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Factors inhibiting foreign investment in Pakistan.

Factors Inhibiting Foreign Investment in Pakistan

Like other developing countries, Pakistan inherited a pre-dominantly rural economy with little industrial activities on the eve of independence. As a result, recourse to inflow of foreign investment was inevitable. The industrial policies of 1948, 1959 and 1984 highlighted the role of foreign investment and the Government encouraged this inflow with various concessions and facilities. The objectives of industrial policies pursued from time to time were expansion in industrial production, export and employment, training of technical personnel and ultimately the improvement of standard of living of the people. Maximum emphasis was laid on private enterprises in the development of the economic resources of the country barring brief interregnum of the first half of 1970s.

Since Pakistan's economy is predominantly agricultural, the Government has been placing emphasis on industrial development. Foreign participation has been particularly welcomed in industries which are eigther highly technical such as electrical and petro-chemical complexes or industries where modern technology is required such as electronics and pharmaceuticals. As there has been notable shortage of foreign exchange in the country, the Government has been encouraging foreign participation in export-oriented and import-substitution industries.

Major Fields

Foreign investment has mostly been in the industrial sector where the market was large enough to absorb industrial output of at least one minimum economic size! plant or where capital or technical know how was not available locally. The whole philosophy behind foreign investment is to enter into the market where the foreign investors can supply the capital goods, technical know-how, scientific management and marketing or any other elements of production where the local counterparts are unable to establish business.

Generally speaking, the foreign investment has come in fields where either the total fixed cost of the plant was too high to establish the plant by the local manufacturers alone or the industry was so new that without foreign technical collaboration it could not run efficiently. The major share of foreign investment has flowed in the following fields because of the complexities and capital intensiveness:

* Fertilizer

* Pharmaceutical

* Edible Oil

* Petroleum

* Cigarettes

* Electronics

The areas of foreign investment have been limited because of several factors among which local environment was prominent. As a result, foreign investors shied away from other sectors and therefore were not all-pervasive. Another characteristic was that foreign investment mostly related to formulation or processing and no basic manufacturing was undertaken such as in pharmaceuticals. As a result, the technology transfer could not take place as originally envisaged. There is no doubt that the foreign companies in Pakistan including the pharmaceuticals performed comparatively better than local ones in terms of basic management, quality control and research and development. But the basic problem has been that these ingredients could not be indigenised for want of technology transfer from the investing countries. The foreign companies were interested in insulated industrial ventures with little spread of backward and forward linkages of foreign investment. They keep the manufacturing formula as highly secret and the concentrate in the case of beverage is directly imported.

The result of the localized type of foreign investment was that the profits and dividends were repatriated to investing countries in larger amount than would have been otherwise. Another factor is that foreign investment has formed a tiny amount of total investment. In 1986 inflow of foreign investment was only Rs. 1,528 million or 11 per cent of total manufacturing capital formation in the private sector.

The foreign investment in Pakistan has come from over thirty countries of the world. By late u960s, United Kingdom was the most active participant and claimed over one third of the total foreign investment. Other countries in descending order were United States of America, West Germany, Japan, France, Switzerland, Yugoslavia, Netherlands, Italy, Belgium, Australia, Canada and Denmark.


Over the next twenty years (i.e. between 1967-86), the position has somewhat changed and the United States of America now tops the list followed by United Kingdom, Saudi Arabia, Switzerland, Hong Kong, France, UAE, Japan and Kuwait. It will be noticed that the Arab countries have now entered into the investors' list because of the huge accumulation of foreign assets as a result of the oil boom of mid-1970s.

Although the Government of Pakistan has from time to time provided various incentives for foreign private investment, nonetheless foreign investors complain of red tapism and labyrinthine regulations regarding sanctioning. Among other factors, procedural requirements continue to be time consuming and tortuous for the approval of joint ventures particularly in matter of determining technical fee and royalties despite the recent maximum liberalisation of sanctioning conditions for traditional projects. In quite a number of projects which involve transfer of intricate technology, the demand from foreign collaborations had been usually contrary to guidelines to the industrial policies framed by the Government of Pakistan. As a result, deferment of cases pending studies and examination confront the sponsors.

