreign Direct Investment / Foreign Portfolio Investment patterns in Pakistan?
 Which sector has received highest FDI in the country from 1997 to 2014?
 What further steps are taken to attract Foreign Investment in future?
RESEARCH OBJECTIVES:
The objective of this study was:
 To find out relationship between type of government and FDI/FPI patterns in Pakistan,
 To find out which sector received maximum FDI in the country from 1997 to 2014,
 And what steps are to be taken to promote foreign investments in future.
SIGNIFICANCE OF STUDY:
This study will unveil that whether different government affects FDI/FPI inflows or not. Now
a day’s foreign investment is considered to be important source of economic growth and
capital formation for developing countries. Foreign investment not only covers saving and
investment gap but also brings technology, employment opportunities, management
techniques etc. For nations like Pakistan that are under heavy foreign debts foreign
investment is fruitful because it’s free from debt liability and interest charges. Despite of
inborn difficulties and inhospitable investment environment, Pakistan is needed to attract
foreign investment in order to boost the sagging state of Pakistan’s economy.

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CHAPTER 3
LITERATURE REVIEW:
A cross border investment by a resident entity in foreign economy with the objective of
achieving lasting interest in host economy is known as FDI (OECD International
Investment). The entry of funds into a country where stocks and bonds are purchased by
foreign investors is known as FPI (OECD International Investment). FDI inflows are more
stable than FPI (Sarno and Taylor1999, world bank 1999, sula and willett). FDI is preferred
over foreign Aid (by IMF and the World Bank), as it is considered to be important source that
supports development process, planning and programming by developing economy in 21st
century (UNCTAD, 2011)
The major difference between direct and indirect investment is control, if an investor has
10% or more shares of a firm then it is direct investment (Ball, McCulloch & Hills (2003).
(La porta and Vishny, 1998) Finds in their studies that a country that provides better legal
protection to investors tend to have active stock market. A country attracts more FDI where
protection of property rights and transparent legal system are available (Globerman and
Shapiro, 2003). (Itay and Razin, 2005) Study shows that a country where agency problems
between managers and investors exist tends to attract FDI rather than FPI.
Democracy promotes high foreign direct inflows by insuring contract enforcement and by
providing property rights protection, said (Li & Resnick ; jensen, 2003). (Greider, O'Donnell
& Haggard, 2009) Said autocracy attracts more FDI by providing repress against protestors,
by suppressing labour demands and by offering tax incentives. (Benhua, 2007) Study
concluded that there is no systematic relationship between FDI inflows and democracy.
Direct investment is considered to be dominant source of economic growth in developing as
well as in developed countries (world develpoment report , 2011). To increase foreign capital
inflow trade liberalisation and investment regimes are needed. This can be achieved by
relaxing controls and when trade incentives are offered by host country (Zaidi, 2004). To
ensure domestic economic activities are stimulating the host country should make it
mandatory for foreign investors to use a certain amount of host country raw material in the
production of final goods (Zaidi, 2004).

Big and vast markets attract FDI in a country (Honley, 2004). (Zhao and Du, 2007) Found
that rapid growth in the economy increases per capita income that increases purchasing
power of the people which results in high demand for goods and services. Therefore big
market size attracts more foreign investment in a country.
Investment promotion agencies also play vital role in attracting FDI in an economy. Such
IPSs strengthens investment seeking economies by enriching them with information- content,
which is then available to foreign investors (DAWN, 2002).
Determinants like political instability, weakness of economy and law and order are the
reasons behind low FDI in Pakistan (Ashfaque, 1997). Political freedom promotes investment
in a country while political instability negatively effects the investment. (YI, Feng, 2001).
Negative relationship is found between political strikes/ riots in host country and flow of FDI
(Schneidr and B. Frey, 1985). (Quazi and Mahmud, 2004)Found that human capital increases
FDI while bad political conditions have negative effect on FDI. Political instability has been
a frequent phenomenon in Pakistan (Akhtar, 2000). (Poon, 2000)MNCs seek stable and safer
environment to minimize their risk.
Hurdles in the way of FDI inflows that are identified by (Jones and R.Golov, 2000) are: bad
culture and political system, non-supportive legal and taxation system, corruption and high
rate of crime and non-effective markets of host country ( M.Ayub & Umie Habiba, 2013).
(Gastanaga, Nugent and Pashamova, 1998) Found that corporate tax rates and economy
openness were the determinants of FDI in Pakistan. Domestic economic conditions are the
main reasons behind capital inflows (M.susan, 1999). ( J.C.Stein & Froot,K.A , 1991)Studies
that when a country’s currency is devaluated it results in reduction of production cost and
when it is measured in foreign currency it results in increased foreign investment inflow
which cause foreign investor wealth to grow. Some economists are of the same view that
domestic activity of host country can be stimulated by FDI (Awan.Khan,Brooks &
Sumulong, 2012).
FDI increases the efficiency of domestic capital by increasing its proper allocation across
firm (Razin and Sadka, 2002). (Razin, 2002) Find out that the effect of direct investment on
domestic investment is larger than loan inflows or indirect investment. (Goldenstein and
Razin, 2006) Found in his study that FDI provide greater return as it gives control and
ownership and is managed efficiently than FPI which is managed by outside parties.
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Productive stock, rate of domestic saving and investment tend to increase together with FDI
inflow (Fry, 1993).
Foreign direct investment increases domestic production and economic growth and reduces
imports of host country (Vernon). (Blomstrom) Penned down in his research that FDI had
positive impact on economy in high income countries but in case of low income countries it
is not beneficial because of low level of education and inefficient labour force. (Ozawa and
Castello) They concluded in their study that host government should provide ownership
advantage to investing firm and should take location advantage. This will result in business
expansion and economic growth, which helps in filling development gaps but on the other
hand host country could lose its cultural identity.
(Khan and Nawaz, 2010) Study shows that there is a positive relationship between GDP and
FDI inflows in a country. Through FDI technology is transferred to developing countries as
the lack necessary infrastructure. (Sanchez-Robles 2002 and Adams 2009). FDI contributes
to capital accumulation and factor productivity (Nath, 2005). Better management practices
are used by foreign investors which increase labour productivity, bring knowledge and train
labours in host country (Mello, 1997).
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TRENDS OF FDI / FPI IN PAKISTAN
The size of foreign inflows shows the success of FDI policies, that are privatization
deregulation and liberalization policies implemented at the end of 1980’s. FDI during 1997-
1998 was $601.3 million. FPI in 1997 and 1998 was $47.3 and $28.6 million respectively.
FPI witnessed an outflow of $57.1 million in 2001 as compared to an outflow of $67.4
million in 2000 (le and Ataullah, 2006).
Foreign direct investment has increased by 58% to $161.60 million in July November against
$202.40 million last year (DAWN NEWS, 2001).
Pakistan attracted $287.4 million FDI in the first nine months of fiscal year 2002 against the
target of $355 million for the entire fiscal year ( Mohiuddin Aazim, 2002). Meanwhile the
aggregate FDI in SAARC region was estimated $2.03 billion, in which Pakistan secured $308
million.

