CHAPTER: 02

Motives for Direct foreign investment

The motives or Direct Foreign Investments are:

• Profitability
• Enhancing Shareholder’s wealth
• Boosting revenues
• Reducing costs

Benefits of International Diversification:

The benefits of international diversification are greater when investing in international small
stocks; international small value stocks and emerging markets than when investing in the
international large stocks that are in the EAFE index.

Advantages of foreign portfolio investment

Foreign portfolio investment is the type of investment that an investor has abroad.
There are many benefits of having a foreign portfolio investment.
Portfolio Diversification
Foreign portfolio investment gives investors an opportunity to engage in international
diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return. This
means that an investor who has stocks in different countries will experience less volatility over
the entire portfolio.
International Credit
Investors who have foreign investment portfolios have a broader credit base because they can
access credit in foreign countries where they have significant investments. This is advantageous
when credit sources available at home are expensive or unavailable due to various factors. The
ability to get credit on favorable terms and as quickly as possible can determine whether a
business executes a new project or not.
Benefit from Exchange Rate:
International currency exchange rates keep changing. Sometimes the currency of the investor's
home country may be strong, and sometimes it may be weak. There are times when a stronger
currency in the foreign country where an investor has a portfolio may benefit the investor.
Access to a Bigger Market
Home markets have become very competitive, as there are many businesses offering similar
services. Foreign markets, however, offer a less competitive and sometimes larger market.
Unilever Company may make more sales selling products in Pakistan than in the entire US for
instance.
Benefits of International Portfolio Diversification
All the major U.S. indices ended the year 2006 having logged double-digit gains. However, even
though Standard & Poor’s 500 index turned in a 13.6 percent performance, an investor would
have done better had he or she ventured outside the U.S. Using averages, domestic stock funds
gained 12.6 percent in 2006 compared to 25.5 percent for international stock funds.
Not surprisingly, Charles Schwab, a leading U.S.-based broker, recommends that its customers
rebalance their portfolios in favor of foreign equities. Many other financial advisors are also
advising their clients to consider investment opportunities in overseas markets. While these
recommendations by brokers may be specific to the current market conditions, globalization
aided by advances in communication technology, abolition of capital and exchange controls, and
deregulation in recent years, seem to have increased access to foreign market.

.
Chapter: 03
Foreign direct investment

An empirical assessment of the role of foreign direct investment (FDI) in a host country’s export
performance is important, since exports have been for a long time viewed as an engine of
economic growth.
There is a widely shared view that FDI promotes exports of host countries by
i. augmenting domestic capital for exports
ii. helping transfer of technology and new products for exports,
iii. facilitating access to new and large foreign markets
iv. Providing training for the local workforce and upgrading technical and management
skills.
On the other hand, however, it is sometimes suggested that FDI may
(a) lower or replace domestic savings and investment;
(b) transfer technologies that are low level or inappropriate for the host country’s
factor proportions;
(c) target primarily the host country’s domestic market and thus not increase exports
(d) inhibit the expansion of indigenous firms that might become exporters;
(e) Not help developing the host country’s dynamic comparative advantages by focusing
solely on local cheap labor and raw materials.

