Zafar Iqbal
Pakistan’s economic future hinges on a strategic shift in its approach to Foreign Direct Investment (FDI). Moving away from the traditional model of attracting any type of investment, the country needs to focus on targeting efficiency-seeking, export-oriented FDI that offers long-term economic growth. Such a transition could help Pakistan build a more resilient economy, reduce its dependence on imports, strengthen foreign reserves, and create sustainable jobs by integrating local industries into global value chains. The Pakistan Business Council (PBC) offers a comprehensive roadmap for this shift, highlighting the potential for sustainable economic benefits through a more strategic alignment of FDI policies.
Currently, Pakistan’s FDI landscape is dominated by market-seeking investments, where multinational companies are primarily driven by the desire to serve the local consumer market. This type of FDI focuses on countries with large or growing consumer bases, allowing foreign firms to set up local operations to cater to domestic demand. While market-seeking FDI has provided some benefits, including direct employment, training, technology transfer, and tax revenues, it has also led to significant capital outflows in the form of profit repatriation. This limits the long-term economic benefits of such investments and underscores the need for a shift towards more productive forms of FDI.
The “Efficiency-Seeking FDI in Pakistan” report from the PBC highlights how the current focus on market-seeking investments has constrained Pakistan’s economic potential. The report points to the negative impact of capital outflows and the missed opportunity to enhance export growth by integrating Pakistan into global value chains. Efficiency-seeking FDI, in contrast, targets investments that improve productivity and innovation, enabling local industries to become part of global supply chains and boosting the country’s export capacity. The key takeaway is that Pakistan’s FDI strategy should focus on quality over quantity, prioritizing investments that offer long-term, sustainable economic growth rather than short-term market expansion.
A comparative analysis of Pakistan’s FDI policies against regional peers such as India, Vietnam, and Bangladesh further underscores the need for reform. The report draws attention to Vietnam and Bangladesh, which have successfully attracted export-oriented FDI through targeted reforms. For example, Vietnam’s “Doi Moi” reforms and Bangladesh’s incentives for the textile sector have helped these countries integrate into global markets and achieve export-led growth. These examples offer practical models for Pakistan to follow, emphasizing the importance of sector-specific policies to attract high-quality, export-driven investments.
Currently, FDI in Pakistan remains small, untargeted, and lacks the strategic focus needed to drive meaningful economic transformation. The PBC report recommends targeting specific sectors, including manufacturing, IT, and agriculture, to boost exports and integrate Pakistan into global value chains. Rather than relying on broad, one-size-fits-all strategies, the report advocates for tailored approaches that align with the country’s strengths and global market opportunities. For instance, fostering FDI in the IT sector could position Pakistan as a hub for business process outsourcing (BPO), while encouraging investments in advanced manufacturing could drive technology transfer, create jobs, and enhance industrial competitiveness.
The report also emphasizes the importance of improving Pakistan’s business environment to attract high-quality FDI. This includes reforms in labor markets, regulatory frameworks, and sectoral incentives that create a more conducive atmosphere for investment. Policy consistency and stronger governance structures are essential for building a stable, investor-friendly environment. Additionally, the report highlights the need for renegotiating trade agreements, particularly those with China, to enhance Pakistan’s competitiveness in attracting export-oriented FDI. Current Free Trade Agreements (FTAs) lack provisions that would boost Pakistan’s export capacity, and renegotiating these deals to secure better market access for value-added goods could make Pakistan more attractive to foreign investors.
In conclusion, for Pakistan to build a resilient economy, it must pivot from attracting market-seeking FDI to prioritizing efficiency-driven, export-oriented investments. This will require targeted reforms in key sectors, improvements in the business environment, and strategic alignment of FDI policies with trade agreements. By learning from regional peers and implementing these strategic changes, Pakistan can unlock the full potential of FDI, integrate its industries into global value chains, and lay the foundation for sustainable, long-term economic growth.