Pakistan’s FDI has improved from 141 points in 1990 to 159 points in 2000 (UNCTAD,
2002). The report revealed that FDI to Pakistan has reduced from $530 million in 1999 to
$305 million in 2000 and improved to $385 million in 2001.
During 2000-2001 and 2001-2002, Pakistan got FDI worth $484.7 million and $798 million
respectively ( Mohiuddin Aazim, 2002) . In the world ranking of 140 countries Pakistan got
114th position in terms of investment potential and performance.
65% higher FDI $798 million is received by Pakistan in 2001-2002. The increase in FDI can
be attributed to the restoration of democracy and political stability in the country. This shows
that perception about investment in Pakistan is improving (DAWN NEWS, 2003).
The repudiation of independent power producers (IPPs) agreement by Nawaz government
affected foreign investors’ confidence in Pakistan. After this the sudden freezing of foreign
currency accounts following the economic restrictions by several countries resulted from
Pakistan decision to go nuclear in 1998 reduces FDI inflows in the country (DAWN NEWS,
2004). Red tapism, political instability, unsatisfactory law and order situation are major
hurdles in attracting foreign investment in Pakistan (Dawn News , 2004).
FDI stood at $949.4 million which was 19% higher than last year 2002-2003, but falling
approximately $50 million short of $1 billion target set for the FY 2003-2004 (DAWN
NEWS, 2004).
FDI is up by 129% $119.6 million against $52.2 million in the corresponding last year
(Khaleeq, 2005). Pakistan attracted highest FDI of $1.5 billion (exactly $1523.9 million) in
2004-2005 as compared to $949.4 million in 2003-2004. The country also received portfolio
investment of $152.6 million this year said Waseem Haqqie, Chairman Board of Investment
(DAWN NEWS, 2005).
Foreign direct investment reaches to $1.974 billion the inflow is 190% higher than the inflow
in the same period of last year. The subscription of $800 million Eurobond was encouraging
factor for the market and it helped to minimize the fear of exchange rate (Iqbal, 2006)
Pakistan’s FDI increased by 95% in 2005 and touched $2 billion, while the outflow fell to
$44 million states World Investment Report 2006 (Syed, 2006).
Despite high risk profile, discouraging economic and political factors FDI reached to $3.481
billion in first 8 months of 2007-08 (Shahid Iqbal, 2008). According to PTA the FDI in
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telecom sector fell to $1438.6 million in 2008 against $1824.3 million in 2007 (Zulqernain
Tariq, 2010).
Despite global financial crises, foreign investors still find Pakistan attractive for foreign
investment. The inflow of FDI reached $2.588 billion and is 1.3% higher as compared to
corresponding period last year (DAWN NEWS, 2009)
In 2008-09 Pakistan attracted huge FDI while FPI witnessed massive outflow. FDI fall by
41.6% at $200.1 million in July 2009 as compared to $342.5 million last year. The net
outflow of FPI was $1.053 billion and net inflow was $96.4 million. Analysts believe global
recession makes Pakistan more attractive as the country received less impact as compared to
other country especially developed countries. The inflow of $11 billion IMF loan helps in
stabilizing the exchange rate which will attract more foreign investment (Shahid Iqbal, 2009).
FDI fell by 57% on the other hand FPI witnessed an encouraging recovery of 134% which is
a positive sign (DAWN NEWS, 2009). Power shortage and poor law and order were the main
hindrance for growth in foreign investment.
The country witnessed sharp decline in FDI by 46%. The FDI fell to $98.5 million in July as
compared to $182 million in the same period last year. FPI in fiscal year 2011 actually
dropped by 44.6% to $173 million against $311 million during fiscal year 2010 (DAWN
NEWS, 2010).
The foreign inflow declined by 14.5% to $828.5 million in July- December against $968.9
million received during the same period last year. While the Portfolio investment decline by
25%. “The poor FDI reflects the deteriorating law and order situation of the country both
foreign and domestic investors require political and economic stability” said Muhammad
Imran, a researcher on investment (DAWN NEWS, 2011).
Inflow of FDI in South Asia has increased by 23%, Pakistan has emerged as third largest
country in the region with $1.3 billion FDI inflow in 2011, says World Investment Report
2012 (DAWN NEWS, 2012).
FDI fell by 67% to $87 million during July-September of 2012-2013 as compared to $263
million the same period last year (DAWN NEWS, 2012), with expert blaming the fall on
poor economic management, energy shortage and persistent terrorism (DAWN NEWS,
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2012). The FPI rose to $96 million in the same quarter as compared to an outflow of $47
million during corresponding period last year.
This year most of the sectors registered outflow including the most popular
telecommunication sector, the only attraction for foreign investor is the oil and gas
exploration which succeeded to receive an investment (DAWN NEWS, 2012).
Pakistan’s FDI witnessed a steep decline in last five years, from $5.5 billion in 2008 to $760
million in 2012 (Shaid Iqbal, 2013). The FDI inflow during July- February was $1billion and
outflow was $900 million, showing decline of 9.7% (DAWN NEWS, 2013). The highest
outflow was noted in telecommunication and chemicals. Sectors like food packing and power
lost their charm for investors (Shahid Iqbal, 2013).
The FDI rose by 3.9% to $622 million in July- April. However the size of FDI was still poor
when compared with inflows five year ago. FPI shows increase of 59% to $820 million
during the same period. With the election of new government, it is expected that improved
law and order situation will boost economy and attract foreign investment (Shaid Iqbal, 2013)
Net FDI reaches $1.447 billion showing 76% increase as compared to previous year (DAWN
NEWS, 2013).
FDI increased by 101.2% to $105.4 million in the first two months (July-August) of FY
2013-2014 as compared to $52.4 million during corresponding period last year (DAWN
NEWS, 2013). Like previous year telecommunication witnessed outflow while oil and gas
exploration remained at the top of list for foreign investors (Shahid Iqbal, 2013). FPI dropped
during the first quarter by 59% to $38.8 million as compared to $96 million during previous
year (DAWN NEWS, 2013).
At the end of 2013 FDI increased by only 4.7 % (to $330.7 million as compared to $315.8
million last year) and decline by 26% (to $47.1 million as compared to $63.7 million last
year). The situation was dismal in FPI which was just $0.6 million during last five months as
compared to $144 million in the corresponding period last year (Shahid Iqbal, 2013).
According to the industry players, Nawaz government that is believed to be business friendly
also fails to attract foreign investors (Daily Times, 2013).
After the recent auction of $2 billion Eurobond (10-04-2014) the stock market is up by 6% in
April. Net foreign portfolio investment touched $49 million in just 9 days of this month (Taha
Khan 2014). The volume of FDI was $670 million (July-March) as compared to $731 million
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during corresponding period last year. FPI dropped by 74% to $50 million at the end of third
quarter (Shahid Iqbal, 2014).
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CHAPTER 4
METHODOLOGY:
RESEARCH DESIGN: Exploratory study is undertaken for better understanding of
mandate. For this purpose case studies are used as research strategy. Unit of analysis is
government and organization.
RESEARCH POPULATION:
1. Government which make policies regarding foreign investments
Ayub khan 1958-1969
Zia-ul haq 1977-1988
Nawaz Sharif 17 Feb 1997 to 12 Oct 1999
2013 to continue…….
Zafar ullah Khan Jamali
Shaukat Aziz
21-Nov-2002 to 26-Jun-2004
29 August 2004 to16 November 2007
Syed Yousaf Raza Gillani
Raja Pervaiz Ashraf
25 March 2008 to 26 April 2012
22 June 2012 to 25 march 2013
(insider.pk)
2. Private or public organization (foreign FDI)
3. Individual investors (FPI)
TIME FRAME:
This is a cross sectional study. Data is collected just once to answer the mandate.
SAMPLING TECHNIQUE:
Responses are collected from members of targeted population who are conveniently available
to provide it and who are expert in their field.

