The wrong FDI race

Pakistan is chasing bigger investment numbers when it should be chasing better ones; the kind that build suppliers, exports and skills, not just headlines.

In 2025, Pakistan received foreign direct investments worth USD 1.85 billion. India received USD 38.9 billion in FDI inflow. The FDI inflow into Indonesia, Vietnam and Malaysia was valued at USD 21.4 billion, USD 20.35 billion and USD 15.4 billion, respectively. Generally considered a cautionary tale as compared to Pakistan, Bangladesh ranked just a little bit behind with expenses of USD 1.78 billion. The figure is also moving the wrong way as FDI fell from USD 2.67 billion in 2024 to USD 1.85 billion in 2025 as reported by UNCTAD (2026). However, the important question is not why Pakistan attracts less investment than its neighbours, but how those countries have been able to translate foreign capital into stronger industrial capabilities.

It is more important than ever since the world game of FDI has narrowed. According to UNCTAD (2026), total global FDI in 2025 is USD 1.6 trillion, with the top 20 host economies accounting for over 80 percent. Strategic sectors, such as electronics, digital infrastructure, advanced manufacturing, critical minerals and energy technology made up 44 percent of the global green field project value compared to 16 percent in 2020. The competition for capital is no longer confined to the national level. Countries compete directly within specific supply chains. A country still offering blanket tax concessions across dozens of sectors is playing a game that was largely discontinued five years ago.

Pakistan’s manufacturing figures provide a small bright spot in an otherwise weak economic picture. The share of Electrical machinery in total FDI increased from USD 79 million in FY24 to USD 176 million in FY25, while electronics increased from USD 37 million to USD 45 million and then to USD 114 million in 8MFY26. Textiles also improved, moving from a small net outflow in FY24 to USD 48 million in FY25, although investment remained relatively modest at USD 32 million in 8MFY26. By contrast, food, beverages and tobacco fell from USD 165 million in FY24 to USD 46 million in FY25 and stood at USD 39 million in 8MFY26 as supported by UNCTAD (2026). It is not evidence of widespread industrial change; it is evidence of a couple of pockets reaping real, sustained impetus and the remainder staying flat or volatile. Pakistan has an entry point in electronics and electrical machinery. It doesn’t yet have much beyond that.

Higher FDI inflows do not compensate for a weak domestic base. In FY2026, the investment-to-GDP ratio stood at 14.38 percent and has remained stable for several years past now and is lower than the regional average. This is a gap that cannot be compensated for by foreign investments. But the real power of its influence will be catalytic, whereby the efficiency, technology, marketing channels of Pakistani firms are enhanced, not just foreign names appearing on the investment ledger without changing the existing local capabilities.

Four countries offer four distinct lessons, and each translates into something concrete. Vietnam developed supplier depth by focusing their incentives on a few industrial clusters instead of dispersing them throughout many industries and the same approach can be used for Pakistan as it is making progress in electrical machinery and electronics; it can choose a few clusters and develop its local suppliers for components within those clusters. Malaysia advanced the value chain within electronics testing facilities, certification, component manufacturing and eventually to design. Pakistan’s increasing figures in this sector mark the start of the similar opportunity provided that policies target it rather than just assembly. Indonesia discontinue draw minerals exports and started processing them; while for Pakistan’s projects related to copper and other minerals, there is a need to establish the refineries from the very beginning itself instead of making it a separate policy question for later, without following in the footsteps of Indonesia. India linked its own technical manpower resources with the global production systems; Pakistan’s freelance-heavy software exports are the foundation, but attracting foreign-owned engineering, development and R&D centres is a different job and it is more challenging, requiring more predictable operating conditions than investors currently get.

Call the resulting approach an FDI-to-Capability Strategy built around four platforms: in the electronics and electrical machinery, where the task is to develop the suppliers, component manufacturing and testing and certification infrastructure; in the minerals and downstream processing, linking the extraction to refining and manufacturing instead of seeing ore as a finished export, in digital and engineering services, marketing and engaging multinationals’ engineering and shared services centres rather than waiting for freelance exports to scale on their own; and in logistics and regional production, where Pakistan’s location will be persuasive for the companies diversifying their supply chains from single country dependence.

In fact, OICCI itself has flagged electronics, electrical machinery, digital services, logistics and light manufacturing as realistic targets, provided the basics reliable power, faster approvals, credible execution are actually delivered. On all four platforms, incentives should shift away from blanket tax concessions and toward outcomes that can be measured: exports, workforce training, upgrading technology, developing a supplier base and conducting R&D.

Pakistan’s demand for more than USD 1.85 billion next year is certainly justified. However, the success of this regimen shouldn’t be measured by whether or not it makes that number USD 5 billion or USD 10 billion. It should be evaluated by how many Pakistani firms enter multinational supply chains, how far exports rise, how many skilled jobs get created and how much technology stays behind once the investment itself moves on. The FDI race Pakistan must win is not for capital. It’s for capability.

Copyright Business Recorder, 2026