Pakistan’s foreign direct investment (FDI) is facing a paradox: foreign investors have become increasingly optimistic about Pakistan’s economic prospects and are more willing to recommend the country as a destination for fresh FDI, but the country continues to lag behind regional competitors in attracting large-scale capital inflows, exposing a widening gap between improving sentiment and actual investment competitiveness.

According to the Overseas Investors Chamber of Commerce and Industry’s (OICCI) Perception and Investment Survey 2025, 73% of foreign investors operating in Pakistan would recommend the country to their global headquarters for new investment, up significantly from 61% in 2023. The improvement reflects growing confidence following a period of macroeconomic stabilisation marked by lower inflation, a relatively stable exchange rate and improved availability of foreign exchange.

However, despite the improved outlook among existing investors, Pakistan slipped from seventh to ninth place among regional destinations preferred for investment projects exceeding $500 million, underscoring the structural impediments that continue to discourage multinational corporations from committing large-scale capital.

“People in government often ask me rather naively why foreign direct investment is not coming to Pakistan. I explain to them the issues investors face here. Often, what is announced and what is implemented are two different things,” OICCI Secretary General M Abdul Aleem said in an interview with The Express Tribune.

The survey paints a mixed picture of Pakistan’s investment environment. While foreign investors acknowledge notable progress in restoring economic stability after the foreign exchange crisis and record inflation of recent years, they remain concerned about policy unpredictability, taxation issues, regulatory complexity and weak implementation of reforms.

“The proportion of respondents willing to recommend the country to their global headquarters for new foreign direct investment increased from 61% to 73%, indicating a renewed perception of Pakistan as a viable destination,” the report noted.

At the same time, it cautioned that improved perceptions alone would not automatically translate into fresh investment flows unless accompanied by sustained reforms aimed at strengthening institutional effectiveness and ensuring policy continuity.

Many policymakers fail to fully understand why Pakistan struggles to attract meaningful FDI despite repeated investment promotion campaigns, said Abdul Aleem. According to him, multinational corporations evaluate investment destinations through highly competitive global frameworks, where countries compete not only on policy but also on market size, regional integration and long-term growth prospects.

“Structural hurdles remain significant. At the same time, Pakistan’s economic size is relatively small compared with competing destinations. When aggressive activist kinds of directors sit in headquarters reviewing global investment opportunities, they make decisions based on the balance sheet in front of them. If they decide they will not invest in economies smaller than one trillion dollars, Pakistan gets excluded automatically,” he explained.

The survey findings support this assessment. Pakistan ranked ninth among countries preferred for market-seeking, resource-seeking and efficiency-seeking investments, unchanged from 2023. This suggests that recent macroeconomic improvements have yet to alter broader perceptions among global investors evaluating potential destinations.

China retained the top position among preferred destinations for large-scale investment projects, followed by Indonesia, Malaysia and the United Arab Emirates. Pakistan’s decline in ranking highlights how competing economies continue to outpace it in implementing reforms and creating investor-friendly environments.

Aleem noted that consumer-oriented multinational companies continue to operate in Pakistan because they “cannot ignore the country’s population of more than 240 million people.””However, services-sector companies are often reluctant to enter Pakistan.” He recalled that Pakistan once hosted more than 30 foreign banks during earlier decades, a number that has gradually declined as international financial institutions reassessed the market.

Among the major concerns raised by foreign investors are intellectual property and copyright protection. Aleem described weak enforcement in these areas as a significant deterrent for companies considering entry into Pakistan.

“FDI is important not only because it brings capital. It also brings knowledge, technology, skills and talent. Countries benefit from the expertise and innovation that foreign companies introduce,” he said.

The OICCI survey identified policy inconsistency as the single biggest obstacle to attracting investment. Investors ranked the absence of a predictable, transparent and stable policy framework as the primary constraint, followed by an increasing tax burden on compliant taxpayers and rising business costs.

Respondents also highlighted the gap between policy announcements and implementation, uncertainty regarding incentives and excessive regulatory controls as factors discouraging long-term commitments.

Aleem argued that regional economic integration is equally important for attracting global capital. “A country must have good economic relations with its neighbours if it wants to attract FDI. Regional trade is a prerequisite for investment. Foreign investors want access to larger markets, not isolated economies,” he said.

He recalled instances where foreign companies explored opportunities in Pakistan primarily because of the possibility of serving regional markets. “There was a time when Korean companies approached us. They wanted to establish a steel mill here to export to India. Had regional trade relations been stronger, Pakistan would have benefited enormously.”

He added that Turkish companies have recently shown increased interest in Pakistan due to cultural affinity and economic complementarities, while multinational participation in technology and engineering sectors remains limited.