FDI: From inflows to impact

Pakistan has long sought foreign direct investment (FDI), and rightly so. Foreign capital can supplement domestic savings, generate productive capacity, bring technology and management expertise, open international markets, and connect local firms to global value chains. For an economy constrained by low investment and foreign exchange, FDI can be a growth engine.

But the headline FDI number tells only part of the story.

Pakistan received net FDI of USD 1.41 billion during July–April FY2026, against USD 2.04 billion a year earlier. Its composition is more revealing. Power accounted for USD 785.6 million and financial business USD 658.9 million, while communications recorded a net outflow of USD 439.6 million. Within power, hydel attracted USD 349.6 million and coal USD 375.9 million.

China was the largest source at USD 740 million, followed by Hong Kong at USD 281 million, the UAE at USD 169 million and the UK at USD 99 million.

FDI is not a single economic phenomenon. Its impact depends on where capital goes, what it produces and how deeply it connects with the domestic economy.

The question is not whether Pakistan attracts FDI, but what kind of FDI it attracts — and what that investment creates.

The composition matters

A dollar invested in a new export-oriented factory has different implications from one used to acquire an existing financial institution, finance a power project or purchase an asset. All may be recorded as FDI, but their developmental effects differ.

CPEC brought major investments in coal, solar, wind and hydropower, including the 720MW Karot and 884MW Suki Kinari projects, creating generating capacity for an energy-constrained economy.

But policy analysis cannot end with the asset.

How much equipment and expertise was sourced locally? How many Pakistani firms entered the supply chain? What skills and opportunities emerged? Did domestic companies acquire capabilities that made them more productive or competitive?

These are questions about the economic multiplier.

Financial-sector FDI raises similar questions. It can bring capital, technology, risk-management systems, financial products and stronger corporate practices. Its wider contribution depends on whether deeper financial intermediation channels more capital into productive enterprises.

The composition of FDI matters as much as its volume.

Greenfield, brownfield — and beyond

Greenfield investment creates a new operation — a factory, service centre or distribution network — and can add directly to productive capacity.

Brownfield investment acquires or expands an existing enterprise or asset. It may add less new capacity, but can bring capital, technology, management, restructuring and market access.

Neither is inherently better. The more important question is:

How deeply does the investment become embedded in the economy?

The investment behind the investment

Consider an international brand entering Pakistan.

In one model, it imports principal inputs, technology and specialised services, distributes locally and captures domestic demand.

In another, it develops Pakistani suppliers, sources inputs locally, uses domestic logistics and professional services, builds workforce capabilities, introduces international standards and creates opportunities for local firms to move into higher-value activities. Production can become part of a regional or global supply chain.

The investor may be the same. The FDI figure may be similar.

The economic impact is not.

In the second model, foreign investment is not merely operating in Pakistan; it is increasingly producing through Pakistan.

That is where investment generates wider economic value.

Investment, jobs and the future workforce

Pakistan’s investment challenge is also a labour-market challenge.

A large and increasingly young workforce needs pathways from low-productivity work to skilled, higher-productivity employment.

FDI can create those pathways through direct employment and the supplier networks, technical services, logistics, engineering and digital activities around productive investment. A manufacturing investment can generate opportunities beyond its payroll when Pakistani firms become suppliers and workers acquire technical skills.

A stronger investment ecosystem cannot eliminate brain drain, but can create more professional and entrepreneurial opportunities at home.

The objective should be productive employment — moving workers towards skilled, technology-intensive and higher-value activities.

Universities are part of the investment ecosystem

The same principle should extend to universities.

FDI should not simply recruit graduates. Foreign firms should link with Pakistani universities and productive sectors through applied research, product development, technology adaptation, testing, innovation and industry-based skills development.

This can create a powerful cycle: investment research skills innovation products firms exports.

For Pakistan, that connection remains underdeveloped.

The deepest form of FDI is therefore not merely capital embedded in an asset. It is knowledge and capability embedded in the economy.

From attraction to integration

Investment policy has traditionally focused on attracting capital through incentives and facilitation.

But attraction is only the first stage.

The second is absorption: whether institutions, infrastructure, skills, finance and regulation allow investment to be used productively.

The third is integration: connecting foreign firms with Pakistani suppliers, workers, universities and businesses.

The fourth is capability transformation: enabling domestic firms and workers to acquire technology, skills, management knowledge and market access to become competitive.

At this point, FDI becomes part of the productive architecture rather than simply an entry in the balance of payments.

What should Pakistan measure?

The investment conversation must move beyond the size of the cheque.

How much productive capacity was created? How many Pakistani firms entered the supply chain? How much technology and managerial knowledge was transferred? How many workers moved into skilled employment? How closely did firms connect with universities and research institutions? How much production became export-oriented? How much was reinvested?

And ultimately:

What capabilities remain in Pakistan after the investment has done its work?

As global value chains are reorganised, the objective is no longer simply to bring a foreign company inside the country’s borders, but to make Pakistan part of wider production, knowledge and market network.

From FDI to productive transformation

Pakistan should continue to pursue FDI for its capital, technology, expertise and access to global markets.

But investment policy needs a more discriminating objective.

The question should not only be how much foreign investment can Pakistan attract?

It should also be:

What kind of investment does Pakistan need?

Investment that creates productive capacity, develops local suppliers, transfers technology, builds skills, supports research, expands exports and strengthens domestic firms should command greater policy attention.

This does not mean discouraging brownfield, financial-sector or consumer-market investment. It means recognising their different economic effects and designing policy accordingly.

The next generation of investment policy should move from FDI attraction to FDI integration — from measuring inflows to measuring what they produce: assets, supply chains, jobs, skills, research, exports and ultimately capability. The real measure of FDI is not simply what enters the economy. It is what the economy becomes capable of doing because it entered.

Copyright Business Recorder, 2026