Khadim Ali Shah Bukhari Institute of Technology (KASBIT) Karachi The impact of FDI on Pakistan Economy A Thesis submitted

to the department of Finance In partial fulfillment of the requirements for the degree of

MASTERS OF BUSINESS ADMINISTRATION (MBA) Finance

Supervised by: Mr. Rais Ahmed

Submitted By: Syed Imran Nadeem

ID: 1353

Abstract

This research paper reveals and discusses the importance of FDI in Pakistan. According to the research, FDI plays a vital role in Pakistan, and management of investment can reap great benefits for the economy. The main focus of the research is on the importance of FDI, its issues in Pakistan and how it can be beneficial for the economy. FDI has impacted on GDP and growth for the past 30 years significantly. Reduction of FDI is one of the main reason Pakistan economy is effected negatively. With the help of FDI Pakistan can make decisions on financial feasibility of the economy and effectively use those investments to boost employment opportunities, infrastructure development and technology.

Acknowledgement

I am very much thankful to Almighty Allah, the most Beneficent and the most Merciful who gave me courage, & potential to accomplish this report on Impact of FDI on Pakistan Economy

I am deeply thankful and Indebted to Sir Rais Ahmad my mentor for this report, for his guidance and knowledge towards the accomplishment of this task. He guided me at every step in preparing this report and for whom I can confidently say that he generates interest in me to give my maximum input and I learnt a lot.

I am thankful to coordinator Mr. Ragib who shared his precious time and valuable information with me, essential for the creation of this report.

I particularly thanks to the people I interviewed, colleagues, and my family members who have supported me, shared their experiences and provided me with their valuable advises at every moment of my research to do better and better

Chapter 1-Introduction 1.1 Background.. ..4 1.2 Statement of Problem4 1.3 Scope of Study.5 1.4 Research Objectives.6 1.5 Methodology.7 1.6 Limitations..8 1.7 Conclusion..9 Chapter 2- Literature Review 2.1International Scenerio..................................................................10 2.2 Regional Scenario........................................................................14 2.3 Conclusion16 Chapter 3- Methodology 3.1.................................................................................................24-26 Chapter 4- Data Analysis, Results/Findings and Discussions 4.1- Different Tests and Results27 4.2 Analysis.28 4.3 Discussions.30 4.4 Conclusion..30 Chapter 5- Conclusion 5.1 Conclusion..31 Chapter 6- Recommendations 6.1 Recommendations34 References.........................................................................................42

List of tables: 1. First statistical test FDI and GDP of Pakistan24 2. Second statistical test FDI and growth rate of Pakistan.25

CHAPTER 1
Introduction: 1.1Background
FDI for the developing countries have been significant as they have become an important part of the external resource inflow since the 1990s. The share of FDI of developing countries is low but still acts as a catalyst fro growth in those countries. The positive affects of FDI in a country is mainly increase in employment level, as well increase production which in turn also boosts exports, while technological advancements are also part of it (Aaron,1999).

A wide range of companies in Pakistan have foreign capital, out of the 30 thousand 675 have foreign capital. ICI was the first of multinationals to set foot in Pakistan setting up an ash plant, but now it has diversified and opened up businesses linking to pharmaceuticals, polyester and chemicals. Other early entrants included uniliver, shell and Phillips. FDI can also be in a form of subsidiaries and joint ventures, in which foreign companies have made arrangements with local operators, these include Exxon and Exide battery manufacturers. Due to very few regulations multinationals find Pakistan to be a very attractive venue to invest in. (Moosa,2002)

1.2 Statement of the Problem:

FDI is necessary for any economy to survive and boost its income. Since 2000 economic turmoil FDI has hit a significant decrease in Pakistan. Investors being more aware of the

risk now associated with it. The present political unrest and security issues ion Pakistan has further decreased FDI. In this report we will be discussing the importance of FDI and also the problems associated with it. We will also be discussing why FDI plays an important role in Pakistans economy and its development.

1.3 Scope of Study:

It is important to understand why FDI is necessary for Pakistan, the advantages associated with it is:

1. Exploring new reserves and also Utilization of raw materials 2. Introduction of new techniques related to marketing and production 3. Technology 4. Building of Infrastructure 5. Quality of Human capital increases 6. Good for competition FDIs share in developing countries has increased over the past years with 16% in the 90s to 26% to start of 2000. FDI inflow has increased from $ 0.24 billion to $55 billion in 2007 (ADB, 2008). This increase has also been helped by the welcoming of the Pakistan government of FDI. With less regulation, low duty on imports of machinery and other supplies, accompanying with low taxes on income, and also government providing with monetary and fiscal incentives along with providing better infrastructure has helped attract FDI. This paper discusses the effect of FDI on Pakistan economy, based on the teachings of the neo-classical production function where it is seen as an additional input instrument.

1.4 Research objective:

Research to find out FDI impacts most on which sector of the Pakistan economy To find out FDIs impact on inflows in current situation. Does Pakistans economy realizes the positive effect of FDI To determine if G7 economies effect the performance of Pakistan economy In what ways can Pakistan attract more FDI

Key research question/hypothesis There was a meager rise of 3.4% in exports which in numbers was $13.46 billion to $13.9 billion. Pakistan relies heavily on textile, cotton, leather, and sports good for its exports revenue. With high import cost FDIs are important for Pakistans economy. The problem with FDI in recent years is that it is on a decline mainly due to political instability, with law and order situation also not helping, the global economic downfall and below par infrastructure. Even with all these problems FDI and remittance still provided a strong platform for the economy to prosper. The study conceived a significant impact of FDI, furthermore research will also define how FDI impacts imports and exports along with the constraints now faced by the Pakistan economy. This study will bring forward results which the policy makers can use to formulate programs which can propel the Pakistan economy (ADB,2008).

