The inflows of foreign direct investment into the country, that peaked at $5.2 billion in 2008, add up to $24.4 billion in the last 10 years.

It was scarcely surprising then that the much drummed up deal envisaging investment of a staggering $45 billion — billed as the highest-ever FDI in Pakistan, through in a joint-venture signed earlier last week between Abu Dhabi Group of UAE and Pakistan’s Malik Riaz of Bahria Town — was taken by many with a pinch of salt.

The ambitions of constructing the 'tallest building in the world in Karachi' and stunning towers and cities on the ‘Kutta’ (dogs) island’, four kilometers off the coast of Karachi, looked too good to be true.

While the Abu Dhabi Group was quick to forward a muted denial of progress beyond the signing of a MoU, the ongoing war of words in newspapers between the Bahria Town and Lahore Development Authority ought to have quickly put the fears of Dubai — if there were any — of being overtaken as the allure of the East, to rest.

All of that, however, hardly diminishes the importance of FDI, which is widely recognised as a major source of foreign capital for industrialisation and growth process in a developing country.

Economists argue that FDI is an important source of private external flows for developing countries. They count those blessings as inflow of foreign exchange, innovation, transfer of technology, managerial skills, creation of jobs and augmentation of exports.

According to the Board of Investment statistics, in the latest financial year ended June 30, 2012 FDI plunged to $813 million. A leading economist expresses concern:

“This is alarming since FDI flows, which come under the country’s capital account, are more stable compared to portfolio outflows” he says , adding that a steep fall from this side of the overall balance of payment is perceived as a serious issue for policymakers.

Many people suspect that funds are flowing in the reverse direction, resulting in a subtle drain of foreign investment from the country. A local entrepreneur counted few of them, for instance, the exit of Xenel and National Power International Holdings, the foreign majority shareholder in Hub Power Company after selling their stake to a local conglomerate; the ICI Omicron sale of controlling shares in ICI Pakistan, also to a highest local bidder; multinational pharma firm, Abbott Pakistan calling quits and another multinational believed to contemplating a similar move.

Yet an economist contends that the foreigners’ flight of capital is not Pakistan-specific. He insists that high income countries have also been spooked by the prolonged global financial crisis, which has made foreign investors risk averse. FDI in developing economies slowed down in the wake of the global recession since 2007; the inflows of FDI in Pakistan also took a dip after 2008.

The figures compiled by an official at the Board of Investment shows that in the latest seven months period (July-Jan 2012-13), FDI in Pakistan amounted to $525 million with the biggest chunk going in the foreigners’ all-time favourite oil and gas exploration and production sector ($327m), followed by financial sector; transport and construction. Fast Moving Consumer Goods (FMCG) is another choice sector for foreign inflows. The growing number of multinational food franchises, proves the point. Inflows from US, UK, Switzerland, Hong Kong and Italy have been in the lead.

A former President of Karachi Chamber of Commerce & Industry, Majyd Aziz says that confidence needs to be created in the minds of foreign investors so that they can visualise the potential of investment in Pakistan with optimism. He contends that the country has been embroiled for too long in political uncertainties, fearful law and order situation, energy crisis, circular debt, lax governance and rampant corruption. Other problems relate to non-availability of gas, water and power, without which industries could barely run.

Under the circumstances the disenchantment of foreigners to invest in the country’s long-term projects is understandable. An industrialist in Karachi made an interesting remark: “Where the local investor goes into expansion or BMR, he has to do it ‘perforce’, such as fear of further weakening of the rupee, in case he were to defer the necessary investment in his already set up industrial project.

Analysts say that under current circumstances, the foreigners want to invest in businesses where returns are high and are reluctant to put money in infrastructure or ‘fixed assets’. Both foreign and local investors are, therefore, attracted to ‘liquid assets’, such as gold, dollar and stocks. The unprecedented bull run at the stock market is fuelled in a great measure by the foreign portfolio investment (FPI). The foreign inflow into the equity market stood in the tall sum of $138 million in July-Jan 2013 (seven months).

Interestingly, while the FDI is on the slide, the foreign investors have continued to earn and repatriate huge amounts in profit and dividends. According to the State Bank of Pakistan, during FY12, FDI inflows plunged to $812.6 million, from $1.63 billion the year earlier. Yet the repatriation of profit and dividend on FDI rose by 36 per cent to $780 million in FY12, from $574 million in FY11.

“Pakistan is therefore clearly not a bad destination for FDI, but it is all a matter of perception of a ‘high risk country’,” says head of research at a foreign bank. He observes that the country offers healthy profitability margins and a return on equity (ROE) at 20 per cent, unmatched by any country in the region. “The high risk, which no one can deny, is compensated by high return”, argues this analyst.