Abstract
Foreign direct investment and telecommunications development are essential for the economic development of a country. Pakistan, although being an underdeveloped country, has managed to excel in the telecommunications sector by manifold since 2001. An increasing number of telephony and cellular subscribers along with the broadband and 3G/4G users, have created an enchanting market for foreign investors. The purpose of this study is to explain the casual relationship between foreign direct investment and economic factors that attract FDI in Pakistan. Among the many economic factors here is telecom infrastructure, market size and trade openness, whereas FDI is taken as the dependent variable. A time series analysis is carried out to determine the growth trend while an ordinary least square test is applied to determine the coefficient of correlation between the variables. The result of the study specifies a positive relationship is observed between the per capita GDP and openness to trade and influx of FDI.
Key Words
Foreign Direct Investment, Telecommunications Sector, Determinative Approach
Introduction
Telecommunication Sector in Pakistan
The telecommunications sector is among some of those industries that will never retire from innovation. Each day new dimensions are being explored in the telecommunications sector encompassing better local loop services to superfast 3G & 4G technology. The telecom sector remains a vulnerable portion of the economy, comprising the national security and control over the local market. It is certain that FDI in the telecom sector is a gateway for foreign funding, new technical skills and development of the sector, but some countries' strict trade and legal polices do not allow a liberalized entry into the telecom sector in order to protect their economic identity. Chun Hung Lin, (2008)
Pakistan's Telecom sector has played a vital role in economic, social, educational and business development. Advancement in the Telecom sector is the top priority of any government as it has created a number of job opportunities along with ease of operations. From landline services to the broadband, from mobile services to mobile banking, the options are unlimited. Pakistan has largely shifted its focus from Industrial growth & agricultural sector to the development and expansion of the service sector.
The telecom sector is one of the major contributors to Pakistan's growing economy. From taking over PTCL over Pakistan telecom and telegraph to Induction of Cellular companies and 3G/4G services; the contribution of the telecom sector to GDP is noticeable. Estimated revenue of Rs. 449,546 million is reported by the telecom sector in 2014-15; while its contribution to the National exchequer is recorded as Rs. 243.3 billion. (PTA sources). Market size has grown substantially from 2003 to 2015, as per PTA annual fixed line, cellular, Broad band and 3G/4G subscribers’ data indicates (Fig.1), especially cellular and the broadband sector proving to be emerging fields after 2005-06.
Figure 1
Annual Telecom Market Size of Pakistan
Source: PTA
Privatization era of Telecommunication in Pakistan
After the
1990s a global evolutionary escalation has been observed with an enlarged
growth of Information and Communication Technologies. A large number of private
telecom service providers have jumped into the field, providing live
broadcasting, satellite communication, public telephony, IP networking and
mobile internet. After the dissolution of British Telecom and AT&T business
merger in 1994 and the privatization of British Telecom backed a new era of
telecom sector's liberalization and deregulation was introduced but the trend
of privatization was slowly followed in developing countries as compared to
underdeveloped countries.
In 1991, under the act of Pakistan Telecommunication
Corporation of 1991, Pakistan Post & Telegraph department was taken over by
the PTC. Pakistan welcomed the private sector's participation in telecom and a
number of cellular licenses were issued along with the regularization of card
operating payphone companies to improve telecom services in Pakistan. In 2006 a
Dubai-based company "Etisalat Telecommunications Company," purchased
26% shares of Pakistan Telecommunication Company Limited with management
rights.
Role of Foreign Direct Investment in Pakistan's
Economy
Foreign direct
investment has emerged as a major global economic contributor in the past few
decades; it has served the developed and underdeveloped countries in the
private sector as well as in the Government sector. DI usually works as a
two-way bridge of economic development; MNCs, in return of expanding their
business in host country, produce extensive economic benefits to that country
in the shape of bringing excess foreign capital, advanced business techniques
and technology, trade development and foreign exchange opportunities. A
correlation between investment in telecommunications and economic development
is proven empirically. (Chun Hung
Lin, March 2008).
Openness
to trade servers is a critical factor to allure FDI, but increased FDI may pose
a threat to local businesses, creating a demand and supply gap for the host
country. Government can control the FDI influx by imposing limits on FDI, laws
for the MNCs operation in the country, bounding the investing company to employ
domestic human resources etc. Creating a balance between the economic benefits
from an FDI with the control over national economic dominion is a substantial
historical problem in many countries; however, it has been empirically proven
through discussion that a more liberalized foreign investment environment does
not always disturb national economic control. (Chun
Hung Lin, March 2008).
The study intends to measure
the potency of the influence of economic variables on the FDI (Telecom) influx
in Pakistan and its contribution to the growth of overall GDP. The study will
help in identifying the factors having a positive effect on the FDI (Telecom)
influx. Table 1.2 shows the foreign direct investment in the telecommunication
sector of Pakistan from 2001.
