Potential of Global Business in Pakistan

ASSIGNMENT #1

Global Business in Pakistan
Challenges and Potentials
Waqar Ahmad Awan (DDP1-BBA-FA10-009) 3/29/2013

Presented to

Mr. Imran Ali

The purpose of this assignment is to point out the amount of challenges and potentials of global business in Pakistan and develop a SWOT and PEST analysis and display the findings.

Table of Contents
Introduction .................................................................................................................................................. 2 Executive summary ....................................................................................................................................... 2 How is Pakistan preparing itself for challenges of Globalization? ................................................................ 3 Agriculture ................................................................................................................................................ 3 Trade regime ............................................................................................................................................. 3 Textiles ...................................................................................................................................................... 4 Exports in Services .................................................................................................................................... 5 Foreign Investment regime and Capital inflows ....................................................................................... 6 Good governance ...................................................................................................................................... 7 Tourism ......................................................................................................................................................... 7 SWOT Analysis............................................................................................................................................... 8 PEST Analysis ................................................................................................................................................. 9 Political Analysis ........................................................................................................................................ 9 Economic Analysis ..................................................................................................................................... 9 Sociocultural Analysis.............................................................................................................................. 10 Technological Analysis ............................................................................................................................ 11 Key Findings and Recommendations .......................................................................................................... 12 Conclusion ................................................................................................................................................... 12 Bibliography ................................................................................................................................................ 13

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Introduction
Pakistan has always possessed a great potential for global business. It is a country gifted with a lot of mineral resources. It is located in a very important and junctionary geographical area; especially its sea ports of Gawadar and Karachi which if maintained properly will serve as a checkpoint for all the trade from Western Europe to South East Asia and further eastern countries. Also there are some truly exotic and beautiful natural site seeing places such as Kashmir, Gilgit and other northern areas which can provide a huge opportunity for tourism business in Pakistan. Still there are many hurdles in achieving the flourished global business in Pakistan which we long for. Although we have come a long way but still there are a many deal of steps needed to properly facilitate global business in Pakistan.

Executive summary
Prior to the Taliban and 9/11 incident, Pakistan was out of sight from the face of the world for most of the business people. But after Pakistan became the biggest ally with USA, it has achieved great recognition in the international society. And has also been the leading player in regional political and economic activity. So we can say without doubt that there is more in this country than which meets the eye. In this topic we shall discuss how Pakistan is trying to position itself in the world regarding global business practices and which challenges does she face in achieving her goal of a flourished global business country where doing trade and investment could become profitable less riskier to all investors who intend to do business in this country. We shall make a SWOT and PEST analysis regarding the matter and also discuss all the important factors which govern or affect the position of Global business in Pakistan.

(Amine, 2004)

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How is Pakistan preparing itself for challenges of Globalization?

Agriculture
Pakistan has always been an agrarian country where the urban area comprises of approximately 30% whereas the rest is comprised of farms and villages. Most of the income of the country comes through agricultural production, imports and exports, although the urban and industrial sector of Pakistan has also shown significant growth. The major change in the agricultural sector is of developing free market products, doing so the farmers now get crops on market prices and are free from extra costs of

the government Food Department intermediary. Imports and exports of agriculture commodities have also been privatized. Also tariffs and duties on such commodities have also been lifted along with limited quota. Removal of subsidies, expansion of water storage and distribution channels, efficient use and conservation of water through land leveling and lining of water courses, constructing spines for disposal of drainage effluent to avert salinity, introduction of new seed varieties encouraging corporate agriculture to bring vast tracks of uncultivable land under cultivating are some of the measures which are being implemented to enhance productivity in agriculture sector. Productivity gains will lower unit cost of production thus making agricultural exports from Pakistan competitive in international markets. As agricultural subsidies and support for production in the OECD countries are hopefully removed under the new WTO Development Round Pakistan should be able to capture a share of global commodities market particularly in the proximate geographical areas. The switch over to higher value added non-traditional products such as meat and dairy, fruits and vegetables and marine products would become more feasible under a liberalized trading environment. (Dr. Ishrat Husain, 2001)

Trade regime
The manufacturing sector of Pakistan has always been secured from international influences through high tariffs, duties and other trade restrictions. But now due to current developments the scenario has changed and the tariffs, duties and quantity of trade restrictions etc. have been lowered and removed to promote trade and remove anti export bias so that flow of trade can be increased in the sections where Pakistan possesses a strategic advantage. The highest rate of tariff was 225% almost 10 years ago, and now it has been considerably
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reduced to round about 20 to 30%. The tariff structure has also been simplified by easing the statuary goals and orders. The Government will also phase out Trade Related Investment Measures in accordance with the agreement with WTO and will not introduce any quantitative import restrictions beyond the standard restrictions related to security, health, and public morals, religious and cultural concerns. Legislation on anti-dumping and countervailing duties will safeguard the securities of local industry against prevalent damage caused by subsidized exports. Export of all goods is allowed except for a few. Pakistan has just begun to diversify its export base and export markets. This will protect the country from shocks arising due to the price fluctuations or production shortfall in cotton or lower demand in the dominant market. The exchange rate is also being set by the market forces and without the intervention the Central Bank. (Dr. Ishrat Husain, 2001)

