In India, income was up $217 million, or 24 per cent, to $1,116 million.

Client revenues drove

income growth. Corporate Finance and advisory transactions performed very strongly and higher
foreign exchange and derivatives sales also contributed. Cash Management benefited from
higher balances. There was strong growth in all customer segments led by local corporate where
income grew 91 per cent. Own account performed well driven by Trading and ALM offset by
lower Principal Finance. Operating expenses were up $69 million, or 27 per cent, to $329
million. Staff and premises related costs contributed to an increase in expenses. Working profit
was up $148 million, or23 per cent, to $787 million. Loan impairment was up $31 million, or
238 per cent, to $44 million. This increase in impairment reflects a general worsening in
economic conditions, with the greatest impact in the middle market customer segment. Other
impairment was up $17 million as provisions were made against private equity and strategic
investments. Operating profit was up $100 million, or 16 per cent, to $726 million.
Managing risk responsibly
Standard Chartered has a well-established risk governance structure and an experienced risk
team. The Group’s balance sheet and liquidity position remain strong and it is prepared to deal
with the challenges arising from global recessionary conditions.

Exchange rates
Changes in exchange rates affect, among other things, the value of the Group’s assets and
liabilities denominated in foreign currencies, as well as the earnings reported by the Group’s
non-US dollar denominated branches and subsidiaries. The effect of exchange rate movements
on the capital adequacy ratio is mitigated by corresponding movements in risk weighted
assets. Under certain circumstances, the Group may take the decision to hedge its foreign
exchange exposures in order to protect the Group’s capital ratios from the effects of changes
in exchange rates. There have been significant movements in currency exchange
rates in some of the Group’s key markets over the past year and Standard Chartered expects to
continue to be exposed to such fluctuations in the coming year. The table below sets out the
period end and average currency exchange rates per US dollar for India for 31 December 2008
and 31 December 2009.
Year Year
ended ended
31.12.09 31.12.08
Indian rupee
Average 43.50 41.08
Period end 48.65 39.39

As a result of its normal business operations, Standard Chartered is exposed to a broader range of
risks than those principal risks mentioned above, and the Group’s approach to managing risk is
detailed on the following pages.
The average daily income earned from trading market risk related activities is as follows:
2008 2007
$million $million
Interest rate risk 3.4 2.3
Foreign exchange risk 5.1 3.0
Commodity risk 0.6 0.1
Equity risk 0.0 –
Total 9.1 5.4

FDI india

The Chartered Bank opened its first overseas branch in India, at Kolkata, on 12 April 1858. Eight
years later the Kolkata agent described the Bank's credit locally as splendid and its business as
flourishing, particularly the substantial turnover in rice bills with the leading Arab firms. When
The Chartered Bank first established itself in India, Kolkata was the most important commercial
city, and was the centre of the jute and indigo trades. With the growth of the cotton trade and the
opening of the Suez Canal in 1869, Bombay took over from Kolkata as India's main trade centre.
Today the Bank's branches and sub-branches in India are directed and administered from
Mumbai (Bombay) with Kolkata remaining an important trading and banking centre. In January
2010, the Indian government gave its consent to 14 FDI tenders which are likely to bring foreign
investment amounting to US$ 157.89 million among them is Standard Chartered Bank (FDI
valuing US$ 44.39 million by Standard Chartered Bank that is likely to elevate to 100% from
74.9% in its portfolio management arm).

Motives of Standard Chartered Bank to invest in India

Attract new source of demand:-

The Chartered Bank first established itself in India, Kolkata was the most important commercial
city, and was the centre of the jute and indigo trades. Market demand of India attracted SCB to
establish its branch in India so that it can take advantage of this huge market.

Enter Profitable Market:-

India is profitable market for any MNC because of India’s stable economic and political
condition. In India Standard Chartered Bank’s Operating profit in 2009 rose 37 per cent, driven
by very strong income growth of 33 per cent to $1.75 billion and gains from the sale of the asset
management company. The strength and sustainability of Indian franchise is demonstrated by the
58 per cent compound annual growth rate in operating profit generated by the business over the
past three years. By this you can make judgment that how much profit SCB is gaining from
India.

