Tracking FDI, Greenfield investment in Pakistan under Covid-19

The world is moving around the Liberal approaches towards economy where development is supported by foreign direct investment (FDI) but under the depressing environment of COVID-19 where humanity is confronting the challenges of health crisis, international flows are also disrupted which declines almost 49% in the first wave of pandemic. Despite of worst situation internationally, FDI inflows into Pakistan have been quite resilient. This continues a trend of generally strong performance in attracting inward FDI in the years immediately preceding the emergence of Covid-19. Between 2015 and 2019, FDI inflows into Pakistan expanded from $1.67 billion to $2.22bn. As of 2019, the value of inward FDI stock into Pakistan had reached $34.8bn. Even amid the onset of the pandemic, Pakistan’s inward FDI flows increased by 9% in the first half of 2020 on a year-on-year basis. The greater resilience of inward FDI in Pakistan is because of the central role of Chinese investment in the country through BRI and CPEC as Pakistan is the largest recipient which is almost unaffected by the external and COVID shocks.

Instead of resilient FDI conditions in Pakistan, Pandemic hardly hit the Greenfield investment (a type of foreign direct investment in which a parent company creates a subsidiary in a different country) in Pakistan where world is experiencing almost 37-45% decline in greenfield investment. Greenfield investment is always a very important source of investment for any nation as it contributes in job creation, productive capacity building and imitate technology. Pakistan is expecting 6,212 jobs in 2019-20 where only 548 jobs are created due to COVID crisis.

Almost every sector of Pakistan’s economy attracts greenfield investment reflecting the harsh impact of COVID on each of the sector. Greenfield investment in sectors of power (coal/oil/gas) comprises of almost 43% of total greenfield investments in Pakistan during 2015-19 but drastically decline in initial quarters of pandemic i-e. $1.5bn in 2019 and $143.2 million in 2020. Other sectors like power are also the victims of COVID while no new investment are announced in 2020.

But, COVID crisis will provide us an opportunity to review our current investment policy by analyzing not only the impact of greenfield investment in our economy but also the extent to which we afford such kind of foreign investment as it has several consequences.

Developing countries like Pakistan tend to attract prospective companies with offers of tax breaks, or they could receive subsidies or other incentives to set up a green-field investment. While these concessions may result in lower corporate tax revenues for the foreign community in the short run, the economic benefits and the enhancement of local human capital can deliver positive returns for the host nation over the long term. In case of startup, green-field investments entail higher risks and higher costs associated with building new factories or manufacturing plants. Smaller risks include construction overruns, problems with permitting, difficulties in accessing resources and issues with local labor. Companies contemplating green-field projects typically invest large sums of time and money in advance research to determine feasibility and cost-effectiveness. As a long-term commitment, one of the greatest risks in green field investments is the political relationship with the host country which is very unpredictable and in case of any disturbance in relationship the company may pull out of project at any time which is financially devastating for the business so, we have three major takeaways from greenfield investments,

  • In a green-field investment, a parent company creates a new operation in a foreign country from the ground up.
  • A green-field investment provides the sponsoring company with the greatest degree of control.
  • A green-field investment poses greater risks and a greater commitment of time and capital than other types of foreign direct investments.

Considering the profile of Greenfield investment in Pakistan which is (dominantly in Power sector) requires a targeted policy for its diversification (sectoral) in order to amplify the productive capacity among different sectors that generate sustained and structural economic transformation to overcome the damaging impacts of unemployment and lower exports. There is a strong need to uplift more in cost of doing business, tax holidays and incentives accompanied with tax reforms to attract FDI in Pakistan and the new dimensions where these FDI’s are required to attract are health, education and e-commerce sectors so that Pakistan will develop its social infrastructure from grass root. In addition, policies must be taken not only to attract investor but to retain the confidence of investor as well in high productivity sectors like ICT, value added products of different domains and manufacturing sector (yielding highest employment).

The author is MD IRP/Faculty Dept of H&SS, Bahria University Karachi

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