Attracting Foreign Direct Investment In Pakistan

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LEEDS UNIVERSITY BUSINESS SCHOOL
Attracting Foreign Direct
Investment in Pakistan
A Qualitative Study
Ayaz H Bhatti
Dissertation supervisor:
August, 2011
This dissertation is submitted in part fulfilment of the requirements for the degree of MSc
International Business

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Abstract
This paper has attempted to examine the reason for declining Foreign Direct
Investment (FDI) in Pakistan and attempted to identify the possible barriers to FDI
with respect to Pakistan and further tried to identify and suggest policy measures to
attract FDI through qualitative method using secondary sources.
This research found out that Terrorism, political Instability and corruption are the
core reasons discouraging foreign investors due to their multidimensional and
interlinked impacts on the overall business environment of Pakistan while also
identifying effective policy remedies to fix the problems not only associated with
the above three factors but the other factors as well.

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Table of Contents
1. Introduction...........................................................................................................................................4
1.1. Research Methodology and Data Collection.....................................................................................4
1.2. Research Objectives..........................................................................................................................4
2. FDI Trends & Dimensions....................................................................................................................6
2.1. Pakistan Inward FDI – Dimension and an Overview: ......................................................................6
2.2. FDI Inflows and Trends in other developing countries: .................................................................14
2.2.1 FDI inflows in India...................................................................................................................14
2.2.2 FDI inflows in Bangladesh ........................................................................................................18
2.3. FDI Inflow/Stocks- A Comparative View: Pakistan, India & Bangladesh.....................................20
3. Literature Review................................................................................................................................22
3.1. Theoretical approaches to FDI........................................................................................................22
3.1.1. Internalization Theory...............................................................................................................22
3.1.2. Porter’s Competitive advantage of Nations - (Porter 1998, cited in De Wit & Meyer 2010
p.575) ..................................................................................................................................................23
3.1.3. Product Life Cycle theory..........................................................................................................24
3.1.4. Dunning Eclectic Paradigm........................................................................................................24
3.2. Multinational Enterprises Motives and Determinants of FDI in Pakistan: .....................................26
3.3. Multinational Enterprises Motives and Determinants of FDI in Emerging Economies .................29
4. Analysis of Pakistan as an Investment Location.................................................................................33
4.1. Quality of life and social development ...........................................................................................33
4.2. Infrastructure:..................................................................................................................................33
4.3. Skilled labor force scarcity: ............................................................................................................34
4.4. Corruption:......................................................................................................................................35
4.5. Terrorism: .......................................................................................................................................35
4.6. Political stability: ............................................................................................................................36
4.7. Economic stability: .........................................................................................................................36
5. Conclusion and Recommendations.....................................................................................................38
6. References...........................................................................................................................................41
7. Appendices..........................................................................................................................................49

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1. Introduction
Foreign direct investment (FDI) plays a vital role in economic development as it creates jobs,
upgrades skills, transfers technology, encourages competition and contributes in the fiscal
stability of the country (Investing across borders – WorldBank,2010). However, when the Global
FDI rose at 5% to the tune of $1.24 trillion in 2010 in which half of the global FDI inflows were
directed towards developing economies for the first time, the same period Pakistan faced a 14%
decline in FDI inflows (UNCTAD,2011). The global FDI inflows are again expected to rise to
the tune of $1.4-1.6 trillion in 2011 and further expected-jump to $1.7 trillion in 2012 and $1.9
trillion in 2013. This puts a great challenge for Pakistan to attract FDI in context with other
emerging economies and especially China which will influence the investment patterns and make
the competition for inward FDI difficult for other developing economies (UNCTAD,2011 and
Oxelheim and Ghauri,2008). Therefore, this research will try to reveal the actual barriers which
are effecting investments in Pakistan and identify effective policies for Pakistan in order to
attract FDI.
1.1.Research Methodology and Data Collection
This research is done on basis of qualitative method using secondary sources. The reason of
using qualitative method is to have a real world feel of the issue at hand which cannot be felt in
statistical and numerical analysis applied in quantitative research. Thus, unlike quantitative
research which inquires causal determination, prediction and generalization of findings,
researcher in qualitative research seek enlightenment, understanding and extrapolation to similar
situations (Golafshani,2003). Considering the nature of the topic, the reason of having secondary
data and not primary data is because of time constraints and difficult access to government
officials and multinational executives. The secondary data is being collected from various
sources i.e. academic journals, newspapers, reports, official websites, internet etc. Further,
various data from government and other bodies such as World Bank, United Nation, World
energy council, World economic forum (WEF), State bank of Pakistan, FDI information from
Board of Investment websites etc is also collected.
1.2.Research Objectives
The objective of the research is to find out the actual factors which can encourage FDI in
Pakistan by analyzing the following factors:
 To analyze the FDI trends in Pakistan.
 To identify the motives of FDI and the factors that influence FDI.
 To identify the motives of Multinationals to invest in Pakistan and other emerging
economies.
 To identify and study the barriers of FDI in Pakistan.
 How Pakistan can improve itself against the barriers?

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Section Two-provides the trends and dimensions of FDI in Pakistan and other emerging
economies.
Section Three-provides a detailed review of the literature, discussing different theories of FDI,
motives and determinants of FDI in other emerging economies/Pakistan and, figuring out the
actual barriers to FDI in Pakistan.
Section Four-provides a detailed analysis of the barriers and comparison against other emerging
economies to analyze Pakistan’s standing.
Section Five-provides conclusion and recommendation about the findings.

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2. FDI Trends & Dimensions
Attracting Foreign Direct Investment (FDI) for government economic policy makers has always
been the number one agenda. A high rate of attracting FDI reaffirms the government initiatives
and long term planning for the economic prosperity of their respective countries. However,
Pakistan in this regards depicts a fluctuating and declining trend of FDI inflows. A comparison
of Pakistan FDI situation is done at the end of the chapter involving India and Bangladesh due to
similar demographics of these countries
2.1.Pakistan Inward FDI – Dimension and an Overview:
An efficient Fiscal Policy encourages a healthy rate of Investments and savings paving way for
capital formation. Conversely, in emerging economies the rate of domestic savings falls short
from the preferred level because of lower per capita income. The domestic saving in Pakistan is
9.5% of GDP in 2010-11, declined 6.8% from 2005-06 (Ansari and Rahil,2011). To fill the gap
between savings and investments inward FDI can prove to be an important source. The
liberalization of trade and investment regime is important to increase FDI inflows (Khan,2007
and Zaidi,2004). However the business environment in Pakistan is in transition with many
important policy improvements since 2000, US commercial service (2010).
After pursuing restraining economic policies, from 1990s Pakistan’s government made the first
move towards market-based reforms through liberalizing trade and investment by granting fiscal
and trade incentives to investors in the shape of easing foreign exchange control, credit facilities,
tax concessions and reduction of tariff. Overseas investors are permissible to hold 100% equity
on repatriable grounds in industrial projects with no prior approval. Profits earned by firms can
also be repatriated to their home countries. Foreign investors require no approval to invest and
foreign equity up to 100% is also allowed in industries except alcoholic beverages, currency,
explosives, security printing, arm and ammunitions and radioactive substances. Manufacturing
sector requires no minimum investment amount. However the lower limit to FDI in agriculture
sector is $0.3 million, Infrastructure and social is $0.3 million and in services sector (including
IT and Telecom) is $0.15 million. Custom duty on import of Plant, machinery and equipment
(PME) for agriculture sector is 0% while all other sectors are charged 5%. Investors are allowed
to pay royalty and technical fees and can negotiate terms of condition appropriate for both
government and the firm wishing to transfer technology in manufacturing sector whereas in non-
manufacturing sector 5% rate of net sales is allowed (Khan,1997; Aqeel and Nishat,2005; Khan
and khan,2011; BOI-Pakistan,2011). (Please refer to Table-1).

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Table: 1 Pakistan Investment Policies (Source: Board of Investment, Pakistan)
Policy Parameters
Manufacturing
Sector
Non- Manufacturing
Sectors -Manufacturing
Sectors
Infrastructure
and Social
Services including
IT & Telecom
Services
Agriculture
Govt. Permission Not required
except 4
specified
industries *
Not required except specific licenses from concerned agencies.
Remittance of capital,
profits, dividends, etc.
Allowed Allowed
Upper Limit of foreign
equity allowed
1 1 1 1
Minimum Investment
Amount (M $)
No 0.3 0.3 0.15
Customs duty on import
of PME
5% 0% 5% 0-5%
Tax relief (IDA, % of
PME cost)
50% 50%
Royalty & Technical
Fee
No restriction for
payment of
royalty &
technical fee.
Allowed as per guidelines - Initial lump-sum upto $100,000 - Max
Rate 5% of net sales - Initial period 5 years
Despite of attractive incentives and concessions and deregulation of the economy, there is a well-
built opinion by overseas investors that the pro-business and inducement policies to attract future
investments are fragile given the real situation when they actually setup and function there
businesses in Pakistan (Khan and Kim,1999). The foreign direct investment in Pakistan has been
showing a fluctuating trend. Table 2 shows the size of FDI inflows that Pakistan has been
receiving from the year 2001 – 2011. In the past FDI inflows have steadily been increasing, FDI
inflows to Pakistan increased from $119.6 million in 1975 – 79 to $3299.8 million in 1995 – 99
(khan and khan,2011) however a drastic increase in inflows in 1995 – 96 (Table-2) was primarily
due to investment in power sector (khan and Kim,1999). Similarly if we analyze the FDI inflows
from 2001–02 there has been a steady increase in FDI inflows. The inflows in 2001 – 2002 were
$485 million, 2002 – 2003 were $798 million and there has been a continuous increase till 2007
– 08 when Pakistan received a staggering figure of $5,409.80 million. Further Between 2006 –
08 in Asia, Pakistan was the 10th
largest receiver of foreign direct investment according to
(UNCTAD,2008) Further the inflows in 2006, 2007 and 2008 contributed 3.6%, 4.1% and 3.9
percent of the GDP, much higher than any previous years. However, until the year 2008 and

