Not long ago, a multinational firm exploring South Asia shortlisted three locations for a regional manufacturing facility: Vietnam, Bangladesh and Pakistan.
Pakistan offered the largest domestic market, competitive labour costs and generous incentives. Vietnam offered fewer incentives – but something else. When the final decision was announced, Pakistan was dropped not because of costs or capacity, but because, as one executive put it privately, “We could not price the policy risk”.
That single sentence captures Pakistan’s FDI paradox: abundant potential, yet limited investability. Capital does not fear risk; it fears unquantifiable risk. In today’s global FDI race, credibility – not incentives, brochures or even market size – has become the decisive currency.
This credibility gap is evident in the numbers: over the past five years, Pakistan has attracted only $1.5 billion to $2 billion in FDI annually, compared with roughly $3 billion in Bangladesh and $15 billion to $20 billion in Vietnam, despite Pakistan’s comparable market size and labour costs.
Across Asia, investors follow a familiar circuit. In Hanoi, discussions focus on production timelines, export logistics, and supplier integration. In Dhaka, the conversation revolves around scaling capacity and meeting global orders. In Islamabad, however, investors often begin with a different set of questions: Will policies change midstream? Will contracts be honoured? Will today’s incentives survive the next budget – or the next government? In Vietnam and Bangladesh, the operating assumption is continuity; in Pakistan, it is reversibility.
This difference in questioning explains why Pakistan’s FDI inflows remain low and volatile, while peers surge ahead.
The urgency is magnified by Pakistan’s demographic reality. The country adds more than 6.5 million people annually – approximately 18,000 per day. To absorb this workforce, Pakistan must sustain economic growth well above 6.0 per cent for decades. Growth at this scale cannot be achieved without large, sustained investment. Domestic capital – constrained by high interest rates and macroeconomic instability – cannot shoulder this alone.
FDI is not optional; it is essential. It matters not merely because of the dollars it brings. Its real value lies in technology transfer, managerial discipline, export market access, and integration into global value chains. Vietnam’s rise as an electronics hub and Bangladesh’s dominance in garments were powered by FDI acting as a system upgrader, not just a source of capital.
So why has Pakistan – with its strategic location, youth bulge and large domestic market – fallen behind?
The answer lies not in geography or demographics, but in political economy choices. Vietnam’s success rests on policy continuity, codification, and macro stability. Bangladesh built credibility through relentless sectoral focus and export discipline.
Pakistan’s paradox is that it does not suffer from a shortage of incentives, but from a surplus of volatility. The problem is not policy absence but policy reversibility. Tax regimes change with fiscal stress. Power sector contracts are reopened. Profit repatriation is periodically delayed during foreign exchange shortages. Sales tax refunds are held back, effectively turning private firms into involuntary lenders to the state. Each of these actions raises the perceived risk premium demanded by investors. Projects that are commercially viable on paper become unbankable once uncertainty is priced in. Capital cannot model this environment; it can only avoid it.
Bangladesh offers an instructive contrast. While regulatory frictions persist outside zones, its export processing zones and special economic zones function as islands of certainty. Within these zones, investors face predictable compliance standards, reliable access to land and utilities, and incentives linked to verifiable export performance. The credibility of these arrangements, not their generosity, has enabled Bangladesh to scale garment exports and diversify production despite infrastructure and logistics constraints.
Vietnam has gone further by codifying credibility across the entire investment ecosystem. Its investment law and enterprise law define clear eligibility criteria for incentives, time-bound approvals, and a well-functioning one-stop shop for licensing and registration. Investors know in advance what they qualify for, for how long, and under which enforceable rules. Combined with macro stability, reliable utilities, strong contract enforcement, and protection of intellectual property, this framework lowers risk premia and enables long-horizon planning.
Pakistan, by contrast, operates with fragmented governance, overlapping mandates, and weak enforcement. Incentives exist, but their durability is uncertain. Zones are announced, but ecosystems remain incomplete. The result is an investment climate in which potential is evident, but credibility is fragile.
What, then, must be done? Resolving Pakistan’s FDI paradox requires moving from announcing policies to locking in guarantees.
First, legislate credibility. Pakistan should enact a Foreign Investment Stability Pact that grants qualifying large-scale, export-oriented, and employment-intensive projects a ten-year shield against adverse changes in taxation, tariffs and core regulations.
Second, build ecosystems, not just zones. The focus should shift from scattering special economic zones to developing integrated, sector-specific industrial clusters.
Third, empower a referee with teeth. The Special Investment Facilitation Council (SIFC) must evolve into a legally backed one-window platform with enforceable service-level agreements and fast-track dispute resolution.
Fourth, pursue an anchor-investor strategy. Pakistan should identify two or three global leaders in priority sectors and offer them a closed-loop ecosystem paired with credible risk-mitigation tools such as fast-track arbitration. The cost of inaction is no longer merely economic. Each year of weak investment means that millions of young Pakistanis enter an economy that cannot offer productive opportunities.
Vietnam and Bangladesh understood the fundamental algebra of global capital: credibility compounds, while uncertainty repels. Until Pakistan makes its policies as durable as its potential, the FDI gap will persist – and the promise of its people will remain the nation’s most consequential unrealised asset.
The writer is the vice-chancellorof the Pakistan Institute of Development Economics (PIDE), and a former chiefeconomist of Pakistan.