1.6 Methodology
Primary data source The research process was largely based on first hand knowledge relying heavily on interviews. The interviews were held with financial analysts to find out how they think FDI impacts on Pakistan economy and how can we boost its inflow. Foreign studies by instituitions and also studies done by local experts will also be used in this research paper.

1.6.2 Secondary data source:

For the secondary data we will be using the internet, news letters, RBI bulletins, Human development reports, CLL surveys and also FCCI reports, through this a wide source of secondary data can be analyzed.

1.7 Limitations:
Limitations should always be pointed out before conducting any research. The set of limitations we as researchers will face on the topic of FDI and its impact on Pakistans economy in the current financial crises will be following:

The amounted of people short listed for interview is 15, which is our sample size including analysts and experts working in the financial sector but this could be less due to the unavailability of some of them.

The researches we will be referring too are unfortunately very few as not many researches have been taken place in Pakistan. We will be conducting our research from Karachi only and will not be able to visit other cities so the research base will not be that broad. Researches available globally are based on economies such as China India US and other European countries. We lack some of the expert knowledge to interpret the financial data we have acquired. Restricted time span of 2 months and low financial budget will be a real constraint on our research (Patterson,2004) .

1.8 Conclusions:
FDI is important for the growth of a countrys economy

Developing countries benefit from FDI Although there are benefits of FDI, risk is involved too Retail marketing can prosper with FDI Competition increases with more FDI Small scale industries also benefit with FDI The money invested in infrastructure benefits all businesses FDI can bring about new employment opportunities FDI can also help spread the benefits to other supporting industries.

CHAPTER 2
Literature Review:
Foreign direct investment plays an important role during global business. It might provide a firm with new markets and marketing channels access to new technology cheaper production facilities products skills and financing. For a host country it might provide a source of new technologies capital processes products organizational technologies and management skills and as such might provide a strong impetus to economic development. Foreign direct investment has been defined as a company from one country making a physical investment into building a factory during another country. In recent years given rapid growth and the change during global investment patterns this definition has been broadened to include the acquisition of a lasting management interest during a company or enterprise outside the investing firms home country. As such it might take many forms such as a direct acquisition of a foreign firm construction of a facility or investment during a joint venture or strategic alliance with a local firm with attendant input of technology or licensing of intellectual property. In the past decade Foreign Direct Investment has come to play a major role during the internationalization of business. Reacting to changes during technology growing liberalization of the national regulatory framework governing investment during enterprises and changes during capital markets profound changes have occurred during the size scope and methods of Foreign Direct Investment. New

information technology systems decline during global communication costs have made management of foreign investments far easier than during the past. The sea change during trade and investment policies and the regulatory environment globally during the past decade including trade policy and tariff liberalization easing of restrictions on foreign investment and acquisition during many nations and the deregulation and privatization of many industries has probably been the most significant catalyst for Foreign Direct Investments expanded role (Gosh, 1993).

The most profound effect has been seen during developing countries where yearly foreign direct investment flows have increased from an average of less than $10 billion during the 1970s to a yearly average of less than $20 billion during the 1980s to explode during the 1990s from $26.7billion during 1990 to $179 billion during 1998 and $208 billion during 1999 and now comprise a large portion of global Foreign Direct Investment.. Driven by mergers and acquisitions and internationalization of production during a range of industries Foreign Direct Investment into developed countries last year rose to $636 billion from $481 billion during 1998 (Source: UNCTAD) Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). Opponents of Foreign Direct Investment note that multinational conglomerates are able to wield great power over smaller and weaker economies and might drive out much local competition. The truth lies somewhere during the middle.

International scenario:
The global Foreign Direct Investment market declined during 2010 due to weak performance from West Europe and the Middle East while manufacturing investment grew strongly during emerging markets and North America as per the Foreign Direct Investment Global Outlook Report 2011 published today by Foreign Direct Investment Intelligence part of the Financial Times Ltd.

Foreign Direct Investment a key driver of economic growth and recovery declined again during 2010 for the second year running with a 16% decline during capital investment and 0.38% decline during project numbers according to the report. The 2 million new direct jobs created by Foreign Direct Investment projects during 2010 were the lowest recorded over the past five years. Despite the decline during global Foreign Direct Investment the manufacturing sector saw robust growth during 2010 with a 21% increase during project numbers and 25% growth during new job creation as companies invested during expanded capacity to meet demand created by the global economic recovery and with the continued attractiveness of emerging markets for manufacturing investment. West Europe was the worst performing region for Foreign Direct Investment during 2010 with a 15% decline during project numbers and over 25% decline during capital investment and new job creation last year. Lackluster economic performance sovereign debt crises and a continued strong euro weighed heavily on companies' decisions to invest during the region according to the report. As the growth divide between West Europe and other key regions of the world economy widens Foreign Direct Investment has been gravitating to the faster growing economies during the East and during the Americas. The eastern half of Europe North America and Asia-Pacific all saw growth during Foreign Direct Investment project numbers during 2010 and Latin America was the only region to attract a higher volume of capital investment than the previous year. Recession-proof considered Brazil and Australia recorded the largest increases during Foreign Direct Investment during 2010 with companies committing record levels of projects and capital investment to these countries. Foreign Direct Investment projects during Brazil increased by 28% during 2010 and during Australia by 39.5% according to the Global Outlook Report with both countries moving into the top 10 locations in the world for Foreign Direct Investment.

