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MGT520 - International Business - Lecture Handout 45

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EXPORT, IMPORT, FDI INTERNATIONAL BUSINESS & PAKISTAN

Learning Objectives:

  • Export & Import
  • Strategies for import and export
  • Status of Pakistan in Exports and Imports
  • FDI and Pakistan
  • International Business and Pakistan

Export Assistance, Pakistan:

  1. Export Promotion Bureau
  2. State bank of Pakistan as export refinance.
  3. Chambers of Commerce and industries as facilitators.
  4. Government as announcing special incentive to exporters like rebates etc.

Export Assistance, International:

  1. Exporters in the US can draw upon two types of government-backed assistance to help finance their exports; the Export-Import bank and export credit insurance provided by the FCIA.
  2. The Export-Import Bank is an independent agency of the US government whose mission is to provide aid in financing and facilitate exports and imports and the exchange of commodities between the US and other countries.
  3. In the US, the Foreign Credit Insurance Association (FCIA) provides export credit insurance. The FCIA provides insurance policies protecting US exporters against the risk of nonpayment by foreign debtors as a result of commercial and political risks.

Counter trade:

  1. Counter trade is a term that covers a whole range of barter like agreements. It is primarily used when the firm is exporting to countries whose currency is not freely convertible, and who may lack the foreign exchange reserves required to purchase the imports.
  2. By some estimates, counter trade accounted for 20% of world trade by volume in 1998
  3. There are five distinct types of counter trade - barter, counter purchase, offset, switch trading, and buy back.
  4. Barter is the direct exchange of goods and services, or both, between two parties without a cash transaction. Although in theory barter is the simplest arrangement, in practice it is not that common.
  5. Counter purchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.
  6. Offset is similar to counter purchase because the exporter is required to purchase goods and services with an agreed percentage of the proceeds from the original sale. The difference is that the exporter can fulfill this obligation with any firm in the country to which the sale is being made.
  7. The term "switch trading" refers to the use of a specialized third-party trading house in a counter trade arrangement. When a firm enters into a counter purchase or offset agreement with a country it often ends up with what are called "counter purchase credits". These should be used to purchase goods from that country. Switch trading occurs when a third party trading house buys the firm's counter purchase credits and sells them to another firm that can make better use of them.
  8. A buyback occurs when a firm builds a plant in a country, or supplies technology, equipment, training, or other services to the country, and agrees to take a certain percentage of the plant's output as partial payment for the contract.
  9. The main attraction of counter trade is that it gives a firm a way to finance an export deal when other means are not available. A firm that insists on being paid in hard currency may be at a competitive disadvantage vis-à-vis one that is willing to engage in counter trade.
  10. The main disadvantage of counter trade is that it may involve the exchange of unusable or poor quality goods that cannot be disposed of profitably.
  11. As an option, counter trade is most attractive to large, diverse, multinational enterprises that can use their worldwide network of contacts to profitably dispose of goods acquired in a counter trade agreement. It is less attractive to small and medium sized exporters who lack a similar network.

Pattern of FDI Inflows in Pakistan:

Till the end of December 2003, Pakistan had attracted a very meager amount of FDI, ie, just US $ 227 million. By the end of December 2004 the total FDI inflows to Pakistan amounted to US $ 445 million, which is higher by 96 per cent over the figure of 2003. This is an enormous rise within a year and this means that now investors are looking at Pakistan as a destination for their FDI. This also indicates that the prospects of large-scale investment are greater now than in the last decade of 1990s and prior to that too.
Although it was less than the half a billion dollars expected, it was 61 per cent more than the $277 million investment made in the same period last year. The indications for the future are far more attractive, running into billions of dollars.
The inflow of FDI has registered a 52 per cent increase during the first seven months (July-January) of the current fiscal year over the same period of the last year. Official figures released by the Board of Investment (BoI) here on Tuesday showed that the inflow of FDI during the period under review reached $515 million against $339.5 million during the same period of last year. The board expected that with the inflow of funds from M/s Kanooz Al Watan of Saudi Arabia for the purchase of KESC, the FDI inflows during the fiscal year would not only exceed $1 billion mark, but would also be the highest in Pakistan’s history.