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onwards the inward FDI performance of Pakistan has been deteriorating at a speedy rate,
reporting $2,150.80 million in the year 2008 – 09 and $1,739.40 million in 2010 – 11.
Table 2: Foreign Investment inflows in Pakistan (USD$Million)
Year
Greenfield
Investment
Privatisation
Proceeds
Total FDI
Private Portfolio
Investment
2001-02 357 128 485 -10
2002-03 622 176 798 22
2003-04 750 199 949 -28
2004-05 1,161.00 363 1,524.00 153
2005-06 1,981.00 1,540.00 3,521.00 351
2006-07 4,873.20 266.4 5,139.60 1,820.00
2007-08 5,276.60 133.2 5,409.80 19.3
2008-09 3,719.90 0 3,719.90 -510.3
2009-10 2,150.80 0 2,150.80 587.9
2010-11 1,573.60 0 1,739.40 344.5
Total 22,556.00 2,805.60 25,498.40 2,720.00
Figure 1: FDI Inflow trend in Pakistan (US$ million)
309 383
823
534
1118
2201
4273
5590
5438
2338
2016
0
1000
2000
3000
4000
5000
6000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Table 3 FDI Inflows to GDP statistics - BOI-Pakistan(2011)
Year
FDI (in Million
US$)
Annual Growth
Rate
FDI as % of
GDP
1995 442.4 24.94 1.74
1996 1101.7 149.03 1.1
1997 682.1 -38.09 0.97
1998 601.3 -11.85 0.75
1999 472.3 -21.45 0.77
2000 469.9 -0.51 0.55
2001 322.5 -31.37 0.82
2002 484.7 50.29 1.17
2003 798 64.64 0.98
2004 949.4 18.97 0.99
2005 1524 60.52 1.38
2006 3521 131.04 2.77
2007 5139.6 45.97 3.57
2008 5152.8 0.26 3.2
2009 2338 - 1.6
2010 2016 - -
Figure: 2
Source: Pakistan Index – Brookings Institution

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Looking at Table-2, we can also see that much of the chunk of FDI inflows in terms of volume
and amount has been Greenfield Investments. The figure of privatization proceeds in 2005–06
has been $1,540 which gives a picture of major acquisitions done by foreign companies in this
period for instance a major sale of government owned companies was done in this period namely
Karachi electric supply company and Pakistan telecommunication company revitalized the
privatization process in 2006 (Fan,2007). However, in the following years there has been less or
no privatization proceeds received. This shows that most of the FDI inflows which Pakistan has
received in these years are Greenfield investments.
Table-4 and Figure-3 gives us a country-wise explanation of foreign direct inflows and shares
(%) in Pakistan, since 2001–2010. USA, UK and UAE by far lead as the major countries
investing in Pakistan. It can be noted that September 11 or 9/11 attacks in 2001 caused a major
decline in FDI from the USA in 2000–01 but soon after being close Ally’s in the war of terrorism
and better relations of USA-Pakistan, the FDI inflows started picking up from USA but with
fluctuated shares in terms FDI inflows for example the share of FDI inflows of USA fluctuated
in 2005–06 i.e. 14.67% as compared to 67.34% in 2001–02. The FDI inflows from UAE explain
the cultural / historical linkages with Arab world. A major deal was done in the year 2005–06 for
the acquisition of Pakistan Telecommunication Limited by a UAE firm ETISALAT
(Yousafzai,2005) which could explain an unusual fluctuated FDI share in the year 2005–06 i.e.
40.46% as compared to 1.61% 2000-01. Similarly we could also see a fluctuating trend in FDI
share from United Kingdom that is 28.07% compared to 6.81% in 2004 – 03. Saudi Arabia being
a very close friend of Pakistan showed a fluctuated trend in terms of shares as well, in the year
2000 – 01 the share of Saudi Arabia was 17.56% compared to 0.27% in 2001 – 02. Similarly
China a very close friend of Pakistan showed a considerable fluctuation i.e. 13.85% in 2006 – 7
compared to any year i.e. between 2000–10. However these fluctuating trends in the FDI share of
the particular countries gives us important information about how Pakistan has been maintaining
a steady flow from USA, UK and UAE and other countries. So far the FDI share of countries had
shown a quick and significant fluctuation despite having the top three spots. For example in the
year 2007 – 08 UAE was in the second position having share of 11.42% while USA on top with
25.41% and UK third with 8.93% shares. 2009-2010 shows decline of USA investments while
UAE showed an increase in the financial & telecommunication sector investment.

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Table 4: Country-wise Investment Trends - BOI-Pakistan(2011)
Country
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
2005-
06
2006-
07
2007-
08
2008-
2009
2009-
2010
USA 28.75 67.34 26.5 25.12 21.39 14.67 17.77 25.41 23.39 15.18
UK 28.07 6.25 27.49 6.81 11.91 6.93 16.73 8.93 7.08 13.22
UAE 1.61 4.44 15 14.18 24.12 40.46 12.87 11.42 4.79 18.06
Japan 2.82 1.32 1.77 1.59 2.97 1.62 1.25 2.55 2 0.2
Hong Kong 1.12 0.58 0.7 0.66 2.12 0.68 0.63 6.59 4.2 7.98
Switzerland 1.12 1.53 0.39 21.63 9.02 4.85 3.4 3.29 6.11 2.1
Saudi
Arabia 17.56 0.27 5.45 0.76 1.21 7.89 2.01 0.9 2.48 0.41
Germany 4.81 2.31 0.46 0.74 0.86 0.81 1.54 1.35 2.07 1.35
South
Korea 1.15 0.08 0.03 0.11 0.09 0.05 0.03 0.02 0.06 0.49
Norway 13 0.02 0.04 15.45 2.06 7.17 0.49 5.34 2.72 -3.05
China 0 0.06 0.38 1.51 0.03 0.05 13.85 0.27 2.73 3.01
Others 41.9 76.6 173.9 108.6 369.3 521.9 1512.2 1748.7 52.8 40.14
Figure 3: Top investing countries 2000-2011(US$ millions)
0
200
400
600
800
1000
1200
1400
1600
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
2005-
06
2006-
07
2007-
08
2008-
09
2009-
10
2010-
11
USA
UK
U.A.E
Japan
Hong Kong
Switzerland
Germany

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Looking at Figure-4 it gives us an indication that right from the period of 2001 till 2011 USA by
far stays as the top investing country in Pakistan with 36% FDI share. Further a major chunk of
other countries apart from the named below have a share of 25%. Further if we analyze the top 7
countries in terms by continent, we see countries from Europe like UK leading by having 19%
share. Similarly if we see Asia the aggregate FDI share is 26% in which UAE stands at the top
with 26% of FDI share whereas USA alone accounts for 36% in FDI share. This gives us a good
picture about the trends of FDI share in each continent of the top 7 countries investing in
Pakistan. By far among the top 7 countries, the countries from Asia have a greater share in terms
of FDI. However, the geographical distribution shows that FDI flows from Developed countries
accounted 77.8 % in 2001 and 61.5% in 2009, whereas the FDI flows from developing countries
accounted 14.7% and 16.1% in Pakistan respectively (Table-5 in Appendix-A for all countries
list).
Figure-4: Top investing countries 2000-2011(%)
Country-Wise FDI Inflows, 2000-2011
USA
36%
UK
19%
U.A.E
26%
Japan
3%
Hong Kong
5%
Switzerland
9%
Germany
2%
USA
UK
U.A.E
Japan
Hong Kong
Switzerland
Germany

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Table-6 indicates the foreign direct investment by sector. It is of worth noticing that the inflows
from 2004 till 2008 are diversified and can be seen in almost every sector of the economy.
However, Table 6 indicates that during 2007-2008, major sector in which foreign firms have
invested are Financial and Communications, contributing 1,864.90 and 1626.8 USD$ millions
(BOI-Pakistan,2011). Whereas the subsector i.e. IT sector shows a weak sign and has received
less attention from the foreign firms. During 2009-11, Financial & communication sectors
experienced a sharp decline while Oil&Gas turned-out to be the leading sector to attract FDI.
Table-6:Sector-wise Pakistan FDI Inflows(USD$ millions)
Sector
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
2005-06 2006-07 2007-08 2008-09
2009-
10
2010-11
Oil & Gas 80.7 268.2 186.8 202.4 193.8 312.7 545.1 634.8 775 740.6 512.2
Financial
Business -34.9 3.6 207.4 242.1 269.4 329.2 930.3 1,864.90 707.4 163 246.9
Textiles 4.6 18.5 26.1 35.4 39.3 47 59.4 30.1 36.9 27.8 25
Trade 13.2 34.2 39.1 35.6 52.1 118 172.1 175.9 166.6 117 53
Constructi
on 12.5 12.8 17.6 32 42.7 89.5 157.1 89 93.4 101.6 60.8
Power 39.9 36.4 32.8 -14.2 73.4 320.6 193.4 70.3 130.6 -120.6 155.8
Chemical 20.3 10.6 86.1 15.3 51 62.9 46.1 79.3 74.3 112.1 30.5
Transport 45.2 21.4 87.4 8.8 10.6 18.4 30.2 74.2 93.2 132 104.6
Communi
cation
(IT&Telec
om)
NA 12.8 24.3 221.9 517.6 1,937.70 1,898.70 1,626.80 879.1 291 -34.1
Others 140.9 66.2 90.4 170.1 274 285 1,107.20 764.5 763.4 586.3 418.9
Total
including
Pvt.
322.4 484.7 798 949.4
1,523.
90 3,521.00 5,139.60 5,409.80 3,719.90
2,150.
80 1,573.60Proceeds
Privatisati
on
- 127.4 176 198.8 363 1,540.30 266.4 133.2 0 0 0Proceeds
FDI
Excluding
322.4 357.3 622 750.6
1160.
9 1980.7 4873.2 5,276.60 3,719.90
2,150.
80 1,573.60
Pvt.
Proceeds
Financial sector had shown a phenomenal growth due to privatization and liberalization of
financial sector in Pakistan (Aman and Zaman,2010). This can be confirmed through the figure
in 2008 amounting to $1,607 million as compared to the previous years, holding 31.2% FDI
share in the services sector in 2008. However, in a power hungry country like Pakistan the
inflows have been somewhat fluctuating, in 2006 the power sector received $320.6 million as
compared to $70.3 million in 2008 thus contributing only 1.4% of FDI flows in services sector.

