FDI in Pakistan Telecom Sector

To reflective what are the factors, which attract foreign investor into telecom sector in Pakistan and its impacts on Pakistan economy?

PHD Proposal to Cardiff metro Politian University

Saif Ur Rehman

Introduction:
This work is only done for the Admission in PHD. This proposal is conduct only for the aim of PHD.
This chapter will demonstrate a very brief overview of this research and also shows overall objectives of the research. There is also including literature review of previous studies, secondary research (journals, survey and previous study) and primary research (interviews of telecom companies, government officials and telecom consultancy agencies in Pakistan. In this paper researcher also mention the associate risk with foreign direct investment in Pakistan telecom sector. Finally recommendations review the whole research structure and very helpful work for new foreign investors to enter into the new market of Pakistan in Telecom sector
Background:
Telecommunication is the exchange of information over significant distances by electronic means. The simplest mean is communication between two different places. This arrangement is called telecommunication. The Internet and telephones are major examples of telecommunication. Telecommunication sectors are based on six major segment, Internet services, wireless local loop sector, mobile sector, payphone services, fix line sector and voice over IP.
Telecommunication started from 1947 and in Pakistan telephone and telegraph department established in 1962. In 1991 PTCL (Pakistan telecommunication corporation) took over function and operation from Pakistan telephone and telegraph department. In Pakistan first mobile company (Mobilink) started his operation in 1994. Other major competitors are
Warid (Abu Dhabi group)
Ufone
Zone (China mobile company)
Telenor (Norway)
Major Foreign direct investment in telecommunication sectors has been arrived from cellular companies, that’s are mention on above. Then later these companies also invested into the Internet, new 3g technologies and voice over IPS. These companies still earning a good profit and there is still good capacity into the Pakistani market.

Pakistan telecom sector is very developing and flourishing industry (Union, 2007-2008). This sector was very developed in the regime of ex president of Pakistan Pervaiz Musharaf and on that time mobile phone was necessity. The difference of 1994 to 2011 was easily judge by visiting the market or sees the total number of subscribers.
Therefore this research will look in details the factors that have resulted for the large inflow of foreign direct investments in Pakistan telecommunication sectors. It will also look the economy growth and GDP effects with these foreign direct investments. It will also give some information about the associated risk with the foreign direct investment in Pakistan telecom sector. This research is very help full for recommendation the suitable new entry mode for foreign investors in telecom sector of Pakistan.
FDI (Foreign Direct investment):
According to the international monetary fund, “foreign direct investment, commonly known as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor. “ 1The investment is direct because the investor, which could be foreign person, company or group of entities, is seeking to control, manage or have significant influence over the foreign enterprise
In this globalised world only foreign direct investment (FDI) is an important source of economy growth. Normally economists consider FDI is phenomenon for developed country but in last two decades FDI inflow towards developing countries were surprising (Nunnenkamp, 2001). The main factors that attract FDI towards developing countries are infrastructure, political stability, natural resource, cheap labour, and government incentive for foreign investors.
Pakistan is developing country with world largest six populations. In last ten years unprecedented increases inflow of FDI, the GDP has grown at an average of 7.0 %.
In the last few years Pakistan have received record inflows of FDI in telecommunication sector. According to (BMI, 2008) Pakistan telecommunication sectors attract FDI estimate US$ 1.824 million out of 1.8 billion, which accounts 54% of the total FDI and telecommunication sectors received 35% of FDI. Pakistan telecom sector has emerged one of the fastest growing telecom. (BMI, 2008)

According to state bank of Pakistan investment in telecommunication sectors helps to increase the GDP. In 2007 telecom sector generate total Rs. 235,613 million revenue and telecom sector contributing 2% GDP out of 7% to government of Pakistan. Government of Pakistan is earning good revenue from those companies in the form of taxes and duties. Which is very positive effect on Pakistani economy.
Research Objective:
To critical analyze the foreign direct investment in Pakistan telecom sector and its affect on economy growth. We will also look some risk associate with this foreign direct investment. This study will help for new foreign investors to invest there capital in Pakistan telecom sector. In Pakistan there is still 36% free market available for new foreign investor in telecom sector. There is still research gap in previous study that how Pakistan attract more foreign investor in telecom sector? During this thesis researcher want to full fill the research gap.