While Brazil and Australia with their diversified economies achieved record performance during attracting investment the Middle East experienced another collapse during Foreign Direct Investment with capital investment down 45% during 2010 indicating that commodities and real estate alone are not sufficient to achieve sustained Foreign Direct Investment and economic development (Gosh,1993). Foreign investors are facing a fast changing economic and political landscape which will have a major impact on Foreign Direct Investment during 2011. In Europe the sovereign debt crisis has been dampening growth and heightening risk during peripheral countries with spill-over effects on the larger economies while at the same time a resurgent Germany benefiting from economic growth during other parts of the world has been reinforcing the strong euro. Foreign Direct Investment into peripheral economies and closely linked countries like the UK and Spain has been likely to decline during 2011 while outward Foreign Direct Investment from Germany expands strongly. Political instability during the Middle East and Africa will have a major impact on Foreign Direct Investment into this region with a sharp decline expected during 2011 during countries most affected. Combined with the nuclear crisis during Japan Foreign Direct Investment during coal oil and natural gas and especially during renewable energy has been likely to grow strongly during 2011 with renewable energy expected to be the fastest growing sector for Foreign Direct Investment during 2011 and during subsequent years. With emerging markets expected to receive a growing volume of Foreign Direct Investment during 2011 during particular China India Brazil Russia Mexico and Indonesia Foreign Direct Investment Intelligence has been predicting a 6.5% growth during global Foreign Direct Investment projects during 2011 (Meyer,2003).

National scenario:
According to the latest data released by the State Bank on 16th April Foreign Direct Investment fell by 49 percent to only $1.553 billion during July-March 2010 as compared to $3.041 billion during the same period last year. Portfolio investment also continued to fall and its net outflow amounted to $182.6 million as against $957.7 million during the corresponding period of 2008-09 (SBP).

Overall foreign investment comprising Foreign Direct Investment and portfolio investment thus registered a massive decline of 34.2 percent or $712.7 million to $1.371 billion from $2.084 billion during the corresponding period of last year. The fall during foreign investment was shared almost by all the sectors.

The communications sector just received $171 million during the first nine months of the current fiscal year as against $805 million during the same period last year. Information technology witnessed an outflow of $91 million during contrast to an inflow of $57 million during the previous year.

Financial businesses also registered a steep fall. The inflow under this head was only $118 million as against $672 million during July-March 2009. Foreign Direct Investment during the oil and gas exploration sector which was traditionally an attractive sector also came down from $555 million to $520 million during the current year.

The reasons for such a steep decline during foreign investment are not hard to understand. The country has lost attraction for foreign investors due mainly to poor performance of the economy the deteriorating law and order situation continued terrorism poor infrastructure and political instability (SBP).

No investor for instance would like to stake his fortunes on a country where the energy supply has been so uncertain multinational companies are perceived to have suspicious motives and even the most secure places might not guarantee safety of one's life. If this

unfavorable situation continues domestic investors would also lose interest and look for greener pastures abroad.

It has been unfortunate that these developments are taking place at a time when the growth rate of the economy has been already very low and poverty and unemployment are on the rise. The financial meltdown during the developed countries which started from US and Europe during 2007 and engulfed the entire global financial system has also taken its toll during the form of reduced Foreign Direct Investment and multiplied the country's problems.

A rising domestic saving rate could have partly compensated for the shortfall during Foreign Direct Investment but this too has been not happening due to contraction during disposable incomes inflationary pressures during the economy and uncertainty about the future. The richer sections of society are even reported to be shifting their savings abroad.

All of this has been bad news for the country. To tell the truth there are no easy solutions either to reverse this unfavorable situation. A very conducive environment has to be created within the country to attract high doses of foreign investment during order to enhance the productivity of the economy and create more jobs to avoid social upheaval which has been almost imminent. This of course has been an uphill task when so many adverse factors are simultaneously working against such a proposition.

Sometimes the government tries to paint a rosy picture about the ground realities through propaganda and publicity which often proves counterproductive because the judgement of foreign investors might not be influenced by such tricks.

The fact of the matter has been that it would take a lot of effort tinged with a stroke of luck to attract the attention of foreign investors to consider the country as a favorable destination for investment. Such an effort would become all the more difficult after the expiry of the Stand-By Arrangement with the IMF which at present has been serving as a

kind of guarantee for sound management of the economy and gives a certain degree of comfort to foreign investors (Mohsin, 2004).

Regional place of study scenario:

The City District Government Karachi led by City Nazim Mustafa Kamal set out to bring a lot of foreign direct investment (Foreign Direct Investment) into the city for the year 2007 but like 2006 this year has passed without any of the development projects materializing.

During the last two years the CDGK has signed millions of rupees worth of agreements with various foreign companies to invest during the city and construct things such as the IT Tower the Elevated Expressway and desalination plant but not a single project has materialized to benefit the citizens.

The city Nazim has repeatedly claimed that it was their government which brought such huge amounts of Foreign Direct Investment to the city but work has not kicked off on a single project during the year 2007 the year during which the city saw a number of bloody events.

City government officials had clarified that the May 12 might be scared many foreigners away from the city as they did not want to invest their capital during a city where no one has been sure about the next day.

It might also be mentioned that the present CDGK regime had thwarted the previous city government which failed to bring any foreign direct investment during the city but during the last two years the situation has been the same when it comes to Karachi and foreign investment.

During the 27-month period of the current CDGK covering 2006 and 2007 the city government had signed agreements with a consortium of foreign firms for the construction of a 47-storey IT Tower and call center a desalination plant at Hawksbay a 24-kilometer

long Karachi Elevated Expressway a 50-MW power generation plant at Dhabeji a bio-gas power generation through dung plant at Cattle Colony and for the revamping of slaughterhouses during Cattle Colony.

These projects were to bring prosperity improve the life style of the common man and generate around 67 percent of the revenue for the national exchequer. Foreigners either blame terrorist activities or the policies of the city or provincial governments.