Table 1. Country wise FDI Inflow in $ millions
Country |
2008-09 |
2009-10 |
2010-11 |
2011-12 |
2012-13 |
2013-14 |
2014-15 |
USA |
869.9 |
468.3 |
238.1 |
227.7 |
227.1 |
212.1 |
223.9 |
UK |
263 .4 |
294.6 |
207.1 |
205. 8 |
63.3 |
157 |
169.6 |
U.A.E |
17S.1 |
242.7 |
284.2 |
36.6 |
22.5 |
-47.1 |
213.6 |
Japan |
74.3 |
26. 8 |
5.2 |
29.7 |
30.1 |
30.1 |
71.1 |
Hong kong |
156 1 |
9.9 |
125.6 |
8O.5 |
2426 |
228.5 |
136.2 |
Switzerland |
227.3 |
1706 |
110.5 |
127.1 |
149 |
209. 8 |
-6.5 |
Saudi Arabia |
-92.3 |
-155.S |
6 5 |
-79.9 |
3.2 |
-40.1 |
-64. 8 |
Germany |
76.9 |
53 |
21.2 |
27.2 |
5.5 |
-5.7 |
-18.2 |
Korea (South) |
2.3 |
2.3 |
7.7 |
25.4 |
25.S |
24 4 |
14.5 |
Norway |
101.1 |
0.4 |
-45 |
-275 |
-25 S.4 |
-21.6 |
2.7 |
China |
-101.4 |
-3.6 |
47.4 |
126.1 |
90.6 |
695. 8 |
319.1 |
Others |
1.964.20 |
1.019.60 |
631.5 |
2S9.7 |
2S5.5 |
255.4 |
-73.1 |
Total including |
5.7 10.90 |
2,150.80 |
1,634 80 |
820.7 |
1.456_50 |
1.693.60 |
987.9 |
pvt. Proceeds |
|||||||
Privatization Proceeds |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
FDI Excluding |
3.719.90 |
2.150.8O |
1.634.8O |
820.7 |
1.456.50 |
1.698.60 |
987.9 |
Excluding |
Source: Board of
Investment Website
Table 2. Sector Wise FDI Inflows ($ Million)
Sector |
2003-09 |
2009-10 |
2010-11 |
2011-12 |
2012-13 |
2013-14 |
2014-15 |
Gil & Gas |
775 |
741 |
512 |
629 |
560 |
502 |
301 |
Financial Bu |
707 |
163 |
310 |
64 |
314 |
193 |
256 |
Textiles |
37 |
28 |
25 |
30 |
10 |
0 |
44 |
Trails |
167 |
117 |
53 |
25 |
6 |
-3 |
51 |
Construction |
93 |
102 |
61 |
72 |
46 |
29 |
54 |
Power |
131 |
-121 |
156 |
-85 |
28 |
71 |
282 |
Chemicals |
74 |
112 |
31 |
96 |
72 |
95 |
60 |
Transport |
93 |
132 |
105 |
19 |
44 |
3 |
6 |
Communication |
879 |
291 |
-34 |
-313 |
-386 |
434 |
40 |
Others |
763 |
586 |
416 |
282 |
766 |
375.2 |
-106 |
Total Including |
3.720 |
2.151 |
1.635 |
821 |
1,457 |
1.699 |
988 |
Privatization |
|
- |
- |
- |
- |
- |
- |
FDI
Exclude |
3,720 |
2.151 |
1.635 |
821 |
1,457 |
1,699 |
988 |
Factors affecting
FDI Influx
Different countries have their
own FDI policy devised determining in which sectors foreign investors may put
their investment. For example, in India, a business sector can receive FDI in
two ways.
Automatic Route
In some sectors, a permissible
amount of FDI in different sectors can directly be employed without prior
approval of the Government. Such sectors include advertising sectors, Hoteling,
Forex brokerage houses, house financing etc.
Government Route
Other sectors that are not
permissible for FDI under automatic routes requires prior government approvals
and such proposal for FDI are enquired by the Department of economic affairs,
Ministry of Finance and Foreign investment promotion board.
Factors affecting
the influx of FDI in a country are identified in the following categories.
1.
Government
policies
2.
Privatization
3.
Potential
economic growth
4. Tax rates
5.
Exchange
rates
6. Terrorism
Government
Polices
Liberalization of trade policy
brings new opportunities for investors. Studies have shown that statically
speaking, trade liberalization has positively impacted Pakistan's economic
growth from 1974 to 2015 as trade openness and economic growth are positively
co-related. The more the openness to trade is found the more positive impact
will be observed on economic growth. An overview of imports and exports and the
trade openness of Pakistan can be estimated from the following table.
Table 3. Trade Openness of Pakistan ($ Million)
Years |
GDP |
Imports |
Exports |
Openness to trade |
2001 |
72,310 |
11,361 |
10,600 |
30% |
2002 |
72,307 |
11,073 |
11,008 |
31% |
2003 |
83,245 |
13,424 |
13,918 |
33% |
2004 |
97;97S |
14,337 |
15,350 |
30% |
2005 |
10'9,502 |
21,423 |
17,180 |
35% |
2006 |
137,264 |
29,577 |
19,401 |
36% |
2007 |
152,386 |
30,136 |
20,137 |
33% |
2008 |
170,078 |
39,478 |
21,060 |
36% |
2009 |
168,153 |
33,086 |
20,844 |
32% |
2010 |
177,407 |
34,333 |
23,979 |
33% |
2011 |
213,587 |
40,524 |
29,831 |
33% |
2012 |
224,384 |
45,794 |
27,816 |
33% |
2013 |
231,219 |
46,374 |
30,699 |
33% |
2014 |
244,361 |
45,594 |
29,916 |
31% |
Source: World
Development Indicators
Privatization
During the 1970s
and 1980s Pakistan government took solid measures to put checks and balances on
rest distribution of national assets from the private sector to state owned
sector. The reason behind this is stated to bring national wealth to the masses
instead of constraining it to some families. This strategy was intended to
support the interests of the poor was an attempt to replicate the success of
the Soviet Union and the socialist economic model.
Privatization
mainly includes selling- off of the State Owned Enterprises (SOEs) along with
contracting out of State services to other foreign and local bidders like in
the case of PTCL. Pakistan, despite being a developing country with strong
geographical importance, has not participated in extensive privatization of
government assets till a certain time. A study conducted by Mehmood, K.A. & Faridi, Muhammad (2013) attempts to
explore the effects of privatization on the economic growth of Pakistan. Data
for the study is taken from 1992 to 2008 and the study concludes that there is
a persistent and gradual rise in the economic growth & GDP of Pakistan,
whereas the idea of privatization remains unstable. (Mehmood, K.A. & Faridi, Muhammad, 2013)
Potential Economic
Growth
Potential Economic growth enriches the investment opportunities
for foreign investors in the form of in-house resources, experiences human
capital, potential market size and per capita income level. After 2000, as
market orient reforms were launched, Pakistan emerged as one of the fast paced
growing countries in southeast and offered open opportunities to foreign
investors. Pakistan's trade liberalization and potential economic growth have
played a robust role in attracting FDI influx. Total trade in 2005 was recorded
as 23.5 times higher with respect to 1986 and the total FDI influx in Pakistan
from 2001-2005 was about 13 times greater as compared the to 1988-2000 periods,
and more over a high growth rate in GDP of 7.5% was recorded annually.
