FDI & Tech Capabilities
Khalil Hamdani
Lahore School of Economics
27 March 2014
Outline
East Asian experience
Pakistan experience
FDI strategy
The East Asian experience
• Rapid growth generated by high rates of
investment, initially with external capital
and later with domestic saving.
• Government stimulated investment by
creating rents and high profits.
• Corporate profits were reinvested.
• Corporate savings thus became a main
source of capital accumulation.
East Asian policies
• Promoted investment in industries with
potential for learning, scale economies and
productivity growth.
• Promoted forward and backward linkages that
stimulated investment in the wider economy.
• Eased constraints on capital accumulation,
particularly on capital goods imports.
• Tied government support to private sector
performance.
East Asian policies to build technological capabilities
• Education and human
resource development
• Teacher training
• Support for SMEs and
emerging entrepreneurs
• FDI to stimulate business
linkages (OEM)
• Managerial programs
• Technology licensing
• Institutions (create ties
between firms,
universities, and research
institutes at home and
overseas)
• Regulatory reforms
Outline
East Asian experience
Pakistan experience
FDI strategy
Pakistan experience had some similarity
• We relied on import substitution, technology
transfer and foreign capital inflows.
• However, we neglected to build technological
capabilities.
• We did not develop a robust relationship
between government and industry.
• We could not foster an environment in which
corporate profits were reinvested. Corporate
savings thus did not become a main source of
capital formation.
Capital formation in Pakistan is well below
the threshold for dynamic growth
25.0
Threshold
20.0
15.0
10.0
5.0
0.0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Gross fixed capital formation (% of GDP)
Gross fixed capital formation, private sector (% of GDP)
GDP growth (annual %)
2010
Lowest capital formation in South Asia
(GFCF % of GDP, World Bank World Development Indicators)
35
30
India
25
Sri Lanka
Bangladesh
20
Nepal
15
Pakistan
10
5
0
2000
2004
2008
2012
Low propensity of the rich to invest
(Accumulation/Concentration Ratio, %, UNCTAD)
1970-1979 1980-1994 1995-2000
Bangladesh
11
16
34
India
25
28
34
Korea
46
53
70
Malaysia
28
32
41
Pakistan
14
18
22
Thailand
35
46
49
Korea: shift to high-tech manufacturing
(low, medium, high technology, % of MVA, UNIDO)
Pakistan: manufactures still low-tech 50%
(low, medium, high technology, % of MVA, UNIDO)
Pakistan: exports low technological content
(%, UNIDO)
1990
2000
2011
Lower Middle
Income
Developing
countries
2011
16
14
18
24
32
30
25
40
88
87
81
79
8
11
11
55
Pakistan
Year
Manufacturing value
added in GDP
- of which: medium or high
technology
Manufactured exports in
total exports
- of which: medium or high
technology
Manufacturing transformation
(MVA, ratio of consumer goods to capital goods, UNIDO)
While other countries have shifted the manufacturing
base from consumer goods to capital goods,
Pakistan has moved in the opposite direction
Outline
East Asian experience
Pakistan experience
FDI strategy
Why FDI?
• FDI can raise the investment ratio under
constrained balance of payments.
• FDI also has wider benefits:
• FDI can augment capital accumulation with
technology and skills transfer.
• FDI can also provide access to global production
networks: expand exports.
• Pakistan needs FDI for all three reasons.
FDI strategy
• The wider benefits of FDI are not automatic.
• Technology can obsolesce or be absorbed into
technological progress and productivity growth.
• Profits from FDI can be repatriated or reinvested.
• Hence, FDI strategy involves generating
inflows and capturing the wider benefits.
Pakistan needs a broader FDI strategy
• A preoccupation with macroeconomic
management emphasizes attracting foreign
capital inflows and neglects the need to
create an investment environment
conducive for reinvestment and
technological upgrading.
• Pakistan needs to attract FDI and also
promote sequential investment.
FDI strategy must begin at home
• Government needs to work with industry to:
• Encourage reinvestment to upgrade production,
train workers, create supplier linkages and develop
exports.
• Strengthen policies and institutions that support
building up of industrial technological capabilities.
• Without such internal efforts, FDI adds to the
balance of payments difficulty.
FDI would double with reinvestment
(Billions USD, State Bank of Pakistan)
7
6
5
4
3
2
1
0
FY2006
FY2007
FY2008
FDI net inflows
FY2009
FY2010
FY2011
FY2012
FY2013
Outflows of profits and dividends
FDI comes when private sector invests
14
12
10
Gross fixed capital formation, private sector (% of GDP)
8
6
Foreign direct investment, net inflows (% of GDP)
4
2
0
2000
2004
2008
2012
Government-industry relationship
• High-level, institutionalized consultation is needed
on:
• urgent problems of energy, security and investor
confidence;
• practical matters of regulatory barriers that impede
entrepreneurship and business; and
• Strategic plans for industrial upgrading.
Pakistan’s FDI profile
 Natural resources: mining, oil and gas.
✘Exports: weak infrastructure, skill base.
 Market: food, beverage, consumer goods
and service industries.
 Sequential investment to upgrade production,
create linkages and develop exports.
FDI linkages
BACKWARD
SUPPLIERS
SUPPLY CHAIN
MANAGEMENT
Improved productivity
Higher incomes for suppliers
Reduced costs for company
FORWARD
Company
NEW MARKETS
PRODUCT
STEWARDSHIP
Better products for consumers
Enlarged market share for
company worldwide
FDI is part of larger industrial strategy
• Industrial transformation: shift to a high
technology, knowledge-based economy
• Diversify existing industrial base (technological
upgrading, linkages, exports)
• Target growth industries (e.g. engineering, ICT,
petrochemical products)
• Encourage SMEs and entrepreneurship
development
• Develop clusters of knowledge-based activities
Investment score card
✔ Investment climate
✗ Strategic policy coordination
Strategic FDI
attraction
✗
Linkages
policies and
programmes
Source: Altenburg, 2005.
Strengthening
hard and soft
infrastructure
✗
Summary
• FDI is more than an external resource inflow.
• FDI can also modernize industry and better
integrate Pakistan into international production.
• Natural resources and large internal market
are Pakistan’s main attractions for FDI.
• With appropriate policies, significantly wider
benefits can be realized, including exports.