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STUDY SETTING:
This study is conducted in natural environment. Through field experiment we came to know
as how type of government (dictatorship, democracy) affects FDI/FPI patterns in Pakistan.
SAMPLE SIZE:
Sample size includes types of governments ruled in the past.
Ayub Khan Dictatorship
Zia-u-Haq Dictatorship
Nawaz Sharif Democracy
Zafar ullah khan Jamali
Dictatorship
Shaukat Aziz
Syed Yousaf Raza Gillani
Raja Pervaiz Ashraf
Democracy
Nawaz Sharif Democracy
RESEARCH INSTRUMENT
Research instrument used in this report is interview1. Beg
DATA COLLECTION METHOD
Without becoming part of any organization or any system data is collected that is related to
mandate. Moreover telephonic interviews were also conducted.
1 See attachment No. 1

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CHAPTER 5
PHYLOSAPHICAL DISCUSSION
A. WHY FDI?
COST AND BENEFITS OF FDI FOR HOST COUNTRY
a) Resources transfer:
FDI positively contributes to host country by supplying foreign capital, latest
technology that might not be available in host country and managerial techniques.
These resources stimulate the economic growth of host country.
b) Employment creation:
FDI effects employment in both direct and indirect manner. Direct effect arises when
multinational company employs number of locals, and indirect effect arises when jobs
are created in supporting industries.
c) Balance of payment:
There are three ways in which FDI affects Balance of Payment. First, the initial
capital inflows by investing company. Second, FDI serves as substitute for imports in
the host country. Third, when foreign company exports goods and services to other
countries.
d) Promote competition:
According to OECD report the presence of foreign companies help in economic
development by increasing competition among local competitors which results in high
productivity, low prices and more efficient resources allocation.
e) Adverse effect on competition:
The foreign companies that are rich in technology can drive indigenous companies out
of the business and gain state of monopoly
f) Adverse effects on balance of payment:
Adverse effects arise first, when foreign companies transfer earning to its parent
company and second, when foreign companies import raw materials from abroad.
Such outflows result as a debit on the current account of host country’s Balance of
Payment.

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COST AND BENEFITS OF FPI FOR HOST COUNTRY
a) In portfolio investment an investor just need to put their money and they have to face
no hassles of talking to all those inefficient government and non- government actives,
which a direct investors have to face. And therefore the opportunity cost of portfolio
investment is far blessed then the opportunity cost of foreign direct investment2.
b) Foreign portfolio investment can bring discipline and know-how in capital market. It
can also increase liquidity of domestic capital market and can develop market
efficiency.
c) The inflows of portfolio investment results in inflow of sophisticated instruments and
technology for managing portfolios.
d) The way these stock markets work money coming and out is so quick. So this un-redialled
concept of taking away profits (when no restrictions are imposed on
remittance of dividends and capital gains) it will be of no advantage to the host
country3.
B. FOREIGN DIRECT INVESTMENT vs. LOCAL INVESTMENT
Foreign Direct Investment is considered as an important source of technology and
organizational innovation. According to (Caves, 1974; Blomstom, 1989; Blomstrom and
Kokko, 1998)) FDI increases productivity of local firms as knowledge is transferred from
parent firm to foreign affiliates which then leaks out to the host country’s markets.
The impact of FDI on local investment is not clear because it depends on the motive behind
such investment. One motive is to remove trade barriers in the host country; this kind of
investment does not result in growth of local investment. The other motive is comparative
advantage; this kind of investment helps in accelerating economic growth of local
investment. An increase of a dollar in capital inflows (Direct investment, indirect investment
and financial inflows e.g. bank loans) is associated with an increase in local investment of
about fifty cents. But in case of foreign direct investment it brings about close to one for one
increase in local investment concluded (Bosworth and Collins, 1999).
(Ghazali, 2010) Research finding shows that FDI plays a vital role in complementing local
investment in Pakistan, the larger the FDI the greater the local investment. Moreover FDI
enhances local investment through more advanced production techniques, improved
2 See attachment No. 2, Interview answer # 3