It might also be mentioned that all such projects have to be completed on a BOT (built operate and transfer) basis and the CDGK has been bound to provide all the facilities including the provision of land for all the projects.

Conceptualizations:
Depending on the industry sector and type of business a foreign direct investment might be an attractive and viable option. With rapid globalization of many industries and vertical integration rapidly taking place on a global level at a minimum a firm needs to keep abreast of global trends during their industry. From a competitive standpoint it has been important to be aware of whether a companys competitors are expanding into a foreign market and how they are doing that. At the same time it also becomes important to monitor how globalization has been affecting domestic clients. Often it becomes imperative to follow the expansion of key clients overseas if an active business relationship has been to be maintained (Athukorala & Menon, 1995). New market access has been also another major reason to invest during a foreign country. At some stage export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing has been thus a combination of a number of key factors including:

Assessment of internal resources Competitiveness Market analysis Market expectations.

The factors that might narrow the gap between Foreign Direct Investment approvals and actual foreign direct investment inflows are:

Availability of infrastructure during all areas Transparency of processes policies and decision making Stability of policies Acceptance of International Standards including accounting standards Capital account convertibility so that all capital and payments might flow easily during and out of the economy Simplification of the regulatory framework during general and tax laws Improvement during bandwidth for internet and data communication Improvement during the enforcement of intellectual property rights Implementation of the WTO agreement full

Conclusion
Internal factors of the host countries also play detrimental role during attracting foreign investment. The potential natural resources of a country attracting cheap labor for international manufacturers proximity to markets economical legal and infrastructural factors and above all political stability plays vital role to motivate investors.

Pakistan needs to significantly boost industrial production due to scarce national savings and international borrowing. It has been of crucial importance to give high priority to foreign investment to facilitate economic development therefore it has been an utmost necessity to mobilize foreign resources into the country.

Despite the massive potential and attractive business opportunities the foreign investors doing business during Pakistan have major concerns. These are frequent change and unpredictable policies lack of follow-up for effective implementation of decisions nonprofessional approach of government officials corruption the internal law and order

situation last but not the least the political instability and marketing of religious extremism by various unrecognized clerics defaming Pakistan to a greater extant internationally. Internationally it seems "Pakistan has been an unsafe place to live forgets about any business plan". This image of Pakistan portrayed wrongly by countries that discourage overseas investors and expatriates. Uncertainty has been the enemy of investment and nothing produces greater impact than the prospects of the threats to life and property.

The year 2007 started from the chief justice of Pakistan issue and gaining momentum on his (CJP) arrival at Karachi on May 12 or Islamabad's Red (Lal) Mosque operation during June that fueled a series of suicide attacks on security personnel across the country. The law and order situation could not stabilize and we witnessed another unfortunate incident of twin-blasts on Ex-prime minister Benazir Bhutto caravan on October 18 2007. The story does not end here and another incident has been during line to happen and likely to take shape of a tragedy the Swat incident during which the people witnessed changing of heaven into hell on October 28 2007. In such an uncertain and politically volatile situation who has been going to risk their capital. The rise of violent extremism and fundamentalism during the society has certainly damaged Pakistan's image during the League of Nations. This has aggravated the decline of foreign investment during Pakistan.

In many instances foreigners and facilities owned by foreign enterprises have been attacked. Such an unsatisfactory law and order situation keeps prospective foreign investors on the sidelines. Safety of capital and the security for the personnel engaged during their projects are key ingredients that govern foreign investment. Karachi the commercial capital of the country which also hosts two active ports of the country has been disturbed during varying degrees. At the moment fight between two politically strong parties has yielded a wave of terror among the people during Karachi. Economic development requires free mobility of labor and capital nationwide. Ironically ethnic violence ran rampant during Pakistan. There were several incidents of murder and

kidnapping. And if an individual which belongs to a particular ethnic origin scared to move and work outside their own district for fear of discrimination then the country suffers from heavy losses on this ground.

By treating the nation during an equal and fair manner we inform the outside investors that we as a society will treat them fairly and squarely too and that there will be no deformations natural or otherwise. The government must remember that globally multiethnic society exists during harmony and so one has to live with all other races and nationalities. Any sign of discrimination within the country has been a message for outside investors that they might be discriminated against too and it does not inspire confidence. Trust has been the whole sum of all political economic socio-cultural and technological strengths and attractiveness.

In recent years the law and order situation has also worsen during the Punjab province. However attractive incentives offered to foreign investors but all during vain. The deterioration of law and order situation played a pivotal role during discouraging them to set up their businesses during Pakistan. Therefore Pakistan might not achieve macroeconomic sustainability unless it has a strong political system. This sense of insecurity about life and property also apprehend domestic entrepreneurs. In their case however poorly functioning legal and regulatory framework are the problematic areas. The Pakistani legal system has been very slow time consuming and cumbersome. Above all it has been not even within the need of our communal system. Foreign investors have the options to rely on courts and arbitration mechanisms outside the country. These options are not available to local businesses. These problems need the government's attention for domestic and foreign investment to increase by significant amount a condition that must be met for the economy to grow at the rate for which it clearly has the potential. Pakistan possesses great investment opportunities but it lacks proper marketing of potential areas for foreign investors. Pakistan due to its geo-strategic location and having the gap during demand and supply offers profitability to its investors during

Telecommunication Automobiles Banking & Financial services Oil & Gas Chemicals Agriculture Dairy & live stocks Fishing Sector Shipbuilding and Repair Insurance Textile & Apparel and electrical goods etc.

