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FDI Inflows - Regional Analysis - Middle East, South and South-East Asia

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It goes without saying that there is a common problem within the region associated with labor. Though
the huge potential in this case lies dormant in the form of a huge base of unskilled labor, the very fact
that they remain unskilled is an alarming situation in itself. The regional analysis shows that multiple
countries including Sri Lanka, India, China and Bangladesh have identified the potential for a boost in
labor skills in its ability to attract FDI
Summary and findings
The analysis of FDI inflows into countries in the region around Pakistan revealed a number of
commonalities that can be seen from the perspectives of both foreign investors, as well as the
governments of the countries receiving Foreign Direct Investment.
The rest of the summary will be divided into the following sections:
i)
ii)
iii)
Pros and Cons that are common with majority of the countries
Role of governments of each respective country in regard to those pros/cons
The resulting effects of the actions on the performances of the countries
i) Prospects (Pros) and Constraints (Cons) common amongst majority of the countries
Prospects
Untapped market of a significantly large population:
In this regard, a number of countries had shown potential in terms of large populations that proved to
be a potential source of revenue for companies that produced and sold consumer goods. Those
countries and their respective populations are listed below:
Pakistan
207m
Bangladesh
164m
China
1.38b
India
1.33b
Indonesia
260m
Philippines
103m
Large domestic labor force:
with key focus to be kept on the fact that to the foreign investors, either of the two categories prove to
be a cheap source of expenditure. Countries that are resourceful in available labor include Pakistan,
Bangladesh, India, UAE and Vietnam
Strategic geographic location:
This pertains to the relative advantage the country within the region owing to the strategic location in
the continent, mainly due to access to deep sea ports capable of harboring big ships and vessels.
Another factor is simply the fact that the country’s location renders it a common point for multiple trade
routes that lay between the East and West. These countries include Pakistan, Bangladesh, India,
Malaysia, Philippines, Sri Lanka and UAE
Decrease in aggregate poverty levels/rising per capita income (higher spending power):
This factor is mainly centred around the population’s aggregte rise in income levels which, in theory and
in reality, directly results in greater spending power. IN terms of attractiveness towards foreign
investment, this translates to greater potential margins and revenue and thus, by extension, contributes
to the relative attractiveness of doing business in that country. Amongst these countries are Pakistan,
Indonesia and Malaysia
Government is in favor of foreign investment:
This factor is about the government being in favor of foreign investment, subsequently the government
having established policies and incentives that make the investment landscape of their respective
country an attractive venture. A prominent aspect of this factor is that the governments have also
established separate Investment Development Agencies/Departments/Authorities that are dedicated to
improving attractiveness of investment, create streamlined process flows that will enable one-window
operations in regard to establishment and documentation of new businesses financed by foreign
investment
Pakistan, Bangladesh, China, India, Indonesia, Malaysia, Sri Lanka, UAE and Vietnam
NOTE: The only exception remains Philippines, owing to the fact that the government has yet to take
action to allow for a change in their constitutional clause that restricts foreign investment inflows to a
great extent
Large reserves of natural resources:
This includes countries that have abundant reserves of natural resources like metals, non-renewable
energy sources (oil, gas and other hydrocarbons). The list covers countries that have tapped into
capitalizing those resources as well as those that have yet to leverage this major advantage. These
resources can either be used to manufacture goods of production for sale in either local or international
markets. Also, these resources can also be refined into purer forms and sold as commodities in
international as well as domestic commodity markets
Pakistan, China, India, Indonesia, Malaysia, Philippines, UAE and Vietnam
Stability (Political, Social, Legal, Bureaucratic)
[NOTE: This factor is not an advantage for Pakistan, as stability remains an area of improvement]
This factor is also covered in the statistical analysis in the form of political stability. Such a factor is,
though important when it comes to determining ways of boosting FDI inflows, a source of concern and
attention. The sole focus here is to make the abovementioned types of stabilities consistent and
correlated with the relative performance of macro-economic variables.
China, Bangladesh, India, Indonesia, UAE and Vietnam
Constraints:
Security:
Security remains a crucial and grave concern from the perspective of foreign investors. Law and order,
terrorism and natural disasters all pertain to this category. The main issue lies in the form of perceptual
not factually based concerns. The fact that investors perceive such countries to be a risky venture owing
to security makes it a simple matter of image.
Pakistan and India
Political influence/Corruption:
With regard to this factor, there are two major types of concerns.
First is that of political influence being detrimental to prospects of successful commencement of
business operations for foreign investors. This is usually due to the vested interests of domestic
producers, who view foreign investors as a threat to their market shares, thus using influence of political
elements within the government to impede the flow of FDI into the country.
Second is that of weak administrative structure of the governments due to widespread corruption in
different pockets of the administration that creates problematic and needless expenditures, rendering
any prospects of profitable ventures into the respective country an arduous endeavor.