Research Questions
The research will answer the following questions:
1. What are the determinants of foreign direct investment in Pakistan telecom sector?
2. How foreign direct investment in Pakistan telecom sector affects on economy in Pakistan?
3. What are the risks associate with foreign direct investment in Pakistan telecom sectors.
4. What recommendations make for Pakistan telecom sector to attract foreign direct investment?
5. In Pakistan telecom sector, what is suitable entry mode for new foreign investors?
Literature Review:
This chapter will provide detail aspects of theoretical background of research. It will also demonstrate in detail the factors that influence the foreign direct investment in developing countries and specific sectors. It will also tell the associated risk with foreign direct investment.
Foreign Direct Investment:
“Foreign direct investment usually involves the establishment of the firm’s own control over raw materials, components, production, distribution and marketing facilities abroad” (Bartels & Pass, 2000). On the other hand foreign direct investment can be defined as An investment involving a long term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or parent enterprise or foreign affiliate)” (United Nations, 2006)
Foreign direct investment enables the investor to take a control of the enterprise and activities, production, distribution, raw material, marketing and infrastructure (Daniels et al., 2004).
There are number of theories that have been motives for foreign direct investment. Theory of trade and investment and marketing form the basis for these theories. The both theories give a complete understanding the reasons for foreign direct investment. Or any particular kind of foreign direct investment, but there is no complete theory of foreign direct investment (Harrison, Dalkiran and elsey, 2000).

International advantage:
According to Dunning (1973, 1979 and 1981). It is very profitable steps for companies that they cross their border and go to other markets for expanding there business and local company to international business. Internalization advantage arises because foreign direct investment allows a firm to remain or become integrated (Harrison, Dalkiran and Elsey, 2000). Company’s can
Achieved cheap labour, batter quality raw materials and local government incentives.
Infrastructure:
Infrastructure in developing countries mean well developed networks of road, power supply, internet and telephone access, water supply, airport, train networks, transport and natural resource are the ingredients that attract the foreign direct investment (Khan and Kim, 1999).
Morisset (2000) argue that good infrastructure attract more foreign firect investment as compare to countries having poor infrastructure.

Table : Host Country Determinants of FDI
Natural Resources:
In host country the availability of natural resource and access plays vital role to attract the foreign direct investment. Harrison Dalkiran and Elsey (2000) argue that location; cheap labour and availability of natural resource and

Location affects foreign direct investment decision. So attracting the foreign direct investment natural resources are very important.
Political stability:
Political instability is big thread for foreign direct investment for developing countries. Political instability provides a hostile environment for foreign corporations, discouraging their investment (Bennett and green, 1972). Basi (1963) argue that political instability is a big factor to change the decisions for foreign investors. There is positive relationship exists between foreign direct investment and political stability.
Labour Cost:
Multinational enterprise transfers all their production into developing countries where labour is very cheap and skilled and as well hard worker. Cheap labour reduced the total production cost. Aqeel and Nishat(2004) argue that high nominal wages discourage foreign direct investment. There is negative relationship between foreign direct investment and high labour cost. In Pakistan there is very skilled labour and that’s what foreign telecommunication companies get benefits.
Foreign direct investment Risks:
Developing countries despite their investor friendly policies pose different kind of risks and threats for foreign investors. According to Meldrum (2000), when foreign direct investment takes place, certain risk involves because of the domestic or national business. There are basically three major risk involves to attract foreign direct investment:
1) Political risk
2) Economical risk
3) Currency risk.
Political risk:
Political risk is major risk for the owner of foreign direct investment. These risks involve the risk of losing revenue or incurring costs due to changes in the political environment of the country (McDonald, 2007). Most of developing countries are suffering with political risks because Army take over the government and dictator freezes all foreign currency accounts and make restriction to transfer money outside the country.

Economic Risk:
“Economic risk involves a sudden change in the economic structure and the growth rate thus causing a significant change in the profitability of the investment” (Meldrum, 2000). Economic risk arises from the unfavourable changes in economic policies (wealth distribution, fiscal, monetary). Sanctions on trade or export on any other country will affect the economy. Foreign investors scared and they don’t want to invest on those countries.

