Economic Factors Contributing to Foreign Direct Investment

The economic development of developing countries is influenced by a multiplicity of factors, including the inflows from foreign multinationals in FDI. Researchers have argued on the impact of FDI on these countries, and conclusions are varied. Some studies show that the FDI has a negative effect on the economy, including creating monopolies as the economy is dominated by foreign players, thus lacking in organic growth. This situation only happens to the FDI-dependent countries where the multiplier effect is weak, leading to economic stagnation. On the other hand, FDI has been found to have a beneficial impact on the economies due to the knowledge transfer and the pressure it places on the local firm to innovate and reach international competitiveness levels. However, for FDI to produce positive economic effects, the local population must be educated and enact export promoting policies and a successful technology transfer. Therefore, to analyze the impact of FDI on a country, a specific study is required to examine the policies, levels of education and infrastructure, technology, and capital formation. This paper analyzes the impact of FDI on Pakistan and Mongolia's developing countries, the impediments to absorption of more FDI, and proposing measures to improve these countries' FDI flow. 

Comparison of FDI intake by Pakistani and Mongolia 

There are some essential points to be made when comparing the FDI of Pakistan and Mongolia. According to some reports, a country's FDI absorptive ability is linked to human resources, domestic firm absorbent potential financial structures, physical infrastructure, technical and organizational growth (Nguyen, Duysters, Patterson, & Sander, 2009). After 2000, FDI inflow into Pakistan has increased dramatically to a peak of just over $5.5 billion in 2007, fell marginally to $5.4 billion in 2008, and then declined steeply to $2.3 billion in 2008, averaging $1.4 billion from 2009 to 2015. (World Bank, 2016). According to the UNCTADs World investment report,2020, the FDI inflows to Pakistan between 2018 and 2019 increased from $1.7billion to $2.2billion due to heavy Chinese investment in the country, the decline in political uncertainty, and abandonment of the deliberate currency undervaluation by the government. However, Pakistan's FDI inflows have been dropping between 2010 and 2019 as the country grapples with security challenges, unreliable power supply, and burdensome investment climate. 

A study of time series data of Pakistan economy between 1981 and 2010 conducted by Saqida et al. (2013) through a multi-regression technique to analyze the impact of the various variables on the GDP concluded that FDI hurts the country's economy. Other variables that had a negative correlation with economic growth include debt, inflation, and trade. The position holds in the short and long-run analysis. The most variable found to be beneficial to the economy is a domestic investment and implementation of policies that encourage organic innovation and growth. 

Mongolia's FDI grew steadily from 2000 to 2009, then spiked to $1.7 billion in 2010, peaked at $4.6 billion in 2011, decreased marginally in 2012, then fell dramatically to $2 billion in 2013 proceeded to decline to $94 million by 2015. (World Bank, 2016). Mongolia experienced a 12.4 % marginal rise in FDI inflows in 2019 to $2.4billion compared to $2.2billion in 2018, primarily due to the additional investments in the copper-gold mines by Australian firm Rio Tinto. The data shows a steady decline in FDI in the last decade due to inefficiencies in the government's economic guidelines. 

To get to the level of attracting the high levels of investment, Mongolia adopted a poverty reduction and economic growth strategy in 2003 that focused on a private sector generated growth and infrastructure development to make it more attractive to FDI. These policies' combined effect made the country record unprecedented economic growth levels in 2010, with consistent annual growth of 7%. As a result, the FDI grew by 76.8% between 2005 and 2010, hitting a high of $4.6 in 2011. Javzandrojt and Dehong (2012) analyzed the FDI inflows and economic growth from 2003 and 2010 and concluded that the robust GDP growth during that period significantly impacted attracting higher FDIs. 

Hurdles to Foreign Direct Investment Absorption in Pakistan 

Several reasons hinder Pakistan; the country's location creates security challenges for expatriates due to the heightened terrorist activities. The government is a high corruption risk, and because the government has not ratified the OECD Anti-corruption convention, international investors are reluctant to commit funds. The labor force is an essential mechanism by which FDI moves to the host nation (Nguyen et al., 2009). Information transfer and job success increase as labor become more professional and trained, and Pakistan is limited in capacity to absorb knowledge and technology transfer. Pakistan's constricted potential to master information transfer is a barrier to FDI (Saqib et al., 2013). The fact that Pakistan lacks sufficient capability in modern technologies and research and development is a challenge to FDI absorption. The host nation profits from the technological transfer, but only to a certain extent can it absorb new technology (Nguyen et al., 2009). Pakistan's financial system is a second impediment. If a host country's economic infrastructure is efficient, then FDI can be used more effectively, and increase absorptive potential (Nguyen et al., 2009). Pakistan's physical infrastructure impedes attracting FDI. Pakistan's capacity to absorb FDI would be boosted if it had better infrastructure (Saqib, Masnoon, & Rafique, 2013). 

