For decades, Pakistan’s economic narrative has viewed foreign direct investment (FDI) as an unequivocal boon. Each inflow is celebrated, incentives are justified, and promotional roadshows abound — all based on the assumption that more FDI will inevitably translate into economic growth, jobs, exports, and a stronger external account. However, this assumption is flawed and needs reassessment. The pitfalls of indiscriminate FDI Attracting FDI without regard to sector or investor intent is not only symptomatic of weak policymaking but, in Pakistan’s case, also an ineffective strategy. A significant portion of foreign investors in Pakistan is primarily driven by the country’s large domestic market rather than any intent to use Pakistan as an export base. With over 240 million consumers, Pakistan offers a sizable and relatively protected market, often shielded by high tariffs and a poor competitive environment. For many foreign investors, serving domestic demand is far more appealing than engaging in global markets where competition is intense. This pattern also mirrors the behaviour of local investors, many of whom focus on the same domestic market without seeking export-oriented growth. Exporters and manufacturers have turned to shopping malls, real estate and sectors such as autos that cater to the home market. Treating all FDI as equally beneficial and celebrating investments that merely exploit domestic demand reflects a flawed economic strategy Barriers to export-oriented investment Pakistan’s business environment is hostile to manufacturing, creating a significant deterrent for both foreign and local investors. The country has some of the highest industrial energy costs in the region. Frequent hikes in electricity and gas prices — usually implemented to manage fiscal pressures — turn energy into a de facto tax on manufacturers and exporters. Where competing economies treat energy as a strategic input, Pakistan has come to rely on it as a revenue source. Taxation further exacerbates the situation. Exporters face high effective tax rates and navigate a complex, opaque system of withholding taxes, advance payments, delayed refunds, and discretionary enforcement. Despite official rhetoric promoting export-led growth, the tax regime often treats exporters as short-term cash cows, rather than long-term drivers of foreign exchange earnings. Foreign investors turn to countries that offer significantly lower tax rates than Pakistan. Investor behaviour and policy flaws Pakistan’s regulatory unpredictability, overlapping jurisdictions, weak contract enforcement, and an intrusive compliance culture further complicate the business environment. Persistent concerns about security, law and order, and inadequate logistics infrastructure undermine Pakistan’s reputation as a reliable platform for export-oriented activity. Faced with these challenges, foreign investors act rationally by prioritising sectors where competition is weak, such as consumer goods and telecommunications, or where returns are guaranteed by state involvement, as in the energy sector. While such investments can inflate headline FDI figures, they contribute little to sustainable economic growth or a balanced external account. Such investments tend to offer short payback periods, but when competition increases, investors are quick to withdraw. The current indiscriminate approach to attracting FDI has failed to generate meaningful structural changes in Pakistan’s economy. While it may yield short-term capital inflows, it does little to foster technological depth or expand export capacity — two key areas where Pakistan’s economy is critically deficient. In some cases, it even crowds out domestic firms, especially those lacking the financial strength or political access enjoyed by multinational corporations. A new approach Pakistan needs to reconsider not just the quantity of FDI it attracts, but also the type and purpose of such investments. Instead of pursuing FDI for the sake of inflows, the focus should shift toward using foreign capital to introduce new technologies, enhance standards, increase exports, and reduce dependency on imports — particularly in food items. Foreign investors expect returns aligned with Pakistan’s risk profile, often seeing returns of more than 100 per cent per annum. Thus, inward market-seeking FDI is swiftly offset by profit and royalty remittances, which over time drain Pakistan’s foreign reserves. The same happens with FDI into utilities or state-owned enterprises that rely on rupee income. A more credible FDI strategy would prioritise export-oriented sectors where Pakistan holds or has the potential for a comparative advantage. Key sectors to focus on include agro-processing, value-added agriculture, pharmaceuticals, light engineering, tourism, and mineral-based industries, all of which have significant export potential. By capitalising on Pakistan’s sub-optimally utilised natural resources — water and land — import dependence could also be reduced. The services sector, particularly information technology, could absorb a significant portion of the country’s young workforce, especially in areas less likely to be disrupted by artificial intelligence. Additionally, medical tourism would benefit from partnerships with global healthcare organisations, such as those in the United Arab Emirates. In textiles, apparel, and fashion, global brands and retailers typically prefer to source rather than directly invest in suppliers. However, with improved security conditions, Chinese apparel companies could relocate their plants to Pakistan to benefit from lower labour costs and avoid high tariffs and import restrictions in Western markets. The recent Service Long March Tyre joint venture with Chinese investment highlights this potential. Leveraging FDI to open new markets FDI can also help improve market access for Pakistani exports. For example, a major global food company investing in Pakistan could open doors for local horticultural products in international markets. Positive FDI impacts are already visible in agriculture, with multinational expertise improving maize cultivation and potato seed quality. A critical area of focus remains the indigenisation of edible oils, which cost Pakistan billions of dollars annually. Barrick Gold’s investment in Reko Diq could also benefit local investors in adjoining mines, although net foreign exchange inflows will take time due to substantial initial investments. By focusing on refining minerals domestically, Pakistan could add significant value rather than merely exporting raw slurry. Building competitiveness The primary challenge for investors is not a lack of ambition but a policy environment that penalises productive activity and rewards rent-seeking. Key reforms are needed — competitive energy pricing, a simplified, globally competitive and predictable tax system, prompt tax refunds, better trade facilitation, and a substantial reduction in regulatory harassment. These reforms would do more to stimulate exports than any number of international investment conferences. This is not an argument against FDI, but rather a call for a more selective approach. FDI should be actively encouraged where it brings new technologies, integrates Pakistan into global value chains, and contributes to export growth. Treating all FDI as equally beneficial — and celebrating investments that merely exploit domestic demand and temporarily boost reserves — reflects a flawed economic strategy. Domestic consumers are exploited when local or foreign investment, protected by tariffs, produces products that are more expensive and of lower quality than imported alternatives. Competitiveness cannot be imported through press releases or investment pledges. It must be built domestically by correcting incentives, fostering local capital, and aligning policy with long-term export productivity rather than short-term capital inflows through indiscriminate pursuit of FDI. The author is a former CEO of Unilever Pakistan and of the Pakistan Business Council and serves on the board of several public companies. Published in Dawn, The Business and Finance Weekly, January 5th, 2026