FDI THEORIES AND FOREIGN DIRECT INVESTMENTS IN PAKISTAN

7/29/2019 FDI THEORIES AND FOREIGN DIRECT INVESTMENTS IN PAKISTAN

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BY

SALEEM ULLAH BAIG

BM35115

Institute of Business & Technology

Karachi(BIZTEK)


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Who? (is the investor)

What? (kind of FDI)

Why? (are we investing)

Where? (is the FDI going)

When? (do we invest)

How? (the mode of entry)


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Capital market theory

One of the oldest theories of FDI (60s)

FDI is determined by interest rates

Dynamic macroeconomic FDI theory

FDI are a long term function of TNC strategies

The timing of the investment depends on the

changes in the macroeconomic environment hysteresis effect


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FDI theory based on exchange rates

Analyses the relationship of FDI flows and exchange

rate changes

FDI as a tool of exchange rate risk reduction

FDI theory based on economic geography

Explores the factors influencing the creation of

international production clusters Innovation as a determinant of FDIGreta Garbo

effect


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Gravity approach to FDI

The closer two countries are (geographically,

economically, culturally ...) the higher will be the

FDI flows between these countries

FDI theories based on istitutional analysis

Explores the importance of the institutional

framework on the FDI flows Political stabilitykey factor


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Raymond Vernon1966

It can be used to analyse the relationship of product life

cycle and possible FDI flows FDI can be seen mostly in the phases of maturity and

decline

The conclusions of this theory are questionablenowadays


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Were initially developed in the 70s of the last century

Main representantTerumoto Ozawa

He analysed the relationship of FDI, competitiveness

and economic development based on the ideas of

Michael Porter

He identified three main phases of development when

he analysed the waves of FDI inflow and outflow from

a country


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I. phase of economic growth

The country is underdeveloped and is targeted by

foreign companies wanting to use its potential

advantages (especially low labour costs)

Almost no outgoing FDI

II. Phase of economic growth

New FDI is drawn by the growing internal marketsand by the growing standards of living

Outgoing FDI are motivated by the raising labour

costs


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III. Phase of economic growth

The competitiveness of the country is based on

innovation

The incoming and outgoing FDI are motivated by

market factors and technological factors


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Stage 1

Low incoming FDI, but foreign companies are

beginning to discover the advantages of the country

No outgoing FDIno specific advantages ownedby the domestic firms

Stage 2

Growing incoming FDI do the advantages of thecountry - especially the low labour costs

The standards of living are rising which is drawing

more foreign companies to the country

Still low outgoing FDI


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Stage 3

Still strong incoming FDI, but their nature is

changing due to the rising wages

The outgoing FDI are taking off as domesticcompanies are getting stronger and develop their

competitive advantages

Stage 4 Strong outgoing FDI seeking advantages abroad (low

labour costs)


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Stage 5

Investment decisions are based on the strategies of

TNCs

The flows of outgoing and incoming FDI come into

equilibrium


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Existence of firm specific advantages (Hymer)

Access to raw materials

Economies of scale

Intangible assets such as trade names, patents,superior management etc

Reduced transaction costs when replacing an arm'slength transaction in the market by an internal firmtransaction

FDI and oligopolistic markets

In oligopolistic markets the companies follow the

actions of the market leader

Mutual threatsgame theory


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Theory of internalisation

Due to market imperfections, there may be several

reasons why a firm wants to make use of its

monopolistic advantage itself (or organise an activity

itself)

Buckley and Casson (influenced by Coase), suggested

that a firm overcomes market imperfections by

creating its own market - internalisation

he theory of internalisationwas long regardedas a theory of why FDI occurs

By internalising across national boundaries, a

firm becomes multinational


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John Dunning attempts to integrate a variety of

strands of thinking

He draws partly on macroeconomic theory andtrade, as well as microeconomic theory and firm

behavior (industrial economics)


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Some firms have a firm specific capital known as

knowledge capital: Human capital (managers), patents,

technologies, brand, reputation

This capital can be replicated in different countries

without losing its value, and easily transferred within

the firm without high transaction costs


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Producing close to final consumers or downstreamcustomers

Saving transport costs

Obtaining cheap inputs

Jumping trade barriers

Provide services (for most services production anddelivery have to be contemporaneous)


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The eclectic, or OLI paradigm, suggests that the greaterthe O and I advantages possessed by firms and themore the L advantages of creating, acquiring (oraugmenting) and exploiting these advantages from a

location outside its home country, the more FDI will beundertaken

Where firms possess substantial O and I advantagesbut the L advantages favor the home country, thendomestic investment will be preferred to FDI and

foreign markets will be supplies by exports


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Why don't a firm just sign a contract with a

subcontractor (external agent) in a foreign

country?

Because contracting out is risky: it impliestransferring the specific capital outside the firm

and revealing the proprietary information (e.g. how

to use the technology or the patent).