In case of
Pakistan, certain measures need to be taken in order to boost the FDI influx as
much as possible. FDI influx in Pakistan can increase due to its
competitiveness as a potentially high returning investment location as compared
to other countries. In Pakistan, many MNCs working in the consumer goods sector
have taken a good share of profit while other major industries like the pharma
industry have winded up their businesses due to a lack of intellectual property
rights protection. According to a State bank of Pakistan's 2017 report, FDI has
increased gradually with a net increase in FDI influx of 4.4% i.e. $2.1
billion, from July-March 2017-18. Whereas a major contributor to this
investment in China, with 55% of the overall influx, other countries including
UK and Malaysia have also invested in Pakistan's economy.
Taxation
It is a difficult
question to answer as to how FDI the influx will react to a new tax policy in
the host country. FDI investors carry out cost & benefit analysis of
investing, tax relief provided, potential economic growth of the host country,
potential tax policy reforms and impact of tax reforms on earnings after taxes.
In
Pakistan, Corporate tax is inversely related to FDI influx both in the short
run and long run. Higher the rates, the lower the influx. Discounted CTR has a
positive impact on domestic investment too. (Khalid Mahmood Lodhi, 2017).
In
1990 Government of Pakistan supported liberalizing trade and investment to
attract foreign investors by providing great tax relations, easy credit, tariff
reduction and easy forex controls. (Mahmood
Pannu, Qaisar. 2010).
In order to attract more FDI, Pakistan needs to promote itself as
an emerging company that caters the local businesses through relaxed taxation,
so they are able to compete in the national and international markets and
create an attractive competitive field for foreign investors. A flat, low rated
and predictable tax regime is the most suitable option for Pakistan to attract
foreign investors and facilitate its major investor that is China.
Exchange Rates
fluctuation
Exchange
rate fluctuations are another enticing factor for MNCs' to prioritize their
investment options; they are more likely to fund the country when the country
is on a growth route and its currency is expected to boom. However, studies
have shown different relationship outcomes between FDI and exchange rate. Even
FDI and exchange rate relations can work backward, where an increase in the
influx of FDI can influence the local exchange rate. Hence the direction of the
relationship between FDI and exchange rate remains an enigma now.
Studies
have shown that appreciation in Malaysian ringgit, Philippine peso and
Singapore dollar the appreciation of Singapore
dollar has a significant positive impact on the foreign, direct influx in these
countries. (Lily,Kogid,Mulok, Lim, Sang & Asid, 2014).
Terrorism
Terrorism
has been an unresolved issue for long throughout the world. Terrorists not only
affect the life & property of a host country, but they also sabotage the
economic growth and ability to attract foreign investment to that country in
the long run.
Investors look for a safer business environment for their
investment and seek economic stability to ensure their returns on the risk taken
but terrorism withdraws all these facilities for investors as written in an
Economist article, "This fear of defenselessness is mainly destructive to
trade or foreign direct investment (FDI) influx because investors always prefer
to invest in countries lesser prone to terror."
Following
is the list of 12 countries that were the main target of terrorist activities
from 2001 to 2012. These countries mainly faced almost 79% of the global terror
incidents.
Table 4. Terrorism Incidents, 2001-2012
Country |
Total Incident |
Domestic Incidents |
Transnational Incidents |
Pakistan |
3,048 |
2,737 |
191 |
India |
2,438 |
2,229 |
78 |
Thailand |
1,027 |
985 |
21 |
Nigeria |
842 |
712 |
92 |
Somalia |
810 |
708 |
91 |
Russia |
722 |
670 |
21 |
Philippines |
702 |
621 |
51 |
Colombia |
620 |
540 |
37 |
Israel |
546 |
482 |
42 |
Nepal |
323 |
282 |
27 |
Turkey |
321 |
264 |
32 |
Yemen |
313 |
261 |
42 |
World |
14,820 |
12,899 |
1,296 |
History of Foreign Direct Investment in the Telecom
Sector of Pakistan
It's a proven fact
that the telecommunication sector is one of the major enticers for foreign
investors. Investment in telecommunications not only helps in technology
transfer but also injects more abundant capital from foreign money markets into
the host country. This also increases the market competition and fosters a
national telecommunication market.
Pakistan
growing telecom sector has managed to attract a noticeable amount of FDI in
past years. During 2005-06 Telecom sector of Pakistan grabbed a 54% share of
the total FDI influx in the country, but this influx decreased to the point
that in 2001-12 Telecom sector's share in total FDI was calculated as negative
44%.
The main reason
behind this massive decline is deemed as the political instability in the
country. However, this trend has changed and a huge increase in FDI is observed
in the shape of 3G/4G in Pakistan. Moreover, banking, mobile marketing and
mobile e-payment services are providing opportunities for further FDI. Table
1.1 (PTA Annual report 2013-14) depicts a clearer picture of FDI in the
Pakistan Telecommunication Sector.
Table 5. Foreign Direct Investments in 3G/4G
Applicant |
Winner in 2100 MHz Band |
Winner in 1800 MHz Band |
Zong |
2x10
MHz (US$ 306,920,000) |
2x10
MHz (US$210,000,000) |
Mobilink |
2x10
MHz (US$ 300,900,000) |
- |
Ufone |
2x5
MHz (US$ 147,500,000) |
- |
Telenor |
2x5
MHz (US$ 147,500,000) |
- |
Total |
USS
902,820,000 |
US
$210,000,000 |
Thus the auction produced a
total of US$ 1,112,820,000. |
Source: PTA Annual Report 2013-14
Recently telecommunication
sector has achieved a record influx of FDI. It was assumed that this investment
trend might go along for the next 5 years as a huge business potential exists
for all telecom operators due to the demand and supply gap for quality
telecommunication services. But the overall FDI level has substantially
decreased in the current year. According to the State Bank of Pakistan (SBP),
the overall influx of FDI was recorded at $120 million in the first half of the
financial year 2015-16 as compared to the handsome influx of $876 million
recorded in the similar period of last financial year. The overall FDI after outflows of investment is $76 million because
local investors and companies invested $43.7 million outside Pakistan in
different projects and businesses related to the telecom sector (SBP
data, 2016).
