After the 1990s a global evolutionary escalation has been observed with an enlarged growth of Information and Communication Technologies. A large number of private telecom service providers have jumped into the field, providing live broadcasting, satellite communication, public telephony, IP networking and mobile internet. After the dissolution of British Telecom and AT&T business merger in 1994 and the privatization of British Telecom backed a new era of telecom sector's liberalization and deregulation was introduced but the trend of privatization was slowly followed in developing countries as compared to underdeveloped countries.

In 1991, under the act of Pakistan Telecommunication Corporation of 1991, Pakistan Post & Telegraph department was taken over by the PTC. Pakistan welcomed the private sector's participation in telecom and a number of cellular licenses were issued along with the regularization of card operating payphone companies to improve telecom services in Pakistan. In 2006 a Dubai-based company "Etisalat Telecommunications Company," purchased 26% shares of Pakistan Telecommunication Company Limited with management rights.   

Foreign direct investment has emerged as a major global economic contributor in the past few decades; it has served the developed and underdeveloped countries in the private sector as well as in the Government sector. DI usually works as a two-way bridge of economic development; MNCs, in return of expanding their business in host country, produce extensive economic benefits to that country in the shape of bringing excess foreign capital, advanced business techniques and technology, trade development and foreign exchange opportunities. A correlation between investment in telecommunications and economic development is proven empirically. (Chun Hung Lin, March 2008).

Openness to trade servers is a critical factor to allure FDI, but increased FDI may pose a threat to local businesses, creating a demand and supply gap for the host country. Government can control the FDI influx by imposing limits on FDI, laws for the MNCs operation in the country, bounding the investing company to employ domestic human resources etc. Creating a balance between the economic benefits from an FDI with the control over national economic dominion is a substantial historical problem in many countries; however, it has been empirically proven through discussion that a more liberalized foreign investment environment does not always disturb national economic control. (Chun Hung Lin, March 2008).

The study intends to measure the potency of the influence of economic variables on the FDI (Telecom) influx in Pakistan and its contribution to the growth of overall GDP. The study will help in identifying the factors having a positive effect on the FDI (Telecom) influx. Table 1.2 shows the foreign direct investment in the telecommunication sector of Pakistan from 2001.

Table 1. Country wise FDI Inflow in $ millions

Source: Board of Investment Website

Table 2. Sector Wise FDI Inflows ($ Million)

Different countries have their own FDI policy devised determining in which sectors foreign investors may put their investment. For example, in India, a business sector can receive FDI in two ways.

In some sectors, a permissible amount of FDI in different sectors can directly be employed without prior approval of the Government. Such sectors include advertising sectors, Hoteling, Forex brokerage houses, house financing etc.

Other sectors that are not permissible for FDI under automatic routes requires prior government approvals and such proposal for FDI are enquired by the Department of economic affairs, Ministry of Finance and Foreign investment promotion board.

Factors affecting the influx of FDI in a country are identified in the following categories.

1.         Government policies             

2.        Privatization                                            

3.        Potential economic growth

4.       Tax rates

5.        Exchange rates

6.       Terrorism

Liberalization of trade policy brings new opportunities for investors. Studies have shown that statically speaking, trade liberalization has positively impacted Pakistan's economic growth from 1974 to 2015 as trade openness and economic growth are positively co-related. The more the openness to trade is found the more positive impact will be observed on economic growth. An overview of imports and exports and the trade openness of Pakistan can be estimated from the following table.

Table 3. Trade Openness of Pakistan ($ Million)

Source: World Development Indicators

During the 1970s and 1980s Pakistan government took solid measures to put checks and balances on rest distribution of national assets from the private sector to state owned sector. The reason behind this is stated to bring national wealth to the masses instead of constraining it to some families. This strategy was intended to support the interests of the poor was an attempt to replicate the success of the Soviet Union and the socialist economic model.

Privatization mainly includes selling- off of the State Owned Enterprises (SOEs) along with contracting out of State services to other foreign and local bidders like in the case of PTCL. Pakistan, despite being a developing country with strong geographical importance, has not participated in extensive privatization of government assets till a certain time. A study conducted by Mehmood, K.A. & Faridi, Muhammad (2013) attempts to explore the effects of privatization on the economic growth of Pakistan. Data for the study is taken from 1992 to 2008 and the study concludes that there is a persistent and gradual rise in the economic growth & GDP of Pakistan, whereas the idea of privatization remains unstable. (Mehmood, K.A. & Faridi, Muhammad, 2013)

Potential Economic growth enriches the investment opportunities for foreign investors in the form of in-house resources, experiences human capital, potential market size and per capita income level. After 2000, as market orient reforms were launched, Pakistan emerged as one of the fast paced growing countries in southeast and offered open opportunities to foreign investors. Pakistan's trade liberalization and potential economic growth have played a robust role in attracting FDI influx. Total trade in 2005 was recorded as 23.5 times higher with respect to 1986 and the total FDI influx in Pakistan from 2001-2005 was about 13 times greater as compared the to 1988-2000 periods, and more over a high growth rate in GDP of 7.5% was recorded annually.

