Trend of Foreign Direct

Investment in Pakistan

Presented By:
Mohsin Munir

Introduction

An investment abroad, usually where the

company being invested in is controlled
by the foreign corporation.
Foreign direct investment(FDI) orforeign
investment refers to long-term
participation by country A into country B.

It is well documented in the literature that

foreign direct investment (FDI)plays a positive
role in the process ofeconomic growth.
Thamos, et al . (2008)argued that foreign
affiliates oftransnational corporation
(TNCs)succeed in developing new products
and technologies faster than local firms,
thereby exerting competitive pressure and
forcing local firms to imitate and innovate.

Introduction Cont

FDI is more than an external resource inflow.

FDI can modernize industry and
betterintegrate the economy into international
production.
Market-seeking FDI is viable incurrent global
recession.
Export-oriented FDI is a desirable mediumterm objective.

Summary

Inward Foreign Direct Investment:

Inward FDI for an economy can be defined as the
capitalprovided from a foreign direct investor(i.e. the Coca-Cola
company)residing in a country, to that economy, which is
residing in anothercountry.
Foreign direct investment by a foreign firm establishing a facility
with in the domestic country. Contrasts with outward FDI
EXAMPLE:
General Motors decides to open a factory in Malaysia. They are
going to need some capital. That capital is inward FDI for
Malaysia.

Types of FDI

http://www.scribd.com/doc/59543692/FDIof-Pakistan-Presentation#scribdinformation

The Importance of the

Right Micro-foundations

Standard competitive model assumed full

employment.
Another assumption was that market work
themselves.
According to Guillermo Ortiz, markets by
themselves are not always efficient.
With imperfect information and incomplete
risks, they cant be efficient.
Not stable either.
Worst manifestations of problems is that crisis.

Continued..

Money and credit highly correlated in normal times.

Relationship between money and credit breaks
during crisis.
During that time it is no longer use full and can be
misleading.
Return to structural models.
Focus on links between what central bank do and
the flow of credit.
Lucas critique emphasized on importance of
structural models.
Used to analyze consequence of policy changes and
their effect on expectations of those policies .

The Key Missing Element:

Credit

But standard models were ad hoc and not

structural when it comes to the relationship
between money and GDP.
According to someone no one recognized these
deficiencies in the standard model. (saw the
crisis coming)
Defense doesnt has such merit
Were warned of the bubble, explaining the
consequences.
Wedded to the model that markets are efficient
& bubbles dont occur.
Two traditions defined, one is older
microeconomic and a newer market economic
tradition.

Continued..

Derived from economic of information

Focus on role of credit markets
Ascertaining credit worthiness and designing
and enforcing credit contracts in presence of
asymmetric information.
Conditions werent incorporated into
mainstream economics.

Continued..

Managing inflation is not an end itself but

means to an end
Low and stable inflation leads to a stable real
economy and fast economic growth
Economists focused on multiple number of
social losses that arise in the presence of
inflation
Financial stability is more important than price
stability
Targeting inflation will lead to financial
stability

Objectives of Monetary
Policy

Central Bankers claimed that they had only the

interest rate as an instrument against the crisis
It was claimed if the central bank had risen the
interest rates it would have ad adverse effects
Monetary & regulatory authorities had a wide
range of instruments
The constraint to not use these instruments was
self-imposed

Instruments

Macro-prudential regulation is needed to

stabilize the economy
Monetary Policy affects the economy not just
through interest rate but also through credit
availability
One of the important endogenous variables in
the macroeconomic system is the lending rate
Foreign countries invested in U.S Treasury Bills
as a safe investment

Macro-prudential
Regulation & The Spread

Relaxation in lending regulations.

Poor credit worthiness of borrowers.
Rising EMI due to higher interest cost.
Borrowers unable to pay.
Failures in banks and financial institution.

Causes of Crisis

Major Banks suffered from huge losses

Lehman Brothers went out of business
Merrill Lynch had to sell itself to Bank of
America for a fraction of its former value
Countrywide financial corporations, the biggest
U.S. mortgage lender, eventually get taken over
by Bank of America.
In Sep2008, AIG collapse as it would not afford
to pay for all of these mortgage defaults. The U.S.
government nationalizes AIG by becoming 80%
shareholder.

Impact of subprime crisis

Investors lost confidence in the stock market.

Consumer spending slowed down due to lack of
cash/Unwillingness.
U.S.A economic condition affected the global
economy.
World economy slipped into recession.
Exports from Chain, Korea, Taiwan and India
decreased.

Global Impact of the crisis

Market instability.
How did it get so bad?
The housing market declined.
The credit well dried up.
The Economic Bailout is designed to
the flow of credit.

Causes and Effects

increase

An essential aspect of financial sector

regulation concerns restrictions on leverage.
Changes in leverage or debt equity ratios dont
affect the total value of the firm.
Increasing leverage shifts risks around.

Leverage

In this crisis, monetary authorities have

increasingly made use of an instrument that
previously was seldom usedbuying longterm bonds (long-term government bonds, or
even mortgages).
The second round of quantitative easing (QE2)
has been defended on the grounds that it will
lower the long-term interest rate and that lower
long-term interest rates will stimulate the
economy.

The Second Round of

Quantitative Easing (QE2)

The main channel by which monetary policy normally

affects the economy is the credit channel, and the credit
channel, especially to small and medium enterprises, is
still blocked.
The Fed welcomed the increase in equity and bond prices
that lower interest rates might bring about, suggesting
that it would encourage consumption. The significance of
these effects, however, may be more limited than its
advocates claim, since the intervention has been
announced to be temporary.

Continued

A standard part of the "conventional wisdom" is that

there should be as many instruments as there are
objectives, with each instrument assigned to an objective.
The Nash equilibrium that would emerge from an
uncoordinated system, with each agency assigned one
instrument and pursuing its own objective, will generally
not be efficient.

The Assignment Problem

While the theory of monetary policy in recent years has

largely been shaped by macroeconomic models, which I
have suggested were badly flawed, how monetary policy
has been conducted has largely been shaped by a set of
beliefs about what constitutes good institutional structures.

Governance

Attention in and outside of the IMF has focused on governance, on how

the structure of decision-making institutions and the incentives
(implicit and explicit) facing decision makers. The conventional wisdom
argued for independent central banks. But the independent central
banks did not perform betterand in many instances they performed
much worsein the run-up to the crisis. The crisis should, accordingly,
make us rethink our ideas about "good governance," just as it should
lead to a rethinking of
the underlying models.

Continued