Foreign Direct Investment (FDI) is generally considered a litmus test for the strength of a country's economy as well as an indicator of its political stability. After all, if foreigners are willing to risk their capital in an alien environment, then things are conducive enough for them to play the odds in search of a return higher than they would achieve in their native habitat; rest assured that FDI is always for a higher return.
The terms alien environment and native habitat are relevant in today's global financial village where national boundaries are illusory and the world is clearly segregated between the developed and the developing nations. Hard-pressed to perform, corporate executives and fund managers in the developed world are hungry for markets and investment opportunities that provide super profits, either through physical presence or simply by deploying surpluses.
This appetite is powered by the dilemma that, even with innovative efficiencies, profits in mature developed markets will continue to shrink. Contrary to an ageing and reducing population and a highly competitive free market in developed countries, the developing world offers a young and growing populace with monopolistic market options. Strategic investments aside, by necessity rather than by choice, emerging markets therefore have to be a part of any corporate growth strategy or international investment portfolio.
Investing in the developing world is however risky, since most of the countries either face political instability or an internal/external security crisis or simply turmoil. Struggling with deficits and the IMF, together with the lack of technology and resources, developing nations go out of their way to attract and entice FDI by offering a range of incentives. The courtship starts by removing restrictions on currency movement and enacting protective legislation, which is followed by tax incentives and is finally consummated through offering generous profits secured by sovereign guarantee.
This must be sounding quite familiar. Apparently, what the developing nations never factor into the equation is that FDI's single motive is profits, directly or indirectly through market share, and selfish motives override other considerations. FDI is not there to assist a nation in its evolutionary process, far from that, it is probably more in FDI's interest if the country remains in the developing phase in perpetuity. Nonetheless pretentions have to be maintained with FDI posing as a knight in shining armour gratefully welcomed by desperate nations.
The proof of FDI's singular quest for profits arguably lies in an anomaly. Almost all the developing nations are charged with corruption and serious human rights violation, nonetheless FDI continues to flourish in these very same markets. It would appear unreasonable to assume that investors from the developed side of the world can manage to operate and conduct business in these so called highly corrupt markets in accordance with their own principles and rules; after all there are two sides to any kickback. Understandably, lip service aside, absence of an independent judiciary is not a hurdle either.
Notwithstanding, while profits may be the primary KPI (Key Performance Indicator) for any investment or growth strategy, loss of principal would obviously be unacceptable. History identifies that overtime, developing nations continue to be volatile. A storm is generally followed by a lull before the next storm; recessions are common with booms rare and short-lived.
Imagine what the investors are going through watching the winds of revolution in North Africa and the Middle East from the sidelines, all is surely lost. It is for this reason that investors target an almost unrealistic payback period for projects in developing markets.
All attempts are made to minimise the exposure by arranging local debt and/or equity and immediate repatriation of any available funds is an efficiency criterion for local management. Another popular strategy is transfer pricing whereby profits and principal are substantially risk-free. The irony is that even after payback, ownership continues to vest with the investors to reap profits infinitely.
So if FDI is targeting super profits and taking an optimistic view to target a payback period of under 5 years is it really a knight in shining armour or a Trojan horse? Homer tells us that accepting a gift from the Greeks was the beginning of the end for Troy. In the age-old conflict between the East and the West, is FDI today analogous to the Trojan horse? Unfortunately in FDI's case it is not so simple.
We learn to be weary of "Greeks" bearing gifts however history also tells us that Troy accepted the gift in the euphoria of victory. Contrary to this developing nations target FDI not because they are spoils of war but because they provide sustainability to their fragile economies. There is no advantage in criticising the investors for guarding their interests and not mixing business with charity, almost everyone is expected to act similarly if the shoe was on the other foot. It would be more beneficial to look at this gift horse more carefully, the proverbial teeth!
What does FDI do for a developing nation? Significantly it provides foreign currency needed to finance the adverse trade balance commonly associated with developing nations. FDI is also promoted by international lenders as a prerequisite for sustaining obligations arising from the debt trap.
Faced with limited options, assets are sold for all times to come to satisfy current wants. Other benefits that are generally acknowledged include funding for project investment, technology transfer, industrialisation and creation of employment, which mainly are the responsibility of the government itself. Lack of resources due to a low tax base maybe the cause of shifting responsibility to others, but interestingly governments seem to inadvertently ignore domestic investors.
From our own experience, we probably remember the quip that Pakistan is a poor country of rich people. That being the case, why aren't we focused towards enticing our own investors is a mystery. We brand our own entrepreneurs as tax evaders and unscrupulous while at the same time incentivize foreign investors through tax exemptions and higher profits.
Why would outsiders feel comfortable in taking financial risks in Pakistan when we ourselves don't, needs deliberation. Considering that domestic investment benefits the country for all times to come, facilitating local businessman would appear to be a far better course of action. Nonetheless, the importance of FDI cannot be discounted on this argument alone and needs a conclusive analysis. We need to establish beyond doubt, the quantum and nature, sector and geographic, of FDI needed for Pakistan.
Hindsight is twenty by twenty. Pakistan has been receiving FDI for over two decades. We need not rely on the experiences of others to prove the theory behind FDI. In order to establish whether FDI has been beneficial to Pakistan we need to analyse the historic data for possibly the last two decades. This will be a tedious exercise involving many variables.
The outcome for each parameter will need to be independently determined. In relation to currency the inflow will need to be matched with the outflows supplemented by an estimate of future outflows for existing FDI only. This can be accomplished by valuing the investment held by foreigners at the cut-off year.
In terms of specific projects a cost benefit analysis may be pertinent. Were the wants critical enough to incur the obligation? In order to identify specific sectors and areas where FDI has been effective, projects may need to be assessed individually. The merits and success of technology transfer has in any case been under debate in the automobile sector. If after a long period commitments have not been met than there may be a need to revisit the arrangements. Lessons can be learned to avoid similar pitfalls in the future.
An industry wise review will also establish whether the "wants" were necessary enough to justify the costs for our future generations. When we talk about sacrifice, the first step is always curtailing our unnecessary wants and desires. Ushering in FDI and spending foreign currency for luxuries should not be the forte of a proud nation.
The preceding paragraphs identify some of the components necessary for a detailed analysis. Accordingly parameters will increase as the study progresses. A final suggestion would be not to involve interested lobbies and stakeholders in carrying out the analysis, notwithstanding the obvious conflict, the analysis should be independently conducted.
Analysts are of the view that the recent net outflow of FDI is due to the remittance of profits by existing projects financed through FDI, the fall of Troy may already have begun. There is therefore some urgency to lay the matter to rest to avoid being the subject matter of a poem by a future Homer.
(syed.bakhtiyarkazmi@gmail.com)