Problem: If the agent interrupts the contract it can use the

technology to compete with the mother company

In the case of brands/reputation: if the agentdamages the brand reputation


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The typology of FDI was developed by Jere Behrman

to explain the different objectives of FDI:

Resource seeking FDI

Market seeking FDI

Efficiency seeking (global sourcing FDI)

Strategic asset/capabilities seeking FDI

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To seek and secure natural resources e.g.

minerals, raw materials, or lower labor costs

for the investing company

For example, a German company opening aplant in Slovakia to produce and re-export

to Germany

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To identify and exploit new markets for the firms`

finished products

Unique possibility for some type of services for whichproduction and distribution have to be

contemporaneous (telecom, water supply, energy

supply)

Automotive TNCs have invested heavily in China

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To restructure its existing investments so as to achieve

an efficient allocation of international economic

activity of the firms

International specialization whereby firms seek

to benefit from differences in product and factor

prices and to diversify risk

Global sourcing resource saving and improved

efficiency by rationalizing the structure of theirglobal activities. Undertaken primarily by

network based MNCs with global sourcing

operations.

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MNCs pursue strategic operations through the purchase

of existing firms and/or assets in order to protect O

specific advantages in order to sustain or advance its

global competitive position

Acquisition of key established local firms

Acquisition of local capabilities including R&D, knowledge and

human capital

Acquisition of market knowledge

Pre empting market entrance by competitors

Pre empting the acquisition by local firms by competitors

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FDI BENEFITS:

FDI IS MUTULY BENEFICIAL AS INVESRTER PROFIT ANDEXPANDING AND CONTRIBUTE TO THE HOST COUNTRY

GROWRTH AND DEVELOPMENT.

RESOURCE GAP BETWEEN TARGETED INVESTMENT

GENERATES ADDITIONAL TAX REVENUE TO GOVERNMENT

SKILL AND KNOWLEDGE GAP BY DEVELOPING MORDERNMANAGERAL SKILLS, TECHNOLOGY.

INVOVATION IMPROVED PRODUCTION PROCESS


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INVOVATION IMPROVED PRODUCTION PROCESS.

ACESS TO UNEXPORLED SOURCES OF FACTOR OF

PRODUCTION.

DECEASRE IN UNEMPOYMENT

HIGHER GDP

HELPS TO BRIGDE GAP IN CURRENT ACCOUNT BY INFLOW

OF FORIEN EXCHANGE


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YEARS FDI US$(MILLION)

2001-02 485.002002-03 789.00

2003-04 949.00

2004-05 1524.00

2005-06 3521.002006-07 5139.60

2007-08 5409.80

2008-09 3719.90

2009-10 2150.802010-11 1634.38

2011-12 812.16

2012-13 87.20

FDI INFIOWS IN PAKISTN FROM

2001-02 TO 2012-13 (MILLIONS US$)


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DIMENSIONS OF FDI IN PAKISTAN.

THE GROWTH OF FDI WAS NOT SIGNIFICANT UNTILL 1990

THE REGULATORY POLICY FRAMEWORK. HOWEVER FROM

90S TO 2005 FDI INREASE FROM US$ 216.2 MILLION IN 1990 T0

US$3521 MILLION IN 2005 @ GROWING ANNUAL COMPUND

RATE OF 21.47%.

DECLINE TO US$322.5 MILLION IN 2000-01 DUE TO US

SANCTIONS IMPOSED AFTER NUCLAER TESTS.


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THE FLOW PICKEDUP AFTER 2001-02 DUE TO THE REVIVAL

OF CLOSER US-PAK TIES.

IN 2007-08 FDI WAS US$ 5152.8 MILLION

FOR YEAR2008-09 FDI INFLOW WAS DECREASE DUE TO THE

GLOBL ECONOMIC SLOW DOWN.


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YEARS FDI(IN MILLION

US$)

ANNUAL GROWTH

RATE

FDI AS% OF

GDP

1990-91 246.0 13.78 0.691991-92 335.1 36.22 0.60

1992-93 306.4 -8.56 0.68

1993-94 354.1 15.57 0.73

1994-95 442.4 24.94 1.74

1995-96 1101.7 149.03 1.10

1996-97 682.1 -38.09 0.971997-98 601.3 -11.85 0.75

1998-99 472.3 -21.45 0.77

1999-00 469.9 -0.51 0.55

2000-01 322.5 -31.37 0.82

2001-02 484.7 50.29 1.17

2002-03 789.0 64.64 0.982003-04 949.4 18.97 0.99

2004-05 1524 60.52 1.38

2005-06 3521 131.04 2.77

2006-07 5139.6 45.97 3.57

2007-08 5152.8 0.26 3.20

-2007-08

CONCLUSION AND RECOMMENDATIONS


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CONCLUSION AND RECOMMENDATIONS

FDI BECOME AN IMPORNT GROWTH FACTOR IN THEGLOBALIZATION OF PAKISTAN ECONOMY

PAKISTAN EXPERIENCED FASTER GROWTH OF GDP INYEARS IN WHICH FDI IS HIGHER.

PAKISTAN SHOULD TAKE EFFECTIVE POLICICES ANDAGGRESSIVE ECONOMIC REFORMS TO ATTRACT FDI IN

COUNTRY

REVISED MONENTARY AND FISCAL POLICIES TOATTRACT FDI IN PAKISTAN

MAINTAING LAW IN ORDER SITUTION AND INCRESEINGINFRASTURE IN COUNTRY TO ATTRACT FDI.

FDI THEORIES AND FOREIGN DIRECT INVESTMENTS IN PAKISTAN

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