One of the other venues for Pakistan has been to take advantage of its geostrategic location as it has been surrounded by oil and gas rich countries and might earn millions of dollars annually by charging transit fee for gas and oil pipelines and international trade that passes through its territory. Energy sector has been another potential domain during Pakistan that has been the focal point of the investors since last many years and even during the current scenario the major part of the foreign investment has been coming during this sector. Pakistan has diverse ethnic composition of the country which has not only affected resource distribution but also affects policy continuity. Interestingly Pakistan possess 65 percent of its population between the age from 18 to 34 years which shows its potential to drive the economy to new heights and it depends entirely on the government's policy to nurture its fruit. But Pakistan's uneven record on political stability and democracy has deprived the country of a long-term vision direction and continuity of economic policy. In Geneva on 19 January 2009 Global foreign direct investment (Foreign Direct Investment) inflows were estimated to fall by 21% during 2008 to an estimated $1.4 trillion and were estimated to further decline during 2009.

Record floods during July-August 2010 lowered agricultural output had contributed to a jump during inflation and restoration costs strained the limited resources of the government. Textiles account for most of Pakistan's export earnings but Pakistan's failure to expand a feasible export base for other manufactures has left the country vulnerable to dangles during world demand. Thus Foreign Direct Investment reduced to $774 million during July-November during 2010 it was $1.62 billion depicting a decrease of 846.7 million dollars. Portfolio investments have reached to $311.3 million during July-November of fiscal year 2010. In 2009 it was 162.9 million dollars.

In a state distressed with terrorism and many a time being termed a failed state' and most dangerous country during the world' the last thing one needs has been to have corrupt and inefficient government. That has been during particular what we are witnessing at the moment.

Pakistan has a extremely negative image on world because of their media as well as well as International press so extraordinary measures and policies are required to reduce this wrong perception about Pakistan. Broadcasting the provincial quarrels and various verbal spates between the high ups of various political parties during the hosted shows on news channels only add to the image of an unstable country. In short domestic political stability the independent press and a fair and impartial judiciary all needed to be strengthened to bring economic continuity and renewed confidence. The other areas that are needed to be addressed are good foreign and trade policies privatization policy tax policy and policy on functioning and market structure. This will bring foreign investment

CHAPTER 3
RESEARCH HYPOTHESIS FOR FOREIGN DIRECT INVESTMENT:

Conclusion 1:
The relationship between FDI and Economic Growth is still inconclusive.

Conclusion 2:
In the past two decades, the primary source of external funding for developing countries has been by FDI.

Conclusion 3:
FDI & TNCs do effect the economic growth and other kinds of developments of any country through three main dimensions; size effects, skill & technology effects and structural effects.

Hypothesis 1: The growth impact of FDI differs by the country of Origin of FDI. Hypothesis 2: The impact on economic growth of FDI differs depending on host country
characteristics, including the quality of Institutions, the extent of trade openness and the stock of human capital.

Methodology
The methodology will tell us about the research processes which have been used in order to gather the required information, facts and other relevant material. These methods may either be quantitative or qualitative.

Sampling
In order to carry out the research, we will have to approach and contact different people and institutions that have varying levels of knowledge, experience and standing in the industry. To make the list of the people systematic we carry out sampling.

We shall mainly use the six broad types of sampling. Random Sampling In this every individual out of the sample frame has an equal chance of being picked up for an interview or survey. This is going to make sure that the results obtained are accurate and bias less. Snow Balling Using this method will we reach to other people through our initial contacts, since contact with higher management staff and government officials may be difficult we shall reach to them through others only. Quota Sampling & Stratified Sampling Here the quota is set and then a certain number of pupils would be chosen for an interview or survey. Quota and Stratified sampling is used when there is a large number of people who have different levels of expertise. All these different types of sampling methods shall be used to connect to the high ranking government officials who shall help us in obtaining facts about FDI. Banks and other pupil re

Population
The Pakistani business community and the people involved with the foreign direct investment and dealings will be in the sample frame, as in the population.

Sample
Just like population the sample will be from the same community.

Data Collection Instrument

The aim of this data collection form is to a gather baseline data about a selected group Of individuals in the workplace, for the purposes of interviewing and survey. The groups shall be organized into sub groups and people categorized according to different qualities. Both primary and secondary types of data shall be used in the study. Data before the year 2000 would not be used so as to keep the results and calculations precise and short.

Primary Data Collection

This includes the material gathered, collected and organized by the researcher himself or herself specifically for the research purpose. In the case of FDI we will shall use interviews and questionnaires/poll questions. People in banks, trading houses and corporate divisions of the government will be interviewed and surveyed, and hence material regarding FDI shall be gathered.

Inn each case the researcher shall personally visit the pupil and take a firsthand account of what and how FDI has been effecting Pakistan and other nations on general.

Random Sample Survey

Here in the random sample survey everyone within the sample frame has an equal chance of being picked up for the interview or the survey. Any respondent can be picked and interviewed.

Interviews
Here in interviews the respondents shall be questioned orally and their feedback taken down. In some cases the interviews shall be structured while in some cases unstructured.

Poll Questions
Poll questions will allow us to gather the information which is high on reliability, objectivity and representative ness.

Open Poll Questions

In open poll questions the questions will not be followed by any choices, the respondent will be free to answer the question in whatsoever way he wants, elaborate it, add his own thoughts and ideas and so on. While conducting interviews on FDI, open poll questions will not only prove to be a useful technique but it shall provide us with more insight and knowledge of how things effect and matter.

Closed Poll Questions

In an open poll, the question is followed by choices provided by the researcher only. The respondent will have to choose from a limited number of choices and will mark only one option out of the others. Close polls will provide an easy and accurate way for us to collect the data and it will clearly show us the response and inclination of the industry regarding FDI.