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Another non-manufacturing sector which has been attractive in terms of FDI flows i.e. extractive
industries in which oil and gas exploration has contributed 12.3% (634.8 million) in 2008 and
740.6 million in 2009-10 while other natural resource extractions has received less attention and
contributed only 0.8%. However the manufacturing sector seems much less tapped sector by
foreign firms in the above five years thus contributing only 11.9% of FDI inflows as compared to
the sum of non-manufacturing sectors i.e. 88.1 % in the year 2008 and the previous years.
2.2.FDI Inflows and Trends in other developing countries:
2.2.1 FDI inflows in India
According to A.T Kearney (2010) report India secures the third most attractive location for
foreign direct investment. This is a very impressive performance of our neighboring country.
Table-7 indicates that in 1990’s India has been receiving a negligible amount of FDI. If we
consider the period 1995–96 almost $4.6 billion worth of FDI was received whereas in the same
period Pakistan received $1.1 billion (Table-3). The gap was not considerable until after 1997
India’s speed of FDI inflows was incomparable to Pakistan, which can be attributed to the start
of liberalization in 1997 of some services sector (Satyanand and Raghavendran,2010). In the
year 2008, India received a staggering $41.6 billion while in 2009 India received $27 billion, a
decline of $14 billion. (UNCTAD,2011)
Table 7: India inward FDI inflows 1991 – 2010
YEAR 1990 1991 1992 1993 1994 1995
India 236.69 75 252 532 974 2151
YEAR 1996 1997 1998 1999 2000 2001
India 2525 3619 2633 2168 3587.99 5477.638
YEAR 2002 2003 2004 2005 2006 2007
India 5629.671 4321.076 5777.807 7621.769 20327.76 25349.89
YEAR 2008 2009 2010
India 42545.72 35648.78 24639.92
Looking at the top 10 investing countries in India we see Mauritius topping the list from 1991 –
1999 to 2010 (Table-8) with 21.61 percent of share in total investments during 1991-99 and
49.6% in 2010. While in 2008 alone Mauritius share grew to 40.9%. But most of the FDI from
Mauritius has been labeled as “round tripping” because of dummy investments to escape from
capital gain tax by Indian firms in Mauritius, which when sent back to India become part of the

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FDI and also because of the use of Mauritius as a platform by foreign firms due to attractive tax
treaty between both the countries, (Subramaniam,2010). Further, since the year 2000 Singapore
has been the 2nd
best investor replacing USA. Japan has been the 3rd
major investor in 1991-1999
but Singapore leading from 2000-2010 while USA is the 3nd
best investing country for India
from the year 2000. However, other major investing countries are UK, Netherlands, Germany,
France and Cyprus.
Table 8: Top Investing Countries in India (share as % of total investment)
1991-1999 2000-2009 2009-2010
Mauritius 21.6 42.8 49.6
USA 14.4 5.4 9.2
Japan 5.1 1.2 5.3
Germany 4 2.4 0.5
UK 3.8 5 3.8
Netherlands 3.7 3.1 3.9
South Korea 3.6 - -
Singapore 2.1 11.3 11.3
Hong Kong 1.6 - -
France 1.6 1.5 1.4
Cyprus - 4.2 7.7
Russia - 1.1 -
UAE - 1 3
Figure 5: Country-Wise FDI inflows(%share) (Aug. 1991-Dec. 1999)
1991-1999
Mauritius, 21.6
USA, 14.4
Japan, 5.1
Germany, 4
UK, 3.8
Others, 8.9
Mauritius
USA
Japan
Germany
UK
Others

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Figure 6: Country-Wise FDI inflows(%share) (Jan. 2000-March. 2009)
Figure 7: Country-Wise FDI inflows(%share) (2009-2010)
2000-2009
Mauritius, 42.8
USA, 5.4
Japan, 1.2
Germany, 2.4
UK, 5
Others, 22.2
Mauritius
USA
Japan
Germany
UK
Others
2009-2010
Mauritius, 49.6
USA, 9.2
Japan, 5.3
Germany, 0.5
UK, 3.8
Others, 27.3
Mauritius
USA
Japan
Germany
UK
Others

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Table-9(a) in Appendix B indicates sector wise inflows in India for the period 2000, 2008 and
2009. We can see that there has been a decline in manufacturing sector which can be attributed to
liberalization and opening up the service sector. In the year 2000 manufacturing sector had
44.8% of FDI share compared to 2009 which was 26.7 However it is worth noticing that power,
automobile industry, computer software and hardware and chemical are still having a major stake
in manufacturing sector. In a big and power hungry country like India investment particularly to
power sector depicts a healthy sign. Further the services sector has shown a phenomenal growth
in terms of FDI share in 2009 with 61.4% share in FDI. The major contributors of service sector
are telecommunication sector, financial sector, information and broadcasting, housing and real
estate and construction activities. Whereas the primary sector has shown an incremental growth
in share with 0.12% share in 2000 compared to 8.86% in 2009 However we can see some major
inflows in agriculture ($1,307 million in 2009), mining ($1,410.2 million in 2008) and petroleum
($1,367.5 in 2008).
This means that in India the services sector is on the rise and contributing the major share of the
FDI inflows. Whereas manufacturing sector has been declining since 2000 but the flows in
specific sectors are still favorable making it the second most invested sector, while primary
sector comes on third with fluctuated inflows in certain sectors. As per sector-wise investments
for 2010 (Table 9-b in Appendix B for detailed sector-wise/year-wise trend), IT(SW&HW) have
showed an increase while telecommunications had remained steady. With automobile and Real
Estate falling short of the targets depicts the global economic downturn impact. (DIPP-
India,2011)

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2.2.2 FDI inflows in Bangladesh
Considering the geographical size, Bangladesh has shown robust economic growth and FDI is
recognized as a crucial source. In Bangladesh, FDI mainly comprises of 100% foreign
investment and joint venture, BOI-Bangladesh (2010).
Figure-8 indicates that Bangladesh has been gradually increasing its FDI inflows and reached an
impressive inflow of $1,086.3 million in 2008 as compared to the 2001 year’s figure of $354.5
million. However, Bangladesh has experienced a decline in 2009 which can be compared to the
decline of FDI inflows in India and Pakistan in the same year. Further if we look at (Table-10) In
2009, banking and telecommunications sector comprised of 56% share of FDI inflows in
Bangladesh whereas textile and wearing occupied 20% share. Considering, the success of textile
sector of Bangladesh, the growth of services sector in terms of FDI inflows is robust. Other
sectors like petroleum, gas and power received 7% and others 17% of the FDI share in 2009.
During the 2010 tenure, Bangladesh has overall shown very positive results in attracting FDI
consistently in all sectors with major contribution from Power, communications and Financial
Services domains
Figure 8: Bangladesh FDI inflows from 2001 – 2010 (Million$)
578.64
354.47
328.31
350.25
460.4
845.26
792.48
666.36
1086.3
700.16
913.3
0
200
400
600
800
1000
1200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

19
Table 10: Sector-wise FDI Inflows-Bangladesh till 2010
Sector/Year 2005 2006 2007 2008
200
9
2010
Sector/Year 2010
Total 803.27 744.62 792.87 1086.33 700.16 Total 913.3
Telecommunication 261.39 267.97 304.71 641.39 250.14 Trade & Commerce 186.63
Banking 94.88 129.96 91.93 141.76 142.57 Manufacturing 238.78
Power, Gas
& Petroleum 198.38 209.31 229.95 101.02 51.15
Power, Gas &
Petroleum 92.06
Textile &
Wearing 74.98 73.53 105.45 126.36 136.38
Transport, Storage
& Communication 360.31
Others 173.64 63.85 60.83 75.8 119.92 Services 21.7

2.3.FDI Inflow/Stocks- A Comparative View: Pakistan, India &
Bangladesh
Based on geo & eco demographic similarities, the comparison of the trends in the subject
countries will help to understand how different factors have direct or indirect impacts on FDI
attractiveness. (UNCTAD,2011; Daily star,2011) As per the FDI inflow trend analysis, Pakistan
and Bangladesh experienced similar pattern during 2000-2005 in terms of fluctuation however
inflow by value for Pakistan was higher during 2004-2005. 2006-2008 was a steady year for
Pakistan FDI Inflows while Bangladesh struggle enhance their FDI Portfolio. However Pakistan
& Bangladesh experienced a sharp decline during 2009. FDI inflow in 2010 showed no
improvement for Pakistan while Bangladesh avoided any major decline. To involve Bangladesh
in the comparison is crucial since negative factors that have caused decline in Pakistan FDI has
given rise to movement of industries e.g. textile into Bangladesh now. During 2000-2008, India
in comparison had a steady growth in FDI inflow in large value but fell short during 2009-2010
mainly due to global economic meltdown as depicted in Figure-9. See Table-11 & 12 for details
Figure-9 FDI Inflow – Pakistan, India & Bangladesh Trend Analysis
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Pakistan
India
Bangladesh