organizational and managerial skills, marketing know-how and market access which is
further expected to encourage local entrepreneurship.
C. GOVERNMENT POLICIES FOR FOREIGN AND LOCAL
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INVESTORS
Pakistan has the most liberal investment policy in the South Asian region. In Pakistan,
foreign and local investors can directly invest in every sector and there are no restrictions on
bringing in and taking out amount invested. The investment policy of Pakistan offer
guarantees of equal treatment to both local and foreign investors.
The foreign investment in Pakistan is fully protected through Foreign Private Investment Act,
1976; and Protection of Economic Reforms Act, 1992. The minimum share of the local
(Pakistani) partner in a joint venture is 60:40 for the services sector while there is no
minimum limit in case of manufacturing sector. Foreign investors are permitted to hold
equity up to 100%, moreover attractive incentive packages are offered and remittance of
capital, profits, royalty, technical and franchise fee is allowed (Zallp). A foreign company
does not require any approval from Board of Investment. The Federal Board of Revenue is
not concerned with the source of the funds; they are only concerned whether the investors
have paid Income Tax or not (Masood).
FDI IN PAKISTAN UNDER DICTATORSHIP &
DEMOCRACY
1. AYUB KHAN (1958-1969)
On 29 October, Ayub khan became the first military dictator of Pakistan. Ayub Khan’s
Era is considered to be the “Decade of Development”. Pakistan was the first country that
supported USA during Korean War. Khan allied Pakistan with U.S.A military against
Soviet Union. This in turn led to major economic aid form U.S (round about $800
million was received by Pakistan during 1960-1965) and European nations resulting in
rapid growth in the economy.
On the other hand, Private investment was encouraged by relaxing direct economic
controls on trade, and earmarking of foreign credit resources for the private sector
through long term credit agencies. This relaxation resulted in double foreign investment

from 2.5% in 1950’s to 5.6% in 1960’s. This increase in investment naturally leads to an
increase in economic growth.
During 1960 -1965 there was a dramatic U-turn in investment and growth; this was the
result of Khan’s strong commitment to development. That is why Ayub khan period is
also known as “The Golden Sixties”. This development momentum was seriously
disrupted by the war with India in 1965 which resulted in reduced foreign aid and
investment.
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2. ZIA-UL-HAQ (1977-1988)
The Zia ul haq era was marked by the second economic revolution after Ayub Khan’s.
First Zia participated in Vietnam War and then he participated in the U.S campaign to
overthrow the Soviet Union in Afghanistan which resulted in large amount of economic
assistance in Pakistan ($5 billion after 1982, making Pakistan 3rd largest recipient of US
aid in the 1980’s). Zia’s period was also characterized by rapid economic growth as large
number of capital inflows was received for U.S and other western countries following the
Soviet Invasion of Afghanistan.
Zia’s era is also known as “The Revivalist Eighties”. The aim of Haq’s govt. was to
restore confidence in the private sector, the relevant policies include denationalization,
Protection of rights of foreign investors, setting up of EPZs, fiscal and other incentives
(like Tax holidays reduced Income taxes and import duties). Private investment increased
from 33 % in 1980 to 46% in 1989. According to an estimate foreign investors have
invested PRs. 10.81 billion in Pakistan out of which PRs.1.99 billion was invested by
American companies.
3. NAWAZ SHARIF (1997-1999)
In November 1997, Nawaz government launched new investment policy. The aim of that
policy was to improve business environment and to open new sectors for foreign
investment. Until 1997 only manufacturing sector was opened for foreign investment
however, the new policy opened other sectors like infrastructure, agriculture, wholesale
and retail trading housing and real estate, health and education (The Economist
Intelligence Unit, 1997). Furthermore, extended tax and tariff concessions were awarded
to foreign investors in these sectors. Further, foreign investors were offered liberty not to

disclose the source of their capital. Both local and foreign investors were exempted form
sales tax and custom duties on imports of machinery (not manufacturing in Pakistan).
It was expected that as a result of this policy the government will attract $5 billion
private foreign investment in three years. The total foreign investment during FY 1997
was $682.1 million, showing a decrease of 61.9 % as compared to $1.1 billion last year.
(Eeconomist Intelligence Unit, 1998). Despite all the efforts of Nawaz govt, foreign
investors did not respond to the incentives that are offered to attract them.
The reasons behind low FDI in Pakistan were: First, Nawaz attack on Independent Power
Producers (IPPs) and criminal action was initiated against Hubco. Second, that has major
impact on FDI was the nuclear test on May 1998. Following the test all the domestic and
foreign exchange accounts were frozen by the Nawaz government. Third, the 1999
“Kargil crises” between India and Pakistan. The foreign investors had to put their
investment decisions on hold because of the environment instability caused by the Kargil
crisis (Cheema, 2004). The total foreign direct investment during FY 1999 was just
$472.3 million as compared to $601.3 million in FY 1998.
The 90’s had been characterized as “a lost decade” because of growing burden of debts,
lowering growth rate, high rate of inflation and political instability (nine different
governments ruled Pakistan in this period). The economic sanctions following the
nuclear test in 1998, IPPs dispute, economic mismanagement and corruption by Nawaz
government in 1993 and Benazir government in 1996 were the causes behind poor
performance of the 1990’s. All these factors adversely affected the investment climate in
the country. The failure of successive government to implement the agreements by
previous governments led to the loss of credibility among the International Financial
Community, which results in withdrawal of foreign economic assistance and outflow of
foreign investment.
24
4. PERVEZ MUSHARRAF (1999-2007)
General Pervez Musharraf successfully tackled the crisis of Nawaz government to attract
foreign investment in the country. The Hub Power Company dispute was successfully
resolved in early 2001. This was a welcome step, and since then foreign investment
inflows has increased in the country.

