FDI in the Telecom Sector Of Pakistan

Abstract

Foreign direct investment (FDI) is an integral part of an international economic system and a major catalyst to development; the benefits of FDI do not accrue automatically and evenly across countries. Recent studies carried out show that the reason for the disparity of FDI in most countries (in particular developing nations) includes macroeconomic instability, loss of assets due to non-enforceability of contracts, poor quality of public services, closed trade regimes and notably the perceived sustainability of national economic policies. The flow of FDI is essential both the developed and developing countries, as developing countries need capital for their development process and developed countries need FDI to maintain their growth. Similarly, FDI is beneficial for both the host country and the investor because the investment helps the host country in their growth, and investors, seek high returns for their capital. With capital transfer, the FDI also brings in the country its financial resources, skill-upgraded work force, advanced and improved technology, an increase in gross national product, improvements in balance of payments, advanced managerial skills and technical expertise, and employment opportunities. In early nineties, Pakistan had opened up its market for foreign investors. Policies were reformed and government liberalized its trade by providing trade and fiscal incentives to foreign investors. Due to liberalization and investment friendly policies almost all sectors received good FDI except a few. Telecom and banking were the two 6 main sectors that received the bulk of the foreign investment from 2001 to 2007. But recently there seems to have been a sharp decline in the overall FDI received by the country. One very important reason of this decline is the economic slowdown in Western countries. Multinational companies have been hit hard by the recessionary conditions and they are unable to invest in developing countries. As per the statistics shown by a report published at Business Recorder half of Pakistanis (together with rural areas) including women have access to a cell phone. According to the survey, Baluchistan is the least served (still, a third of the population have access to mobile phones), and as the use of cell phones is still mostly confined to voice services (for 78.5 percent of cell phone users), there is still a large room for new services and advancements in the industry, for example, delivery of financial services over mobile phones etc. Pakistan telecom market has seen great progress after liberalization and privatization of telecom sector. Foreign investment played a dominant role in the development of this sector. Foreign Direct Investment, a form of foreign investment is the investment of foreign assets into domestic structures, equipment, and organizations. As the telecommunication sector of a country plays a vital role in its rapid growth, development and modernization and provides support in conducting economic transactions in the expanded economy, Pakistan must also encourage investment in this sector. Considering Pakistan’s delicate balance of payments position it is becoming crucial to increase mobilization of foreign resources. However, as portfolio investment cannot be encouraged and is not a suitable 7 market policy as Pakistan’s capital market is very narrow and underdeveloped, therefore high priority must be given to foreign direct investment in telecom sector as it seems to provide best opportunity for economic growth. In the past few years’ investment liberalization, privatization and openness to modern technology has also made this sector more attractive for foreign investors. In this research the country of focus is Pakistan and the purpose is to study the best mode to enter the Pakistani telecom market as a foreign investor. The research will examine existing foreign players in this market and the reasons as to why they chose their particular investment method to enter the market. This research would be helpful for foreign investors to get an insight about Pakistan Telecommunication Market, best suitable method to enter this market and the opinion of already existing foreign players. The purpose of this paper is to explore Pakistan telecom market so that the foreign companies who want to invest in this sector could have a deep insight of the market and thus could get maximum out of their decision to start a business here as once the facts are known, steps could be taken to avoid risks and avail opportunities. Moreover, the research would suggest the best suitable entry strategy depending upon the probed factors from the country viewpoint and why the already existing players have selected the mode by which they had entered the market. For a clear understanding below is a brief profile of the country “Pakistan” and its Telecom Market. 8 1.1 The Country Tireless struggle and brilliant leadership of Quaid-e-Azam Mohammed Ali Jinnah led to the establishment of an independent state Pakistan, a South Asian country, in August 1947 when the British Indian Empire was partitioned into two independent states - India and Pakistan. With a total area of 803,940 sq.km (land area 796,096 sq km) it comprised of the provinces of Sindh, North-West Frontier Province, West Punjab, Balochistan and East Bengal. Pakistan became an Islamic republic after the adoption of its constitution in 1956. A civil war in 1971 resulted in the separation of its East wing, making it an independent country ‘Bangladesh’. 1.2 Pakistan Telecommunication Market Since the independence of Pakistan, a governmental department T&T (Telephone and Telegraph department), a monopolist provided the basic telecom services. It played multiple roles as “regulator, policy maker, operator and service provider in the country. The T&T department was later converted into a corporation”. The corporation was earning high profits and was re-investing that amount for providing more telecom services, but the investment was not enough. Moreover, with the technological advancement, more telecom services were being introduced in the sector but the corporation didn’t have enough financial resources to cope up with the changing telecom market needs