21
Table-11 FDI Inflow – Pakistan, India & Bangladesh (USD$ million)
Country/
Year
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Pakistan 309 383 823 534 1118 2201 4273 5590 5438 2338 2016
India 3587.99 5477.64 5629.67 4321.08 5777.81 7621.769 20327.8 25349.9 42546 35648.8 24639.9
Bangladesh 578.64 354.47 328.31 350.25 460.4 845.26 792.48 666.36 1086.3 700.16 913.3
Table 12 FDI Inflow – Pakistan, India & Bangladesh
Country/
Year
1995-
2004
2005-
2007
2008 2009 2010
As % of Gross Fixed Capital
Formation
1995-2004 2008 2009 2010
Pakistan 585 4021 5438 2338 2016 4.7 18.3 8.1 7.5
India 3789 17766 42546 35649 24640 3.1 9.7 8.2 4.5
Bangladesh 386 768 1086 700 913 3.8 5.6 3.2 3.7
A quick analysis of FDI Stock as % of GDP (UNCTAD, 2011) for Pakistan, India and
Bangladesh reveals a consistent increase from the year 1995 to 2010. The decline is seen for
Pakistan & Bangladesh economies in stock as % of GDP in 2009 as compared to India where
Stock as % of GDP increase to 13%. However India experienced a decreased stock as % of GDP
during 2010 as compared to increases % for Pakistan and Bangladesh to 12.2% and 6.1%
respectively. See Table-13.
Table 13 FDI Stock – Pakistan, India & Bangladesh
Country/
Year
1995 2000 2008 2009 2010
As % of GDP
1995 2008 2009 2010
Pakistan 5408 6919 16473 16460 21494 7.5 11.3 10.3 12.2
India 5641 16339 125212 167023 197939 1.5 9.8 13 12
Bangladesh 600 2162 4816 5279 6072 1.6 6.1 5.9 6.1
India in overall terms has come out as more consistent and solid in FDI value terms too. Pakistan
has been a growth market in FDI inflow/stock value terms till 2008 as compared to Bangladesh
but started to decline sharply whereby Bangladesh remained slow but steady during 2009-2010

22
3. Literature Review
The purpose of the literature review is to understand the theories and the research which has been
conducted previously about attracting Foreign Direct Investment and to understand the policies
which were being suggested. The literature review will further help me to understand about what
Multinational Enterprises motives are to invest in emerging economies and Pakistan. Further the
literature review would be of assistance to identify the key themes which can attract foreign
direct investment.
3.1.Theoretical approaches to FDI
To determine and explain the causes and effects of Internationalization and FDI several theories
have been proposed on Multinational and host countries context. It is of relevance to study those
theories in order to have a general framework of FDI. Therefore, I will be discussing (1)
Internalization theory (2) Porter’s National competitive advantage (3) Product life cycle theory
and (4) Eclectic Paradigm.
3.1.1. Internalization Theory
A dynamic theory proposed by (Buckley and Casson,1976) explained internalization to elucidate
foreign direct investment and argued that MNE’s would internalize their activities in a Host
country if the costs of internalization are less then exporting and other contractual agreements
(Zhao and Decker,2004). Further they also identified two types of internalization i.e. operational
internalization by internalizing stages of production and the distributional channel of
intermediate products and Knowledge internalization resulting from research and development
(R&D). However the basic theme of theory has two dimensions i.e. (1) The firms will internalize
missing or imperfect external markets until the cost of further internalization outweigh its
benefits and (2) The firms will choose those locations which will minimize their overall cost of
operation for their different activities while taking its linkages with other activities in to
consideration (Buckley et al,2007). Further they emphasize that location strategies are complex
in practice. Firstly because there increasing returns to scale i.e. economies of scale in several
activities, secondly firm does not only perform production activity but a combination of different
activities like marketing & R&D which are interlinked with production and the firm with such
inter-linkages are complex so the information flows and transportation costs must be considered .
Thirdly, is the nature of market structure i.e. firms operating in imperfectly competitive markets
that can compel down factor or input prices will concentrate the production process which are
factor or input intensive in that region and finally the level of government intervention will also
influence the complex location decisions (Buckley and Casson,2009) However, the theory
recognizes four factors relevant to Internalization theory i.e. Industry-specific factor (nature of
product and external market structure), region specific factors, Nation-specific factors including
government policies and firm specific factors (Rugman and Verbeke,2003).

23
3.1.2. Porter’s Competitive advantage of Nations - (Porter 1998, cited
in De Wit & Meyer 2010 p.575)
The Diamond model for the competitive advantage of nation helps us to understand the
competitive advantages of a nation in the world of global competition and further gives us
insight regarding the four determinants which can help a country achieve national
competitiveness.
Factor conditions:
Porter highlighted that in order to create a competitive advantage nations must create those
crucial factors of production which are not just inherited. He argues that these factors require
continuous up gradation and the way nations deploy it in specific industries but to be competitive
the factor must be highly specialized and according to industry needs. This means that nations
should create a pool of highly skilled labor or a scientific base (Noorbakhsh et al,2001). These
factors in turn become difficult to imitate and requires huge investments. According to him the
nations succeed in those industries in which they are good at specialized factor creation including
human resources and infrastructure (Porter,1990).
Demand conditions:
Nations where the home demand gives firms a view of buyer’s future needs and where the
buyers put pressure to innovate faster and achieve sophisticated competitive advantage in view
of their rivals, the nations gain competitive advantage in those particular industries. Therefore
the home-demand situation helps build competitive advantage where a specific industry sector is
larger/more evident as compared to foreign markets and where there are most sophisticated –
demanding buyer, the nation’s firm gain competitive advantage (Porter,1990).
Related and supporting industry:
The related industries in terms of technology, channels etc are important sources of innovation
and sustained competitive advantage. Its presence enables nation’s firms to exchange ideas about
the developments in the industry. Further the presence of world class suppliers also leads to a
National advantage as they deliver the most cost-effective inputs in a very innovative and
efficient way (Porter,1990).
Firm strategy, structure and rivalry:
In this determinant of competitive advantage he points out the compatibility of style of
management and organizational structure should be according to the nation industry needs and
that there is no one management style/structure of universal application. Further the
nation/industry competitiveness and success depends upon the choice of education its people
choose. Finally the presence of capable domestic rivals forces firms to innovate and upgrade
hence creating sustained competitive advantage (Porter,1990)

24
According to him all the four determinants are interlinked and have a joint impact which can
ultimately determine the fate of nation international success. Further the governments can also
influence the above determinants of competitiveness by being as a catalyst and encouraging
firms through specific policy approaches i.e. focus on specialized factor creation, enforce strict
product safety standards, avoid intervention in factor currency markets, limit cooperation among
industry rivals, promote goals that lead to sustained investment, deregulate competition etc to
gain national competitive advantage (Porter,1990).
3.1.3. Product Life Cycle theory
Another perspective of “Product Life Cycle theory” (Vernon 1960,cited in Hill 2010 p.175)
determined that as the product matures, the only factor to fight on is cost, production facilities
moves from USA to advanced countries and further when the price factors becomes even more
crucial it moves to developing countries. This research is useful but lacks the knowledge in
today’s world of globally integrated operations and decisions of MNE’s and particularly when it
comes to the firms which are already born global (Buckley and Casson,2009)
3.1.4. Dunning Eclectic Paradigm
Dunning Eclectic Paradigm provides a very good explanation of the type and nature of foreign
direct investment undertaken by MNE’s. The central idea of the paradigm is that in order to carry
out FDI the firm must have (O) ownership advantage to compete with host country firms, (L)
location advantage otherwise it can export and further (I) internalization factors that is if the firm
can exploit its O - factor rather than licensing / contracting production (Zheng,2009).
Ownership (O) advantages:
Ownership advantages are firm’s own competitive advantages i.e. (resources and capabilities). It
stresses that if a foreign firm’s competitive advantage is of more value and state of the art as
compared to the firms in the host country, it will likely to engage in foreign direct investment
(Dunning,2000 & 2001).
Location (L) Advantages:
Location advantages are host countries advantages in shape of immobile, natural and self
produced resources which foreign companies utilize through their (O) ownership advantages in
foreign locations. Further the FDI attractive location is determined by four investment interests
i.e. market-seeking (access host-country market via horizontal strategy), resource-seeking (raw
material, skilled labour & infrastructure), efficiency-seeking chiefly in developing countries (to
access lower labour cost via vertical strategy) and strategic asset-seeking (to access local R&D
and modern technology). However Dunning highlighted that the major portion of FDI inflows
were targeted for market-seeking, efficiency-seeking and resource-seeking motives in developing
countries (Dunning,2000; Narula & Dunning,2000 & Zheng,2009)