The following are the other reasons that Standard Chartered Bank foreign investors are
attracted to India:

 A good command of English at the management and technical levels.

 Extremely low labor costs.
 A tremendous buyers' market in India itself that derives from a population of a billion.
 An expectation of a sharp increase in the buying power of Indian residents, a fact that is
influenced by rapid increases in wages in India.
 An extremely high technological ability in India that finds expression, among other
matters, in the nuclear industry and hi-tech services provided in India for foreign
companies.
 Despite the economic reforms carried out in India since 1991, foreign residents'
investment are still restricted. These restrictions relate to specific sectors where there is
maximum imposed on investments made by foreign residents. These are subject to one of
two options. The first is entry to an "automatic track" in which there is no need for prior
approval. The foreign investor in an existing company must report his holding to the
central bank (RBI) within 30 days of issue of the shares. The second option relates to
investments outside the "automatic track" and they require the prior approval of the
Indian Government. The approval, if granted, is on a separate basis for each class of
investment.

Conditions provided by Indian government on FDI

 Real estate -foreign residents are not allowed to invest in retail real estate transactions or
in the purchase of agricultural land.
  Commerce - foreign investors may not invest in commerce but an investment of up to
51% is permitted in export-oriented commercial ventures.
 A foreign investment of up to 100% is permitted in IT such as software other than in the
defense and space industries.

The Indian government has assured to release an improvised FDI policy in every six months. The
offers announced by Union Finance Minister, Pranab Mukherjee, in Union Budget 2010-11, to
enhance investment ambiance in India on February 26, 2010 entail:

 Measures implemented to un-complicate the FDI system

 System for computation of indirect foreign investment in Indian firms has been
comprehensively classified.
 Entire liberalization of costing and imbursement of technology transmit charges and
trademark, and royalty expenses.
Additionally, the Indian government has permitted the Foreign Investment Promotion Board
(FIPB), to sanction FDI tenders of up to US$ 358.3 million. Previously all the tenders that
entailed foreign direct investment of more than US$ 129.16 million were presented in front of
Cabinet Committee of Economic Affairs (CCEA) for authorization. As the Union Home
Minister, Mr P Chidambaram, the exemption would accelerate foreign direct investment inflow.

Advantages of FDI

Foreign Direct Investment plays a pivotal role in the development of India's economy. It is an
integral part of the global economic system. Advantages of FDI can be enjoyed to full extent
through various national policies and international investment architecture. Both the factors
contribute enormously to the maximum FDI inflows in India, which stimulates the economic
development of the country.

An Overview of Advantages of FDI-

Foreign Direct Investment in India is allowed through four basic routes namely, financial
collaborations, technical collaborations and joint ventures, capital markets via Euro issues,
and private placements or preferential allotments.

FDI inflow helps the developing countries to develop a transparent, broad, and effective
policy environment for investment issues as well as, builds human and institutional
capacities to execute the same.

Benefits of Foreign Direct Investment-

Attracting foreign direct investment has become an integral part of the economic development
strategies for India. FDI ensures a huge amount of domestic capital, production level, and
employment opportunities in the developing countries, which is a major step towards the
economic growth of the country. FDI has been a booming factor that has bolstered the
economic life of India, but on the other hand it is also being blamed for ousting domestic
inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment
patterns. The effects of FDI are by and large transformative. The incorporation of a range of
well-composed and relevant policies will boost up the profit ratio from Foreign Direct
Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed
as under:

Economic growth- This is one of the major sectors, which is enormously benefited from
foreign direct investment. A remarkable inflow of FDI in various industrial units in India has
boosted the economic life of country.
 Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the
trading of goods and services in India both in terms of import and export production. Products
of superior quality are manufactured by various industries in India due to greater amount of
FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportunities
by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of
knowledge from India especially in the Information Technology sector. It helps in developing
the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now occupying a
position in the Indian market through Joint Ventures and collaboration concerns. The
maximum amount of the profits gained by the foreign firms through these joint ventures is
spent on the Indian market.