In case of Pakistan, certain measures need to be taken in order to boost the FDI influx as much as possible. FDI influx in Pakistan can increase due to its competitiveness as a potentially high returning investment location as compared to other countries. In Pakistan, many MNCs working in the consumer goods sector have taken a good share of profit while other major industries like the pharma industry have winded up their businesses due to a lack of intellectual property rights protection. According to a State bank of Pakistan's 2017 report, FDI has increased gradually with a net increase in FDI influx of 4.4% i.e. $2.1 billion, from July-March 2017-18. Whereas a major contributor to this investment in China, with 55% of the overall influx, other countries including UK and Malaysia have also invested in Pakistan's economy.

Taxation

It is a difficult question to answer as to how FDI the influx will react to a new tax policy in the host country. FDI investors carry out cost & benefit analysis of investing, tax relief provided, potential economic growth of the host country, potential tax policy reforms and impact of tax reforms on earnings after taxes.

In Pakistan, Corporate tax is inversely related to FDI influx both in the short run and long run. Higher the rates, the lower the influx. Discounted CTR has a positive impact on domestic investment too. (Khalid Mahmood Lodhi, 2017).

In 1990 Government of Pakistan supported liberalizing trade and investment to attract foreign investors by providing great tax relations, easy credit, tariff reduction and easy forex controls. (Mahmood Pannu, Qaisar. 2010).

In order to attract more FDI, Pakistan needs to promote itself as an emerging company that caters the local businesses through relaxed taxation, so they are able to compete in the national and international markets and create an attractive competitive field for foreign investors. A flat, low rated and predictable tax regime is the most suitable option for Pakistan to attract foreign investors and facilitate its major investor that is China.

Exchange rate fluctuations are another enticing factor for MNCs' to prioritize their investment options; they are more likely to fund the country when the country is on a growth route and its currency is expected to boom. However, studies have shown different relationship outcomes between FDI and exchange rate. Even FDI and exchange rate relations can work backward, where an increase in the influx of FDI can influence the local exchange rate. Hence the direction of the relationship between FDI and exchange rate remains an enigma now.

Studies have shown that appreciation in Malaysian ringgit, Philippine peso and Singapore dollar the appreciation of Singapore dollar has a significant positive impact on the foreign, direct influx in these countries. (Lily,Kogid,Mulok, Lim, Sang & Asid, 2014).

Terrorism has been an unresolved issue for long throughout the world. Terrorists not only affect the life & property of a host country, but they also sabotage the economic growth and ability to attract foreign investment to that country in the long run.

Investors look for a safer business environment for their investment and seek economic stability to ensure their returns on the risk taken but terrorism withdraws all these facilities for investors as written in an Economist article, "This fear of defenselessness is mainly destructive to trade or foreign direct investment (FDI) influx because investors always prefer to invest in countries lesser prone to terror."

Following is the list of 12 countries that were the main target of terrorist activities from 2001 to 2012. These countries mainly faced almost 79% of the global terror incidents.

Table 4. Terrorism Incidents, 2001-2012

It's a proven fact that the telecommunication sector is one of the major enticers for foreign investors. Investment in telecommunications not only helps in technology transfer but also injects more abundant capital from foreign money markets into the host country. This also increases the market competition and fosters a national telecommunication market.

Pakistan growing telecom sector has managed to attract a noticeable amount of FDI in past years. During 2005-06 Telecom sector of Pakistan grabbed a 54% share of the total FDI influx in the country, but this influx decreased to the point that in 2001-12 Telecom sector's share in total FDI was calculated as negative 44%.

The main reason behind this massive decline is deemed as the political instability in the country. However, this trend has changed and a huge increase in FDI is observed in the shape of 3G/4G in Pakistan. Moreover, banking, mobile marketing and mobile e-payment services are providing opportunities for further FDI. Table 1.1 (PTA Annual report 2013-14) depicts a clearer picture of FDI in the Pakistan Telecommunication Sector.

Table 5. Foreign Direct Investments in 3G/4G

Source: PTA Annual Report 2013-14

Recently telecommunication sector has achieved a record influx of FDI. It was assumed that this investment trend might go along for the next 5 years as a huge business potential exists for all telecom operators due to the demand and supply gap for quality telecommunication services. But the overall FDI level has substantially decreased in the current year. According to the State Bank of Pakistan (SBP), the overall influx of FDI was recorded at $120 million in the first half of the financial year 2015-16 as compared to the handsome influx of $876 million recorded in the similar period of last financial year. The overall FDI after outflows of investment is $76 million because local investors and companies invested $43.7 million outside Pakistan in different projects and businesses related to the telecom sector (SBP data, 2016).

Table 6. SBP figures for FDI in telecom in Pakistan

Source: State Bank of Pakistan

But this investment paid off in the form of extra revenue for the country. It’s an important source of taxes for the Government over the past ten years, as shown in Table 2.