The increase in foreign direct investment in the country during the first eight months of the
current financial year (July-June), promises to project the country's investment climate. Pakistan
has made new record as regard to Foreign Direct Investment (FDI) in Financial Year 2006-07.
Pakistan’s investment friendly policies have yielded record results as witnessed during the past
FY 2006, which touched the record level of US $ 3.9 billion and this accelerating trend has also
been witnessed during the first half of the current fiscal year 2006-07 by setting new record of
FDI till December 2006 as close to US $ 3.5 billion, which was going to increase further in
coming half, heading to set another new record. Pakistan has comprehensive and broad based
Privatization Program, which provides exciting and attractive opportunities.
Liberal investment policy includes 100 % foreign equity in all economic sectors, with attractive
incentives like remittances of capital, profits, royalty, technical and franchise fees without
obtaining permission from the government.
The privatization of public sectors entities has confined the government’s role to policy making,
good governance and has foster competition and increased efficiency and revenues. Exciting
investment opportunities in an environment of level playing field for both local and foreign
investors, effective regulatory framework with liberal policies have made Pakistan an attractive
destination for investment, which has also given boost to the investors’ confidence.
The countries, which appeared prominently in raising their investments to Pakistan, were led by
the United States which kept its lead among the list of foreign investors with total investments of
about $1.1 billion during this period, followed by Britain with investments of $875.8 million
followed by China with investments of $678.5 million and the UAE with $328.2 million.
FDI amounted to $ 962.5 million during this period as against $ 1026.0 million last year,
showing a decrease of 6.2%. A major factor for this decline is attributed to the fact that during
the period under consideration there was no inflow of privatization proceeds. On the other hand,
Pakistan received $ 133.2 million as during the same period last year.
The US has been the single largest investor in Pakistan, accounting for 31.4% of the total FDI in
the July –September 2007 followed by UK (7.8%), UAE (5.4%), Switzerland (4.1%), Mauritius
(3.3%), Oman (2.5%), Japan (2.9%), Norway (2.1%), and so on. Communications along with
energy sector (oil & gas, petroleum refining and power) have been the major attraction for
foreign investors in Pakistan, accounting for 39.3% and 18.0% respectively, followed by
financial businesses (15.4%), both cement and trade (4.6%), construction (2.4%), and transport
equipment (automobiles) 2.9%.
Among the destinations towards different sectors, the sharpest rise went to the
telecommunications sector, which attracted investments worth $1.28 billion followed by
investments of just over $572 million going to the banking sector.
These latest statistics work as the cornerstone of Pakistan's target of foreign investment of about
$6 billion during the present financial year, up from $3.87 last year.
However the sustainability of such a policy for domestic development has to be questioned. The
usefulness of foreign direct investment, whereby foreign investors bring their capital and
repatriate their earnings, profits, debt servicing, royalties, technical fees and even capital, without
any restrictions in reality brings no benefit to Pakistan. Under the guise of globalization many
western companies place production facilities in the Third world making use of lax laws, cheap
labor then sell the very same items for extortionate prices abroad.
Pakistan has not become an important destination for investors as India has over the last decade.
India offers the promise of political stability, a legal system that can protect investors, a highly
trained workforce, and a fairly large rate of domestic savings. It also has a large domestic
market, which is of interest to foreign companies. Pakistan, on the other hand, is a country with a
high level of illiteracy (only 54% of people above the age of 15 can read or write), in which
political instability continues to threaten the pursuit of economic policies that could be sustained.
If foreign investors have been attracted to the country it is only those who either are tapping the
large market for basic goods for their own consumption. When the government claims that it has
made possible large foreign direct investment into the country, it does not mention that FDI has
come in the form of purchase of domestic cigarette manufacturing by America’s Altria group, or
by an expansion in the presence of food and beverage companies such as Pepsi Cola and
McDonald’s.
But investment in consumer products and domestic services cannot be the basis of long-term
sustainable growth. During the Musharraf period, the rate of investment has increased by a third,
from 17.2% of GDP in 2001-02 to 23% in 2006-07. However domestic savings have declined
from 17.8% to 16.1% of GDP in the same period. This means that the economy is even more
dependent on foreign flows than was the case in the 1990s. This dependence may not mean that
the continuing political support of western governments and development institutions such as the
World Bank is absolutely critical for economic progress. But there is now reliance on foreign
companies and the money they invest in Pakistan. Hence Pakistan’s reliance on foreign funds has
changed from international institutes to international companies. The claim of Islamabad that the
economy is now moving on a sustainable course and that it will not be derailed by political
storms is hard to accept. This is because a reliance on foreign funds can never be sustainable as
foreign companies will choose the cheapest markets for production facilities that will not always
be Pakistan; hence any economy which relies on foreign investment remains vulnerable to
external shocks.

The contributions of foreign affiliates to China’s exports include the following four aspects:
Exports through processing and assembling: By processing components and assembling in
which domestic firms import unfinished and intermediate goods, China became a dominant
exporter of labor intensive products (toys, shoes, clothes, and sporting goods) and some
technology-intensive products (machinery and equipment, including electronic circuits,
automatic data- processing machines, and mobile phones) . Generally, these exports are
organized by MNCs within vertically integrated international production network . Most of the
exports created by FDI (80% in 2002) take place in this form, which constitutes three quarters of
China’s total processing-assembling exports.
Exports through converting import-substituting industries: Many developing countries
including China restrict imports of manufacturing products but may allow FDI in these sectors.
With well-designed policies, China started and increased exports of the import-substituting
products by combining its cheap labor with advanced technology embodied in FDI (Zhang,
2005). This has been happening in home appliances (TV sets, VCD, DVD players, cameras,
refrigerators, and washers) and the automobile industry.
Exports of new labor-intensive final products: The success of some Chinese brand names of
light consumer goods in entering world markets is partly due to FDI providing links to final
buyers, especially in the US markets (Zhang, 2002 and 2005).
Exports of local raw materials processing: In the processing of locally produced raw materials,
foreign affiliates may have better export potential than indigenous firms, because of their
business contacts abroad, marketing skills, and superior technology, both in product and
processes, and greater general know-how. This is especially true in the 1980s, when the Chinese
firms lacked these assets and FDI was the only means, at least for the time being, of increasing
exports.
CHAPTER NO: 04
We want to open another subsidiary OF Unilever in Pakistan where budgeting and demand as
follows:
Withholding tax =20%
Corporate tax =31%
Initial Investment= Rs. 20,000,000
Interest =15%
Annual depreciation =2,800,000
Cost of capital =15%
Fixed cost =9,000,000
In the budgeting techniques depreciation, fixed cost and variable cost and interest effects the
capital budgeting. In that case no interest is paid for Five years because Unilever not provide and
take loan facility. It has unique criteria for the business and investment. All amount after taxes
convert into dollars because all international transactions are deal in dollars. And at the last year
it will be converted into pounds, if unilever subsidiary is opened in Pakistan. Company will be in
loss for three years and in next year’s it will earn highest profits.

