Changing FDI dynamics (1)

When it comes to foreign direct investment, Pakistan has intentionally or unintentionally barely scratched the surface of the potential there is. The minuscule and constricted FDI landscape in the country has now been rattled by Covid -19 that has deeply shocked the global investment. According to the latest FDi Intelligence Report 2021, both the number of FDI projects and capital investment in FDI plummeted by a third in 2020 from 2019’s levels with the transforming world under Covid-19 a driving force behind global investment decisions in 2021 and beyond.

Amid the debilitating global environment for foreign investment, FDI inflows in Pakistan continue to be unimpressive with only investment from China under CPEC holding the fragile structure. Much has been said about FDI diversification, but little is often offered as the way to bring the revolutionary change. Besides the sectoral lens to tackle FDI shortcomings, there are the policy and regulatory needs to be addressed, which this space will take up later this week.

The focus of the policy makers should immediately be a response to t he rapid changes and intense competition the global FDI landscape has entered and will enter in the post Covid era. This period is characterized by precipitously changing priorities of investors as well as FDI destinations, which should mean not only will there be a marked change in risk acceptance and avoidance of the investors but also a shift away from the conventional sectors towards more disruptive, advanced and vertical segments. Decisions for FDI will more likely be based lowering the input cost and gaining greater control of sustainable supply chains, which means Pakistan should think not only look beyond conventional FDI attracting sectors but also in delve further into the traditional sectors and look for opportunities within the supply chain and value addition that offer lower costs, infrastructure, and liberal trade regulations in general because these sectors are still the top sectoral destinations for global FDI.

Pakistan Business Council has also highlighted in its collaboration with Kearney th at climate change has begun to emerge as an important factor driving decisions by the investors. Its analysis shows the result of a survey where 79 percent of respondents indicated that climate-related risks are affecting existing foreign direct investment assets, and 77 percent of respondents believe that climate change will impact their FDI decisions in the next 3 years. This is further shown in how renewable energy is the only sector among the top recipients that witnessed a staggering year -on-year positive change in 2019. The new report by FDi Intelligence for 2020 also highlights that renewable energy has dethroned oil and gas as the biggest recipient of foreign direct investment for the first time ever. Other sectors that have stood out during the shifting times are the communication, software & IT and the larger digital economy, and biotechnology. Sectors that saw massive downturn include coal, oil & gas, hotels and tourism, and global textiles.

As the analysis by PBC suggests, the key to unlock the FDI potential for Pakistan lies in rigorously determining the most promising sector for export oriented, vertical FDI – which should now consider the world post Covid-19 pandemic – and creating persuasive value propositions in those sectors. The four sectors that it has identified in its analysis for the most potential for vertical FDI include the textile sector, food and beverages sector, automotive; and IT & IT services primarily because of cost advantages, strong supply base or value chain, and priority in CPEC SEZs. Whereas globally, it is being observed that the paradigm shift has propelled renewable energy and digital economy as holding most potential as sectoral FDI destinations. The key lies in value addition or a shift toward complex products to incre ase the attractiveness of the priority sectors. Findings like these must be at the fingertips of the policy makers and those in investment promotion!

Published in Business Recorder