Statistical Tools and Software for Data Analysis Statistical Analysis

SAS/STAT software includes a wide range of statistical analyses, including analysis of variance, regression analysis, categorical data analysis, multivariate analysis, survival analysis, psychometric analysis, cluster analysis, and nonparametric analysis.

Statistical Interface
The Analyst Application is a data analysis tool that provides easy access to basic statistical analyses. The Analyst Application is included with SAS/STAT software on Windows 95, Windows NT, UNIX workstations, OpenVMS Alpha, OpenVMS VAX, and OS/2.

Exploratory Data Analysis

SAS/INSIGHT software is a dynamic tool for visualizing your data to uncover trends, spot outliers, and gain an understanding you might not derive from other analytical methods. You can explore data through a variety of interactive graphs and analyses linked across multiple windows as well as describe data distributions and fit explanatory models.

Matrix Programming Language

SAS/IML software provides a powerful and flexible matrix programming language in a dynamic, interactive environment for programmers, statisticians, and researchers. You can use the SAS System for data manipulation and statistical analysis, then employ the SAS/IML matrix language for more specialized analyses and exploration.

Matrix Programming Interface

SAS/IML Studio is a graphical user interface and extension of SAS/IML software that enables you to explore data interactively using standard statistical graphics and tables. SAS/IML Studio provides an integrated development environment for writing, debugging, and executing SAS/IML programs. SAS/IML Studio also implements the IMLPlus programming language, which is an enhanced version of the IML programming language. IMLPlus provides new language features such as the ability to call SAS procedures and external C/Fortran/Java functions. SAS/IML Studio also provides the capability to interface with the R language. SAS/IML Studio requires a PC running the Microsoft Windows operating system.

Data Analysis Methodology

Data analysis methodology shall be done while keeping in view the software used.

Sample Characteristics
The pupil in the sample shall be related to the government so that they have a complete know how of FDI or they shall be a part of a MNC or else company so that they are eligible enough to help us with our cause.

Demographics of Respondents
The respondents shall only belong from Karachi, Lahore and Islamabad since these three are the only cities in the country which have majority of the business community residing

in them. Apart from them a few foreigners who have invested in the country and live abroad shall also be contacted and interviewed.

Conclusion
All the methods, tools and software mentioned above will be employed in our research about FDI.

CHAPTER 4
DATA ANALYSIS, RESULTS/FINDINGS AND DISCUSSIONS
Different Tests & Results
Ho Ha Regression Analysis There is no impact of FDI over GDP There is an impact of FDI over GDP

Regression Statistics
Multiple R R Square Adjusted R Square Standard Error Observations ANOVA 0.048704 0.002372 -0.01513 1783534 59

df
Regression Residual Total 1 57 58

SS
4.31E+11 1.81E+14 1.82E+14

MS
4.31E+11 3.18E+12

F
0.135528

Significance F
0.714131

Coefficients
Intercept 2.89 864333 146.7672

Standard Error
358509.1 398.6704

t Stat
2.41091 0.368142

P-value
0.019159 0.714131

Lower 95%
146431 -651.556

Upper 95%
1582235 945.0908

FDI
137.53
1980

GDP

51,736
164.16

1981

55,048
400.6

1982

266,571
534.18

1983

284,667
568.05

1984

295,977
607.26

1985

321,751
623.56

1986

342,224
599.07

1987

362,110
769.14

1988

385,416
559.72

1989

403,948
548.07

1990

422,484
149.59

1991

446,005
27.14

1992

480,413
74.19

1993

491,325
68.43

1994

513,635
23.13

1995

534,861
22.79

1996

570,157
57.17

1997

579,865
36.32

1998

600,125
102.14

1999

625,233
45.72

2000

649,656

228.02
2001

3,632,091
937.34

2002

3,745,118
377.93

2003

3,922,104
406.12

2004

4,215,582
490.42

2005

4,593,230
689.43

2006

4,860,476
688.62

2007

5,191,710
614.48

2008

5,565,375
1353.65

2009

5,767,536
1867.13

2010

6,018,865

Analysis:
With the statistics we proved Ha correct, as there is a significance impact of FDI on GDP.

Ho there is no relationship between FDI and output growth in Pakistani economy Ha there is a significant relationship between FDI and output growth in Pakistani economy Regression Analysis

Regression Statistics Multiple R 0.282277191 R Square 0.079680413 Adjusted R Square 0.022160438 Standard Error 50.21874548 Observations 18 ANOVA Df Regression Residual Total 1 16 17 Coefficients SS 3493.531077 40350.75837 43844.28944 Standard Error MS 3493.531077 2521.922398 F 1.385265098 Significance F 0.25641939

t Stat

P-value

Lower 95%

Upper 95%

Intercept 216.2
FDI (in Million US$) 216.2 246 335.1 306.4 354.1 442.4 1101.7 682.1 601.3 472.3 469.9 322.5 484.7 798 949.4 1524 3521 5139.6 5152.8

16.34079996 0.008962272
Annual Growth Rate 0 13.78 36.22 8.56 15.57 24.94 149.03 38.09 11.85 21.45 0.51 31.37 50.29 64.64 18.97 60.52 131.04 45.97 0.26

15.29649541 0.00761468

1.068270837 1.176972853

0.30125168 0.25641939

-16.08632151 -0.007180129

48.76792143 0.025104673

Year 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Source: State Bank of Pakistan.

Analysis:
We through our statistics have proved that Ha is correct, proving the relationship between growth and FDI.

Discussions
Looking at the Statistics the significance of FDI again has proved important as it impacts on both growth and GDP positively with its increase. For the past 30 years we have seen our theory proven right as results shown by our statistical tests prove the Ha in both cases is correct.