YEARS DEMAND PRICES(Rs.) VARIABLE

(UNIT) COST

1 40000 560 35

2 45000 560 40

3 50000 560 45

4 55000 560 50

5 60000 560 55
Multinational Capital Budgeting techniques:

Year 1 year 2 Year 3 Year 4 Year 5

Revenue 22,400,000 25,200,000 28,000,000 30,800,000 33,600,000
Expenses:
Variable Cost 1,400,000 1,800,000 2,250,000 2,750,000 3,300,000
Overhead Cost 9,000,000 9,000,000 9,000,000 9,000,000 9,000,000
Depreciation 2,800,000 2,800,000 2,800,000 2,800,000 2,800,000
Total Expenses 13,200,000 13,600,000 14,050,000 14,550,000 15,100,000
Profit Before Tax 9,200,000 11,600,000 13,950,000 16,250,000 18,500,000
Tax @31% 2852000 3596000 4324500 5037500 5735000
Profit After tax 6,348,000 8,004,000 9,625,500 11,212,500 12,765,000
Depreciation 2,800,000 2,800,000 2,800,000 2,800,000 2,800,000
Net operating cash flow 9,148,000 10,804,000 12,425,500 14,012,500 15,565,000
Withholding tax @20% 1829600 2160800 2485100 2802500 3113000
Remit to Parent Co 7,318,400 8,643,200 9,940,400 11,210,000 12,452,000
Salvage Value 25,000,000
37,452,000
0.0087 0.0087 0.0087 0.0087 0.0087
Cash flow to parent
company $63,670.08 $75,195.84 $86,481.48 $97,527.00 $325,832.4

Present Value @15% $55,365.29 $56,858.86 $56,862.98 $55,761.58 $162,025.0

Initial Investment $174,000 $174,000 $174,000 $174,000.0 $174,000.0

$ $ $ $ $
NET VALUE (118,634.71) (61,775.85) (4,912.88) 50,848.70 212,873.76
Cash flow in pounds £287,667.25
Chapter # 05
Conclusion:
Unilever Company Limited is operating effectively and efficiently on overall basis and
generating enough profit to keep its operations running in the most effective way possible and
keeping its standard of being one of the largest and most stable multinational organizations in
Pakistan most of the unilever product consumed. When unilever open subsidiary in Pakistan it
will earn more and more profit day by day. The unilever not provided the loan facility and not
allowed to get any loan from any source to its business partner. Unilever provided half initial
investment to all its new investors or business partner. Unilever follow a unique pattern to make
its partner and investors and distributors.

References:
https://www.slideshare.net/Azamaliani/financial-analysis-of-unilever-pakistan
https://en.wikipedia.org/wiki/Unilever
https://www.unilever.com/about/who-we-are/our-history/
https://tradingeconomics.com/pakistan/corporate-tax-rate
https://www.google.com.pk/search?q=Unilever&oq=un&aqs=chrome.0.69i59j69i6
0j69i59j69i60j69i59j69i60.1350j0j7&sourceid=chrome&ie=UTF-8
https://www.google.com.pk/search?q=pakistani+currency+exchange+rate&oq=pa
&aqs=chrome.5.69i57j69i61l2j69i60l2j69i59.5060j0j7&sourceid=chrome&ie=UT F-
8

https://www.google.com.pk/search?q=us+interest+rate&oq=us+int&aqs=chrome.4
.69i57j69i60l2j0l2j69i60.6866j1j7&sourceid=chrome&ie=UTF-8