Foreign direct investment (FDI) is a powerful engine for economic growth as it enables a country to offer more employment opportunities, develop productive capacities, and integrate domestic economy with the global economy. The experience of South Asian countries proves this assertion. Despite the fact that Pakistan’s FDI has increased, the inflows are not sufficient to cover the widening current account deficit.
Many analysts believe that the country’s swiftly urbanizing population is an attractive feature of the economy for foreign investors. Therefore, most of the FDI that the country receives is market-seeking. Urbanization is increasing in Pakistan at an annual speed of 3% and it is believed that by 2025 almost half of the population of the country will be living in urban areas.
Urban population is a lucrative market for multinational companies (MNCs). Such organizations can be best described as transnational corporations (TNCs).
TNCs usually operate through subsidiaries with the sole aim to ensure sustained revenue growth through worldwide sales. Moreover, TNCs that have expanded their operations to Pakistan over the last decade, prove the above mentioned point. For instance, Coca Cola recently expanded its operations in Pakistan via its affiliate in Turkey. Whereas, several UAE based firms have invested in retail and construction industries with some local partners.
Japanese firm Yamaha Motorcycles and German-based firm Metro Cash & Carry also expanded their operations in the country. Therefore, it would be appropriate to say that urbanization brings foreign investment. However, analysts believe that market-seeking FDI is not going to help Pakistan achieve sustained economic growth.
Pakistan should encourage urbanization as it brings foreign investment. That being said, the country should focus on joint ventures (JV) with foreign firms in the form of parent-affiliate agreement, as it will enhance the country’s technological base.
Researchers have confirmed that whenever FDI comes outside of this parent-affiliate agreement, the process of technological transfer is minimal.
Joint ventures and collaborations are usually considered viable methods by foreign investors, only if they believe that their contractual rights and intellectual property rights will remain intact. These can be considered as soft business infrastructure.
As of now, Pakistan’s soft business infrastructure is in miserable condition. It is believed that with improvement in this area Pakistan can entice foreign investors and promote efficiency-seeking FDI.