On 9 September 2001, Pakistan got the status of front line state because immediately
after the attacks on World Trade Centre, the U.S government approached Pakistan and
presented stark choices. Pakistan had to make common cause with US in its war against
terrorism or to persist with its pro-Taliban Afghan policy and live with isolation from
rest of the world (musharraff). Musharraf gave green signal and did an effective job of
realigning Pakistan with U.S policies (News, 2001).
The President of United states, Bush without wasting any time announced the reward for
Pakistan for the corporation. And in the very next week the sanctions related to May
1998 Nuclear Blast of 10 October, 1999 were lifted, and announced foreign aid of $1
billion.US also announced the actual and budgeted amount of Aid of $5.174 billion
during the period of 2001-2008. And according to an estimate an additional $800- $100
million was given each month in coalition support fund (a total of $4.75 billion until
August 2006) ( Rehana Saeed Hashmi).
Pakistan globally ranked 10th among the most active in perusing pro-business policies. In
terms of foreign Direct Investment, Musharraf had proven himself to be the manager of
Pakistan. Foreign direct investment during FY 2002 was $357.3 as compared to $322.4
million in FY2001. The multinational corporations were provided excellent opportunities
like bringing in the required capital, latest technology, developed human resource and
management. All sectors were opened for foreign investment, foreign investors were
allowed to hold 100 % ownership, and there were no restrictions on remittance of profits,
dividends and repatriation of capital. He started tax free industrialization to attract
foreign investors ( Rehana Saeed Hashmi). In Musharraf’s era number of multinational
companies launched in Pakistan like:
 Dubai Port world invested $10 billion to develop real estate, infrastructure and
25
transport in Pakistan.
 The Chinese Petroleum Chamber invested $12 billion for the ‘Oil’ City project.
 Capital Investment Overseas, an Abu Dhabi based company invested Dh 1.25
billion to build a five-star hotel in Lahore.
 Mid Roc Tussonia (a Saudi- Kuwait joint venture), will invest $3 to $4 billion in
power generation, refining and real estate in Pakistan.

 Investment in communication sector; Warid Telecom of U.A.E invested $290
million, Telenor of Norway invested $2 billion, china mobile of china invested
$860 million.
 Daewoo International, a transport equipment company of Korea invested $229
26
million in Pakistan.
 Noor Finl Invested KSCC merges with Meezan Bank Ltd an invested $38.1 million
in financial sector of Pakistan.
Source: (musharrafsupporters.wordpress.com)
The sound economic policies of Musharraf revive microeconomic stability in the
country, which led to improvement in credibility among international donors and
restored foreign investor’s confidence. Consequently foreign investment increased in
Pakistan (Cheema, 2004). The total FDI during 11 years (1988-1999) was $4.87 billion,
and during 8 years of Musharraf FDI registered enormous growth $13.195 billion at the
end of 2007. Investment as %age of GDP rose from 17.4% to 22.9 % in 8 years. Foreign
investment rose from $0.5 billion to $8 billion, a 17 fold increase in 8 years which
reflects the growing confidence of foreign investors on Pakistan
(Presidentmusharraf.wordpress.com).
Karachi Stock market emerged as one of the best stock exchanges in the emerging
economies. Rising from 1257 points in October 1999 to 13998 in November 2007, an 11
times increase in 8 years (Presidentmusharraf.wordpress.com). Foreign portfolio
investment stood at $1820.4 billion in FY 2007 as compared to $27.3 million in FY
1999.
FDI inflow to Pakistan started to uplift from 2005 to 2008, but after the military
operations against the militants a sharp decline could be seen because of the instability
created by the terrorist attacks (Nadia Mushtaq , 2013).
5. ASIF ALI ZARDARI (2008-2013)
Zardari’s government provided all the incentive, facilities and concessions to both
domestic and foreign investors. Full repatriation of capital, gains, dividends and profits
are allowed, no minimum or maximum requirement for investment (Brecorder, 2012).
Custom duties on imported machinery by manufacturing and social service sectors range

between 0 to 5 %. Sales taxes range between 4 to 6 % for unregistered supply chain and
0 % for registered supply chain of textile, surgical, sports, and carpet sector. There were
no restrictions imposed on transfer of technology moreover, Foreign investors were
allowed to sign technical contracts with local investors (Investmenst Climate Statement-
Pakistan, 2012). The multinational companies that have invested in Pakistan were:
 Wartsila, of Finland had invested $666 million and Xenel industries of Saudi
27
Arabia have invested $659 million in power sector of Pakistan.
 Dubai Islamic Bank of U.A.E invested $448 million in financial sector of Pakistan.
 Glaxo Smith Kline, a Pharmaceutical company of United Kingdom merge with
Bristol-Myers Squibb of Pakistan and invested $36.7 million.
 MOL of Hungary invested $40 million and OMV of Austria invested $112 million
in oil and gas sector of Pakistan.
 British petroleum, Orient petroleum and Occidental petroleum invested $37.42
million, $37.42 million and $34.32 million respectively (Investment climate in
pakistan, 2012).
Besides offering these incentive foreign direct investment was continuously declining. It
stood at $3719.7 billion in FY 2009 and $1634.6 billion in FY 2010. The reasons behind
falling in foreign investment were: inconsistence policies, security problems, bad
governance and microeconomic and political instability. No practical efforts were made
by Zardari’s government to overcome these problems to attract FDI (Mohammad
Arifeen, 2013). According to Global Competitiveness Report of 2011-2012 “Pakistan
standing was not encouraging when it comes to macroeconomic environment,
infrastructure facilities, quality of institutions and political risk, which are important
determinants for foreign direct investment” (pmln.org, 2013).
Taliban insurgency in the northwest and chronic power shortage put off investor’s
confidence. The total FDI during FY 2012 was $820.7 million as compared to $1634.8
billion in FY 2011.
The performance of Pakistan’s equity market was encouraging in terms of attracting
foreign portfolio investment. The portfolio investment at Karachi Stock Exchange stood
at $587.9 million during FY 2010, while it was -$510.3 million in FY 2009. In FY 2011
FPI were $364.6 million, and -$60 million in FY 2012.

28
6. NAWAZ SHARIF (2013-2014)
Pakistan under Nawaz, meets most of the essential requirement’s which traders and
foreign investors seek for that includes: macroeconomic stability, sophisticated financial
sector, liberalized trade and investment regime, low production cost and easy access to
policy makers. Besides offering these incentive foreign direct investment was
continuously declining. It stood at $3719.7 billion in FY 2009 and $1634.6 billion in FY
2010. The reasons behind falling in foreign investment were: inconsistence policies,
security problems, bad governance and microeconomic and political instability. No
practical efforts were made by Nawaz’s government to overcome these problems to
attract FDI (DAWN NEWS, 2013).
FDI in Pakistan has shrunk to 27 % in November 2013 under Nawaz government
whereas it was 54% in November 2012 during Zardari government. Same in case of FPI
it went negative figure of $72.8 million in of November 2013 as against $18.2 million in
November 2012. The Nawaz government which was believed to be business friendly has
also failed in providing relief to business community said President Dr. Shinail Daud
Arain Rawalpindi Chamber of Commerce (RCCI) (Israr Ahmad , 2013). Foreign Direct
Investment slightly increased by 6 % but the volume of investment is still negligible
while FPI dropped by 74 % to $50 million at the end of third quarter FY 2014.
The government is trying really hard to attract foreign investment. The foreign investors
show strong desire to invest in recently lunched Euro bonds by Pakistan. The reason
behind very large investment in Eurobond was very high rate of return (almost double
than many weak economics). Despite offers by the government the foreign investors are
not ready to land in Pakistan and the reason is simple: “the country is still not safe for
foreigners, said analyst” (Shaid Iqbal, 2014).