Table 6. SBP figures for FDI in telecom in Pakistan
Foreign Direct Investment in
Telecom Sector (US $ million) |
|||
FY |
FDI in Telecom |
Total FDI |
Telecom (%) Share |
2001-02 |
6.1 |
484.7 |
1.26% |
2002-03 |
13.5 |
798 |
1.69% |
2003-04 |
207.1 |
949.4 |
21.80% |
2004-05 |
494.4 |
1,524.00 |
32.40% |
2005-06 |
1,905.10 |
3,521.00 |
54.10% |
2006-07 |
1,824.20 |
5,140.00 |
35.50% |
2007-08 |
1,438.60 |
5,410.00 |
26.60% |
2008-09 |
815 |
3,720.00 |
21.90% |
2009-10 |
373.62 |
2,199.44 |
17.00% |
2010-11 |
79.2 |
1,574.00 |
5.00% |
2011-12 |
-361.4 |
820.6 |
-44.00% |
2012-13 |
-404.1 |
1,576.00 |
-25.60% |
2013-14 |
429.9 |
1,667.60 |
16.30% |
2014-15 |
121 |
529 |
21.00% |
Source: State Bank of Pakistan
But this investment paid off in the form of extra revenue for the
country. It’s an important source of taxes for the Government over the past ten
years, as shown in Table 2.
Table 7. Telecom Revenue
Telecom Revenues
(Rs. Millions) |
||||||
FY |
Cellular |
L.
Loop |
LDI |
WLL |
VAS
(Estimated) |
Total |
2003-04 |
27,840 |
76,444 |
1,336 |
1,152 |
10,056 |
116,827 |
2004-05 |
48,880 |
78,828 |
3,672 |
275 |
12,570 |
144,226 |
2005-06 |
89,896 |
71,186 |
7,199 |
12,453 |
13,827 |
194,562 |
2006-07 |
133,132 |
68,368 |
15,567 |
2,645 |
15,901 |
235,613 |
2007-08 |
182,122 |
63,693 |
23,396 |
2,704 |
8,048 |
279,964 |
2008-09 |
212,423 |
62,568 |
47,969 |
2,670 |
8,179 |
333,809 |
2009-10 |
236,047 |
61,464 |
44,964 |
2,880 |
10,202 |
355,557 |
2010-11 |
262,761 |
58,342 |
34,195 |
4,978 |
7,052 |
367,327 |
2011-12 |
298,510 |
63,805 |
32,675 |
5,861 |
11,175 |
412,026 |
2012-13 |
311,145 |
80,661 |
38,572 |
5,617 |
3,526 |
439,521 |
2013-14 |
322,683 |
88,512 |
43,901 |
6,278 |
4,123 |
463,497 |
2014-15 |
317,016 |
80,813 |
40,765 |
3,874 |
7,078 |
449,546 |
Source: PTA
Trade
liberalization has attracted huge FDI in recent years, as shown in Table 3.
Table 8. Annual Trade %age
of GDP of Pakistan
YEAR |
Trade (% of GDP) |
2001 |
30.37 |
2002 |
30.54 |
2003 |
32.S4 |
2004 |
30.3 |
2005 |
35.25 |
2006 |
35.68 |
2007 |
32.99 |
2008 |
35.59 |
2009 |
32.07 |
2010 |
32.87 |
2011 |
32.94 |
2012 |
32.81 |
2013 |
33.34 |
2014 |
31 |
Source: World Development Indicators
Table 9. Annual GDP per Capita (Current US $)
Year |
GDP Per Capita
(Current US $) |
2001 |
510.66 |
2002 |
499.86 |
2003 |
563.59 |
2004 |
649.8 |
2005 |
711.47 |
2006 |
950.43 |
2007 |
873.77 |
2008 |
1,039.31 |
2009 |
1,006.60 |
2010 |
1,040.14 |
2011 |
1,226.22 |
2012 |
1,261.21 |
2013 |
1,272.44 |
2014 |
1,316.98 |
Source: World Development Indicators
Figure 2
GDP growth, GDP per capital, Trade % age of GDP 1985 to 2015
Source: World Development
Indicators
Literature Review
FDI and the Host country perspective
Foreign investment can be beneficial to the host country and harmful to its domestic business at the same time. Most of the time, investors choose to invest in such countries that offer cheap resources in the form of labor, raw material, and poor interest rates on loans or technology. The government's degree of wiling to induce FDI in the host country plays a significant part in the FDI influx.
A country's Technological advancement is a widely accepted essential element for economic growth. (Romer, 1994). FDI plays a critical role in developing infrastructure through upgrading the technological framework that supports the host country's technological base. (Ramesh & Samal, 2015).
During the last two decades, India has made itself the most suitable host for FDI with policies such as openness to privatization, trade, economic and financial liberalization. Since 2013, the Indian Government has revised FDI limits for the telecom sector up to 100% in order to increase the influx of FDI. The Indian government is paving the way to building a lucrative telecommunication sector and making the business environment more investor friendly. (Papori & Rashmi, 2014)
Domestic profitable sectors are monopolized by foreign investors as they tend to invest more in machinery and intellectual property than in increasing the salaries of locals. Terrorism affects a country's overall economy and business, resulting in security issues for foreign investors and reducing the speed of overall business growth. (Mobeen, Akram & Zahid, 2017)
Determinants of Global FDI
There have been a number of experiential studies carried out to find the link between foreign direct investment and a variety of macroeconomic variables. An Ownership Location Internalization (OLI) paradigm was introduced by him to explain FDI by Multinational Enterprises. The theory is based on a framework that classifies
a significant set of variables influencing FDI. The major categories of variables are cultural, social, economic and political in nature.
The infrastructure of Host Country
Infrastructure development is significantly vital for economic growth; a world bank study suggests that purchasing power parity is higher in countries with developed infrastructure as compared to that underdevelopment. Economists classified infrastructure as logistics, communication, administration, markets, and innovations.
