- FDI has played an important role in the process of globalisation
By filling the gap between domestic savings and investment, Foreign Direct Investment (FDI) plays an important role in capital formation and economists recognise capital formation is an important determinant of economic growth. FDI facilitates transfer of technologies, contributes to the promotion of competition and develops the human resource of the recipient country. Not often realised is the fact that FDI enables recipient countries to keep interest rates low thereby providing an impetus to further fixed investment. By directly contributing to economic growth, FDI flows create new job opportunities and reduce unemployment.
During the past two decades, Foreign Direct Investment has played an important role in the process of globalisation. The international pool of funds available for FDI has seen a massive increase over this period partly because of globalisation and more so because of rapid expansion of multinational enterprises. Fast developing technologies have resulted in some enterprises becoming so large as to dwarf the economies of many countries. Each of Amazon and Apple, for instance, has market capitalisation which is triple the GDP of Pakistan. There are many other companies, not just American but also European, Chinese and Japanese which are bigger than our national economy.
Many countries have liberalised their trade and investment regimes in order to take advantage of these international developments. Unfortunately the Pakistan bureaucracy refused to budge and we missed the boat. Instead of liberalising the Pakistan government machinery tightened and increased rules and regulations particularly for foreign companies in such a way that it appears it was a considered attempt to discourage foreign investment.
While it may be fairly straightforward for a Pakistani national, or a group of Pakistani nationals, to incorporate a company in Pakistan, every foreign company has to run the gauntlet set up by the Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan (SBP). Consider the following obstacles.
Had we been able to attract the same per capita FDI as India, it would have brought incremental capital inflows of around $120 billion over the last twenty years
Since 2011 all foreign shareholders and directors have to obtain security clearance from the ministry of interior before they can incorporate a company in Pakistan. In order to obtain this security clearance, which can take up to three months, each foreign shareholder and/or director, must provide a written undertaking to SECP stating that if, for any reason, security clearance is denied by the ministry of interior at any time, the said shareholder/director will immediately resign his directorship and sell his shareholding in his local subsidiary. To add insult to injury, the said shareholder/director must submit this undertaking on Rs500 stamp paper, (which means it must be prepared in Pakistan) signed in the presence of a notary public and attested by the Pakistan embassy in the home country of the foreign investor. If he still persists on investing in Pakistan, the SECP also requires the foreign investing company to provide a board resolution of the parent company authorising an investment in Pakistan. I guess the board resolution is required because the SECP finds it hard to believe the foreign company decided to invest here. And of course the board resolution must be attested by the Pakistan embassy in the home country of the foreign investor.
Assuming the foreign investing company clears the above hurdles, and wishes to open a bank account in Pakistan, the SBP requires the following documents to be submitted before an account can be opened.
- Business profile containing ownership, locations of subsidiaries, and its products.
- Directors names, passports, addresses and place of domicile.
- Certificate of incorporation and memorandum &Articles of association.
- Annual Financial Statements with Auditors Report.
- Pattern of shareholdings (number of shares held by each shareholder).
- Shareholders agreement (which is normally a confidential document).
Most of the above documents require attestation by the Pakistan embassy in the home country of the foreign investor.
When the foreign investor company is finally ready to do business in Pakistan, they have to deal with more than a dozen government departments and perhaps more if the business is a manufacturing concern. These include, amongst others the Zila Council (or the city development authority), the Health and Safety Department, the Environmental Control Department, the Labour Department, the Highway Authority (if the concern is on a main highway), Wapda (Lesco, Fesco etc), Customs and Excise Department and FBR, etc, each of which has very cumbersome requirements for certification.
It is not correct to blame the lack of FDI on the security situation of our country. Foreign multinationals were investing large amounts in African countries when Africa was a war torn continent. Today even Iraq and Iran are able to attract FDI. Multinational corporations (MNC’s), with billions of dollars in surplus funds, are not risk averse. MNC’s are staffed with rational and educated professionals who cannot understand the illogical investment regulations of Pakistan. A good example is the SBP regulation that foreign parent companies cannot make interest free loans to their local subsidiaries, when clearly interest free loans are in the interest of the local company and our country. We just do not understand that it is “ease of doing business” which would encourage FDI.
It is no wonder then that Pakistan has failed to attract its due share of FDI over the last twenty years. FDI as a percentage of GDP in Pakistan is only 1.1pc while in India it is more than double at 2.7pc. Similarly FDI per capita in India at $47 is nearly triple that of Pakistan at $17. Had we been able to attract the same per capita FDI as India, it would have brought incremental capital inflows of around $120 billion over the last twenty years. Assuming that each one billion dollars can on average create up to 15,000 direct and indirect jobs in the country, we would have been able to create 1.8 million jobs and reduce our present unemployment rate by 50pc. In addition such inflows of foreign investment would have had a major impact on our current account deficit and strengthened our currency. Dollar would still be costing Rs64 if we had taken steps to liberalise our investment regime. Foreign debts would have been reduced, debt servicing cost lowered, allowing us to provide tax incentives to attract further fixed investment.
