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Prospects for foreign investment.

Extracts from Foreign Business Collaborations in Pakistan. The experiences of Canada, Japan the U.K. and the U.S.

The report has based prospects for foreign investment mainly on the incentives provided by the government. But the constraints it has listed are based on field studies and experiences of those who have already made investment in Pakistan which need attention not only of the government agencies, but also of the local businessmen themselves who are to serve as catalysts for foreign investment.

Pakistani Businessmen

The report says Pakistani businessmen in general inherited cash and capital assets as well as the business practices from their fathers. By Western standards, these businessmen are barely educated. Their business decisions are made on the basis of instinct and gut feeling, rather than market research. Their businesses are mainly operated with the assistance of family members, and are controlled by way of complete ownership. Outsiders are rarely placed in executive positions nor are they allowed to make key decisions. The report adds that in order to compete in the global economy, Pakistani businessmen have more recently started educating their children, usually by sending them to North American management schools. However, as businesses are still controlled by the old guard, conflicts often arise between the father's decisions based on instinct and experience and the son's based on the teachings at management schools.

Profitability

It is in this connection that the comments of the report made in the context of profitability of joint venture projects are relevant. It says, foreign companies interviewed reported that profitability was higher for those joint ventures where the attitude towards control was relaxed as compared to those enterprises where control was considered necessary. The report says: "It appeared that when foreign companies placed more responsibility on Pakistani partners, it induced them to perform more effectively. This view was further supported by the evidence that the profitability of joint ventures was not necessarily related to the level of foreign equity ownership".

Law and Order

About the general investment climate, the report says, a deterioration of law and order in the industrial heartland of the country, political tensions between the centre and provinces and conflicting notifications about fiscal incentives from different ministries have resulted in industrial dislocation, regional flight of capital and a lack of response from foreign investors. The report acknowledges the improvement in investment climate made in the industrial policy, but says: "Unless necessary infrastructure facilities are provided and a business environment conducive to long-term investment created, local and foreign investors will be unwilling to implement new projects".

Tax Incentive

The report says, compared with some of the other Asian countries which have also devised policies to attract foreign private investment, tax incentives in Pakistan are not as attractive as they first appear. In this connection, it mentions about the corporate tax rate, vague determinants of tax rate and valuation problems which are created by depreciation of the rupee.

Transfer of Technology

The report mentions complications in transfer of technology as a major constraint for foreign investment, although Pakistan needs technology on a priority basis in a wide range of investment activities. According to it, the main areas where latest modern technology is needed in Pakistan include agro-based industries, chemicals, mechanical engineering components, metallurgical products, machinery and equipment and electric and electronic industries. The report says, major obstacles in the path of flow of technology from Canada, Japan, the United States, the United Kingdom and other European countries to Pakistan are the local environmental and market conditions which include excessive bureaucratic controls, shortage of skilled workers, an over-ambitious indigenisation policy, high levels of protectionism, an inefficient tariff structure and a lack of competition. It says, the absence of incentives for improving technology and a lack of pressure to upgrade quality are perhaps the most disturbing aspects of the technology problem in Pakistan.

According to the report, the low literacy rate is another barrier to the acquisition and mastery of technology. It says, some of the appraisal reports in this area indicate that the academic standard of the country has been continuously deteriorating, and as a result, the quality of scientific teaching and research has suffered.

It says, in spite of these constraints, a number of companies reported in interviews that they were prepared to invest resources to improve the quality and productivity of their industrial operations in the country. However, these companies have been held back to a certain extent by their inability to rely on small firms as sub-contractors. In many cases, the sub-contractors lack the expertise to produce goods of agreed upon quality and they do not deliver the goods on time.

Protectionism

According to the report, some interviewees, operating in the key industries of Pakistan, complained that high protectionism has slowed down their becoming efficient and gaining a level of maturity. They are frequently required to use high-cost and low-quality domestic materials and components and they have to pay high duties on imported components not manufactured locally. As a result, their production costs increase, prices to consumers rise, and opportunities for exports of their products diminish. It says, the complex tariff structure and method of cross-subsidisation often result in widespread distortion and inefficient production.

Deletion

Speaking about the deletion programme, it says, the industrialists in Pakistan expressed the view that a comparison of the current level of their cost of production with the imported finished products including duties indicated that the indigenised industries would not be able to compete. It appears that profits would tend to fall as more and more parts are manufactured locally. Such a system, which envisages declining profit rates with indigenisation, is judged not to have much prospect of success.

As such, it says, there is currently not much incentive for foreign collaborators to cooperate fully in achieving the deletion targets, since most of their profit comes from technical fees and royalties and from the sale of parts. A successful deletion would be contrary to their interests, as it would reduce the profit from the sale of components. A more effective way, according to the report, to encourage transfer of transnational technology and to enhance the rate of indigenisation would be to increase the share of foreign equity participation in local business ventures.
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Title Annotation:Pakistan
Author:Lashkar, M.I.
Publication:Economic Review
Article Type:Cover Story
Date:Nov 1, 1992
Words:1038
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