FDI influx can be allured into the economy by the provision of usable infrastructure. Infrastructure serves are the foundation for the economic growth of a country. It encourages
agriculture and industry while providing support for operations. This support comes in
the shape of health and education services, power supply, transportation, telecom, irrigation etc. (Ramesh & Samal, 2015).
The study suggests that in the case of Pakistan: the host country's development via public sector enterprise is not suitable due to insufficient funds and bad governance; however, the Foreign influx of individual investment in financial equities or bonds is more suitable but this requires greater financial liberalization from the government. Infrastructure improvement can be achieved through initial funding from foreign investments, mainly from China, in the form of CPEC. (Ayub Mehar,2017)
Human Capital of Host Country
Human capital is another important factor that has a close relations ship with FDI influx and economic growth of a country, creating a continuous trio for growth where a change in one factor leads to change in other. FDI influx promotes exports of the host country by creating new jobs and enhancing productivity.
There are a number of factors that economic growth; however, Human Capital and FDI have gained a lot of attention in the recent era. Mix results are observed using these two sources. Due to a lower supply of skilled labor Malaysia should shift focus on these two factors, especially human capital. (Gulam Hassan, Mohamed Aslam and Abou Sakar, Sameer, 2013)
An increased work remittance increases the ratio of enrollment in schools to produce skilled human capital and hence FDI is positively correlated with human capital. Also, it was found that the FDI influx promotes the education level in these 34 countries and hence contributes to the development of human capital. (Azam, Saleem, Zainal, Karuppiah and Farah Khan, 2015)
Trade openness of Host Country
Trade openness or trade liberalization also showed its positive and negative effects on the economic growth of a country, restating from FDI. It has been observed that FDI does not always have a positive effect on the host country as expected. Cheap human capital, loose trade policy, and easy access to unimpaired and worthy resources can actually be the sole motives of a multinational for foreign direct investment.
Thus, creating a small relationship between economic growth and FDI. In a study by Dr. M. Umer Chaudhry and Kasloom Akther, it has been highlighted that there exists a positive effect of Trade liberalization or trade openness on the economic growth of Pakistan meanwhile showing the significantly negative effect of same Trade liberalization in post-financial liberalization era. (Umer & Kasloom, 2016).
A study concludes that Pakistan's GDP is still not mature enough to play its role in manipulating the interest of foreign investors. The economic instability is the main deciding factor as due to this instability, the foreign investors are not attracted to invest in Pakistan (Irfan, Kamal & Sumayya, 2009).
Determinants of FDI in the Telecom Sector of Pakistan
A large number of telecom subscribers are not in favor of handing over the tax levy rights to the provincial or local government due to their low confidence in provincial government for tax collection rather than the FBR. According to a survey conducted by the Directorate General of Training and Research (IR), Lahore an average of 67.6% of the population was of the opinion that the telecommunication sector is heavily taxed, that not only affects the daily living expenses but also increases of cost of doing the business. (Fahad & Umar, 2010)
Another study by Khalid & Chaudhry (2017) concludes that major factors affecting FDI influx in a country can be Political stability and Dictatorship, GDP/PC, gross national income, fluctuation in the exchange rate and openness to trade. Time series data for study and Autoregressive-Distributed Lag (ARDL) technique for data analysis. The study reveals that served that during the Dictatorship the FDI influx reached to the maximum in the history of Pakistan. This mainly depicts the relationship between Government's relaxed policies and openness to trade. (Khalid & Chaudhry, 2017)
Methodology
Theoretical Framework
The study identifies and
explains the casual relationship, using the multiple regression analysis,
between the influx of FDI in the telecommunications sector of Pakistan and the
macro-economic variables affecting the influx of Foreign Direct Investment in
the country.
Data of FDI in Pakistan is
taken from 2001 to 2014 (PTA), while the data for Telecom infrastructure in
Pakistan, Market size of the country and Trade %age of GDP are taken for 2001
to 2014 from PTA and World Development Indicators respectively. For in-depth
analysis, quarterly data is used. Data is on the next pages. Variables are
defined as:
Dependent Variable
1.
Foreign
Direct Investment in the Telecom Sector of Pakistan
Independent
Variables
1.
Telecom
infrastructure in Pakistan (Fixed land line and mobile cellular users)
2.
The market
size of the country. Determined by the GDP per capita of the country
3.
Openness to
trade. Represented by the Trade %age of GDP
For this purpose,
following regression model is used.