25
Internalization (I) Advantages:
Internalization provides an outline for evaluating ways a firm can manage and take advantage of
their core competencies, given the location advantage in host country. It also explains the
rationale behind why firms exploit their internal (O) ownership advantage rather than to acquire
or sell their rights through the open market through inter-firm non-equity agreements etc. Rather
than licensing it is said that the firm will internalize activities through FDI until the cost of
further internalization outweigh its benefits (Dunning,2000)
Even Though it explains FDI at the firm level but it is applicable to the national level by
examining differential country factors of both host / home countries and also identifying country
specific factors crucial for country selection (Zhao,2003). Above and other theories of
International business are not substitutes but complementary and therefore can be included in
eclectic framework (Dunning,2000).
Model Summary
Summarizing the above models in terms of their application on FDI attractiveness and
determinants in general and Pakistan in particular, it gives us certain clues regarding the
exploitation of certain Firm specific advantages (FSA) and host Country specific advantages
(CSA). Firstly, if we study Internalization theory it explains FDI at firm level, it gives a picture
of firm’s resource based view (RBV) and transaction cost economics pertaining to difficulties of
doing business through different entry modes specially when there is danger of knowledge spill-
over and the liability of foreignness in entering risky host countries (Rugman,2010). However,
FSA’s are not merely the criteria in order to exploit FSA’s as firms need to hire host country’s
business students, engineers and scientists. So internalizing firms might not only exploit their
capabilities but look abroad for knowledge-seeking motives and also acquire host R&D facilities
for local market adaptation specially in R&D intensive industries, this means that location
specific factors apart from lower-cost operation locations is not only the criteria and innovation
can come from subsidiaries as well (Chung and Alcacer,2002 and Rugman and Verbeke,2003)
further the host government can offer tax incentives and ensure local value added or job creation
together with political stability to influence entry mode of the firms (Buckley and Casson, 1998).
While the eclectic paradigm explain the reasons of firm’s outward FDI, apart from its O and I
advantages, (L) location specific advantages give us a country level analysis of FDI
attractiveness (advantages such as labour force, market size, natural resources, infrastructure,
legal/education system, governance structures and political/government activities/policies etc are
considered) which are related to asset-seeking, market-seeking, natural resource-seeking and
efficiency-seeking motives (Rugman,2010). Further product cycle theory explains that firms first
exports before switching to market-seeking FDI and then to cost-oriented FDI, means that
technological capabilities in manufacturing and marketing factors (per capita income) of host
country influence location decisions and thus explaining standardization (Buckley and
Casson,1998). Whereas Porter’s competitive advantage of nations suggest that following the

26
diamond and its four elements would help to nurture and create clusters of competitive industries
concentrated geographically (Porter,1990) may be this is the reason that high value-adding
subsidiaries are found in such specialized agglomerations and clusters because of learning,
knowledge transfer / spillover and specialized inputs and labour it provides. For example India
FDI-centred cluster is software cluster in Bangalore attracting Indian migrants and expatriates,
thus creating a locationally-bound asset which MNE’s would access through FDI or contract-
based entry mode therefore education policy and government support has been crucial for the
creation of such clusters (Buckley and Ruane,2006). Competitive industries also help to create
other industries for instance Japan’s consumer electronic dominance created success in
semiconductors that these products use (Porter,1990) thus creation of clusters enables countries
to attract FDI on longer term and tempt investors to ignore other host country policy issues
(Ketels,2004 and Yehoue,2009) it has also been argued that if firms are simply attracted to
financial incentives than the FDI can be quite low and short-term (Afza and Khan,2009).
3.2.Multinational Enterprises Motives and Determinants of FDI in
Pakistan:
In context with motives of foreign direct investment carried out by Multinational Enterprises in
Pakistan, little research has been conducted. The multinational enterprises perspective has not
much been taken in to account as also mentioned in (Akhtar and Buckley,2000) no research has
been conducted to identify the motives of foreign firms which have invested and will be
investing in Pakistan. Akhtar and Buckley(2000) work was based-on to identify Multinational
enterprises motives to invest in Pakistan by conducting survey with 32 MNE’s having wholly
owned subsidiaries or majority owned operations/assets in Pakistan. To have reliability in the
results they have taken in to account different firms across various sectors and nationalities
belonging to manufacturing, trading and services sectors using detailed interviews using
structured and pretested questionnaire with respective subsidiaries/branches of the MNE’s. In
their research the main findings which motivated MNE’s to show interest and invest in Pakistan
were market size and market growth. They found out that the smaller MNE subsidiaries with
having assets of 50-to-100 million rupees were motivated by market growth but on the contrary
MNE’s having bigger subsidiaries holding assets of 51-to-300 million rupees considered market
size as the prime motivation to invest in Pakistan. Therefore market-seeking FDI that is market
size found to be very crucial to 63% of the firms in the sample. They found little evidence on
MNE’s for tapping the potential of efficiency-seeking motives as there were only 3
manufacturing MNE’s exporting for the international markets from Pakistan. This might be
because of protectionist policies long being followed and anti export bias in the trade regime
resulting due to these policies. They highlighted that manufacturing by MNE’s was primarily
done on the basis of market size and to serve the local market resulting in a significant finding of
market-seeking behaviour of MNE’s in Pakistan. The next important motive of MNE’s was to
earn high rate of profit particularly in service sector due to offensive reason that is profit-seeking
/ lack of competition in local market and that was also taken in to account by MNE’s having

27
higher sales/revenue and assets in Pakistan. They also found out other features apart from
market-seeking characteristics by MNE’s to invest. For example, MNE’s in manufacturing sector
were tempted to excess lower cost of labor than higher profits. They also highlighted that firms
in manufacturing sector were more inclined towards lower cost-seeking where as in service
sector firms are found to be in profit-seeking motives. Government privileges were also
highlighted as being the motivator, to beat tariff barriers particularly for larger firms and the
firms exporting from Pakistan. They also found out that psychic distance played a very important
motive by MNE’s of Muslim countries to invest in Pakistan due to geographical closeness and
cultural similarities. Further they found out that the abundance of raw material and lower
production cost also motivated MNE’s to invest in Pakistan. MNE’s motive to invest was also
defined by having excess to cheap labor, lower transportation cost and to overcome tariff and
non-tariff barriers so as to lower their transaction cost. They also found out that in order to
protect their export market in Pakistan and to get access to neighboring market, MNE’s invested
in Pakistan to retain and expand their business size. They highlighted that market size and
growth as a motivator were important and most cited variables for MNE’s investing in Pakistan.
Even though the other above motives can also explain the investment decision of MNE’s in
Pakistan. They concluded by writing that Pakistan’s economy has a potential to attract more FDI,
and Pakistan should bring firm reforms to build a better picture of the economy. Further the
government should support and retain the existing MNE’s investments and the one’s planning to
invest in Pakistan.
A recent theoretical/empirical research by (Khan.A,2011) looked at the political dimension of
attracting FDI. The main objective of the research was to find out the influence of international
political relations in attracting FDI to Pakistan with particular attention to US-PAKISTAN
relations. The research found out that the US-Pakistan relations and US Sanction Policies could
influence the FDI inflows negatively in short-run but has no significance impact in the long-run
particularly for other countries investing in Pakistan. However unlike political relation effect on
FDI, Politically unstable and risky countries have been found to be less attractive for FDI in the
short run as well (Dar, Presley and Malik,2004). Further a recent publication by (Hamdani,2011)
U.N Director, highlighted foreign investors major concerns about investing in Pakistan is law
and order, energy deficit and Political stability, which also lead Boeing to postpone its $5 Billion
Greenfield investment on manufacturing aircraft spare parts in 2010. He also emphasized on
Govt of Pakistan to have partnership with private sector to tap in to extractive industries and
country’s market potential as also mentioned by (Shah and Ahmed,2003) that it is evident that
foreign direct investment brings new technological expertise / know-how, management and
marketing techniques and global contacts therefore Pakistan cannot alienate itself in order to
achieve a good economic health of its economy but this can only be achieved by encouraging
private businesses therefore FDI is the main catalyst but this requires a complete support from
public sector for creating state of the art infrastructure and fiscal provisions that is Tax relaxation
coupled with political stability to encourage foreign investment in Pakistan. Another empirical
research done by (Aqeel and Nishat,2005) looking at trade, fiscal and financial sector

28
liberalization as a catalyst to attract FDI in Pakistan, found that relaxation on import tariffs and
corporate tax would give a positive impact to attract FDI. Further they found out the appreciation
of Rupee being an accelerator to FDI inflows because of sound economic potential and high
returns for investors, while declining value of Rupee also gave them a positive impact on FDI
inflows, which according to the authors decrease the cost of assets and resources. However they
also found a positive impact on credit facilities offered to private sector. The research gives us a
good view of short-term policy initiatives. Another research done by (Khan and Kim,1999)
looked in to the policies related to Pakistan FDI and emphasized the importance of export-
oriented FDI, Infrastructure, law and order, yet highlighted the deficiencies in financial capital
reserves due to foreign exchange appetite of local market-oriented FDI, creating a huge deficit in
balance of payments.

