The
PHENOMENON of foreign investment in general should be seen as
another link in the chain of capital exchange relationships
which have emerged between the developed and the developing
world in the post-decolonization period. The flow of capital
from the developed world to the developing one was, to start
with, a political need of the capitalist world which was looking
for ways and means to curtail the spread of Communism.
Therefore, a mechanism of providing grants, aid packages and
loans to the third world countries through bilateral agreements
or through international institutions, such as the IMF and the
World Bank, was evolved to implement the western developmental
model in these societies. And this mode of economic transaction
among nations is still prevalent, though now it is not pursued
with as much enthusiasm as it was done in the bygone days.
Moreover, quite often than not, the terms and conditions of such
aid packages and loans has also proved to be counterproductive
for the recipient economies. This very basis of this model have
come under serious questioning and foreign investment, rather
than loans and aids, is now considered as a more desirable
procedure to muster the capital needed for economic growth in
the developing countries. Thus, foreign investment has now
become a buzzword and it is generating unprecedented euphoria in
the third world - especially in Pakistan.
Broadly speaking foreign investment has two categories : direct
investment and indirect investment. While dealing with indirect
investment we are invariably referred to the investment which is
done through the stock market. Now, for a developing country
like Pakistan where capital resources are scarce, foreign
investment is almost an ideal mode of accumulation of capital
badly required for launching developmental projects in various
sectors.
As compared to direct investment in such projects, foreign
investment through stocks is regarded safer and often more
profitable for the investors. This is so mainly because of two
reasons : Firstly, favorable exchange rates, and relative
strength of the foreign currency as compared to that of the host
country, minimize the risk of their investment s turning bad and
this is true for both short term and long term investments.
Secondly, the level of control the foreign investors enjoy over
their shares investment in particular and over the trend of a
stock exchange in general provides them more room to make
appropriate decisions.
The last part of the argument, however, can also be used to
highlight the adverse effect that foreign investment may have on
the functioning of a stock exchange. The equity market trends to
follow the pattern set by the foreign investors and moves into
bearish or bullish groove depending on the interest shown by the
foreign investors and the overall atmosphere that they create in
the market by large scale paring in of the capital of its
massive with drawl. Here, we have to consider this pertinent
point being highlighted every now and then by our local market
investors and the press that the current decline of the market
since middle of 1994 to date is the result of withdrawals by the
foreign investors. If this point is considered in its proper
perspective, we would like to argue that the KSE index, which
stood at that time at 1050, started to rise from the middle of
1993, picked up gradually towards the end of the year and rose
to an all time high mark of 2662 by July 1994 and then started
to decline.
It has been argued that. Besides other factors, the flow of
foreign investments in that period was instrumental for that
phenomenal rise and withdrawal of foreign investment was the
cause of decline of the stock market form the middle of 1994
onwards.
It is quite natural for a large number of investors � whether
foreign or local � to invest in a rising market and there would
be a selling pressure in the declining market. In the latter
scenario, local investor would also like to dispose off his
investment to minimize his losses. The foreign fund manager is a
trustee of those investors who have invested through him and he
is duty bound look after the interests of his depositors and
investors and if the market is declining then there would be a
selling spree which is quite natural. The foreign fund managers
are also required to sell a part of the investment at opportune
moment that the realized gains could be shown in the accounts
for distribution of profits to which the investors of the
foreign funds are rightfully entitled.
While it might be valid justification for such cases, and true
that the foreign investors do hold the key to market
fluctuations in a stock market like ours which is not only small
but also lacks depth, this argument can in no way be employed to
undermine the importance of the foreign investment. The fact
must be kept in mind that this is about the only adverse impact
the foreign investment can be described to have and that too is
not an incurable ailment. With the development of the market, as
would happen with the rise in the number of listed companies,
maturity of the investors through education and experience and
rise in the shares of the institutional investors, this negative
impact of foreign investment would also become manageable.