FDI tele = ?o+ ?1INF + ?2 MKT + ?3OT + e
Where
FDI tele = Foreign Direct Investment Influx in
Telecommunication Sector of Pakistan
INF
= Total infrastructure of the Telecommunication users (Mainly comprised of Fixed land line and mobile cellular users)
MKT
= Market size of the country (Represented by the GDP per capita of country)
OT
= Openness to trade by the Government (Represented by the Trade %age of GDP)
e = residual/error for the regress
Table 10. Data used for Analysis
Quarters |
Exp Goods |
FDI In Telecom |
GDP US * |
Imp Goods |
INFRA |
MKT Size |
OT |
2001Q1 |
2_.748.73 |
11.01 |
18,676.04 |
3,011.66 |
0.36 |
132.75 |
7.69 |
2001Q2 |
2_.656.83 |
2.75 |
18,163.00 |
2,869.95 |
0.35 |
128.58 |
7.6 |
2001Q3 |
2,604.15 |
-2.61 |
17,820.92 |
2,769.47 |
1.05 |
125.58 |
7.55 |
2001Q4 |
2,590.51 |
-5.05 |
17,649.78 |
2,710.23 |
1.14 |
123.74 |
7.52 |
2002Q1 |
2,615.33 |
-4.59 |
17,649.60 |
2,692.21 |
1.22 |
123.07 |
7.54 |
2002Q2 |
2,680.54 |
-1.22 |
17,820.37 |
2,715.43 |
1.3 |
123.56 |
7.58 |
2002Q3 |
2,784.21 |
5.06 |
18,162.09 |
2,779.88 |
1.33 |
125.21 |
7.66 |
2002Q4 |
2,926.38 |
14.25 |
18,674.76 |
2,885.56 |
1.45 |
128.03 |
7.77 |
2003Q1 |
3,264.33 |
29.36 |
19,637.52 |
3,191.68 |
1.43 |
134.05 |
8.18 |
2003Q2 |
3,423.11 |
43.53 |
20,380.44 |
3,316.14 |
1.53 |
138.38 |
8.25 |
2003Q3 |
3,558.81 |
58.56 |
21,182.66 |
3,418.15 |
1.66 |
143.07 |
8.25 |
2Q03Q4 |
3,671.42 |
75.05 |
22,044.17 |
3,497.70 |
1.32 |
148.1 |
8.16 |
2004Q1 |
3,687.63 |
52.78 |
23,238.56 |
3,257.59 |
1.88 |
155.33 |
7.52 |
2004Q2 |
3,783.43 |
88.29 |
24,109.24 |
3,411.12 |
2.16 |
160.33 |
7.48 |
2Q04Q3 |
3,885.33 |
141.35 |
24,929.78 |
3,661.10 |
2.52 |
164.95 |
7.55 |
2004Q4 |
3,993.56 |
211.97 |
25,700.19 |
4,007.50 |
2.36 |
169.19 |
7.75 |
2005Q1 |
4,108.25 |
402.29 |
25,660.84 |
4,649.67 |
3. T9 |
165.16 |
8.53 |
2005Q2 |
4,228.74 |
467.15 |
26,634.82 |
5,109.21 |
3.32 |
171.79 |
8.76 |
2005Q3 |
4,355.33 |
508.71 |
27,862.52 |
5,585.46 |
4.87 |
181.18 |
8.93 |
2Q05Q4 |
4,488.01 |
526.96 |
29,343.93 |
6,078.42 |
6.02 |
193.34 |
3.03 |
2006Q1 |
4,700.01 |
475.54 |
32,207.09 |
6,926.58 |
7.66 |
227.53 |
9 |
2006Q2 |
4,815.61 |
465.72 |
33,744.71 |
7,317.55 |
9.11 |
237.54 |
8.98 |
2Q06Q3 |
4,308.01 |
451.14 |
35,084.82 |
7,589.82 |
10.66 |
242.61 |
8.91 |
2006Q4 |
4,977.22 |
431.8 |
36,227.43 |
7,743.40 |
12.31 |
242.75 |
3.79 |
2007Q1 |
4,958.00 |
405.1 |
36,578.37 |
7,138.40 |
14.42 |
216.17 |
8.29 |
2007Q2 |
5,006.92 |
377.28 |
37,563.63 |
7,310.55 |
16.12 |
215.16 |
8.21 |
2007Q3 |
5,058.76 |
345.74 |
38,589.06 |
7,619.95 |
17.76 |
217.94 |
8.2 |
2007Q4 |
5,113.50 |
310.48 |
39,654.66 |
8,066.62 |
19.36 |
224.5 |
8.28 |
2008Q1 |
5,222.88 |
255.09 |
41,627.11 |
9,608.34 |
21.44 |
252.05 |
8.89 |
20Q8Q2 |
5,262.74 |
218.97 |
42,426.35 |
9,946.40 |
22.73 |
259.3 |
8.96 |
20Q8Q3 |
5,284.82 |
185.69 |
42,919.07 |
10,038.60 |
23.75 |
263.45 |
8.93 |
20Q8Q4 |
5,289.12 |
155.25 |
43,105 28 |
9,884.94 |
24.52 |
264.51 |
8.81 |
20D3Q1 |
5,100.29 |
129.04 |
41,78198 |
8,572.35 |
24.49 |
252.13 |
8.18 |
2003Q2 |
5,139.16 |
103.75 |
41,836.34 |
8,292.19 |
24.35 |
251.12 |
8.03 |
2003Q3 |
5,230.39 |
80.76 |
42,065.37 |
8,131.40 |
25.35 |
251.15 |
7.34 |
2003Q4 |
5,373.97 |
60.06 |
42,463.08 |
8,089.37 |
25.7 |
252.21 |
7.32 |
2010Q1 |
5,594.65 |
53.11 |
42,432.33 |
8,273.18 |
25.63 |
250.93 |
8.17 |
2010Q2 |
5,833.04 |
32.43 |
43,431.43 |
8,428.38 |
26.06 |
255.41 |
8.21 |
2010Q3 |
6,113.89 |
9.46 |
44,851.27 |
8,660.83 |
26.5 |
262.23 |
8.24 |
2010Q4 |
6,437.20 |
-15.8 |
46,691.83 |
8,970.55 |
27.01 |
271.52 |
8.25 |
2011Q1 |
7,216.43 |
-64.59 |
50,996.50 |
9,586.67 |
27.7 |
235.01 |
8.24 |
2011Q2 |
7,459.27 |
-85.31 |
52,861.16 |
9,959.23 |
28.31 |
304.28 |
8.24 |
2011Q3 |
7,579.18 |
-101.01 |
54,323.18 |
10,317.39 |
28.96 |
311.19 |
8.24 |
2011Q4 |
7,576.17 |
-103.9 |
55,400.57 |
10,661.15 |
29.64 |
315.74 |
8.23 |
2012Q1 |
6,951.59 |
-131.27 |
55,238.50 |
11,137.68 |
30.56 |
312.95 |
8.19 |
2012Q2 |
6,902.19 |
-120.24 |
55,851.37 |
11,393.76 |
31.22 |
314.77 |
8.19 |
2012Q3 |
6,929.32 |
-95.51 |
56,402.34 |
11,576.56 |
31.83 |
316.21 |
8.2 |
2012Q4 |
7,032.98 |
-57.08 |
56,891.42 |
11,686.09 |
32.39 |
317.28 |
8.23 |
2013Q1 |
7,547.73 |
73.93 |
56,917.48 |
11,592.29 |
32.83 |
315.76 |
8.4 |
2013Q2 |
7,670.64 |
108.2 |
57,443.22 |
11,607.30 |
33.31 |
316.93 |
8.39 |
2013Q3 |
7,736.27 |
124.61 |
58,067.51 |
11,601.06 |
33.77 |
318.72 |
8.33 |
2013Q4 |
7,744.61 |
123.16 |
58,730.35 |
11,573.57 |
34.2 |
320.38 |
8.22 |
2014Q1 |
7,695.66 |
103.85 |
53,611.75 |
11,524.84 |
34.61 |
323.77 |
8.07 |
2014Q2 |
7,583.42 |
66.63 |
60,531.70 |
11,454.86 |
35 |
327.07 |
7.87 |
2014Q3 |
7,425.30 |
11.67 |
61,550.20 |
11,363.63 |
35.36 |
330.3 |
7.63 |
2014Q4 |
7,205.10 |
-61.21 |
62,667.25 |
11,251.15 |
35.69 |
335.24 |
7.34 |
Hypothesis
Based on the
question of interest following hypotheses are developed.