Conclusion
The data is synchronized and is analyzed according to the modern methodology and the requirements of the software used. In the end all the analysis have been compiled and

evaluated against the results and hence the final tabulated and theoretical result published. In both cases Ha is proven right with tests conducted. If Pakistan wants to prosper economy wise then FDI will play a very important role.

Chapter 5
Conclusion:
Our Research proves that there is significant relation between FDI and GDP, with increase in FDI it helps GDP grow as well. The growth In terms of all goods and service produced in the country over the year is effected positively. We will conclude our research with the how we have gone by defining the FDI and its effects and what can be done to improve it in the future. In lay mans term Foreign Direct Investment (FDI) refers to the investment made in a foreign country by an investor. In most modern and developing countries FDI is seen as an important source of funding, advanced technology alongside other hard and soft skills. FDI gives any country and firm with a unique opportunity to interact and gain an increased level of exposure in terms of industry and the international market. Although there may be different types of FDI, their effects are almost the same.

Compared to other Asian nations such as Singapore and India, Pakistan is much far behind in terms of attracting Foreign Direct Investment dude to various reasons. Political upheaval, irregular electrical supply, lack of security and other major issues have made Pakistan lag behind in attracting Foreign Direct Investment in addition to the declining economy. The Government will have to revamp its policies and plan a completely different strategy in order to gain back the lost Foreign Direct Investment back in the country. The industry needs to be stabilized; the government will need to provide high level security and other actions which shall bring Foreign Direct Investment. Primary and Secondary methods of data collection were used in order to collect information related to the local industry. The data collected from the print and the live interviews of pupil helped us to understand the current market situation and an overall impact and level of Foreign Direct Investment in the country.

The Graph above shows the rate of FDI in Pakistan from 1970 2010. This graph gives us a clear picture of what the current market situation is.

After a though study and research a few points were found which showed that Foreign Direct Investment is one of the most important factors which effect the growth of a countrys economy. Developing countries may greatly benefit from FDI dude to various reasons. FDI can boost the economy and employment, help the retail industry, increase the competition and give a reason for the supporting industry to improve and expand. In a nutshell Foreign Direct Investment is essential for growth and the increasing presence of a country in the global and emerging markets.

To make the final conclusion I would like to add some recommendation which may help to revive the FDI in this country. The government should make strong efforts to attract as much FDI as they can especially in the foreign exchange sectors, this will decrease the unfavorable balance of payments. Political stability and satisfactory law and order situation is imperative in order to attract investors. Recently, Pakistan has been shown as

one of the worlds most corrupt and dangerous country in the global media, we should try to enhance our image as being a friendly nation and should use the media to show the brighter side of the country and end the misconceptions being shown on international media. The authorities should streamline the administrative procedures regarding approval and official clearances. Foreign investors in Pakistan have to cope with a complex legal situation, this method should be made simpler and transparent so that the foreigners can understand and pass through it easily. The tax collection system is very complex and highly unorganized, that needs to be changed. The level of taxes levied on foreign investments and multinational cooperations need to be reduced so that at least more people look at Pakistan as an option. Foreign firms operating in Pakistan are currently facing cash flow problems as a result taxes and the Asian crisis. That these firms cannot borrow more than their equity capital has further aggravated the cash flow problem. There is a need to review this policy. Anti-monopoly Restrictions; The existing monopoly control laws that benchmark the concentration of economic power to an unrealistically low limit of Rs 300 million for assets discourage capital formation. The monopoly control authority must review the limit in consultation with the Overseas Investors Chamber of Commerce and Industry in Pakistan. The availability of better quality and more reliable services in all areas of infrastructure are key ingredients of a business environment conducive to foreign investment. Other than this, building trust and a rapport of confidence between the host and the foreign country will lead to a better and increasing FDI.

Chapter 6
Recommendations:
In the light of current situation and in order to improve and enhance the investment climate and increase FDI situation, the following recommendations must be taken into consideration:

1. To continue working towards attaining a stable macroeconomic environment.

2. To ensure that legislation has a unambiguous and unique interpretation.

3. To catalyze the implementation of new laws and corrections to existing legislation.

4. To ameliorate and improve the business climate.

5. To take evaluates to combat bureaucracy, corruption issues and red tape, including establishing a powerful, independent supervisory authority.

6. To stimulate the participation of the private sector, increase the pace of application of privatization programmers and work on changing negative cultural perceptions and concept of privatization.

Foreign direct investment is now perceived in many developing countries as a key source of much needed capital, foreign advanced technology, and managerial skills. Realizing its central importance to economic development, these developing countries have taken wideranging steps to liberalize their inward FDI regime and have succeeded in attracting substantial amount of FDI.

Before the financial crisis, the Asian countries emerged as the largest FDI recipients with an estimated $87 billion of inflows in 1997, with East and Southeast Asian countries accounting for more than 90 percent.

South Asian countries, however, lagged behind considerably compared with their other fellow Asian countries. Pakistan stands nowhere close to many other Asian countries in attracting FDI.

Another major problem facing Pakistan is massive FDI on the power sector following the 1994 power policy. It has invited considerable criticism based on its serious balance of payments implications. The new power policy has resulted in an overcapacity in the power sector under subsequent industrial stagnation. Massive inflows of FDI also gave rise to a huge amount of recurring foreign exchange cost to cover fixed and variable foreign currency expenses. Further, it involves the problem of large cash outflows by IPPs for debt repayments, dividend payments, and fuel payments. With terms and conditions stated in the power policy and the various assumptions made in calculating the balance of payments implications, Pakistan is likely to experience.

