Does FDI ensure growth?

What else is required along with FDI

Ahsan Hayat
Faizan Abbas
Bushra Saeed
Sakina Ali
Almas jafery
Nida siddiqui

Outline

What is FDI
Types of FDI
FDI in Pakistan
Does FDI ensure Growth
Research Paper

Foreign Direct Investment

Foreign
direct
investment (FDI)
is
an investment in a business by an investor from
another country for which the foreign investor
has control over the company purchased
An investment made by a company or entity
based in one country, into a company or entity
based in another country

 Pakistan had Insignificant FDI before 1980 due to regularity

policy framework.
The foreign investment was not allowed in the fields of banking,
insurance and commerce during 1960s.
In 1970s the foreign investors discouraged more due to
nationalisation drive and excessive regulation of trade and
commerce from the government.
In 1990s Pakistan received comparatively higher amount of FDI
due to due to its market-oriented policies, conducive
environment for investment and
reemphasis on private sector for economic growth.
Although Pakistan has not received any considerable amount of
FDI as yet,but has remained relatively greater over the past
couple of decades as it adopted market oriented policies.

Types of FDI
Horizontal FDI arises when a firm duplicates its
home country-based activities at the same value chain
stage in a host country through FDI.
Platform FDI Foreign direct investment from a
source country into a destination country for the
purpose of exporting to a third country.
Vertical FDI takes place when a firm through FDI
moves upstream or downstream in different value
chains i.e., when firms perform value-adding activities
stage by stage in a vertical fashion in a host country.

FDI in Pakistan
The average value for Pakistan during 1970-2013
period was 0.76 percent with a minimum of
-0.06 percent in 1973 and a maximum of 3.67
percent in 2007.
FDI is crucial to a developing country like
Pakistan as it provides the needed capital for
investment. In addition, FDI brings with it
employment, managerial skills and technology,
and thus accelerates growth and development.

FDI as percentage of
GDP

Does FDI ensure Growth

FDI and GDP Growth in Pakistan

Does FDI ensure growth?

Investment by any means will add growth to
economy whether it is domestic or foreign direct
investment (FDI)
There is a debate over the effects of FDI on host
countrys growth in all terms

Positives
FDI brings the state of art technology to a country which
is need of hour
It is of long term investment which means stability in
growth
Employment generation which makes people lives better
FDI influences economic growth by filling up savinginvestment and trade gap
Increases productivity and not only this but also
transfers managerial skills to local management

Negatives
FDI not always contribute positively but it can
also worsen a host countrys balance of payment
FDI only focuses on urban areas
MNCs send back their profits to home country
and they dont re-invest in the host country

Theories related to FDI and growth

Modernization theory suggests that FDI could
promote economic growth under the principle
that the growth requires capital investment.
The new growth theories emphasizes the role of
technology transfer through FDI because
developing
countries
lacks
necessary
infrastructure such as education such as
education, liberalized financial markets, socioeconomic and political stability.

Empirical literature
FDI promotes economic growth in countries
where the domestic infrastructure is well
developed and trade and FDI policies are more
liberal.
Growth enhancing effects of FDI are stronger in
countries where the labor force is highly
educated and pursuing export promotion rather
than import substitution trade policies.

Dependency Theories
In contrast, the dependency theories suggest
that dependency on foreign investment is
expected to produces negative impact on growth
and income distribution because FDI creates
monopolies in industrial sector, which in turn
leads to underutilization of domestic resources.

Research Papers

FDI and Economic growth in Pakistan:

Sectoral analysis
This paper establishes a relationship between
industry specific FDI and output.
Primary: Agriculture, forestry, fishing
Secondary: Manufacturing
Tertiary Sector: Communications, Retail and
Services

Analysis
Services sector attracted most of the FDI and
enhanced its contribution in the GDP by 66%. In
short run, increase in FDI effects GDP positively
In second place comes financial sector. FDI
increased in this sector mainly due to financial
reforms and liberalization
Whereas, in manufacturing sector, growth and
output attracts FDI

Economic evaluation of FDI in Pakistan

FDI helped to narrow down saving-investment
gap in developing countries like Pakistan.
Transferred new technologies, avenues of
knowledge, training of manpower.
Imports increased both in short and long
whereas, exports decreased in short run but
increased in long run.

What else is required along with FDI

Pakistan failing to attract new FDI from the
world, but it is failing to retain part of its existing
FDI stock of around $29bn
Pakistan offers market size but little else to a
world-savvy investor

What else is required along with FDI

Countrys investment regime and the general
business environment
The economic as well as political risks associated
with the investment
Policy and political stability
Serious commitment to economic reform
Labor force educated and skilled
Technological innovation
Favorable tax regime

What else is required along with FDI

Companies are still motivated to make foreign investments, but because of
the vagaries of technology investments, they are now finding new vehicles
to accomplish their goals:
Licensing and technology transfer
Collaboration between the academic and business communities
Grants for R&D
Limit their overall risk to royalty payments
Reciprocal distribution agreements
More trade-based, but in a very real sense it does in fact represent a type of
direct investment
Two companies, usually within the same or affiliated industries, agree to act
as a national distributor for each others product
No distributor support payments and other related expenses

What else is required along with FDI

Joint venture and other hybrid strategic alliances
Two parties who are within the same industry who are partnering for some
strategic advantage
Joint ventures involving three or more parties are usually called syndicates
and are most often formed for specific projects such as large construction or
public works projects

Portfolio investment
Transactions in equity securities, such as common stock, and debt securities, such
as banknotes, bonds, and debentures
Passive investments
In contrast to FDI, which allows an investor to exercise a certain degree of managerial
control over a company
Two or three companies with "soft" investments in another company could find some
mutual interests and use their shareholder power effectively for management control
Also called "shadow alliances"

Conclusion
Think FDI, think China
In the first 11 months of 2013, Chinese
companies announced 107 deals worth USD 43.7
billion compared to just 45 deals worth USD
17.3 billion in the whole of 2007
In the latest official rankings from the United
Nations Conference on Trade and Development
(UNCTAD), China comes a strong second,
currently behind the US, for FDI received

Conclusion
Global FDI conference took place in Shanghai, China
An international study by UHY member firms at the
end of 2013 shows that the worlds developing
economies are taking a bigger share of global FDI than
developed economies.
However, the USs mature economy made a far bigger
input into global FDI flows than did China,
contributing USD 329 billion into global FDI flows
during 2012, nearly three times Chinas USD 84 billion
worth of investment in other countries over the same
period