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FOREIGN DIRECT INVESTMENT (FDI)

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FOREIGN DIRECT INVESTMENT (FDI) Cross-border flows of capital have increased significantly over the last couple of decades and have become an important source of investment in countries around the globe The bulk of these resources comes from transnational corporations that have been diversifying their sources of production With the extraordinary improvements in the flow of information over the last 15 years, it has become easier and cheaper for these corporations to relocate production and services to the areas in which there is comparative advantage for these operations Consequently, the actions of transnational corporations have created a new system of production in which components are manufactured in many different locations before being assembled into final products It is extremely important for developing countries to become partners in this production system Pakistan’s performance in this area has been erratic, given the ups and downs in the state of its economy In the 1990s, as a result of the opening up of the energy sector-in particular electricity generation-Pakistan was able to secure fairly large flows of foreign direct investment At one point, in the 1990s, the amount being received crossed the US$1 billion mark However, by accusing some of the foreign investors of having bribed politicians and bureaucrats to obtain access to the Pakistani market, the second administration of Prime Minister Mian Nawaz Sharif discouraged further involvement by foreign investors FDI declined significantly in the late 1990s, picked up a bit in the early years of this century, to US$823 million in 2002, declined again to US$534 million in 2003, and increased once again to US$952 million in 2004



Pakistan’s share, in 2004, was only 04 percent of the total flow of foreign direct investment to developing countriesLargely because of the low rates of domestic savings, Pakistan has a larger presence of foreign capital in the stock of cross-border investment in the country than do other countries of South Asia In 1990, this stock was estimated at US$19 billion, but it increased to US$76 billion by the year 2004 The share of foreign direct investment as a percentage of GDP increased from 47 percent, to nearly twice as much-92 percent in 2004 This percentage is much higher than that for South Asia For India, the stock of foreign direct investment in GDP was only 5

9 percent, and for South Asia as a whole it was 63 percent Pakistan also has a much higher proportion of foreign participation in total investment In gross fixed capital formation, the share was 62 percent in 2004, compared with 37 percent for South Asia and 34 percent for IndiaWhile Pakistan had been receiving about US$1 billion of foreign capital investment every year over the last several years, it has not been investing abroad In 2004, outward flow of foreign investment from Pakistan was only US$56 million, compared to as much as US$22 billion for India In other words, while the Indian corporations have become active in obtaining assets abroad, companies in Pakistan have not ventured into this field

Consequently, Pakistan is not a player of any significance in mergers and acquisitions

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