Is the Physical Infrastructure in Pakistan Enough to Attract Foreign Direct Investment

One suitable way for Pakistan to develop its infrastructure can be attracting FDI in infrastructure development and maintenance. The developing world needs a massive increase in private sector involvement in infrastructure investments. Although after 2000 Pakistan has realized and focused on the opportunity, driven by foreign direct investment, areas that had traditionally been defined as public sector responsibilities benefited from substantial commitments of capital and resources. The World Bank Project Database indicates that an estimated total of 1,707 private infrastructure projects worth US$458.2 billion were concluded from 1990 to end-1998. Foreign direct investment is the engine behind this development, with foreign investors involved in over 80 percent of transactions. During this period developing countries received an estimated US$138.3 billion in foreign direct investment from these infrastructure investments. Supported by a strong policy framework, private sector financing and operation of infrastructure facilities can result in significant efficiency gains while alleviating budgetary pressures. There is a startling gap between, allegedly, globalization-induced changes in international competition for foreign direct investment (FDI) and recent empirical evidence on the relative importance of determinants of FDI in developing countries. Traditional market-related determinants are still dominant factors. This paper analyzes the role of infrastructure availability in determining the attractiveness of countries for FDI inflows for export-orientation of MNE production. We posit that investments by governments in providing efficient physical infrastructural facilities improve the investment climate for FDI. MNEs may be particularly sensitive to infrastructure availability for locating their investments designed to feed the global, regional or home country markets. E.g. Transport infrastructure, telecommunications infrastructure, information infrastructure, energy availability for countries. The role of infrastructure in explaining the attractiveness for foreign production by MNEs, MNEs’ decision making pertaining to location of product mandates for global or regional markets sourcing is significantly influenced from infrastructure availability considerations. These findings suggest that infrastructure development should become an integral part of the strategy to attract FDI inflows in general, and export-oriented production from MNEs in particular.