29
CHAPTER 6
DISCUSSION
FDI is needed in Pakistan because we need capital resources to grow4. The principle is very
simple and the principle is cost and benefits analysis. If the overall cost of a foreign
investment is more than the overall benefits then it should not be encouraged and vice versa5.
So any foreign investment that enhances our skills, our quality of product, increase
competition in local market and brings us closer to the world economy should be encouraged.
And if any foreign investment that becomes a monopoly on our natural resources and assets
should be discouraged6.
It is often said that FDI increases under democratic government because democratic
government provides property rights protection. Since there is no guarantee that democratic
government will not violate property protection (North & Weingast , 1989). Democratic
government is considered to decrease political risks and have been found credible in making
agreements (Cowhey 1993; Fearon 1994;). Political risks include contract repudiation,
expropriation and nationalization (North & Weingast , 1989).
On the contrary, a number of authors said that dictators attract more FDI inflows. Dictators
protect foreign investor from high wages and taxation (Donnell, 1978) and to the extent
property rights protection is positively related with FDI inflows, stable dictatorship
government win high level of FDI (Olson,1993). Multinational corporations prefer to invest
in dictator administration, because dictators can provide better entry deals and low wage rate.
This relationship leads to high levels of FDI in countries where dictators rule. It is also
assumed that dictators are good at bargaining with multinational firms, and the lack of
constraints in taking decisions creates more generous situations for multinationals (Nathan M.
Jensen, 2003).
The constraints impose in democratic governments may limit the amount of discretion in
offering deals to multinationals. This limited discretion can provide benefits to multinational
corporations. These constraints lead to policy stability and favourable policies toward
multinationals (Nathan M. Jensen, 2003). There is no evidence of relationship between

democracy and foreign investment. This means being a democracy does not help in attracting
high level of FDI in a country (Benhua Yang, 2007).
30

31
Source: Handbook of Statistics on Pakistan Economy & State Bank of Pakistan7
7 See attachment No. 4 & 5

We can see from the above graph that FDI has increased more under dictatorship rather than
democracy. The reason for favouring dictatorship is first stability. The investor’s confidence
is developed on stability (in policy making). And in Pakistan it is experienced that policies
are stable under dictatorship. Because decision maker is only one and parliament is not
involved so you don’t need any bill to be approved. On the other hand under democracy you
need approvals at multiple levels that cause delay of process that’s why stability is found
under dictatorship8. The other reason behind high FDI under dictatorship is that whenever
military government rule Pakistan, Pakistan involves itself with America against on-going
War. Ayub khan participated in Korean War, Zia-ul-haq in first Vietnam War and then the
afghan War against the Soviet Union and when Musharraf came to power he involved
Pakistan in War against Taliban after 9/11, which results in high foreign investment inflows9.
Despite all the criticism of Musharraf’s policies and personality it was his over- arching
policy of deregulation, privatization and liberalisation that Pakistan has received $5 billion
FDI in 2007, which is ten times the figure of 2001. It was Musharraf’s economic policies that
were kept unchanged or with minor changes that boosted the confidence of both local and
foreign investors (Shaid Iqbal, 2007) . The stock exchange under Musharraf’s administration
has been the best performing stock market among the Asia’s emerging economies. The KSE-
100 which was launched in 1991 with base price of 1000 points reached to 13772 points in
the first quarter of FY 2007-2008 (Fazl-e-Haider, 2008).
If foreign investment really grows under dictatorship than still why democracy is favourable
for Pakistan?
It is said that “during military government every country makes progress economically but
travels downward morally”. To achieve macroeconomic stability, Pakistan must become
politically stable by strengthening its institutions of democracy. No doubt that Pakistan has
received high foreign investments under dictatorship but it is not possible to attract high FDI
without stable political system. Economists believe that a country can achieve high foreign
inflows if it is democratic. Because democratic government serves collective interests and is
considered to be business friendly.
That is why democracy is favourable for foreign investment and economic growth in
Pakistan. Democracy fails because of its short life in Pakistan. Democracy is a process not a
32

revolution. Democracy takes time, several decades, sometime even centuries before it is fully
established. Only then its full benefits are realised.
33
MOST ATTRACTIVE SECTORS IN PAKISTAN (1997-2014)10
Source: Board of Investment, Pakistan11
The sectors that remained most attractive during 1997 to 2014 were:
SECTORS TOTAL ($US MILLION) %
Oil and Gas 6160.2 22.5
Financial Business 5564.2 20.4
Textiles 423.3 1.5
Trade 1018.3 3.7
Construction 900.0 3.3
Power 1328.9 4.9
Chemical 1078.5 3.9
Transport 754.8 2.8
Communication (IT & Telecom) 6545.0 23.9
Other 6210.4 22.7
Total including Pvt. Proceeds 30135.6 110.3
Privatisation Proceeds 2805.1 10.3
FDI Excluding Pvt. Proceeds 27330.5 100
10 Objective # 2, See chapter No. 2
11 See attachment No. 3

Currently Pakistan provides investment opportunities in industrial, communication,
infrastructure, textile and energy sector (ePakistan, 2014). Its location as a regional hub
makes it a very attractive place for foreign investment and business. The top five investing
countries in Pakistan are: U.S.A with $6987.7, U.K with $4227.7, U.A.E with $4158.9, Hong
Kong with $1244.6 and Japan with $604.6.
To promote foreign investment in future12 the BOI ‘Foreign Investment Policy 2013-2017’
introduces “Operational Window” for attracting FDI into Pakistan, which includes; Policy
Formulation, Public-Private Sector Dialogue, Investment Facilitation, Coordination Network
with Stakeholders Ministries and FDI Promotion Campaign (BOI, 2013). The key objectives
of Investment policy and FDI strategy 2013- 2017 are; curtailing cost of doing business, to
reduce the time constraints, cost of starting business and cutting down procedures and
processes. The new policy stresses liberalisation of economy by providing protection to
investment, more facilitation to investors, removal of regulatory hurdles, public- private
partnership and better co-ordination among stakeholders. This policy will help to enhance
Pakistan’s international competitiveness in attracting, stating and long term continuation of
businesses, industrial and financial operations (DAWN NEWS, 2013).
34
12 Objective # 3, See chapter No. 2

