The Effects of the Foreign Direct Investment: Liberalisation on Pakistan

Stephen Guisinger
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Stephen Guisinger: International Management at the University of Texas at Dallas, Ricardson, Texas, USA.

The Pakistan Development Review, 1997, vol. 36, issue 4, 403-418

Abstract: Pakistan for many years maintained strict controls on foreign direct investment. However, over the past decade controls on foreign investment in manufacturing have diminished sharply, though less so for the service sector. The government continues to impose restrictions on foreign trade, which adversely affect foreign direct investors in several ways. Nonetheless, Pakistan has moved a substantial distance toward liberalising direct foreign investment. There are two obvious policy issues related to foreign investment raised by these developments. First, should Pakistan proceed further toward liberalisation and at what pace? Second, with a liberalised investment sector, should Pakistan become an active protagonist among developing countries for a multilateral agreement on investment? This paper explores the macroeconomic effects of foreign direct investment liberalisation on developing countries that have yet to substantially and fully liberalise. The principal focus will be on relatively short term effects—those changes that will occur between one and five years after liberalisation, although long-term effects are also discussed. Unfortunately, very little is known about the repercussions of foreign direct investment liberalisation on host economies. There is a rich literature on the effects of trade policy liberalisation on macroeconomic variables. Considerable scholarly work has been done on the impact of foreign direct investment on host economies under existing investment regimes. However, for a variety of reasons discussed below the link between investment liberalisation and macroeconomic performance has received scant attention from researchers. This study summarises a few pieces of this small body of research on foreign direct investment, but this only takes us part of the way. As Sebastian Edwards noted in a recent study, “applied economists often ask too much of their data sets, and try to extract information that is simply not there” [Edwards (1993)]. With that caveat in mind, the paper takes two approaches to achieving its stated purpose of exploring the macroeconomic effects of investment liberalisation.

Date: 1997
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