29
3.3.Multinational Enterprises Motives and Determinants of FDI in
Emerging Economies
In order to understand the reasons of other emerging economies of being strong magnets for
attracting FDI from several MNE’s across the world, it is very important to study the MNE
motives and emerging economies determinants of attracting this unusually huge amount of FDI
in their economy.
A (Deloitte,2007) report, mentions that in emerging economies like China and India the
companies are not only investing because of just being a low-cost locations but they are looking
to establish their higher value added activities like production, R&D and marketing operations in
these countries because of the business opportunities and government initiatives. Though in the
report, Deloitte has highlighted that the companies need to manage risk in terms of retaining and
identifying skilled labor but they have stressed the importance of company’s decision to invest in
these economies because of the quality of highly skilled labor they offer for instance China and
India has made education as an integral part of their economic strategy and they are producing
1.2 million engineers and scientists in their universities (tripled in 10 years). However they
quoted the American Chamber of commerce’s member survey that the human resource was a big
concern in china rather than government bureaucracy and corruption issues. The report is also
supplemented with a detailed survey with 446 manufacturing companies from 31 countries
around the globe having different size and annual sales revenue and in-depth interviews with
executives of 8 leading manufacturers. In the report the top three motives to invest in emerging
economies were to increase revenue and capture market share which was reported by 84% of the
executives, reduce cost was 77% and excess low cost suppliers were 69% respectively. While top
three concerns and assessment before investing in emerging economies were legal / regulatory
which were reported by 77% of the executives, supply chain 76% and business continuity 72%
respectively, however terrorism was considered by only 30% of the executives however when
they found that between companies having $1 billion or more in revenue about 10% of them
didn’t consider the terrorism risk at all. Further they also found a surprising result that only two-
third of the executives reported that they have conducted a rigorous evaluation of IP risk
however they have also found in the survey that companies are working on creating efficient risk
strategies by placing their higher value added activities in developed countries or low risk
emerging markets with good intellectual property law enforcement, which was reported by 49%
and 38% respectively further there has been a change in entry mode strategies by companies due
to IP and control issues and used Greenfield strategy considering build Vs buy decisions.
Another study by (Mellahi et al,2003) looked at motives of FDI in Oman and found out that
political and economic stability are the main motives to invest in Oman. They conducted the
research through questionnaires and got 106 responses from companies having different
nationality and sectors established in Oman. Apart from political and economic stability the three
other important motives by foreign firms to invest were repatriation of profit, investment
incentives and legal reforms. However surprisingly they found out market size, purchasing
power and low-cost inputs factors to be least attractive for the investors which according to the

30
authors were pretty much publicized by Oman’s publicity literature to be attractive features.
They found out that companies from EU were less concerned about market size, purchasing
power, economic growth, government policy, competition, access to markets and transportation
cost when investing in Oman. However “repatriation of profit” for GCC countries (Gulf co-
operation council) was not an important motive as compared to EU, US and Asia which
according to the authors was because GCC countries can freely move their capital among them.
Further they said that the possible reasons for not considering market size and purchasing power
as a motive is because of small population size of Oman. Finally they recommended that Oman
should consider the country of origin of the companies and identify/promote those incentives
which attract those particular origins. They further elaborates that market size should be
considered in Oman when targeting banking and construction industry and not manufacturing
sector. However they highlighted that political and economic stability are not alone important
variables and cannot differentiate countries to attract FDI. Another study by (Chen and
Reger,2006) studied motives of German firms to invest in China and found out that most of the
investment was done in manufacturing sector, which accounted for 74.7% and 25.3% for the
service sector. However their survey revealed that the motives of German firms were market
development, capturing market share and expansion while lower labor cost was considered less
important. However these firms market oriented strategies and establishment of local R&D
facilities were clearly focused because of the local market and industrial buyers in China.
China’s importance of its market size, and EU, US and Japan’s (Triads) market oriented
approach in China was also highlighted by (Zhang,2005 and Zhang,2001) he commented that
low labor cost is not a motive for the Triads. Further the triads are bringing in state of the art
technology to compete with local Chinese companies for market share. Further he said that
China’s export promotion strategy that is fiscal incentives (such as Tax holiday, tariff credits and
minimum land fee), cultural / linguistic similarity, geographical proximity, Guanxi and low labor
cost are the main reasons of Taiwan and Hongkong’s major share in inward FDI of China, the
reason being that both were looking at China as being a place for exports to international markets
and a place for cheap labor. This explains the reason of both sending their labor intensive stages
of production and considering China as a place for export-oriented FDI rather than to serve the
local market of China. A study by (Zhao,2003) also found out that China’s undervalued currency
not only helped exports but also facilitated and encouraged FDI because of inexpensive
availability of plants and equipments etc.
A qualitative and quantitative study by (Wei,2005) compared the determinants and differences in
inward FDI received from OECD countries among China and India. The results found China
being most attractive was because of its huge domestic market (rather than low labor cost) and
strong international trade ties with OECD countries, China’s trade relations has also been
emphasized by (Chen and Reger,2006) with respect to Germany, mentioned that dramatic
increase in German FDI has been due to China’s strong trade relations with Germany in the last
two decades. However India’s lower labor cost, geographic closeness, country stability,
declining exchange rate and cultural similarity attracted OECD countries and helped them in

31
minimizing the FDI gap with China. Further Wei has highlighted an interesting point about the
Non-resident Chinese (NRC) and Non-resident Indian (NRI) he said that NRC mostly from East
Asian countries were the main contributors of FDI flows in mainland China because of their
cultural links and business oriented mindset where as NRI’s were not the major contributors of
FDI except in garment industry which were export-oriented, the reason being that most NRI’s
are in different professions related to health, engineering, science and education and their
purpose of sending finances back to India was to diversify their portfolio in the shape of bank
deposits. Further he highlighted the different policies followed by India and China for industrial
development and mentioned that India has long been following import substitution and
encouraging FDI only in higher technology industry where as China is being following export-
oriented policy. It shows that India has to create mass production scale and capabilities in
different manufacturing sectors and encourage export-oriented policy to compete with China
(Rajan et al,2008 and Zheng,2009). Further Wei said that China’s comparatively better
education, abundant resources and infrastructure made it attractive for Efficiency and resource
seeking FDI where as India may only have advantage in skilled labor for IT industry. However
his study has been challenged by (Zheng,2009) saying that Wei considered only 15 OECD
countries, which comprised a small portion of inward FDI for both the countries and said that the
results may have an element of biasness. For that Zheng has taken more countries responsible for
FDI in China and India considering characteristics of both home and host countries. He found
out that major FDI contributor countries and others in China and India are attracted towards
market growth because of purchasing power, economic growth and market prospective offered
by both for market seeking FDI but investors still prefer China because of market size and access
to other export markets. He found out another major finding in which he said that China’s level
of exports and imports are major determinants of FDI where as India’s level of imports unlike
exports does not indicate it as a reason for more FDI from home countries which might be
because of India’s import substitution policy. Further India’s English language skills has also
been a major reason for inward FDI but it overshadow its importance because of its rigid FDI
policies, lower economic growth and corruption perhaps will be the reason to invest more in
China. However lower labor cost and country / political risk is an important determinant for
both. Further he said that China should continue to liberalize its FDI policies, improve legal
system, be more responsible in terms of Intellectual property protection and corruption and
encourage FDI in finance and service sector which will help in restructuring the inefficient
industries. While India has to develop its hard infrastructure and change its import substitution
policy and focus more on export-led growth in order to attract more FDI. All the location
determinants are important but promotional activities conducted by governments to market their
countries is equally important in today’s world as mentioned by (Lim,2008) that investment
promotion agencies (IPA) also play a vital and mediating role in attracting FDI because it
reduces information costs, lack of knowledge and attempts to eliminate the feeling of an
unfamiliar environment for the investors who visit overseas IPA offices. Further in countries
where natural disasters are frequent, early warning systems and efficient crisis management

32
could reduce the infrastructure damage and may encourage firms to invest (Escaleras and
Register,2011).
Summary-Motives & Determinants
While looking at Pakistan and other emerging economies Market size and growth plays a very
important role in attracting FDI. But it may be possible that India and China comparatively huge
market size and growth then Pakistan might tempt firms to invest in both. Despite of market size
being an important determinant of FDI for Pakistan, it is still not attracting a reasonable figure
which also might lead us to think the heterogeneity in FDI determinants and MNE motivation to
invest (Zheng,2009). Further outward looking emerging economies seeking export markets are
also successful in attracting export-oriented FDI (Jun and Singh,1996) It is evident that export-
oriented FDI has increased a lot in Asia specially by Japanese firms usage of host countries as
export platform (Katayama et al,2011) because of differences in factor endowments and fiscal
incentives (Milner et al,2004). Further, China’s location advantage as production location is
because of lower labor cost, technological capability in Knowledge and capital-intensive sectors
augmented by China’s extensive improvement in education system, infrastructure and supply
networks. Therefore countries must provide immobile assets which could match with MNE’s
assets to qualify as an export platform (Buckley et al,2005)Further, Outward-oriented countries
like China attracts FDI due to their export performance, openness and developed infrastructure
thus inward FDI flows further increases export growth in return (Zhang and Felmingham,2001).
This means that intransigent factors like socio-culture, market size and GDP are as well not
predetermined therefore any country can grab the opportunity to increase FDI (Wilhelms,1998).
In the case of Pakistan, market size may affect inward FDI in the long run but not in the short run
(Mughal and Akram,2011). However corruption, political instability, quality of life, social
development (Khan and Amine,2004) current image of terrorism (Hamdani,2011) situation of
hard-infrastructure (Rehman et al,2011) economic stability, government bureaucracy and skilled
labor force scarcity can be the factors discouraging FDI in Pakistan compared to other
developing countries (Khan and Kim,1999). According to (Khan,1997) for 50 years Pakistan
focused mostly on incentive-based policy i.e. concessions to attract FDI, which might be the
reason of diminishing trend of inward FDI.

