Foreign Direct Investment (FDI) was proven to be a
significant source of investment for developing countries which helps to
bridge saving-investment gap, creates employment opportunities,
benefits from transfer of technology, and ultimately gives economic
growth of host countries the much-needed fillip.
FDI not only provides developing countries with the much needed
capital for investment, it also enhances job creation, managerial skills
as well as transfer of technology. All of these ultimately contribute
to the economic growth and development.
Developing countries are motivated enough to compete in attracting
the foreign investment in order to foster and regulate their industrial
sector. FDI has proven to be a key factor in buttressing the third world
countries’ national markets.
Therefore, most of the developing countries are very keen to attract more inflows of FDI.
FDI is very crucial for the economic growth of Pakistan as well since
its economy faces the dilemma of saving-investment gap. Pakistan does
not have sufficient internally generated sources to maintain the tempo
of economic activities; therefore, FDI is very important to complement
the domestic investment in order to achieve economic objectives. FDI is
crucial for Pakistan in order to finance development projects,
strengthening industrial sectors, increasing employment opportunities,
attaining improved technology, enhancing domestic managerial skills,
enhancing productivity and output, improving balance of payments,
foreign exchange reserves, physical infrastructure and human resources
and ultimately achieving higher rate of economic growth. Economy of
Pakistan has been under severe economic pressure because of War against
Terrorism. Terrorist activities not only affect that particular region
or country’s infrastructure, but it also affects the financial wellbeing
of that country, because terror creates instability and uncertainty in
the country. This results in loss of foreign investors’ confidence in
that economy, thus decreasing the level of foreign investments. Small
wonder, Pakistan is also facing this bitter reality of decreased foreign
direct investment because of the rising tide of terrorism. Due to the
uncertainty and instability in the economy investors feel insecure about
their investment and their returns. Global media has played a
significant role in spreading awareness about the pitfalls of investing
in a country wracked by violence. So, investors do critical analysis of
all these situations before pouring their money in international
markets. Terrorism has both political and economic implications. They
manifest themselves in dwindling FDI inflows, damage to infrastructure,
extra cost incurred on security, loss of trade, disturbed balance of
payments, and increased insurance premiums, etc.
Beside all these issues, terrorism directly creates risk and anxiety
in the prevailing economy that makes individuals more conscious about
their expected returns linked with any transaction. Investors think it
as a harmful investment. So this increased ambiguity decreases the
demand patterns and compels investors to look to some other markets.
Moreover, if governments take steps against these terrorist
activities it increases the cost for governance. Pakistan being in a
state of war has been bearing its brunt in the shape of an economy down
in the dumps.
It’s not one sector alone which takes the fall. The terrorism affects
almost every sector of Pakistani economy, be it agriculture, business,
industry, services, or tourism.
Investors have chosen to cold-shoulder Pakistan over the years in view of the risks spawned by terror.
The level of foreign direct investment is broadly commensurate to the
level of terrorism. The regulatory authorities and policymakers should
take some concrete measures in order to reduce the cost of war against
terrorism and improve the security conditions in the country. Secondly,
the government should strengthen political institutions and adopt
democratic principles for ensuring stability of political environment
which may lead to increased FDI inflows. Thirdly, Pakistan should take
some effective measures to increase electricity generation on an urgent
basis. The government should immediately formulate policies aimed at
increasing electricity generation and implement these policies
effectively to restore investors’ confidence. It will assist in
improving economic and financial conditions and also attract domestic
and foreign investors. Fourthly, the market size is also a very
important variable for increasing inflows of FDI in Pakistan. Finally,
the exchange rate of Pakistani rupee should be strengthened in order to
lure foreign investors. More fiscal incentives should be offered if the
country is to stem the fall in overall investment.
The writer is a researcher at the Sustainable Development Policy Institute
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