Removal of constraints will rope in FDI from MNCs.

Byline: Ahsan Nisar

Most countries have liberalized their policies to attract investments from foreign multinational corporations (MNCs). On the expectation that foreign MNCs will raise employment, exports, or tax revenue, or that some of the knowledge brought by the foreign companies may spill over to the host country's domestic firms, governments across the world have lowered various entry barriers and opened up new sectors to foreign investment.

An increasing number of host governments also provide various forms of investment incentives to encourage foreign owned companies to invest in their jurisdiction. These include financial incentives such as tax holidays and lower taxes for foreign investors, financial incentives such as grants and preferential loans to MNCs, as well as measures like market preferences, infrastructure and sometimes even monopoly rights.

However, evidence shows that incentives alone are not the primary drivers of investment and potential investors' first look for policy stability, security and overall business environment. In fact, investment incentives if not designed carefully, can end up costing more than the benefits that they achieve, and have inadvertent consequences like tax evasion and rent seeking. Currently, Pakistan is at 65th place with respect to the FDI received at the global level. It must shift its focus from aid and loan reliance to economic investment packages for the foreign investors in the form of repatriation of profits, dividends and capital gains. Also, FDI is coming from a handful of countries, which indicates that a lot needs to be done to make the country attractive for international investors.

There is no doubt that the country's potential is under-utilized at the moment but there are several constraints which are still persisting and hindering the development aspects.

Following corrective measures must be taken to eliminate the persistent constraints:

1. Pakistan should initiate and encourage co-production programs where foreign company partners with the local company having the same specialization to manufacture goods. This extends confidence to investors and safeguards their investment whereas it strengthens and encourages employment and business prospects within the country. Whereas, if a company wants to enter the market with 100% equity, it should not be discouraged either.

2. Pakistan must lower its tax brackets as it diminishes the profit margins, which makes the market unattractive...