H0: FDI Influx in the
Telecommunication Sector of Pakistan is unaffected by Infrastructure, Market
size and Openness to trade
H1: FDI Influx in the
Telecommunication Sector of Pakistan is affected by Infrastructure, Market size
and Openness to trade
OR
Ho: b1=b2=b3=0 (There is
no correlation between the variables)
H1: At least one beta is not zero or b?0 (There is a correlation between the variables)
Level of significance
The level of significance is
taken as ? = 0.05
Test Statistics
§ The multiple regression
technique, has opted for testing if any correlation exists between the
independent and dependent variables of the study.
§ ANOVA and F test further
clarify the relationship.
§ F ratio is simply the ratio
between the Mean Squares of regression and residual.
§ The degree of freedom for
regression is one less than the number of parameters being tested. In our
study, this is 3.
§ The degree of freedom for
Residual is simple the difference between the sample size and the number of
parameters being estimated. i.e.
§ df(Residual) = n - k – 1
§ so In our study it is
§ df(Residual) = 56 - 3 - 1=
5
Estimates & Discussions
After running the regression
test following estimates are found.
Descriptive Statistics
§ Descriptive
results of the time series data of independent and dependent variables are as
under and define the mean and the standard deviation..
Table 11. Descriptive Statistics
|
Mean |
Std. Deviation |
N |
FDI in Telecom |
123.9679 |
183.76496 |
56 |
Infrastructure |
17.2193 |
12.95462 |
56 |
Market Size |
230.7589 |
71.51462 |
56 |
Openness to Trade |
8.1875 |
.45914 |
56 |
Correlation
Estimates
§ Correlation between dependent and independent
variables is a statistical measure of how well they are related to each other.
Pearson Correlation is the commonly used correlation measure. Pearson
correlation coefficients amongst the independent variable i.e. FDI & the
dependent variables i.e. Infrastructure (Telephone and Mobile users), Market
Size of the country ( per capital GDP) and Openness to trade (Trade %age of
GDP) are respectively -0.317, -0.192 and 0.635
§ The results conclude that there is a negative
correlation between the influx of FDI in the telecom sector of the country and
its infrastructure when taken as only the fixed landline users along with the
mobile users of the country. This result contradicts some of the studies such
as Zahra, Azim &
Mahmood (2008). This could be because my study
focus is only on the combination of fixed landline and mobile cellular users;
however other studies might have included the numbers of transmission boaster,
users per boaster, broadband user, broadband width etc. (Table 11)
Table 11. Correlation
Statistics
|
|
FDI |
INFRA |
MKT SIZE |
OPENESS_TRDE |
Pearson
Correlation |
FDI |
1 |
-0.317 |
-0.192 |
0.635 |
INFRA |
-0.32 |
1 |
0.966 |
0.144 |
|
MKT_SIZE |
-0.19 |
0.966 |
1 |
0.272 |
|
OPENESS_TRADE |
0.635 |
0.144 |
0.272 |
1 |
|
Sig. (1 tailed) |
FDI |
. |
0.009 |
0.078 |
0 |
INFRA |
0.009 |
. |
. |
0.144 |
|
MKT_SIZE |
0.078 |
0 |
|
0.021 |
|
OPENESS_TRADE |
0 |
0.144 |
0.021 |
56 |
|
N |
FDI |
56 |
56 |
56 |
56 |
INFRA |
56 |
56 |
56 |
56 |
|
MKT_SIZE |
56 |
56 |
56 |
56 |
|
OPENESS_TRADE |
56 |
56 |
56 |
56 |
§ The correlations results of the Market size of the
country i.e. GDP per capita, shows a mild negative tendency towards the influx
of FDI in the telecom sector of Pakistan. As the GDP per capita defines the
ability of the targeted market to afford the service industry and the potential
amount that can be saved in comparison with the country's consumer price index,
this measure gives a glimpse of the potential.
§ The real effect on the FDI in telecom in Pakistan is
observed from the Trade openness by the country. As measured by the Trade
percentage of GDP a strong positive correlation exists between the influx of
FDI and openness to trade in the country. This indicates that as the Government
liberalizes its trade policies new opportunities arise for the MNCs and more
trade activity is observed in every
sector of the economy, which boosts the economy of
the host country by creating competition but also is beneficial for the funding
country to generate more and more business. The results coincide with the study
conducted by Shumai, Munir, & Khan (2008).
Model Summary
§ As R2, called the determination
coefficient of multiple regression, basically measures the nearness of the data
to the regression line. As the resulted value gets nearer to 100% or 1, the
better, the model explains the data variation around its Mean value. In my
study, the resulted value of R2=0.584 and Adj R2=0.560
clearly depicts that the model is partially fit and explains about 56.0% of the
total variation of the regression line.
Table
12. Model Summary b
Model |
R |
R2 |
Adjusted R2 |
Standard
Error of the Estimate |
1 |
.764a |
.584 |
.560 |
121.95764 |
a.
Predictors:
(Constant), Openness to Trade, Infrastructure, Market Size
b. Dependent/Criterion Variable: FDI in the Telecommunication sector
ANOVA
§ The value of the F-ratio in the ANOVA table
is 24.291
indicating a linear relationship among the Model’s variables. (Table 13)
§ Either positively or negatively; the selected independent
variables do affect the dependent variables.
