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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.