Pakistan, Bangladesh, Indonesia, Philippines, Vietnam
Weak infrastructure:
A highly crucial matter of concern not only for foreign investors, but local as well. Infrastructure includes
an efficient transport system consisting of roads, railway, air transport and sea ports. Equally important
is the availability of power, land, communication services and jurisdiction related issues. Such areas of
improvement are both a highly common factor for investors as inefficiencies in infrastructural elements
render prospects of growth and development through foreign investment an unattainable goal, with the
only relevant solution provider being the government and its available sources of financing projects to
improve infrastructure
Pakistan, Bangladesh, Indonesia, India, Philippines, Sri Lanka and Vietnam
Lack of domestic sources funds to finance projects/weak financial sector:
Another important factor is the relatively weak financial sectors, especially banking, owing to lack of
available sources of capital, either debt or equity, or both. This points towards the larger
macroeconomic health of the economy in its ability to sustain debt as well as determine limitations in
microeconomic factors like saving vs consumption.
Pakistan, Bangladesh, Vietnam
ii) Role of governments of each respective country in regard to those pros/cons
Pros
Untapped market of a significantly large population
Large domestic labor force
Strategic geographic location
Decrease in aggregate poverty levels/rising per capita income (higher spending power):
Government is in favor of foreign investment:
Large reserves of natural resources:
Stability (Political, Social, Legal, Bureaucratic)
The factor of an untapped market of significantly large population is in itself a self-promoting factor,
serving to attract foreign investors/producers of consumer goods to begin manufacturing to cater to
local demand. In this regard, a number of countries have established Export Processing Zones (EPZs),
regions which provide incentives in tax, custom duties, utilities (gas, electricity, water) as well as export
related schemes that provide easy short term financing for production of goods for exporting. Pakistan
already is well equipped in this regard with Export Refinance Schemes and Tax incentives for production
of consumer goods for export as well as domestic sales.
The large domestic labor force is a complicated matter, given that though the labor is cheap and
abundant in multiple countries, there is a dire need for training of said labor force to better equip them
with skills necessary for/demanded by foreign investors. These skills include hard and soft skills.
For example, Sri Lanka has in recent years a Skill Development Taskforce, the purpose of which revolves
around targeting unskilled laborers and empowering them with necessary hard-skills that are required
by foreign investors.
India has long since its early days (post-independence) focused on empowering its people with
knowledge and education that will allow seamless employment opportunities in the future. Technical
education as well as specialization programs are offered via 11 Indian Institutes of Technology. As a
result, presently, India posses a highly skilled labor force with fluent, English speaking, soft skills.
China is another one of those countries that have invested in empowering their labor force with
necessary hard-skills that allow immediate absorption of unemployed yet skilled laborers into the
employed side. This was also done in order to have locals especially in rural areas to be able to
contribute to production of export related products in their own homes/local setup as a form of cottage
industrial setup.
The strategic geographic location is yet another leveraged point that is seen almost unanimously as an
opportunity to boost national income i.e. GDP either through lowering of trade related duties or
through Export Processing Zones, which financially facilitate production and trade of locally produced
goods.
Lastly, the increase in ownership of businesses above 50% in certain sectors is a move that directly
addresses and caters to concerns of foreign investors over the prevalence of political elements that
hamper seamless entry and establishment of industry. This move alone has proved to be significant in
boosting investment within a country as foreign investors would have greater control over flow of funds
to and from their businesses as well as management and administration of operations.
Cons
Security:
Political influence/Corruption:
Weak infrastructure:
Lack of domestic sources funds to finance projects/weak financial sector:
The constraints pertaining to lack of FDI inflow owing to lack of infrastructure have been a key focus of
almost every government that is experiencing road blocks to influx of FDI. In all of the countries
identified with having infrastructure related impediments to FDI inflows, the sectors of Manufacturing,
Transport, Energy and Real Estate have been core focus for development for at least the next 10-20
years. In regard to this, the governments of India, Indonesia, Philippines and Vietnam have begun
focusing on redirecting government expenditures to focus towards building better quality road
networks, have improved sources of finance for investment in heavy-industry and lowered customs
duties pertaining to import of heavy-machinery that is required to set up factories of production.
There been a noticeable change in government’s handling political constraints, corruption in various
government bodies and streamlining the processes involved with ease in setting up of business and tax
processing. The governments have established Investment Promotion/Development bodies that are
tasked with promoting the attractive investment landscape of their respective country (Vietnam).
Additionally, key measures have been taken in order to make the tax processing and applications of
registering businesses streamlined and unhindered by making the respective Investment Development
Authorities responsible for providing one-window facilitation services, as a means of both convenience
and transparency of documentation/taxation related core activities.
There should be a key focus on the fact that some of these countries show high involvement in creating
a more investor friendly image via the incredibly powerful communication tool in the form of the
Internet. Investment Development Associations/Authorities of Bangladesh, India and Vietnam have
proven effortful actions, including online portals of their respective Investment
Facilitation/Development Agency. The portals include past performances of countries’ FDI inflow in the
form of absolute figues as well as analytical ratios like FDI to GDP ratio. Compared to Paksitan’s BOI’s
involvement in the abovementioned areas of concern, India and Bangladesh are one step ahead in terms
of well established, autonomous and accountable Investment Development Agencies