35
CHAPTER 7
CONCLUSION
In the end it is concluded that Dictatorship attracts more Foreign Investment in Pakistan than
Democracy. The reason for favouring Dictatorship is first stability, and in Pakistan it is
experienced that policies are more stable under Dictatorship rather than Democracy, because
decision making power is in one hand. The other reason for favouring dictatorship is that
whenever military government rule Pakistan, Pakistan involves itself with America against
on-going War, which results in high foreign investment inflows.
From 1997 to 2014 Communication (IT & Telecom) sector, remained one of the leading
contributor of FDI in Pakistan, has received $6545 million (23.9%) foreign investment. The
telecom was one of the most attractive sectors for foreign investors from 2005 to 2008, but in
2011-2012 it has witnessed an outflow of $253 million. The reason behind outflow was: high
operational costa and tough competition environment, suspension of licences by PTA on
different grounds, and dispute between GOP and Etisalat over legal transfer of land and
property titles. After communication sector the second most attractive sector for FDI in
Pakistan is Oil and Gas sector, and has received $6160 million (22.5%) foreign investment.
Third Financial Business that has received $5564 million (20.4%) foreign investment.
The introduction of “Operational Window” in Foreign Investment Policy 2013-2017 will help
to enhance Pakistan’s international competitiveness in attracting, stating and long term
continuation of businesses, industrial and financial operations.

36
CHAPTER 8
RECOMMENDATION
Pakistan is among the emerging economies of the world so the government should strive hard
to make the investment environment attractive for both local and foreign investors. Foreign
investment has been hit badly by power shortage and at the same time Pakistan also faces
terrorism and security problems. As instability in country and energy crises are the factors
discouraging foreign investment in Pakistan, so these problems should be addressed on
priority basis to give green signal to foreign investors. Current government should introduce
more investment-friendly, stable and long term investment policies to encourage foreign
investment in the country. These policies should not be interfered or amended again and
again every few months and should not be abruptly changed with the change in government.
As the macroeconomic policies that attract foreign private investment take at least three years
to show their impacts so stability in policies is needed.

37
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43
CHAPTER 10
ATTACHMENT 1 (TELEPHONIC INTERVIEW QUESTIONS)
FDI/FPI PATTERNS IN PAKISTAN
Date Interviewer
Time Interviewee
Recording ref:
Assalam-o-Alaikum, I am going to ask some brief questions about current situation of FDI in
Pakistan. Your corporation in this regard will help me to better understand this scenario.
1. What is your opinion about FDI in Pakistan?
2. What do you think type of government (Democracy / Dictatorship) really affects
FDI/FPI inflows? HOW?
3. Which factors do you think drive FDI in Pakistan?
4. Which factors in your opinion drive FPI in Pakistan?
5. What are the reasons behind low FPI (as compared to FDI) in Pakistan OR reasons
behind outflow of FPI in Pakistan?

44
ATTACHMENT 2 (TELEPHONIC INTERVIEW ANSWERS)
1. Mr. Ata Malik
FDI is needed in Pakistan because we need capital resources to grow. In long term
democracy works better for FDI because highest FDI in Pakistan was in 1995 and after
2006-2007 crises the highest FDI was in 2011. One thing that is needed for FDI is an
independent legal system. FDI inflows are more in democratic countries because if
stability remains the same democracy is better than dictatorship. Moreover democratic
governments are regarded as trustworthy. The factors that drive FDI in Pakistan are
Policy stability because investors want stability and economic reforms (opening up of
economy for foreign investment). The reasons behind low FPI in Pakistan as compared to
FDI are; our capital markets are not big enough, FPI compared to FDI is more effective
by terrorism and macroeconomic instability.
2. Prof. Ehsaan Ullah
As Pakistan is a developing country so FDI is needed for economic growth especially
third world countries purely depends on FDI. The investors’ confidence is developed on
stability (in policy making). And in Pakistan it is experienced that policies are stable
under dictatorship. Because decision maker is only one and parliament is no involved so
you don’t need any bill to be approved. On the other hand under democracy you need
approvals at multiple levels that cause delay of process that why stability is found under
dictatorship. Investment opportunity is the main factor that drives FDI in Pakistan.
Capital market stability and interest rate that depends on inflation rates. If inflation rate of
a country is high that means interest rates are high which automatically increase FPI.
3. Dr. Qais Aslam
All nations need finances developed and developing. There are three types of finance one
which government takes as public debt, second which private sectors takes from their
partners to sell them something and third, foreign investors invest their money to gain
foot hold in local economy. The principle is very simple and the principle is cost and
benefits analysis. If the overall cost of a foreign investment is more than the overall
benefits then it should not be encouraged and if overall benefits are more than the overall
costs then an economy should welcome them. So any foreign investment that enhances
our skills, our quality of product, and competition in local market and brings us closer to

the world economy should be encouraged. And if any foreign investment that becomes a
monopoly on our natural resources and assets should be discouraged.
When Ayub khan became the dictator of Pakistan, U.S.A started Korean War and the
dictators Pakistan supported U.S.A against Korean War we got colossal amount of money
and growth rate went up. When Bhutto came into power Pakistan was not part of any war
and we didn’t get any money and growth rate went down. When Zia-ul-haq came to
power America was involved in first Vietnam War and then the afghan War against the
Soviet Union and we were partners to America and we got colossal amount of money and
our growth rate went up. And when Zia-ul-haq went away and our so called democratic
government of Benazir and Nawaz Sharif came in to power we were not part of war
against Soviet Union so America stop giving us money. When Musharraf came to power
America was in War against Taliban and we supported the American efforts in destroying
the Taliban’s and colossal amount of investment came in our country and growth rate
again went up and after Musharraf the money stopped flowing and growth rate came
down.
So there is a co-relationship between dictatorship and American interventions in the
world and therefore foreign investment. Democracy which wants peace in the world and
does not favour those military targets ultimately reduces foreign investment. The profits
motives and security of investment drive FDI in Pakistan. You will find more Pakistanis
are investing abroad then what foreigners are investing in Pakistan because profit motives
in Pakistan are less and the cost of doing business is more. Money lands in China, India
an even in Afghanistan but not in Pakistan because we can’t insure neither the
profitability nor the security.
Big profits drive portfolio investment in Pakistan. In portfolio investment an investor just
need to put their money and they have to face no hassles of talking to all those inefficient
government and non- government active which a direct investors have to face. And
therefore the opportunity cost of portfolio investment is far blessed then the opportunity
cost of foreign direct investment. Those who are risk takers go for portfolio investment
rather than direct investment. When all the input costs are going up (cost of land, energy,
labour, technology, loans), form where the investors will earn profits because foreign
investors come to capture local market to ensure profits margins.
45

