Foreign Investment

Shahzad Kazi

The factors that influence foreign investment.

We constantly hear from various government officials about how the government is trying to encourage foreign investments in Pakistan. At the same time we hear of foreign firms shutting down their businesses in Pakistan and leaving.

Identifying the reasons for foreigners willing to invest in a country is not hard; it is the change from status quo to attract foreign investment that is hard. The key factors attracting foreign investment can be divided into three distinct groups. These groups relate to ease of doing business, economics and personal comfort factors. If we look at countries that have seen foreign capital inflows, at least two of the three groups of factors are present. Unfortunately none of the three exist in today’s Pakistan.

If our aim is to promote Pakistan’s economy by attracting foreign investment then we as a nation will have to put in a lot of hard work and effort to make sure that at least two of the three factors are present.

Economic Factors

The first thing to note is that no company or investor would risk his capital if he did not expect to make a significant profit from his investment. In order to ensure profitability, the following things need to be present:

1. Significant local market for goods and services. This is dependant upon the purchasing power of the population and the size of the middle class that forms the bulk of the consumers who drive demand.
2. Availability of raw material at low cost with consistent supply.
3. Cheap and uninterrupted power sources.
4. Availability of cheap and skilled labor.

We can see that in Pakistan 1 and 3 are non-existent. Even if 1 is non-existent, but a sufficient export market exists for goods and services produced, an investor would still be able to get a good return on his investment. So it may be safe to assume that it is item 3 that needs to be focused on.

Ease of Doing Business

This group relates primarily to the laws in force and bureaucratic and other hurdles. Investors are not happy with hurdles in going ahead with their plans. Any company or business owner would like to have a minimum in terms of paper work and permits that allow him to work. We can see from the list below that this group of factors is a major impediment to attracting investment to Pakistan:

1. Simple and few regulations.
2. Dealing with few regulatory bodies.
3. Corruption (Lack of).
4. Non-restrictive labor policies.
5. Unions, pressure groups and extortionists.
6. The ease of getting work permits for expatriate staff.

Unfortunately, there are major issues with all six factors listed above and if Pakistan cannot take care of these, let alone attracting new foreign investment, we can safely say goodbye to the existing one.

Personal Factors

Most multi-national companies start off their businesses with expatriate management and as the company develops a sense of comfort with local management, the expatriates are gradually pulled out and locals are inducted into management. In addition to this there is also a constant stream of technical experts and executive management into the county from overseas. Therefore, a key factor here is the sense of comfort that senior management develops with a country and the convenience that they have in traveling to and fro to that country. Some of the factors that I am going to list below may be categorized as intangibles, but play a very important role in deciding where investment goes.

1. Safety and security of personnel. This is the most important factor of all and needs the most focus. If an investor fears for his own life in traveling to a country, there is no way that he will invest in that country no matter what the expected returns are.
2. Before even considering any economic issues, the first thing that an investor sees is the image of a country. If all a person sees on the media is images of bearded mullahs burning flags and vehicles and militants carrying guns, then one can safely assume that the thought of investing in such a country will not come into anybody’s mind.
3. Assuming that a potential investor applies for a visa, gets it and then lands at the airport, the experiences that he has gone through in the process of entering the country are very important and will remain in the back of his mind and will ultimately influence the investment decision.
4. Familiarity and comfort. This is an intangible factor, but is very important. When a westerner goes to a country and spots a Wal-Mart or a McDonalds, he immediately feels at home. Therefore, a proliferation of foreign retail chains actually encourages large foreign investment in a country.
5. Quality of housing for expatriates.
6. Quality and availability of shopping venues.
7. Entertainment. This is another factor that is often overlooked by planners, but is very important. When an expatriate is living in a foreign land away from family and friends and is cut-off from familiar surroundings, his need for venues of entertainment is much higher than the need that he would have living at home. It may be just a good restaurant, a bar or a movie theater, but the need is always there. A few good golf courses also help in a big way.

I believe that the personal factors play at least as major a role if not more as the other two groups in influencing an investment decision. Other than 4,5 and 6 above, we can see that a lot of work has to be done on fixing the rest.

Safety and security of course is the single biggest issue currently facing Pakistan in all avenues. The image of the country also needs bolstering and the policy makers would do well in setting up media and public relations campaigns.

In summary the key factors hampering foreign investment in Pakistan are Law and Order, Bureaucracy and Corruption, which at the end of the day are all, linked by a common thread.