33
4. Analysis of Pakistan as an Investment Location
4.1.Quality of life and social development
Pakistan is the 6th
most populated country in the world and second in South Asia following India
with a population of 184.8 million yet it has immense challenges. Pakistan’s GNI per capita
based on PPP is $2,678 which is less than India that is $3,337 this implies less purchasing power
of an individual in Pakistan. However it is surprising that the share of population living below
$1.25 a day is 22.6% in Pakistan is much less than India (41.6%) and Bangladesh (49.6%).
Pakistan also has a lower percentage of people without having access to water and sanitation
services i.e. 10% and 55% compared to India (12%/69%) but in Bangladesh only 47% of people
don’t have access to sanitation. Despite of having such development in Pakistan almost 39.8% of
people are living without electricity which depicts that these people cannot even consume
electronic appliances and have access to electronic media whereas in India only 34.2% of people
are deprived from electricity. Further, there is still huge gender discrimination in Pakistan as
females are still not allowed to work at night or in particular industries according to local labor
regulations. In Pakistan only 21.8% of females are in labor force as compared to males which is
86.7% but in India and Bangladesh the percentages of females in labor force is quite healthy i.e.
35.7% and 61.4% respectively. Further the female population above 25 Age, only 23.5%
completed secondary education (at least) compared to India 26.6% and Bangladesh 30.8%
(UNDP,2010). In Pakistan there is still huge discrimination in rural areas where female school
enrollment has been extremely low compared to Bangladesh and India which can be attributed to
family preference to send male kids due to financial constraints(Lewis and Lockheed,2007).
While looking at Pakistan we see that despite of having some favorable indicators among the
South Asian economies, quality of life and the level of social development in Pakistan is still not
up to world standards.
4.2.Infrastructure:
Good infrastructure promotes both vertical and horizontal FDI but a poor infrastructure increases
the transaction cost and limits market access and discourage FDI in developing countries
(Rehman et al, 2011). Pakistan in this regards has been struggling. Pakistan’s road density is
33km of road per 100 sq km as compared to India (129km) and Bangladesh (166km) however
Pakistan’s 65% of paved road are in better condition compared to India (49.3%) and Bangladesh
(9.5%) but the density overshadows the quality (WorldBank,2011). Pakistan’s railway network is
also very small i.e. 7,791 km compared to India 63,273 km which is putting strain on road
system as only 15% of freight traffic is carried by railway (Global Insight,2011) making Pakistan
railway network quality ranked 55th
compared to India 23rd
in the world (WEF,2010). The
situation of electricity is also not helping Pakistan either, Pakistan is facing a power deficit of
almost 5,000MW (Global Insight,2011) leading to power outages causing severe business

34
interruption, specially small scale and large scale manufacturing businesses and at the same time
transmission and distribution losses in Pakistan accounts for 21% due to theft, excess load on
transmission lines and transformers (ADB,2005) as compared to only 5% in Bangladesh but
much better than India that is 23%. (WorldBank,2011). The amount of electricity produced per
capita in Pakistan is 436 kWh greater than Bangladesh (208kWh) but far less than India
(566kWH) (WorldBank,2011) leading to an overall ranking of Pakistan quality of electricity
supply at 128th
place compared to India 110th
(WEF,2010). Telecommunication has been much
better, mobile networks cover 90% of the population where as in India only (60%) and
Bangladesh (90%) but in fixed telephone lines only 1 person per 100 people in Pakistan
compared to India 3. The number of internet users in Pakistan is also healthy that is 12 users per
100 people compared to India (5.3) and Bangladesh (0.4) (WorldBank,2011). The quality of port
infrastructure also stands fairly above for Pakistan, ranked 73rd
than to India 83rd and
Bangladesh 107th
. The above analysis of infrastructure gives us a serious bottleneck in
infrastructure, the overall infrastructure ranking of Pakistan that is 100th
better than Bangladesh
(130th
) but much behind India (91) gives us a picture about Pakistan being unfavorable
investment location (WEF,2010).
4.3.Skilled labor force scarcity:
A technically and educated skilled labor force is a backbone for any economy. In today’s world
countries with highly skilled labor force are selling themselves as a location choice for talent of
the highest caliber (BCG/WEF,2011). Unfortunately Pakistan stands nowhere, literacy in
Pakistan is only 56% (same as Bangladesh) than to India 63%. Only 33% of the students are
enrolled in secondary school and 6% in tertiary education in Pakistan as compared to 60% and
13% in India and 42% and 8% in Bangladesh respectively. The overall education system in
Pakistan is ranked 87th
compared to India 39th
. To top it Pakistan’s percentage of GDP
expenditure on education is only 2.7% (greater than Bangladesh 2.4%) but much less than India
(3.2%). In Pakistan researchers in R&D per million people is 152 much greater than India (137)
but the technicians in R&D per million people in Pakistan is only 64 compared to India is 94
(WEF,2010 and WorldBank,2011). The reason of such variation could be associated with the
brain drain ranking of Pakistan i.e. 68th
(WEF,2010), according to
BCG/WEF report (2011) more immigrants are going back to India from America than moving to
America because of career opportunities and purchasing power. Further Pakistan is ranked 80th
in terms of scientist and engineers availability compared to India (15th
) and Bangladesh (75th
).
R&D Industry collaboration with universities in Pakistan is ranked 81 compared to India 58 but
better than Bangladesh 128. The quality of research institution is another problem in Pakistan
and also receives a poor rank that is 79 compared to India 30. To add to the problem, Pakistan’s
expenditure on R&D as percentage of GDP is only 0.67% compared to India 0.80%
(WorldBank,2011 and WEF,2010). Looking at the statistics gives us a picture that Investors are
shying away due to inadequate skilled labor force in Pakistan.

35
4.4.Corruption:
In the medium term, high corruption levels play a vital constraint to growth and ruin investment.
In Pakistan corruption remains widespread at all levels. The legal system of Pakistan is
mistrusted not only because of its slowness but also because of corrupt practices (like political
influence) and a tool of administration. Bureaucracy is also slow and disruptive because of
bribery and cronyism, making foreign business officials to frequently visit government offices
(Global Insight,2011). Further corruption has been recognized as the most problematic factor for
doing business in Pakistan (WEF,2010). Corruption has also hindered accountability and law
enforcement in Pakistan. In a recent Transparency International report (2010) Pakistan is ranked
143rd
whereas India (87) and Bangladesh (134). The reason of such rampant corruption includes
low salaries at junior civil servant levels and a culture of Political association and support. Low
ranked officials require small payments called as “chai-pani” or “tea-water” to process
applications whereas high profile civil servants and politicians seek huge kickbacks on major
investments. Due to such corrupt practices many (not all) of the foreign companies found giving
bribes as unavoidable. This deteriorating situation puts a key challenge for Pakistan on
eliminating corruption in order to attract foreign investment (Global Insight,2011).
4.5.Terrorism:
Violence in certain countries in general and Pakistan in particular is gaining attention of global
policy makers as global terrorism remains a serious threat. Further due to security force
operations in tribal areas, the rising number of IDP (internally-displaced-persons) population in
Pakistan is ruining recovery from violence because of population movements into urban
locations causing the potential for crime, social tension, and communal violence
(WorldBank,2011). Osama Bin Laden’s presence in Pakistan has also aggravated suspicion
among the countries despite being close allies in the war of terrorism, leading to further
deterioration of country’s image. The terrorist prime targets in Pakistan are government
buildings, security forces, places visited by foreigners and infrastructure (Global Insight,2011
and EIU,2011) Further the trade-and-energy corridor between Gwadar port (Pakistan) and
Xinjiang (China) has been negatively affected by the risk of Violence (Duchatel,2011). All such
developments has led to a lower ranking, placing Pakistan at second last position that is138th
in
terms of business cost of terrorism and 126th
in Crime and violence as compared to Bangladesh
124th
/118th
and India 127th
/67th
(WEF,2010). The most serious concern is over ranking of police
services reliability in Pakistan which is completely under political influence and ordered not to
think but to do (Tiedemann,2009) is ranked 119th
but better than
Bangladesh that is 123rd
(WEF,2010) which leads us to think that security and terrorism would
be an extreme deterring factor for investment in Pakistan.

36
4.6.Political stability:
In today’s world political instability rather than economic difficulties in a host country, influence
investor view of the overall political risk. Today, Political instability tops the list of government
or bureaucratic obstacles in emerging markets (MIGA,2010). Unfortunately, Pakistan has been
“see-sawed” between democracy and military rule throughout its history (Global Insight,2011)
which has lead to abrupt administrative and economic policies changes thus deterring FDI flows
in Pakistan due to fear of government collapse and the policy changes associated with it
(Zaidi,2011). Further Government instability and military coups have been recognized as the
second most problematic factor for doing business in Pakistan among the top five factors
whereas in India and Bangladesh political instability does not comes in the top five problematic
factors (WEF,2010). In Pakistan few elite families have dominated political and commercial
environment with landlords taking advantage of rural votes. This rigid status quo has prohibited
emergence of vibrant middle class and restricted intellectual elites to come in power thereby
hindering political development (Global Insight,2011). Further, The Global Insight (2011)
reports highlight political risk in Pakistan as ‘Extreme’ giving a score of 4.5, whereas in India
(the largest democracy of the world) it is highlighted as ‘Medium’ with a score of 2.75
considered as stable and Bangladesh as ‘High’ with a score of 3.50 which shows that Pakistan is
in a serious political turmoil which has been seen by the investors as a big risk to invest.
4.7.Economic stability:
Investors unlikely to invest in countries where economic indicators are unfavorable that it
becomes difficult to forecast about how the host government adjust to external and internal
economic shocks. An economically strong and stable economy provides commercial
opportunities due to government and private sector investment in projects also ensuring
purchasing power in the hands of the people (Khan and Kim,1999). Unfortunately, Pakistan is
dealing with multiple economic shocks. The inflation in Pakistan was 11.7% in 2010 which is
again expected to reach a double digit figure of 16% in 2011 is incomparable in south Asia
region, only Nepal’s inflation hits to a expected double digit figure of 10% which is
comparatively much controllable than Pakistan (ADB,2011). This double digit growth of
inflation could lead Pakistan in to additional poverty and inequality. Pakistan’s high inflation
with low GDP growth that is 4.4% compared to India (9.5%) and Bangladesh (5.8%) is making
the economy more vulnerable to internal and external shocks (WorldBank,2011 and
Hussain,2011). Further Exports of goods and services of Pakistan accounts only 13% of GDP
compared to India 20% and Bangladesh 19%. Whereas, Pakistan export of computer,
information and communication accounts only 39% of total services export which is much less
than India (70%) and Bangladesh 72% (WorldBank,2011) while only the textile sector is
dominating the overall exports of Pakistan (Global Insight, 2011). Further Pakistan is suffering
from ruthless fiscal imbalances resulting from high government expenditure and low revenue
collection. Pakistan has one of the world’s lowest tax-to-GDP ratio at approx 10% with only
specific sections of society are taxed whereas feudal lords and influential politicians escape