46
4. Prof. Yasir Iqbal
The structure of FDI in Pakistan is different from all over the world. We have seen that
during Musharraf era the FDI in Pakistan was high. When a foreign company came in a
country they see how much they can earn and take back to their home country. Under
democracy there is no fear of restrictions but under dictator there is fear of sudden
restriction. The macroeconomic policies that attract FDI take at least three years to show
their impacts. The discouraging fact in 1990’s was that when new government came to
power they repudiate the previous government contracts.
The strategic vision of Musharraf attracts foreign companies in Pakistan. Pakistan
receives record FDI under Musharraf period. The main problem in Pakistan’s democracy
is lack policy coherence, terrorism, political instability and the scenario of democracy and
dictatorship in Pakistan is different from rest of the world. One other factor is interest
rate, when interest rate is high foreign companies are reluctant to land in Pakistan because
opportunity cost of doing business is high but when interest rates are low foreign
companies freely move in Pakistan. When more currency is issued by State Bank that
results in high demand, high demand means high prices, high prices means high inflation
that leads to high interest rates which ultimately discourages FDI. Musharraf attract
foreign investors through low interest rates. The factors that attract FPI are capital gain
and dividend.

SECTOR 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013
Oil and Gas 99.1 112.8 79.7 80.7 268.2 186.8 202.4 193.8 312.7 545.1 634.8 775.0 740.6 512.2 629.0 440.4 346.9
Financial Business 20.4 24.4 29.6 -34.9 3.6 207.4 242.1 269.4 329.2 930.3 1864.9 707.4 163.0 310.1 64.4 314.2 118.7
Textiles 27.3 1.7 4.4 4.6 18.5 26.1 35.4 39.3 47.0 59.4 30.1 36.9 27.8 25.3 29.8 10.0 -0.3
Trade 12.6 5.5 7.6 13.2 34.2 39.1 35.6 52.1 118.0 172.1 175.9 166.6 117.0 53.0 25.3 5.7 -15.2
Construction 21.5 13.9 21.2 12.5 12.8 17.6 32.0 42.7 89.5 157.1 89.0 93.4 101.6 61.1 72.1 46.0 16.0
Power 239.5 131.4 67.4 39.9 36.4 32.8 -14.2 73.4 320.6 193.4 70.3 130.6 -120.6 155.8 -84.9 28.4 28.7
Chemical 72.1 54.1 119.9 20.3 10.6 86.1 15.3 51.0 62.9 46.1 79.3 74.3 112.1 30.5 96.3 71.6 76.0
Transport 7.5 33.3 31 45.2 21.4 87.4 8.8 10.6 18.4 30.2 74.2 93.2 132.0 104.6 18.7 44.1 -5.8
Communication (IT & Telecom) - - - - 12.8 24.3 221.9 517.6 1937.7 1898.7 1626.8 879.1 291.0 -34.1 -312.6 -385.7 -132.5
Other 101.3 95.2 109.1 140.9 66.2 90.4 170.1 274.0 285.0 1107.2 764.5 763.4 586.3 416.3 282.6 872.6 85.3
Total including Pvt. Proceeds 601.3 472.3 469.9 322.4 484.7 798.0 949.4 1523.9 3521.0 5139.6 5409.8 3719.9 2150.8 1634.8 820.7 1447.3 669.8
Privatisation Proceeds 0.0 0.0 0.0 0.0 127.4 176.0 198.8 363.0 1540.3 266.4 133.2 0.0 0.0 0.0 0.0 0.0 0.0
FDI Excluding Pvt. Proceeds 682.1 601.3 472.3 469.9 322.4 357.3 622.0 750.6 1160.9 1980.7 4873.2 5276.6 3719.9 2150.8 1634.8 820.7 1447.3 669.8
47
ATTACHMENT 3
SECTOR WISE BREAK-UP OF FDI IN PAKISTAN (1997-2014)
SOURCE: State Bank of Pakistan & Board of Investment
* The data of 2014 is form July 2013 to March 2014
2013-2014
(July-Mar)

48
ATTACHMENT 4
FPI INFLOWS IN PAKISTAN DURING 1997-2014
YEARS FPI
1996-1997 267.4
1997-1998 221.3
1998-1999 27.3
1999-2000 73.5
2000-2001 -140.4
2001-2002 -10.1
2002-2003 22.1
2003-2004 -27.7
2004-2005 152.6
2005-2006 351.5
2006-2007 1820.4
2007-2008 19.3
2008-2009 -510.3
2009-2010 587.9
2010-2011 364.6
2011-2012 -60
2012-2013 199.5
2013-2014 (July-Mar) 118.3
Source: State Bank of Pakistan & Board of Investment

49
ATTACHMENT 5
FDI INFLOWS IN PAKISTAN DURING 1959-2014 (UNDER DICTATORSHIP AND
DEMOCRACY)
FDI INFLOWS
US$ MILLION YEAR
YEAR
1959 3.9
1960 5.9
1961 2.3
1962 1
1963 2.5
1964 37.1
1965 3.9
1966 49.5
1967 37.1
1968 1.4
1969 59
1970 72.1
1971 90.1
1972 8.1
1973 0.5
1974 6.3
1975 14.9
1976 22.5
1977 10.7
1978 35.5
1979 36
1980 28.2
1981 35
1982 98
1983 42.1
1984 48
1985 70.3
1986 145.2
1987 108
1988 162.2
FDI INFLOWS
US$ MILLION
1989 209
1990 216.2
1991 246
1992 335.1
1993 306.4
1994 354.1
1995 442.4
1996 1101.7
1997 682.1
1998 601.3
1999 472.3
2000 469.9
2001 322.4
2002 484.7
2003 798.0
2004 949.4
2005 1524.0
2006 3521.0
2007 5139.6
2008 5276.6
2009 3719.9
2010 2150.8
2011 1634.8
2012 820.7
2013 1447.3
2014 669.8
Source: Handbook of Statistics on Pakistan Economy & State Bank of Pakistan

FDI/FPI patterns in Paksitan

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