Foreign direct investment (FDI) in Pakistan soared by 180.6 per cent year-on-year to US$2.22 billion and
portfolio investment by 276 per cent to $407.4 million during the first nine months of fiscal year 2006,
the State Bank of Pakistan (SBP) reported on April 24. During July–March 2005-06, FDI year-on-year
increased to $2.224 billion from only $792.6 million and portfolio investment to $407.4 million, whereas
it was $108.1 million in the corresponding period last year, according to the latest statistics released by
the State Bank.[81] Pakistan has achieved FDI of almost $8.4 billion in the financial year 06/07, surpassing
the government target of $4 billion. [82] Foreign investment had significantly declined by 2010, dropping
by 54.6% due to Pakistan's political instability and weak law and order, according to the Bank of
Pakistan.

Foreign acquisitions and mergers

With the rapid growth in Pakistan's economy, foreign investors are taking a keen interest in the
corporate sector of Pakistan. In recent years, majority stakes in many corporations have been
acquired by multinational groups.

 PICIC by Singapore based Temasek Holdings for $339 million

  Union Bank by Standard Chartered Bank for $487 million
 Prime Commercial Bank by ABN Amro for $228 million
 PakTel by China Mobile for $460 million
 PTCL by Etisalat for $1.8 billion
 Additional 57.6% shares of Lakson Tobacco Company acquired by Philip Morris International for
$382 million

Badar is being designated as Chief Executive for Saudi Arabia & North Africa, subject to regulatory approval. He
moves on after a seven years association with Standard Chartered Pakistan as its Chief Executive. During his
association with Standard Chartered Pakistan, Badar has led the transformation of the Bank, with the high point
being the Union Bank acquisition in 2006, one of the largest FDI investments in Pakistan‟s banking industry.
Standard Chartered is now the largest international Bank in Pakistan.
Shayne Nelson, Chairman of the Board of Directors, Standard Chartered Bank (Pakistan) Ltd., said “Pakistan is a
very important market for Standard Chartered. Our uninterrupted presence here since 1863, the year we
established our first branch in Karachi, is a testament to our brand promise, Here for Good.

The success of FDI policies can be judged by the size of the inflows of capital. Pakistan
has been making efforts to attract FDI and such efforts have been intensified with the advent
of deregulation, privatization, and liberalization policies initiated at the end of the 1980s.
FDI in Pakistan consists primarily of three elements, namely, cash brought in, capital
equipment brought in, and re-invested earnings. The information provided in Table 3 shows
that the structure of the sources of financing FDI in Pakistan has undergone a noticeable
change.
Foreign Direct Investment (FDI) in Pakistan is one of the major external sources of funding to meet obligations of
resources gap and goal achievement. FDI has played a vital role in the economic growth of Pakistan. FDI
contributed significantly in the human resources development, capital formation, and organizational and
managerial skills of the people in the country. Total foreign investment was $ 6.0 billion, of which FDI amounted to
$ 4.16 billion in the year 2007.