Year Debt Payments Dividend Payments Fuel Payments Total BOP Impact First, FDI has not necessarily beneficial to developing countries in the short term if an improper FDI policy has been implemented. Second, developing economies must accord their short-term priority to inviting FDI to the foreign-exchange-earning sector, or at least, both the foreign-exchange-earning sector and other sectors simultaneously. International development organizations, including the Asian Development Bank, must consider this need in their operations particularly build-own-transfer type operations that involve the participation of foreign private investors.

Policy Recommendations General Recommendations

First of all, Pakistan must make stronger efforts to attract as much FDI as possible to the foreign exchange sectors in the short term. Taking into account unfavorable balance of payments prospects, it must refrain from attracting any further massive FDI in the non foreign-exchange-earning sectors for some years in the future. Political stability and satisfactory law and order are likewise critical to attract FDI.

The international press and media coverage Pakistan has received in recent years was not at all conducive to attracting foreign investors. News items on Pakistan being one of the most corrupt countries in the world, its bomb detonations, and its use of child labor will hardly encourage foreign investors to undertake initiatives in Pakistan. The countrys political leadership must take practical steps to improve the law and order situation particularly in the major growth poles of the country including Karachi. Macroeconomic stability plays a key role in boosting economic growth and restoring foreign investors confidence on the economy. In an environment of large fiscal deficit and precarious foreign exchange reserves position, foreign investors are unlikely to increase their participation. Pakistans fiscal situation and foreign exchange reserves position will remain under considerable strain for some time making the macroeconomic environment less conducive for foreign investors. Some drastic and far-reaching measures are needed to reduce the fiscal deficit on the one hand and raise foreign exchange reserves on the other. Inconsistent economic policies discourage foreign investors in undertaking projects of medium to longrun duration. Several recent examples of inconsistent economic policies pursued by Pakistan have sent wrong signals to foreign investors.

There has been a strong perception among foreign investors that the pro-business policies and inducements used to attract prospective new investors are somehow lost in the reality they encounter when they actually begin to set up and operate their business in Pakistan.

Although the intriguing investment approval requirement has been removed, numerous permits and clearances from different government agencies at national, regional, and local levels are still applied to foreign investors, causing delays to complete the process. The authorities must streamline administrative procedures regarding approval and official

clearances. Foreign investors in Pakistan have to cope with a complex legal situation. Law based on different legal systems are applied independently and it is often not obvious which one will take precedence. The legal situation is even further complicated by the fact that government agencies are empowered to introduce certain changes through administrative orders and SROs. The laws and regulations must be simplified, updated, modernized, made more transparent, and their discretionary application must be discouraged.

Specific Recommendations
Taxes Payment of taxes and contributions in Pakistan is complex and cumbersome. In addition to corporate income taxes, a large number of indirect taxes are levied at the federal, provincial, and local levels. Basically, separate collection of taxes and contributions have forced enterprises to face unnecessary, cumbersome, and costly administrative procedures, and to deal with a large number of collecting agencies at all three levels of government.

There is an urgent need to reduce the number of taxes and contributions; streamline tax regulations and administrative procedures; and most importantly reduce the contact of foreign firms with a large number of tax and contributions-collecting agencies. The presence of such a large number of taxes and collecting agencies may breed corruption, which adds to the cost of production. Import tariffs on plant and machinery have discouraged investment, more so in Pakistan where capital is scarce and cost of borrowing is high. Because of this high cost, manufacturers are discouraged to modernize and the quality of local industry products is restricted against international competition. There is a need to examine tariffs of plant and machinery with a view to substantially reducing them.

Credit Facilities Foreign firms functioning in Pakistan are currently facing cash flow problems as a result of many taxes and the Asian crisis. That operating firms cannot borrow more than their equity capital has further aggravated the cash flow problem. There is a need to review this policy.

Anti-monopoly Restrictions The existing monopoly control laws that benchmark the concentration of economic power to an unrealistically low limit of Rs 300 million for assets discourage capital formation. The monopoly control authority must review the limit in consultation with the Overseas Investors Chamber of Commerce and Industry in Pakistan.

Labor Laws Over enhance protective labor laws do not encourage productivity and frighten away much needed productive investment. There is a dire need to rationalize the labor laws and multiple levies on employment that inhibit business expansion and job creation.

Infrastructure:
The accessibility of better quality and more reliable services in all areas of infrastructure are key ingredients of a business environment conducive to foreign investment. In most institutional infrastructure services, Pakistan is highly deficient as compared with many developing countries that have attracted higher levels of foreign investment. If Pakistan wants to catch up gradually with the development of the economies of East and Southeast Asia, it will have to investment more in the areas of education and physical infrastructure. On the education front, the government must identify the nature of skills critical to sustained industrial growth, and formulate strategies, policies, and programs that could facilitate the enhancement of these skills.

In telecoms, the government must expedite the privatization of PTC. In the railway and road sector, government must engage the private sector in leases, concessions, and build operate- transfer (BOT) type contracts. The high cargo handling costs at the Karachi port need to be controlled. Dredging of shipping channels to accommodate large vessels, lowering labor costs, upgrading port handling equipment, and improving documentary procedures need urgent attention.

Confidence-building Measure:
The close business concern between the private and public sector is essential to build confidence. In this respect, it is recommended that a forum be established where the private and public sectors could sit together to discuss business promotion-related issues. The forum must be composed of the prime minister, all the presidents of the national chambers, top businessmen/industrialists, top bankers, as well as heads of overseas chambers of commerce and relevant ministries' secretaries and ministers. The forum may meet regularly to review the economic situation of the country. The problem faced by the business community can be discussed and decisions could be taken immediately. This kind of partnership between the government and private sector will help restore market.

Hence these can be incorporated in order to enhance and improve the situation of the state of foreign investment.

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