37
themselves from being taxed due to lack of transparency and weak audit/enforcement
procedures. Adding to this problem, delays in crucial fiscal reform that is inclusion of reformed
general sales tax (RGST) and removal of expensive energy subsidies dictated by IMF for $11.3
billion loan will threaten to keep Pakistan away from external financing sources as IMF remain a
main source for Pakistan (Global Insight, 2011). Additionally, unforeseen increases in defense
that is 3% of GDP (usually understated) and relief expenditures accompanied by the
government's offensive against the Taliban and Pakistan’s heavy reliance on expensive oil
imports accounting 28% of total imports and shockingly 35.4% of total electricity production has
not only hindered fiscal stability but choked up resources for public investment and human
capital development thus further creating inflationary pressure and foreign exchange scarcity
(WorldBank,2011; Global Insight,2011; Ahmed,2011 and Fazl-e-Haider,2011). This current
precarious economic situation of Pakistan will not only sabotage internal and external confidence
of economy’s prospect but can be the factor to declining FDI.

38
5. Conclusion and Recommendations
While looking at the analysis of Pakistan as an investment location, it gives us a clear picture that
terrorism, political instability and corruption are the major reasons for existing and potential
foreign investors to not invest in Pakistan, reason being that all the three factors have multi-
dimensional and interlinked impacts on the overall business environment of Pakistan may it be
economic stability, infrastructure and skill development etc, the above three factors are keeping
market-seeking, resource-seeking and efficiency seeking FDI away from Pakistan.
On the security front where terrorist’s potential targets are many (especially foreign companies),
Pakistan must create innovative and efficient intelligence system and screening procedures with
a notion of information sharing and collaboration among the major stakeholders using
information technology as a key tool to encourage two-way communication. As rightly said,
“Quickly identifying terrorist threats and infrastructure vulnerabilities calls for cooperative, fluid
information networks. Reducing barriers to information - sharing rather than compartmentalizing
secrets represents the greatest challenge in fostering such networks”. This means that state, local
governments, private sector and public have a key role in identifying suspicious activities and
individuals thus sharing information would give a larger pool of information about the security
(Steinberg et al,2003). Another angle to terrorism is the use of military force to curb militancy in
Pakistan. This approach has increased the support from non-militant individuals or groups who
have lost their loved ones as a result of military operations in tribal areas. The strategy to counter
terrorism needs to be reviewed by the Government and the institutions. Military intervention
must be minimized; peace building activities must be executed in parallel and solid development
projects needs to be implemented in the affected areas. Conflict resolution through dialogue is a
must to control militancy. Militancy is becoming spread due to 2 more factors: Poverty and lack
of Education. Militancy gets more support from the poverty stricken areas of Pakistan. Reviewed
strategy must include a plan to alleviate poverty and start vocational education programs to
engage the youth into building their careers to earn a living. Maddarsahs needs to be regularized
by a Governing body to address the issue of religious radicalism in the society and teach the true
essence of Islam at these institutions (Siddiqa,2011) However, to counter terrorism Police should
be used as a tool for law enforcement not military. For that proper training, forensic services and
adequate equipment and complete coordination with the intelligence agencies should be
implemented. Further Police should be depoliticized and promotions should be done on merit
while corrupt individuals should be punished publicly (Abbas,2011).
On the political front, Pakistan has to promote political stability at any cost, with continuity in
economic and administrative policies to retain and attract foreign investors. Additionally,
military coups should be discouraged at all levels and governments should be given time to
complete their tenures while encouraging young intellectual elites to come in to the political
arena.

39
Further to fight against corruption, Pakistan has to promote civil service professionalism with
improved pay and incentive system; bring transparency in public expenditures through internal &
external audits, with clarity in rules of budgeting and procurement; eliminate inefficient
regulations and bring transparency in effective ones; establish and enforce meritocratic i.e. merit
based system; encourage competition and transparent promotion policies; bring judicial
independence while reducing protection from trial of judicial, legislative and executive figures
(Todaro and Smith,2002) and use information technology to strengthen reporting and monitoring
the flow of information to reduce corruption and red-tapism.
On the skill front, it is high time for Pakistan to increase expenditure on education and R&D
while reducing its bulk expenditure on military. Pakistani state need to improve educational
system and increase enrollment rates in secondary and especially tertiary education, by providing
equal standard services to universities in infrastructure, facilities and capabilities. The education
system must develop those skills which are required by the industry, through encouraging
university-industry collaboration as to match the supply and demand of practical/theoretical
skills while on parallel vocational training of non-degree students should be on top priority with
a long-term view to forecast present/future skill-demand yet upgrading the skills accordingly
through public-private partnership. Further Pakistan should provide tax incentives for local and
foreign businesses to train employees. The brain drain ranking of Pakistan is also an alarming
situation, to deal with this problem the government should specially design a policy to provide
better career opportunities, security, fiscal incentives and a promise for economic growth so that
the educated and skilled Pakistani living abroad could come back. This would not only enable
acquisition of innovation, new ideas, cross-cultural skills but would also encourage foreign
companies to access the talent pool of Pakistan (WEF/BCG,2010 and 2011).
Extending my discussion on poverty alleviation and educational enhancement, another element
to improve the matters on social development and quality of life can be done by limiting the
massive growth of population in a small country like Pakistan. This could be achieved by
educating people in rural areas specifically women through child-care and family planning
services, further the government should subsidize education/training for women in rural areas so
that their families could encourage them. Additionally the government should remove restrictive
labor laws pertaining to female participation in certain industries and allow them to work at
equal standing. Such steps would not only encourage smaller families and limit poverty but
would increase their purchasing power and women contribution in productivity (Todaro and
Smith,2002 and Lewis and Lockheed,2007). Further, the government should seriously work on
the basic needs of the rural areas by providing good water and sanitation services and using solar
energy or solar home systems to generate electricity(Chakrabarti and Chakrabarti,2002 and
Paul,2011). By implementing the above steps would not only impact trade, commercial activities
and productivity but would make particularly the rural areas active consumers and encourage
FDI.

40
Further Pakistan must improve the infrastructure if it really wants to encourage foreign direct
investment. Pakistan government has to show willingness and be very serious about it. Firstly,
they need to improve the road density and expand the network while ensuring quality and
reliability of the roads. Secondly, they should expand the railway networks so that the strain on
roads and the freight traffic could be minimized and diverted, this would bring efficiency in
transport infrastructure. Further Pakistan must address the challenges of power and distribution
losses by ensuring investment in new transmission lines, transformers and minimizing theft at the
same time. Pakistan must encourage public-private partnership and also encourage FDI in power
sector to minimize the power deficit (WorldBank/ESMAP,2010). Therefore, Pakistan should
divert resources from the creation of nuclear weapons while encouraging its commercial use.
Further Pakistan must encourage investment on supplementary energy modes that is extraction of
coal from Thar, Sindh and wind power in coastal-areas/hill-terrains and solar-power generation
as Pakistan receives high solar radiation intensities (Sahir and Qureshi,2008 and WEC,2010) to
minimize the load on oil power-stations and hydro-power generation which accounts to 35.4%
and 30.3% of electricity production (WorldBank,2011) and at the same time educating people on
the usage of energy saving techniques.
Lastly, if Pakistan really wants to attract foreign direct investment it must work on its economic
management. Pakistan must review and improve its fiscal and monetary policy on urgent basis.
The government needs to improve its revenue collection and include/collect all sections of the
classes on tax net and at the same Pakistan must implement RGST as a long-term solution to
increase revenue and gain IMF confidence. Further, it’s high time that Pakistan must cut its
massive military expenditure while at the same time the rising oil prices must encourage Pakistan
to minimize its oil imports by producing ethanol (Bio-fuel) from sugarcane’s molasses as
Pakistan is the 5th
largest sugarcane-producer of the world (IIED,2010). This could be achieved
by following Brazil’s initiative on bio-fuel as strikingly 80% of Brazilian cars can have various
blends up to 25% of ethanol with fuel and its further wastage i.e stalks/Bagasse are used for
electricity generation in Brazil (Hira and Oliveira,2009) However, Pakistan also need to increase
its sugarcane yield by using efficient agronomic practices (IIED,2010). Further, Pakistan must
diversify its exports and provide support to other sectors rather relying only on textile sector as it
could be highly vulnerable to changes in international policy regime (Enderwick,2007).
Therefore, the above policy reforms would not only decrease inflationary pressure and leads to
fiscal stability but would divert resources to invest in development projects like encourage the
creation of clusters/export processing zones, decrease volatility in GDP growth and increase
foreign exchange reserves etc. Such strides would not only minimize the overall volatility in the
economy of Pakistan but would encourage FDI (Enderwick,2007 and Global Insight,2011).

41
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