Besides, it betrays common sense to condemn one aspect of the
flow of foreign investments at the expense of numerous positive
developments that it brings to the domestic stock market. It
gives a boost to investors� confidence in the equities and adds
tremendously to the stock valuations despite the fact that
foreign investors usually hold only 4-6 percent of the total
market capitalization. As foreign investment mostly comes in the
institutionalized form, it affects a healthy shift in the
composition of a stock market like ours where the speculators
are regularly accused of manipulation. Slowly, but surely,
foreign investment helps the process of automation of the
trading activities at the market and also serves the purpose of
disseminating awareness and education among the local investors.
But more importantly, it endows a certificate of credibility to
the stock exchange activities and creates an atmosphere of trust
among the traders.
Over the last decade or so, there has been a visible shift in
the mood of our policy makers who are gradually coming to rely
more on foreign investments rather than an aid or loans and a
campaign has been launched and pursued by successive government
to lure foreign investor in the domestic market. Without going
into thee efficacy of this campaign or debating the means
adopted to achieve the desired end, it needs be stressed here
that we cannot find a better modus operandi for accumulating
capital than foreign investment.
So far, investment worth more than $ 1.8 billion have come from
abroad into our equity market since 1992.
An amount of $24 billion is reported to have been committed on
the part of the foreign investors during the last 18 months.
However, we do not expect the volume of actual foreign
investment for the current year in Pakistan to exceed $1.6
billion by the end of the financial year. The share of portfolio
investment out of this total expected foreign investment stands
at $1 billion. Though, it may not sound like an extraordinary
figure, given the prevalent conditions � both socio-economic and
political � this amount is certainly an encouraging sign. But
still, we cannot compare it with the level of investment flowing
from abroad into other developing countries of the region.
Thailand, for example receives foreign investment to the tune of
$ 3 to 4 billion on average annually. Same is the figure for
Indonesia while the Philippines inflow of foreign investment is
estimated to be around $ 1 billion. India�s share is twice as
large.
It is quite evident that our economy has just started to open up
over the last decade or so and our stock exchanges are yet to
attain their full potential. We can hope for a far more dynamic
equity market once it matures, yet is would be foolhardy to
anticipate any complement by deliberate and well formulated
policies � not only in the sphere of economic activity but also
in the realm of political and social restructuring. It must be
kept in mind that a foreign investor does not just dump his
capital in the market and stays out in his home town; his
capital comes along with a whole paraphernalia which warrants
some adjustment on the part of both the investor and the host�s
environs. It goes without saying that security for his life and
prosperity is a prerequisite. Furthermore, the problems of lack
of an investor-friendly environment in our major urban centers
should b addressed in a manner which neither hurts our value
systems nor dissuades the investors from bringing in his
capital. To state the truth, we do not have an enviable record
as far as the law and order problems are concerned and there is
a dire need for the government to take stringent and efficient
measures to cope with this disturbing situation. The
infrastructure that we have to offer to the investors form
abroad should also be given a new look. Given the overall level
of social and technological development of the society, it is
quite understandable that the facilities present at our stock
exchanges are quite below the international standard. The
exchanges are quite of the stock exchanges should concentrate on
improving the quality of our services so as to bring them at par
with those of other exchanges operational in the region.
Conversely, some of the most attractive markets for the foreign
investors are to be found in the South East Asia, especially
Singapore, Malaysia, Thailand and Hong Kong. Three
characteristics of these economies can easily be identified as
the pull factors contributing to the growth in size of foreign
investment in these markets, i.e. swift and smooth discharge of
bureaucratic procedures, a tangible improvement in the civic
facilities over the last two decades ranging from the use of
state-of-art gadgets in market processes to modernization of
traffic systems and last, but not the least, the quality of the
social life in which an investor has to consume his leisure
hours after a hectic business day. On these counts, in contrast,
our country can hardly be considered as a competitive market.
Unless we bring about major changes in our attitude regarding
these issues, we cannot hope to lure foreign investors.
But probably the most crucial factor which would determine the
fate of our foreign investment scenario is the continuity in
government policies. Relationship between the two protagonists
across the domestic political divide have been sour to the point
of no return and political environment in the country is as
hostile as ever. Nevertheless, fortunately, the economic
policies of both the major parties are remarkably similar.
Incentives given to the foreign investor in a number of sectors
have persisted despite quick change of hands at the state reins.
This factors alone can be considered as a propitious omen for a
better future which is in store for our national economy and
foreign investor is likely to show more faith in our market.
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