FDI & Tech CapabilitiesKhalil Hamdani

Lahore School of Economics27 March 2014

Outline

FDI strategy

Pakistan experience

East Asian experience

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

• Managerial programs

• Institutions (create ties between firms, universities, and research institutes at home and overseas)

• Support for SMEs and emerging entrepreneurs

• FDI to stimulate business linkages (OEM)

• Technology licensing

• Regulatory reforms

Outline

East Asian experience

FDI strategy

Pakistan experience

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

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0.0

5.0

10.0

15.0

20.0

25.0

Gross fixed capital formation (% of GDP)Gross fixed capital formation, private sector (% of GDP)GDP growth (annual %)

Threshold

Lowest capital formation in South Asia(GFCF % of GDP, World Bank World Development Indicators)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

5

10

15

20

25

30

35

India

Sri Lanka

Bangladesh

Nepal

Pakistan

Low propensity of the rich to invest(Accumulation/Concentration Ratio, %, UNCTAD)

  1970-1979 1980-1994 1995-2000Bangladesh 11 16 34India 25 28 34Korea 46 53 70Malaysia 28 32 41Pakistan 14 18 22Thailand 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)

   

Pakistan

  Lower Middle Income

Developing countries

Year 1990 2000 2011 2011

Manufacturing value added in GDP

16 14 18 24

- of which: medium or high technology

32 30 25 40

Manufactured exports in total exports

88 87 81 79

- of which: medium or high technology

8 11 11 55

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)

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY20130

1000

2000

3000

4000

5000

6000

7000

FDI net inflowsOutflows of profits and dividends

FDI comes when private sector invests

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

2

4

6

8

10

12

14

Gross fixed capital formation, private sector (% of GDP)

Foreign direct investment, net inflows (% of GDP)

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.

BACKWARD

SUPPLIERS

FORWARD

NEW MARKETSCompany

FDI linkages

PRODUCT STEWARDSHIP

SUPPLY CHAIN MANAGEMENT

Improved productivityHigher incomes for suppliers Reduced costs for company

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 climate

Linkages policies and programmes

Strengthening hard and soft infrastructure

Strategic FDI attraction

✗ Strategic policy coordination

Source: Altenburg, 2005.

Investment score card

✗ ✗

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.