Need to make incentives even more generous to attract Chinese firms

Foreign direct investment is crucial for a robust economy and an essential driver for development

Foreign direct invest­ment (FDI) is crucial for a robust economy and an essential driver for develop­ment. By bringing their capi­tal into a country, the foreign investors benefit the host na­tion by fostering economic expansion, creating new jobs, constructing infrastructure, and transferring modern tech­nologies, knowledge and man­agement techniques. There are numerous countries from around the globe, especially from the South East Asian re­gion, that have harnessed the power of FDI to pull back from the brink, develop their econo­mies, industrialise, cut poverty as well as construct infrastruc­ture in recent decades. 

Vietnam is one such example where FDI has driven rapid eco­nomic growth, transforming it from one of the poorest nations on earth to a lower-middle-income country, with a bur­geoning and globally integrated economy. Forecasts project the economy to grow from $327b in 2022 to $760b by 2030.

FDI, a key pillar of Vietnam’s economic growth, accounts for 4-6pc of its GDP annually and having accrued $438b as of De­cember 2022. Foreign invest­ment in Vietnam continued to grow even during the pandem­ic. Back in 2020 it was amongst the world’s 20 top countries in terms of FDI attraction, rank­ing fourth in Asia-Pacific after China, India and Indonesia with $28.53bn in FDI. The fig­ure rose to $31.15bn in 2021 and $27.72b in 2022. 

Likewise, Cambodia has per­formed impressively on Invest­ment Monitor’s 2022 Inward FDI Performance Index, with FDI surging from just $130m in 2004 to $3.58b in 2022. The FDI stock increased from $2.1b to $44.54b in the same period. Cambodia places third for FDI into Asia-Pacific and it receives more than three times its fair share of Greenfield FDI com­pared to what could be expected given the size of GDP. The coun­try seems to be following the right trajectory, having achieved an average GDP growth of 7.7pc annually for the past two de­cades. While its GDP shrank during the pandemic due to national and global contraction, Cambodia has bounced back sharply, with the IMF projecting a growth of 6.1pc in 2024, mak­ing it the 14th fastest-growing economy this year. 

Compared with these coun­tries, FDI inflows into Pakistan have historically been meager. In 2022 and 2023 instead of attracting more investors we saw a number of multinational companies exit Pakistan; many others are preparing to leave. Generally, a country must at­tract FDI flows equal to at least 3pc of their GDP yearly to in­dustrialise, create jobs, and develop its economy. The only time the country had received its fair share of FDI inflows slightly over 3pc was during 2006-08. Ever since 2011, the incoming investment flows have remained below 1pc of GDP. Another major problem is the concentration of FDI in domestic-oriented sectors like telecom and power gen­eration rather than in the ex­port-oriented industry, which results in large foreign ex­change costs and repatriation. This has a serious balance of payments implications.

Given Pakistan’s fragile bal­ance of payment position, and its urgent need to boost indus­trial production and exports Pakistan requires to significant­ly raise foreign inflows. With long-term official assistance – both multilateral and bilateral – becoming increasingly scarce in recent years, it is crucial to put in place policies to boost FDI. Among major impediments to FDI inflows are security condi­tions, inconsistent economic policies, bureaucratic red tape, political instability, ad-hoc plan­ning and incompetence. There are signs that the authorities in­tend to pursue FDI flows. Paki­stan has made ambitious plans to attract over $50b in foreign direct investment to deal with the ongoing economic turmoil featuring a frail balance of pay­ments position and a widening fiscal deficit. In June, the gov­ernment formed the Special Investment Facilitation Council (SIFC), a civil-military body, to attract and facilitate foreign in­vestment in Pakistan. The SIFC aims to bring in foreign invest­ments in the energy, informa­tion technology, minerals, and agriculture sectors. However, it seems that the army-backed SIFC has pinned all hopes for economic survival on invest­ments from Saudi Arabia, the UAE and other Gulf nations, and potential investments from Chi­na are completely missing from any plan. That is strange given the fact that China has been the largest source of foreign invest­ment during the last 10 years. The fact of the matter is that no other country but China could or would help Pakistan industri­alise and transfer new technol­ogy to boost its exports through investment. Focus should, therefore, be on attracting in­dustrial investment from China to increase our industrial out­put and merchandise exports. This will not only create jobs, ac­celerate overall economic activ­ity and earn foreign exchange. This is the only way forward.

Unfortunately, Pakistan lost the opportunity afforded by the CPEC initiative to diversify its industrial landscape by at­tracting private Chinese invest­ments and technologies trans­fer through relocation of its industry – the linchpin of the second phase of the corridor project. For now the Chinese fo­cus seems to be venturing into Vietnam, Myanmar, Cambodia, Indonesia, and Bangladesh rather than Pakistan. We could get China’s firms to ‘relocate their manufacturing here if we tackle the policy issues imped­ing Chinese investors, build SEZs and offer them incentives’ like the other countries. But there still is room for Pakistan to join the race for Chinese in­dustrial investment if they can find reliable local partners for joint ventures in export-ori­ented industrial sectors. The JV between Servis Industry with China’s Long March, a leading global manufacturer of truck and bus tyres, nearly four years ago to produce truck and bus tyres for local consumption as well as exports is a good exam­ple. There are other examples in different sectors where Chi­nese companies have invested in other businesses such as sports textiles, crockery, etc to take advantage of Pakistan to export their products to Eu­rope and the US. 

The trend of relocating off­shore among Chinese manu­facturers presents a significant opportunity to Pakistan. Now it is for Islamabad to address the Chinese concerns on policy issues, provide developed in­frastructure, ensure security of Chinese personnel and an­nounce liberal tax and other incentives for joint ventures between Chinese and Pakistani investors to attract FDI flows from Beijing in the industrial sector to boost exports and sub­stitute imports for longer term economic stability, job creation and poverty reduction. Other countries have increased their exports by attracting FDI from China by tailoring policies to meet the expectations of the Chi­nese investors. We have many disadvantages as compared to these countries, which have no security issues, have consis­tency of policies, share similar culture, geographical proximity, etc. We will therefore have to make our incentives even more generous to attract the Chinese firms. For example, by creat­ing a special zone for Chinese investors at the vast land of the steel mills in Karachi and hand­ing over its management to the Chinese could attract massive FDI inflows and easily boost our exports $8-10bn within 3 to 5 years. With Shehbaz Sharif back in the saddle we hope to see the authorities address the Chinese concerns so they could relocate their factories here.


— The writer was Paki­stan’s first Consul General at Shanghai and a Special Envoy for CPEC. Currently, he is president of a think tank Understanding China Forum.


— The writer was Paki­stan’s first Consul General at Shanghai and a Special Envoy for CPEC. Currently, he is president of a think tank Understanding China Forum.

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