The study identifies and explains the casual relationship, using the multiple regression analysis, between the influx of FDI in the telecommunications sector of Pakistan and the macro-economic variables affecting the influx of Foreign Direct Investment in the country.

Data of FDI in Pakistan is taken from 2001 to 2014 (PTA), while the data for Telecom infrastructure in Pakistan, Market size of the country and Trade %age of GDP are taken for 2001 to 2014 from PTA and World Development Indicators respectively. For in-depth analysis, quarterly data is used. Data is on the next pages. Variables are defined as:

1.         Foreign Direct Investment in the Telecom Sector of Pakistan

1.         Telecom infrastructure in Pakistan (Fixed land line and mobile cellular users)

2.        The market size of the country. Determined by the GDP per capita of the country

3.        Openness to trade. Represented by the Trade %age of GDP

For this purpose, following regression model is used.

FDI _tele = ?_o+ ?₁INF + ?₂ MKT + ?₃OT + e

Where

FDI _tele       = Foreign Direct Investment Influx in Telecommunication Sector of Pakistan

INF = Total infrastructure of the Telecommunication users (Mainly comprised of   Fixed land      line and mobile cellular users)

MKT = Market size of the country (Represented by the GDP per capita of country)

OT = Openness to trade by the Government (Represented by the Trade %age of GDP)

e = residual/error for the regress

Table 10. Data used for Analysis

Based on the question of interest following hypotheses are developed.

H₀: FDI Influx in the Telecommunication Sector of Pakistan is unaffected by Infrastructure, Market size and Openness to trade

H₁: FDI Influx in the Telecommunication Sector of Pakistan is affected by Infrastructure, Market size and Openness to trade                            OR

H_o:  b₁=b₂₌b₃₌0 (There is no correlation between the variables)

H₁:   At least one beta is not zero or b?0 (There is a correlation between the variables)

The level of significance is taken as ? = 0.05

§  The multiple regression technique, has opted for testing if any correlation exists between the independent and dependent variables of the study.

§  ANOVA and F test further clarify the relationship.

§  F ratio is simply the ratio between the Mean Squares of regression and residual.

§  The degree of freedom for regression is one less than the number of parameters being tested. In our study, this is 3.

§  The degree of freedom for Residual is simple the difference between the sample size and the number of parameters being estimated. i.e.

§  df(Residual) = n - k – 1

§  so In our study it is

§  df(Residual) = 56 - 3 - 1= 5

After running the regression test following estimates are found.

§  Descriptive results of the time series data of independent and dependent variables are as under and define the mean and the standard deviation..

Table 11. Descriptive Statistics

§  Correlation between dependent and independent variables is a statistical measure of how well they are related to each other. Pearson Correlation is the commonly used correlation measure. Pearson correlation coefficients amongst the independent variable i.e. FDI & the dependent variables i.e. Infrastructure (Telephone and Mobile users), Market Size of the country ( per capital GDP) and Openness to trade (Trade %age of GDP) are respectively -0.317, -0.192 and 0.635

§  The results conclude that there is a negative correlation between the influx of FDI in the telecom sector of the country and its infrastructure when taken as only the fixed landline users along with the mobile users of the country. This result contradicts some of the studies such as Zahra, Azim & Mahmood (2008). This could be because my study focus is only on the combination of fixed landline and mobile cellular users; however other studies might have included the numbers of transmission boaster, users per boaster, broadband user, broadband width etc.  (Table 11)

Table 11. Correlation Statistics

§  The correlations results of the Market size of the country i.e. GDP per capita, shows a mild negative tendency towards the influx of FDI in the telecom sector of Pakistan. As the GDP per capita defines the ability of the targeted market to afford the service industry and the potential amount that can be saved in comparison with the country's consumer price index, this measure gives a glimpse of the potential.

§  The real effect on the FDI in telecom in Pakistan is observed from the Trade openness by the country. As measured by the Trade percentage of GDP a strong positive correlation exists between the influx of FDI and openness to trade in the country. This indicates that as the Government liberalizes its trade policies new opportunities arise for the MNCs and more trade activity is observed in every 

sector of the economy, which boosts the economy of the host country by creating competition but also is beneficial for the funding country to generate more and more business. The results coincide with the study conducted by Shumai, Munir, & Khan (2008).

§  As R², called the determination coefficient of multiple regression, basically measures the nearness of the data to the regression line. As the resulted value gets nearer to 100% or 1, the better, the model explains the data variation around its Mean value. In my study, the resulted value of R²=0.584 and Adj R²=0.560 clearly depicts that the model is partially fit and explains about 56.0% of the total variation of the regression line.

Table 12. Model Summary b

a.        Predictors: (Constant), Openness to Trade, Infrastructure, Market Size

b.       Dependent/Criterion Variable:  FDI in the Telecommunication sector

§  The value of the F-ratio in the ANOVA table

 is 24.291 indicating a linear relationship among the Model’s variables. (Table 13)

§  Either positively or negatively; the selected independent variables do affect the dependent variables.

§  As the p < 0.05, hence the model suggests a good prognostic ability

Table 13. ANOVA a