Social and political climate is pre-requisite for determining the flow of foreign investment. Unfortunately, in Pakistan this climate has not been much favourable. On the political front, the change in Government policies from time to time has affected the foreign investment, e.g. in the early 1970s, the nationalization drive hurt the investment climate although no foreign venture was nationalized drive hurt the investment the Foreign Private Investment (Promotion & Protection) Act 1976, was passed. The fact is that when the local capital dries up or shifts abroad, foreign investors cannot be lured to invest in Pakistan.

Over the last three or four years, the law and order situation in the country has deteriorated which has affected the overall investment climate including the foreign investment. The law and order problem creates risks which the foreign investors may not like to assume.


The primary strategy for attracting foreign investment is inflow of foreign technology which has not been achieved as discussed above. The second point is the emphasis on employment generation as Pakistan's labour force has been growing at a fast rate because of the rapid population growth of over 3 per cent per annum. It is pertinent that employment generation remains one of the most significant objectives of industrial policy.

The old, dilapidated foreign plants established during 1950's or 1960's often suffer from marketing, management or other problems. Revamping to rehabilitate and expansion of the existing archaic plants particularly with regard to induction of new management techniques or technology will help improve their performance to the benefit of both the foreign entrepreneurs as well as domestic economy.

It has been observed above that basic manufacturing has been lacking in pharmaceutical industry. This factor calls for the creation of production facilities of necessary raw materials. It is, therefore, strongly felt that vertically integrated plants should be encouraged which will be able to reduce dependence upon perennial imports of raw materials as well as stem larger outflow in terms of dividends and royalty payments.

In the past, emphasis has been on the high-tech industries such as pharmaceutical or fertilizer but foreign investment need not necessarily be acquired for high-tech industries. Instead, other industrial areas such as textiles, readymade garments, food processing, etc. could also be candidates for foreign investment. In addition, demonstration projects by foreign investors can be established in different areas of existing traditional industries which will be able to spur quality standard or otherwise improve the performance of other units within the industry. This fact will have much sought after spread effect where local units will try to ape foreign ventures in order to compete and grow which will, in the end, boost the deplorably low productivity level. Pakistan has reached a level of industrial development where further acceleration is seriously hampered by lack of thrust of exports in order to narrow or close the burgeoning import-export gap over the years.

As a result, a shift from the import substitution or catering local demand to export would lead to launching of projects if the foreign private participation can be attracted to participate. It may be suggested that in large size projects with compulsory emphasis on export, conditions for foreign participation may be liberalized with permission for over 50 percent equity investment. This would accelerate the inflow of sophisticated technology which undoubtedly is the key to the viability of industrialisation.


Foreign investment in Pakistan has been forthcoming in certain selected sectors such as fertilizer, edible oil and pharmaceuticals and have shown spectacular progress. Performance in terms of productivity of multi-national companies is quite respectable. There is no doubt that the productivity of foreign ventures is high as they pay high wages and perquisite to their employees, extract high labour input from the same number of employees and create neat and clean atmosphere within the factory premises. Unfortunately in Pakistan the technology of foreign investors could not be indigenized because they were unwilling to part with the technology secrets and for want of spread effect due to absence of forward and backward linkages. Policy shifts over the different time periods have however, discouraged the foreign investors from coming in a big way, and in varied fields. Trilateral arrangement has recently emerged in which public sector and private sector from Pakistan and abroad join together in different industrial spheres. Such arrangements have proved very fruitful interms of performance and should be extended to Heavy Machinery Complexes, petroleum and power generation sector.

Lack of infrastructural facilities such as electricity, telephone, road etc. has lately emerged as constraint for industrial development including foreign investment. Any attempt to overcome the bottlenecks will, therefore, help promote foreign investment in Pakistan.
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Author:Hussain, Syed Habeeb
Publication:Economic Review
Date:Oct 1, 1990
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