In recent decades under the changing modes of international transactions and cross-border
mobilization of production factors, foreign direct investment
*The authors are, respectively, Graduate Student of Economics, Professor and Chairman, Department of Economics,
and Graduate Student of Economics, University of Sargodha, Sargodha (Pakistan). Corresponding author e-mail:
zakir_rana@yahoo.com. 38 Pakistan Economic and Social Review
(FDI) attracted great attention not only in developing countries but also in developed countries. The
open FDI regime forced the host countries to adopt greater deregulation policies and reliance on
market forces in their economies. Most developing countries such as Pakistan now considered FDI as
the major external source of funding to meet obligations of resources gap and economic growth,
however it is difficult to measure economic effects with precision. Nevertheless, various empirical
studies showed a significant role of inward FDI in economic growth of the developing countries,
through its contribution in human resources, capital formation, enhancing of organizational and
managerial skills, and transfer of technology, promoting exports and imports and the network effect
of marketing. The other positive spillover effect was that the presence of foreign firm helps expand
infrastructure facilities, which makes it easier and profitable for local firms to crowd-in (Lemi, 2004).
The negative impacts occur with competition over scarce resources and limited skilled manpower,
due to strategic motives by the affiliates of Multinational Corporations (MNCs) or the high
technological gap between local and foreign firms. There were also other costs associated with
inflow of FDI such as restrictive business practices by foreign firms, profit repatriation and forgone
tax in the case of tax holidays. The net welfare effects also differed by the nature of FDI, motives
behind internal transactions, and host countries government policies.
Many factors made Pakistan an attractive place for foreign investments. Firstly, the Pakistanis
economy showed responsiveness and potential capacity to meet exogenous shocks and minimize
risks in response to various major regional and global events, for instance, the nuclear blast (1998),
the bombing against French technicians in Karachi (2001); 9/11, 2001 which placed Pakistan in the
frontline again and aid from Washington began to flow once again. The subsequent events included:
Afghanistan war; the attack on India’s Parliament (2001) that led to mobilization of Indian troops,
the 2003 war in Iraq, Karachi Stock Exchange (KSE) crisis and severe earthquake (2005). Thus,
foreign investors were assured that they could carry out business in a stable and certain environment.
Secondly, Pakistan has a population of more than 150 million (IFS, 2005) which provides a large
market for consumer goods, a growing middle class with adequate purchasing power, and provision
of low-cost labour, which reduces the cost of production and its strategic geographical location in
Central and South East Asia. YOUSAF et al.: Economic Evaluation of FDI in Pakistan 39
Thirdly, Pakistan has a world-class physical infrastructure, which was necessary for investment. The
country inherited strong institutions from the British, and provided adequate communication
infrastructure for foreign investors.
Finally, there was also a strategic consideration for increasing FDI in Pakistan having implications
for global security (Hussain, 2003).
Pakistan also undertook wide-ranging structural reforms in various sectors of the economy and
pursued sound macroeconomic policies for the last seven years. Pakistan has now emerged as a
favorite destination for foreign investors, both direct and portfolio investment. Total foreign
investment during the (2006-2007) increased to $ 6.0 billion, which was almost 48 percent higher
than last year in the same period. Within total foreign investment, foreign direct investment (FDI)
amounted to $ 4.16 billion, which was 37 percent higher than last year (GOP, 2006-07). Important
areas of FDI were: telecom, energy (oil and gas, power, petroleum refineries), banking and finance,
and food and beverages. These four groups accounted for over 80 percent of FDI inflows (GOP,
2006-07). Other areas, for instance, textile, chemicals and petro-chemicals, automobiles, construction
and trade, were also attracting FDI. Nearly 78 percent of FDI came from five countries. Pakistan’s
equity market was also attracting huge portfolio investment and has created brisk activity in stock
markets (as Karachi Stock Exchange (KSE) of Pakistan). The magnitude of the foreign investment
reflected the confidence of global investors on the current and future prospects of Pakistan’s
economy (GOP, 2006-07). The target of Exports in 2006-07 was at $ 18.6 billion or 12.9 percent
higher than last year.
During the current fiscal year, exports increased only by 3.4 percent, rising from $ 13.46 billion to $
13.9 billion. Pakistan’s exports were mainly consisted of few items namely; cotton, leather, rice,
synthetic textiles and sports goods. Imports target was set to decline by 2.1 percent in 2006-07 to $
28.0 billion from last year’s level of $ 28.6 billion (GOP, 2006-07).
The FDI inter alia was constrained by a number of factors namely, political instability, law and
order, economic environment and no proper infrastructure, the instability in stock markets and
regulatory regime. Nevertheless, FDI and foreign remittances provided a strong base to improve the
economic situation of the country. The study envisaged a significant addition to the empirical
estimation of the impact of foreign direct investment on Pakistan economy. The objective of this
paper is to analyze the impact FDI on imports, exports and identify the constraints confronting 40
Pakistan Economic and Social Review
foreign investment. The results of the study provide the policy makers with a firm basis to formulate
appropriate programs leading to the development of the Pakistan economy.

Investment in Service Sector in Pakistan

Foreign Direct Investment in a Service Sector is allowed in any activity subject to obtaining permission,
NOC or license from the concerned agency/agencies and fulfilling the requirements of the respective
sectoral policy.

Foreign investors may hold 100% equity allowed on repatriation basis and the minimum amount of
foreign equity investment in the project shall be 0.15 million dollars.