By Dr Jazib Mumtaz
Pakistan has pursued foreign investment for years, but the economic payoff has been disappointingly small. Factories are shutting down, exports are stagnant or declining, and the country continues to import far more than it produces or sells abroad.
A recent study published in the Lahore Journal of Economics titled “Impact of Efficiency-Seeking FDI on the Economy” explains why. The real issue is not the volume of foreign money flowing in, but its nature. Most foreign investors come to Pakistan primarily to tap its large and growing domestic consumer market, not to build new factories or strengthen the country’s ability to manufacture and export.
These investors concentrate in non-tradable or import-heavy sectors such as banking, telecommunications, retail chains, and consumer services. While these businesses can be profitable and create some jobs, they rely heavily on imported equipment, technology, and services. As they grow, they actually widen Pakistan’s trade deficit: more dollars leave the country than enter it. In effect, Pakistan becomes an attractive sales market for multinational corporations rather than a competitive global producer.
The study contrasts this with “efficiency-seeking” foreign direct investment (FDI) focused on manufacturing sectors where Pakistan already has a foundation—textiles, food processing, metals, chemicals, engineering goods, and similar industries. When foreign firms bring advanced technology and management practices into these tradable sectors, the benefits spread widely: productivity rises, local suppliers upgrade, quality improves, exports grow, and import dependence falls. One improved factory can lift an entire value chain of farmers, component makers, workers, and supporting industries.
The central conclusion is straightforward: Pakistan must become far more selective about the type of foreign investment it courts. Policy should prioritize projects that build production capacity, transfer technology, create skilled employment, and integrate local firms into global supply chains—rather than projects that simply sell imported or import-dependent goods and services to Pakistani consumers.
Current incentives, regulations, and the overall business environment still favor the easier, quick-return consumer-market investments. Unless Pakistan deliberately shifts toward export-oriented, efficiency-enhancing FDI—through better-targeted incentives, lower input costs, transparent rules, and a level playing field between foreign and domestic firms—it will remain stuck in the same cycle: a growing market for foreign products, a shrinking industrial base, and a chronic balance-of-payments problem.
Pakistan is at a critical juncture. It can continue expanding as a consumption-driven economy dependent on imports and foreign brands, or it can pivot to becoming a production and export hub powered by smart, productive foreign investment. The difference is not how much money comes in, but what that money is used for. The wrong kind of FDI keeps Pakistan dependent; the right kind helps Pakistan stand on its own. The choice, as the study makes clear, is now.
Jazib Mumtaz is an applied economist and social scientist with a strong focus on welfare economics, income distribution, and trade policy research.