Hurdles to Foreign Direct Investment Absorption in Mongolia 

There are also roadblocks in Mongolia's capacity to absorb sufficient FDI. Mongolia's politics is a crucial challenge to more FDI inflows (Javazandorj & Dehong, 2012). If foreign investors find the local government welcoming, they are more likely to educate the local workforce to boost technology transfer (Nguyen et al., 2009). Furthermore, supportive regimes will attract investors to increase their contributions or reinvest their earnings in the host nation, pushing for stronger FDI absorption. 

Crime and instability are the second impediment in Mongolia (Javazandorj & Dehong, 2012). Suppose foreigners believe the host nation has problems with graft and violence. In that case, it not only deters outsiders but also hurts the host country's economic sectors and FDI absorption potential (Gurra, 2002). Institutional factors provide a significant block in Mongolia's ability to attract more FDI. Investors are less likely to get their money into the host nation when government policies are unstable (Nguyen et al., 2009). Inconsistent finance policies, regulatory frameworks discourage businesses' establishment, thus impacting the FDI inflows. According to the UNCTAD report,2020, Mongolia's high corruption levels, geographical isolation, and unreliable transportation network taint its investment image as an investment destination. 

Concerns and Methods on Strengthening Macroeconomic Conditions 

Mongolian FDI has been slowly decreasing, owing to its fiscal and monetary policies, which have harmed Mongolia's economic development (Mongolia, 2014). Mongolia's Gross Domestic Product (GDP) has decreased, and FDI reduced as well. Since China accounts for more than 90% of Mongolia's exports, any slowdown in China's affects Mongolia (Mongolia Department of State, 2014). FDI has also been hindered by the economic policies put in place to secure Mongolia's territorial interests. The laws and legislation appear to have been rushed into effect with little consideration regarding their impact. 

Strengthening and intelligently designing economic policies would help Mongolia's macroeconomic conditions by signaling to investors that the government is concerned about increasing FDI. Other policy changes aimed at accelerating economic growth centered on the private sector to improve. 

In Pakistan, as in Mongolia, it is essential to restore political cohesion to boost economic standards (Gillani, 2010). Human capital is also a problem for Pakistan, and it must be developed. Human capital growth is a critical component of Pakistan's FDI policy, aiming to improve its international competitiveness (Gillani, 2010). Pakistan is now struggling with overall debt, which has hurt the economy (Saqib et al.,2013). Taking ownership of Pakistan's overall debt would help the country's economy and make it more appealing to investors. 

Austerity measures Required to Attract More Foreign Direct Investment 

Numerous changes are needed for both nations to be able to absorb additional FDI. Democratic changes are necessary for both countries so that there are a functioning government and political prosperity. Commercial rules and their interpretation are constantly changing, which affects contract conflicts, which has an impact on international investors (Mongolia Department of State, 2014). Regulatory changes that portray nations as more business-friendly and boost business conditions should be implemented (Gillani, 2010). Both states must change their trade laws for their benefit and regions (Nguyen et al., 2009). Investment policies can also be updated to appeal to international investors. This would significantly increase the host nation's ability to absorb FDI. 

Conclusion 

Foreign direct investment plays a positive role in developing countries' economic development since it challenges local firms to innovate and transfer knowledge and technology. However, on its own, FDI cannot achieve economic growth as indicated by countries with heavy reliance on FDI to achieve growth. Comparing the levels of FDI in two developing economies of Pakistan and Mongolia shows contrasting results. In Pakistan, FDI negatively correlates with economic growth, while Mongolia, an enabling environment, has resulted in higher economic growth and increased FDI inflows. The declining levels of FDI inflows to these countries have highlighted the need for organic growth. However, the respective governments have to provide a friendly climate for investment, both domestic and foreign investors. Mongolia and Pakistan's political climate has caused its lack of appeal to investors. However, both states have aspects within their governance, legal, and regulatory structures that can be improved to draw more FDI. As demonstrated, both nations must adopt a systematic approach to resolving problems that, if resolved, would render the countries more attractive for FDI. 

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