Currency Risk:
Currency risk or exchange rate risk involves a sudden change in currency regime of a country such as change from fixed to floating exchange rate (Meldrum, 2000). Depreciation of home country currency also involves the currency risk.
Methodology:
Research methodology is the way to carry out the data including research, philosophy, purpose of research, data analysis and data collection. The research onion described by Mark Saunders, Philip Lewis and Adrian Thornhill (2006) is used to analyse the philosophy, approach, purpose and strategy of research.
Research strategy:
The best suitable strategy for this research is case study: According to Robson (2002), “case study is a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real time context using multiple sources of evidence”
Qualitative Method:
Qualitative research method is a very perfect tool to analysis the research (Gummesson, 2000). This method is very useful, where the aim is to undercover and understand a phenomenon about which is little known. In Pakistan there is not much research conduct on foreign direct investment in Pakistan telecommunication sector so qualitative method is suitable to apply. Qualitative data enable the research to explore more and in detail understanding the issues.

Data Source:
There is two type of data source.
1) Primary source
2) Secondary source
Primary data:
Primary research will be use to analysis the Pakistan telecom industry. It will also answer to some extent, the important question of what sort of entry strategies firms are using to invest in telecom sector in Pakistan.
In primary source there is no data available. Hence the research has to start from scratch. That’s why research prepaid some question and conducts interviews and made some survey to collect the data and analysing the data. The main sources of collecting the primary data are
Interviews of telecom companies’ officials and top-level management,
PTA (Pakistan telecom authority) official
Telecom consultancy agencies management in Pakistan
Secondary Data:
In secondary data there is enough material or data available for researcher, the data available from other source like publishers, newspaper, online journals, official websites and companies’ annual reports.
There is advantage and disadvantage for both methods. Primary research is very more time consuming and very costly and some time researched does not need that information. While some secondary research may not suitable for researcher because data figures change significantly by time. In this research secondary data is suitable for researcher, so researcher decide to use secondary research method for this work.

Bibliography:

Aqeel, A. & Nishat, M. (2004), ‘The determinants of foreign direct investment in Pakistan’, The Pakistan Development Review, pp. 651-664
Akhtar, S. (2007), ‘An Investment Friendly Destination’, Pakistan Investment Conference, 2007

Addison, T. & Heshmati, A. (2004), ‘The New Global Determinants of FDI Flows to Developing Countries: The Importance of ICT and Democratization’, In M. Bagella, L. Becchetti, I. Hasan, and W.C. Hunter (eds), Monetary Integration, Markets and Regulations, Research in Banking and Finance, Vol.4, pp- 151-186

Alhajhouj, H.R. (2002), ‘Foreign Direct Investment and Exchange Rate Risk’, Scientific Journal of King Faisal University, Vol. 3, 2002

Dunning, J. H. (1993), ‘Multinational Enterprises and the Global Economy’, Harrow: Addison-Wesley

PTA (2010), ‘Annual Report 2007’, Pakistan Telecommunication Authority, Islamabad, 2010

Bibliography: Aqeel, A. & Nishat, M. (2004), ‘The determinants of foreign direct investment in Pakistan’, The Pakistan Development Review, pp. 651-664 Akhtar, S. (2007), ‘An Investment Friendly Destination’, Pakistan Investment Conference, 2007 Addison, T. & Heshmati, A. (2004), ‘The New Global Determinants of FDI Flows to Developing Countries: The Importance of ICT and Democratization’, In M. Bagella, L. Becchetti, I. Hasan, and W.C. Hunter (eds), Monetary Integration, Markets and Regulations, Research in Banking and Finance, Vol.4, pp- 151-186 Alhajhouj, H.R. (2002), ‘Foreign Direct Investment and Exchange Rate Risk’, Scientific Journal of King Faisal University, Vol. 3, 2002 Dunning, J. H. (1993), ‘Multinational Enterprises and the Global Economy’, Harrow: Addison-Wesley PTA (2010), ‘Annual Report 2007’, Pakistan Telecommunication Authority, Islamabad, 2010