The largest investment so far announced is that of the German company Daimler Chrysler along with the Coastal Group of the UAE. They propose to invest $3 billion through two companies - one for production of hydropower on which $2 billion will be spent and the other billion dollars on the manufacture of trucks and then cars.
Sectoral Pattern: The major sectors, which attracted FDI during the period under review, were oil and gas with an amount of US $123.2 million. Communications accounted for US $72.1 million. The power sector has an FDI worth US $43.4 million. Chemicals have a small volume of FDI US $30 million. Trade segment has FDI worth US $27.5 million. Financial business accounted for US $60.1 million. Others sectors have marginal value worth US $158.7 million.
Major Investors: Among the leading investors in Pakistan, the United States is occupying the lead during this period by investing US $129.2 million. The second biggest investing nation in Pakistan after the US is the United Kingdom with an amount of FDI US $95 million investment. Germany and Saudi Arabia are the emerging countries on the Pakistan’s map of FDI. There are other investing countries. But their FDI is of marginal nature.
The Board of Investment is a prime agency created by the government of Pakistan for facilitating local and foreign investors to establish business in the country. According to the BoI, there are bright prospects for FDI inflows to Pakistan. This is because the government of Pakistani has successfully created both macro and micro business environment in the country. The country has offered foreign and domestic investors a string of high profit businesses as part of its new industrial policy, which is advocating for totally opening up the economy. Prospective investors have been allowed certain essential segments required for attracting FDI inflows namely a 100 per cent ownership and equity, full repatriation of total dividends, profits, gains and remunerations, wages and fees. These concessions would go a long way in making Pakistan a favorable destination for FDI.
Conclusion: From the foregoing pages it is clear that Pakistan has not been a favorable destination for FDI inflows. But the present government is committed to making Pakistan a favorable destination for FDI inflows. Accordingly, the government has taken a lot of measures in this direction. Recently the government said the trade deficit would be bridged by inviting more FDI inflows to Pakistan. The government of Pakistan has made concerted efforts on both the counts, i.e., micro and macro environment, sine qua non for becoming favorable destination. It is hoped that in years to come Pakistan would get a reasonable volume and value of FDI, which is the necessity of the day.

Foreign investment jumps in September-2006:

Foreign private investment in Pakistan’s stock market has suddenly jumped in September. Almost all the investments came from the United States and the United Kingdom.
Official figures released by the State Bank showed that up to September 22 this year, an investment to the tune of $42.096 million flew into Pakistani stocks. It was much higher than the portfolio investments made in July and August that totaled $31.9 million.
The figures showed that only investors from the US and the UK were active while the usually active Singapore, the UAE, Saudi Arabia and some European countries remained on sidelines. The US invested $26.730 million and the UK $16.371m in September. Experts said most of the investments went in the oil sector, while telecommunications and cement also attracted some investments. Analysts said if the pace of portfolio investment continues for the whole year, it
might cross the last year investment. During 2005-06, a total of $351.5 million was recorded as portfolio investment.
The inflow of foreign direct investment (FDI) also went up significantly during the first two months of the current fiscal year. During July-August 2006-07, FDI reached $375.4 million against $230.8 million during the corresponding period last year, showing a rise of 63 per cent.

PAKISTAN & EXPORTS

Cotton Fabrics:-

  • Export of Cotton Fabrics came up to $ 1.863 Billion from $ 1.711 Billion in the year 2004-05 as compared with 2003-04. showing an increase of 9 % in A.U.P. However a decrease of 0.4% is recorded in Quantity which came down to 2399.5 Million Sqm. From 2409.4 million Sqm.
  • Major buyers of the product were USA, Turkey, Hong Kong, U.A.E. and Italy

Garments:

  • Export of Garments increased by 11%, contributed 18.9% in the total Pak export during 2004-05.
  • Hosiery went up to $ 1635 Million in the period under review 2004-05 as compared $1459 Million in last year. Upward trend was witnessed in exports to USA,
  • Leather and Leather Products
  • Showing an increase of 26%, exports of Leather and Leather Products went up to $ 938.5 Million from $ 744.1 Million.
  • Leather Gloves; registered an increase of 132.4% from $ 70.7 million of the previous year to $164.3 million.
  • Surgical Instruments; The exports, which were $ 132.56 Million in 2003-04 came up to $ 182.88 Million in 2004-05, showing an increase of 38%.
  • Sports Goods; from $ 325 Million in 2003-04 the exports came down to $ 307 Million in 2004-05, showing a decrease of 5.4%.

EXPORTS:

  • 1994-95 $8.1bn
  • 1995-96 $8.7bn
  • 1996-97 $8.3bn
  • 1997-98 $8.6bn
  • 1998-99 $7.8bn

Pakistan and Exports of other countries:

  • COUNTRIES CAGR
  • JAPAN 0.76%
  • MALAYSIA -1.75%
  • KOREA 0.88%
  • PHILIPPINES 6.25%
  • INDIA 6.85%
  • CHINA 9.84%
  • USA 0.88%
  • UK 0.77%
  • SINGAPORE -0.65%
  • PAKISTAN 5%

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