The myth of foreign investment - I

ARTICLE: Dambisa Moyo's book titled "Dead Aid" confronts one of the greatest myths of our time that billions of dollars sent in aid from wealthy countries to developing nations have helped reduce poverty and increase economic growth. Moyo successfully postulates that the so-called aid has trapped developing nations in a vicious circle of aid dependency, corruption, market distortion, and further poverty, leaving them with nothing but the "need" for more aid.

Presently, Foreign Direct Investment (FDI) is the catch word for fuelling economic growth in developing nations. Therefore, FDI is vigorously sought by countries for stirring economic growth and attracting foreign investment has become basis of economic policy of under developed economies. For the last many years Pakistan has been trying to attract FDI. It has been undergoing a process of economic liberalization and adopting policy measures to attract FDI and up to December 2016, it had received FDI of $ 42 billion.

Many countries like Ireland, Singapore, China and India are known to have benefitted from FDI as hosts to FDI while at the same time many other countries have failed to reap such benefits as hosts. Therefore, as to whether the Pakistan economy has benefited from FDI or to what extent it has, needs to be examined for finding the actual position on ground and more so for any future FDI policy.

Types of FDI

It may be kept in view that FDI is not transmitted or takes place in one singular form, but there are various forms adopted for the inflow of FDI into a host country.

One such form of FDI is called export-platform FDI in which funds from a foreign source country going into a destination country are for the purpose of generating export to a third country, like Ford's manufacturing plant in a host country is exporting FDI output to third countries or FDI can be horizontal through which a foreign firm duplicates its home country-based activities at the same value chain stage in a host country like car manufacturing plant in Pakistan is for local sale. FDI may also take other forms like vertical FDI or financial FDI or services sector FDI, etc.

FDI takes multiple forms but export-platform FDI is the most preferred one in which foreign firms investing say in Ireland export Ireland FDI output to third countries or foreign-owned service enterprises account for 89 percent of the Ireland 's service-sector exports. The case of Ireland is no exception at all.

Economic benefits to a host country depend more on the form of FDI received by the host economy rather than the benefits are much pronounced for export-platform FDI and the position of $ 42 billion FDI received in Pakistan up to 2016 stands as such.

Up to 2016, the sectors of Pakistan's economy namely food/food packaging/drinks, vehicles, cigarette/tobacco and construction in all put together received FDI of $ 13 billion but the total annual Pakistan export from all these sectors in all was not even $ 40 million. FDI received in the country's textile sector is not even one-half of $ one billion and the export of our textile sector alone is more than $ 13 billion which is not at all based on FDI. Further, FDI received in surgical/sports goods sector is zero but exports of this sector alone are of $ 700 million. Moreover, there is FDI of $ 2.1 billion received by country's pharmaceutical/OTC sector but it is not for the manufacture of organic chemicals or active pharmaceutical raw material and is based on doze packing from raw and active material imported mostly from parent foreign MNE creating minor doze pack export. The foregoing makes it clear that FDI received in Pakistan so far is totally for local sales or import substitution and is not export-platform FDI for export.

The foregoing observation that FDI has not created exports or economic turnaround for Pakistan is supported by other empirical studies of the subject (AA Dar) which concludes: "... FDI had no impact in improving domestic technology and exports" in Pakistan and that "the cross sector results also showed no spillover impact of FDI of a particular sector to other sectors" in Pakistan. This is also admitted in the official report (2018) of Commerce Division, Ministry of Commerce that "... During the last five years, the cumulative FDI inflows into Pakistan were $ 10 billion, out of which 81% has gone into non-manufacturing".

Even otherwise, Pakistan's case offers a dismal comparison with other regional countries such as Vietnam's or India's which have high ratios of exports to third countries from FDI operation output. FDI in India has created exports and in 2018, this South Asian country exported vehicles worth $18.2 billion, automobile parts/accessories $5.1 billion, organic chemicals of $17.7 billion, pharmaceutical in doze packs of $14.3 billion or machinery/computers export of $20.4 billion. Thus FDI in India has resulted in creating large exports from India and in the case of Pakistan, FDI-based output exports are almost near to zero.

Asian Development Bank became aware of the dismal Pak FDI contribution and thus got country's FDI reviewed through (EDRC-Yun H KIM) Report No. 66 more than 18 years back and that report had concluded as under:

"... That the inflow of FDI has largely been directed towards...production for domestic market while little has gone toward export-oriented industries ... that FDI has worsened the country's trade balance... Further it involves the problem of large cash outflow by IPPs for debt-dividend and fuel payments."

The ADB-sponsored report concluded that Pakistan's FDI had no positive effect on Pak economy. FDI in Pakistan's power sector is not a subject of this column. Pakistan's power FDI is based on sovereign guarantees and purchase agreements with assured return on investment in dollar terms to foreign investor, thus the country's power sector FDI is not FDI in the real sense of the word sense and the negative comment of ADB report on Pakistan's power sector FDI remains valid to the day. Moreover, Pakistan's energy has a solar/wind energy mix at 1% against minimum of 10% in parallel countries.

The study of the causes of Pakistan's failure to get economic benefit from FDI illuminates that this failure is mainly due to an unsuitable FDI legal framework and policy in force in Pakistan or by not prioritizing sectors for receiving FDI as recommended by professional institutes like Mckinsey which prescribe that for economic turnaround FDI must bring into the host economy the "ability to tap into global demand growth through export" and Pakistan's FDI policy is far away from the professionally recommended FDI parameters.

(To be continued)

(The writer is Chairman of National Industrial Parks)

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