§ As the p < 0.05, hence the model suggests a good
prognostic ability
Table
13.
ANOVA a
Model |
Sum
of Squares |
Df |
Mean
Square |
F |
Sig. |
|
1 |
Regression |
1083895.172 |
3 |
361298.391 |
24.291 |
.000b |
Residual |
773430.612 |
52 |
14873.666 |
|
|
|
Total |
1857325.784 |
55 |
|
|
|
a.
Dependent/Criterion
Variable: FDI in Telecommunication sector
b. Predictors: (Constant), Openness to Trade,
Infrastructure, Market Size
Coefficients
§ The regression model for the study is
FDI tele
= ?o+ ?1INF + ?2 MKT + ?3OT + e
FDI tele = -2014.140+(-0.286) INF +
1.189MKT + 253.137OT
§ Hence from the following
results it is interpreted: a single unit increase in value of
independent/predictor variables: infrastructure, market size and OT will bring
a combined average variation in the value of outcome/dependent variable: FDI in
telecom with the values -0.286, 1.189 & 253.137
respectively.
§ Here the actual p-values determine the acceptance or
rejection of H0.
§ As the p-values of constant is zero, less than 0.05
for infrastructure and zero for openness to trade but is greater than 0.05 i.e.
0.263 for market size thus this concludes that we reject H0 and
accept the alternative hypothesis inferring that there is an acceptable
relationship between the influx of foreign investment in telecom sector of
Pakistan and infrastructure, market size and openness to trade combined.
Model |
Unstandardized
Coefficients |
Standardized
Coefficients |
T |
Sig. |
Correlations |
Collinearity
Statistics |
|||||
B |
Std.
Error |
Beta |
Zero-order |
Partial |
Part |
Tolerance |
VIF |
||||
1 |
(Constant) |
-2014.140 |
296.285 |
|
-6.798 |
.000 |
|
|
|
|
|
Infrastructure |
-12.132 |
5.634 |
-.855 |
-2.154 |
.036 |
-.317 |
-.286 |
-.193 |
.051 |
19.696 |
|
Market Size |
1.189 |
1.049 |
.463 |
1.133 |
.262 |
-.192 |
.155 |
.101 |
.048 |
20.823 |
|
Openness to Trade |
253.137 |
42.402 |
.632 |
5.970 |
.000 |
.635 |
.638 |
.534 |
.714 |
1.402 |
Table 14. Coefficients
a
a.
Dependent Variable: Foreign Direct Investment in Telecom
Plots
§ The normal P-P plot of regression (Fig 3.1) shows the
normality statement of regression error. As the errors are normally distributed
around the diagonal reference line hence, it is assumed that the normality
assumption exists in the regression model.
Table 15. Estimated Distribution Parameters
Figure 5,6
Figure 5: Normal P-P Plot for Market Size
Figure 6: Normal P-P Plot for Openness to Trade
Figure 7
Normal P-P Plot of Regression Standardized Residual
Conclusion
Foreign direct investment and telecommunications development are vital for the financial development of any country. Pakistan, although being an underdeveloped country, has managed to excel in the telecommunications sector manifold since 2001. An increasing number of telephony and cellular subscribers, along with broadband and 3G/4G users, have created an enchanting financial marketplace for FDI investors. This study intends to explain the casual relationship between FDI influx and economic factors that attract FDI in Pakistan. Among the many economic factors here are telecom infrastructure, market size and trade openness, whereas FDI is taken as a dependent variable. A time series analysis is carried out to determine the growth trend while an ordinary least square test is applied to determine the coefficient of correlation between the variables. The results of the study help us in concluding that there is a negative correlation observed between the influx of foreign direct investment in the telecom sector and telecom infrastructure when confined only to the number of users of landline and cellular mobiles in the country. However, a positive relationship is observed between the per capita GDP and openness to trade and the influx of foreign direct investment in the telecom sector of Pakistan. Here Pakistan Government ought to focus on improving the per capita GDP to make it mature to upgrade the living standard of people and hence create an alluring market for the MNCs. Also, openness to trade, tariff agreements, quota and short & long term development contracts with the foreign countries will bring more foreign investors to the country. Here it must be mentioned that liberalization of the trade policy is only effective if MNCs are given a business friendly environment with relaxed tax levels, low barrier to entry and safety & security of their capital to ensure return.
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- Zulfiqar, B., Fareed, Z., Shehzad, U., Shahzad, F., & Nabi, S. (2014). The Impact of Terrorism on FDI inflow in Pakistan. European Journal of Economic Studies, 10(4), 279–284. https://doi.org/10.13187/es.2014.4.279
Cite this article
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APA : Ali, B., Gul, N., & Aziz, S. (2022). Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach. Global Regional Review, VII(II), 52 - 70. https://doi.org/10.31703/grr.2022(VII-II).06
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CHICAGO : Ali, Babar, Nagina Gul, and Saba Aziz. 2022. "Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach." Global Regional Review, VII (II): 52 - 70 doi: 10.31703/grr.2022(VII-II).06
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HARVARD : ALI, B., GUL, N. & AZIZ, S. 2022. Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach. Global Regional Review, VII, 52 - 70.
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MHRA : Ali, Babar, Nagina Gul, and Saba Aziz. 2022. "Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach." Global Regional Review, VII: 52 - 70
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MLA : Ali, Babar, Nagina Gul, and Saba Aziz. "Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach." Global Regional Review, VII.II (2022): 52 - 70 Print.
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OXFORD : Ali, Babar, Gul, Nagina, and Aziz, Saba (2022), "Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach", Global Regional Review, VII (II), 52 - 70
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TURABIAN : Ali, Babar, Nagina Gul, and Saba Aziz. "Foreign Direct Investment in Telecommunications Sector of Pakistan: A Determinative Approach." Global Regional Review VII, no. II (2022): 52 - 70. https://doi.org/10.31703/grr.2022(VII-II).06