A study conducted by the Pakistan Business Council (PBC) has highlighted the need for a strategic pivot from the current market-seeking FDI to efficiency-seeking, export-oriented FDI.
The paper explores the dynamics of foreign direct investment (FDI) in Pakistan and criticizes Pakistan’s approach as untargeted and overly reliant on FDI aimed at exploiting local markets rather than enhancing exports.
Historically, Pakistan has attracted market-seeking FDI, primarily aimed at serving its domestic consumer base. Though multinational companies in Pakistan have been raising tax revenues through a high level of compliance and contributing to improved labor productivity by bringing global best practices to their supply chain – which are replicated by the industry in general – they do not export from Pakistan as exports are not the primary purpose of their presence in the country despite their global marketing networks, the paper says.
It highlights that due to protection through higher import tariffs on finished goods (than on imported intermediates), they can compete locally but not globally. High energy costs don’t help. Hence, none of the MNCs have meaningful exports.
This domestic market focus has led to short-term gains, particularly in sectors like telecommunications and power, but has not resulted in sustained, broad-based economic growth. Significant FDI inflows have been offset by large outflows, as foreign investors repatriate profits, dividends, and royalties, draining Pakistan’s foreign reserves and limiting reinvestment in the local market.
The paper highlights the limitations of market-seeking FDI, noting that while it initially brings in capital, it often fails to deliver long-term development benefits. Instead, it argues for a shift toward efficiency-seeking FDI, driven by labor market competitiveness, focused on the country’s comparative advantage, and addresses the scope for improved market access (particularly China, Central Asia and other partner countries with whom Pakistan has market access agreements such as the EU, Türkiye, etc.,).
The paper argues that FDI should ideally focus on export-oriented as well as import-substitution industries and in those sectors for which local investors lack knowledge or access to foreign capital. Examples of the latter are mining, petrochemicals, etc. Such investments, aimed at leveraging Pakistan’s lower labor costs, natural resources and large domestic market, would not only integrate the country into global value chains but also create positive spillovers for domestic industries by boosting innovation and productivity.
The paper calls for a recalibrated approach to FDI. It advocates for targeted policy reforms that attract efficiency-seeking FDI and foster export-led growth rather than relying solely on investments that cater primarily to local demand. It emphasizes the need for Pakistan to break away from the “all FDI is good” mindset. Barring rare exceptions, future FDI should be directed to investments that can positively impact the external account within a reasonable period.
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