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Analysis of Foreign Portfolio Investment in Pakistan

1. 1Investment Business is the need of human life as human can’t produce everything needed by them so they have to exchange the commodities when business expends at particular level it needs more finance as not everyone have enough finance so they need to raise capital Through loans or giving partnership (investment) to others “A commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities. ” Business is an organization engaged in the trade of goods services or both to consumers.

Businesses are most important in capitalist economies. In which most of them are privately owned and administered to earn profit to increase the capital of their owners. Businesses may also be not-for-profit or state-owned. A business owned by multiple individuals may be referred to as a company, although that term also has a more precise meaning. (Investor World) Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument.

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It is related to saving or deferring consumption. (Maps of world Finance) Investment is involved in many areas of the economy like business management or finance not involved for household government and firm. Investment involves an individual or an organization like pension fund after some analysis and though to place or money in a vehicle instruments or assets like property, commodity, stock, bond, and financial derivatives and foreign assets dominated to foreign currency. Risk generates the possibility of return period. 1. 2Foreign investment

Foreign aid and investment have played a critical role in Pakistan’s economic development since the first years of independence. Since 1954, the government has tried to attract foreign investment to maintain economic development, provide specialized technical knowledge, and bring in much-needed foreign exchange. Incentives for private investment include guarantees for the repatriation of capital invested in approved industries, facilities for remittance of profits, and guarantees for equitable compensation in the event of nationalization of an industry.

In addition, special tax concessions available to certain local industries are also available to foreign investors. Since the late 1980s, a series of regulatory reforms related to exchange controls, repatriation of profits, and credit for foreign-owned firms, issuing of equity shares, foreign currency accounts, and transactions on the stock exchange have significantly reduced the restrictions on general foreign investor activity in the wider Pakistani economy. (encyclopedia of the nation) 1. 3Foreign direct investment

Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm. Khan, 2011) Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.

Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home country.

As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property, in the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI.

New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been the most significant catalyst for FDI’s expanded role.

The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26. 7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global FDI. FDI allows transfer of technology particularly in the form of new varieties of capital inputs that cannot be achieved through financial investments or trade in goods and services.

FDI can also promote competition in the domestic input market. Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country. Profits generated by FDI contribute to corporate tax revenues in the host country. Thus, it contributes not only to the direct source of investment but also to the government revenue. FDI helps to integrate the host countries economy to the global economy. (Sureshlasi, 2008) 1. Policies to attract Foreign Direct Investment The many different methods used by policymakers to attract FDI and their effectiveness providing targeted fiscal incentives, such as tax concessions, cash grants, and specific subsidies; improving domestic infrastructure; promoting local skills development to meet investor needs and expectations; establishing broad-reaching FDI promotion agencies; improving the regulatory environment and decreasing red tape; Engaging in international governing arrangements.

Promotional efforts to attract foreign direct investment (FDI) have become the important point of competition among developed and developing countries. This competition is also maintained when countries are adopting economic integration at another level While some countries lowering standards to attract FDI in a “race to the bottom,” others praise FDI for raising standards and welfare in recipient countries. Countries have adopted their respective policies for attracting more investment.

Some countries rely on targeted financial concessions like tax concessions, cash grants and specific subsidies. Some countries focus on improving the infrastructure and skill parameter and creating a base meet the demands and expectations of foreign investors. Others try to improve the general business climate of a country by changing the administrative barriers and red tapes. Many governments have created state agencies to help investors through this administrative paperwork.

Finally most of the countries have entered into international governing arrangements to increase their attractiveness for more investment. Sound investment climate is crucial for economic growth. Microeconomic reforms aimed at simplifying business regulations, strengthening property rights, improving labor market flexibility, and increasing firms’ access to finance are necessary for raising living standards and reducing poverty in a country. (Khan, 2011) Reform is necessary for creating an investment-oriented climate.

Reform management matters as investment climate reforms are done politically. They often favor unorganized over organized groups and the benefits tend to accrue only in the long term, while costs are felt up front. Political decisions play a significant role in this context. Each and every country over the globe is stepping forward to change the climate for attracting more investment. Opening up of doors by most of the nations have compelled them for adopting reforms. Relaxation of rules and regulations, of course, is an essential requirement but not sufficient on its own to bring in FDI.

As the study points out, business rules in India still bar FDI in most sectors. It was only last February that the government there decided to allow FDI of up to 51 percent in the single brand retail sector, which is expected to trigger a new flurry of investment. As things stand, Pakistan is far ahead of India in terms of offering all kinds of incentives to foreign investors – although some administrative bottlenecks still remain to be removed. It also boasts a high economic growth rate and there exists a consensus among all political forces on following the market economy model.


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