Textiles
The cessation of Multi Fiber agreement (MFA) in 2004 grants a huge opportunity for Pakistani textile producers. As future market shares will depend on price and quality advantage and not according to the current quota regime it will facilitate competent and low cost producers to increase their contribution in the North American and EU markets. Simulation results have depict that Pakistan will be one of the few developing countries which will still be competitive in international textile trade. Pakistan is a major producer of Cotton and textiles are relatively more labor intensive which convenes price advantage upon its exports. There has been considerable investment in textile industry and so far imported new machinery worth $ 1 billion which will certainly improve the productivity, quality of products and capital efficiency but the quality of human resources also needs to be considered regarding this matter. The institutional infrastructure such as Textile University, Textile Institutes etc. does already exist in the country but the quality, staffing, standards of instruction, curriculum and its relevance to subsequent job requirement are the issues which need to be quickly resolved. Employers should provide on-the-job training and in-house courses in basic literacy for those who are illiterate because this can substantially increase labor productivity and output. Induction level training and apprenticeship are the other tools which can help upgrade the quality of manpower in textile industry. Pakistan should also capitalize on high growth in the trade in synthetic textiles. A number of synthetic fiber plants have already been installed in the country but there is a need to expand the capacity and in some cases to reduce the end-use price through increased efficiency or scale economies. Since the U.S and European firms are
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becoming less productive in textile and clothing business, Pakistani firms should take advantage and make joint ventures with them so as to import technology and marketing techniques. As the U.S. and European firms become uncompetitive in textile and apparel business, Pakistani firms should enter into joint venture agreements with them for technology transfer and marketing. All these steps can contribute toward making Pakistan the largest exporter of textiles in the world; it is already ranked in the top ten. (Dr. Ishrat Husain, 2001)

Exports in Services
The export of services in the world has increased from $ 560 billion to $ 1500 billion during the last decade meanwhile Pakistan’s share has only doubled from $ 0.8 billion to $ 1.6 billion during the same time. Pakistan as other developed countries has the edge of delivering cheap labor for the investors considering doing business in the country especially in the areas of the Middle East and surrounding have significantly added to the foreign exchange income for our country. Still Pakistan has not been able to capitalize on this advantage in the most efficient of manners. State Bank of Pakistan has taken a step to change that by allowing incentives for the exporters of financial services, IT services, consultancy, engineering and accounting services which allow them to retain 35% of their export incomes. They have also been permitted access to Export Refinance schemes. The SBP has also legalized Pakistani firms to buy equity in overseas enterprises. Export of financial services mostly to the Middle East, Central Asia and Africa is being keenly promoted as Pakistan has a well-established professional crew of bankers and financial experts of world class who can be availed for this purpose. To make it happen we need to establish highly competitive, strong and efficient financial institutions which can take the lead in export of their services. (Dr. Ishrat Husain, 2001) The evolving model of merging capital and financial strength of Middle East investors and management expertise from Pakistan is at its starting phase but has more potential. In other fields such as Construction and Engineering services, Pakistani firms have a great experience in the past in Africa and the Middle East and it can most definitely achieve its former glory. Pakistan has great potential for exports in services, all we need is a more dedicated and direct approach with proper marketing and resource allocation. (Dr. Ishrat Husain, 2001)

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Foreign Investment regime and Capital inflows
The unique aspect of 1990s which affected the shape and size of capital flows to developing countries was the tilt from official development assistance (ODA) to private capital. This was assisted by an increasing discontent among the donor countries with the efficiency of aid and by deregulation of international finances and elimination of capital controls. Although this has increased the risk for recipient countries but the situation can still be controlled by using the correct policies which address the problems properly. Open financial markets have more growth but as same as openness to trade. Annual FDI flows to developing countries now amount to about three times the value of official flows. But the contribution of Pakistan in total private capital flows to developing countries has been reduced. Pakistan is now following a deregulated and market based policy of exchange rate which means that there is no interference from the government and the investment can flow freely on the basis of market forces. Also, authorized dealers can make remittances and repatriation of profits, dividends and capital. The above policy measures had raised the ratio of FDI and portfolio flows to GDP until May 1998. But a series of external shocks slowed it down such as    the nuclear test in May 1998 change in the Government in October 1999, and the war in Afghanistan in post September 11, 2001 period

Now, the factors that could contribute to the foreign investment in the coming years can be:     The withdrawals of economic sanctions, Restoration of lines of credit by Export Credit agencies, Grant of substantial debt relief by Paris Club, Access to the Poverty Reduction and Growth Facility (PRGF),

Pakistan can take advantage of the increasing private financial flows and assimilation with financial markets by keeping:    An open trade policy Macroeconomic stability A conducive environment for foreign investment flows. (Dr. Ishrat Husain, 2001)

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Good governance
Pakistan lacks good governance and lack of well-established economic instates. There is a lot of corruption in economic decision makings, waste of public resources kickbacks and unrealistic amount of favors to party loyalists in selecting projects. Every decision was biased and trampled the very existence of the concept of merit. Almost every public sector suffers this phenomenon. WAPDA, KESC, PIA, Railways, Steel Mills, OGDC and nationalized commercial banks are all in fiscal deficits and major reason for indebtedness of the country. Since October 1999 the Government is trying to improve governance and redevelop and reform key economic institutes. The vital tools to implement this agenda are wide ranging reforms in Civil Service, Judiciary, Police, Tax Administration and an institutional mechanism for accountability. During the last two years, some reasonable success has been achieved in restructuring Railways, Steel Mills, PIA, WAPDA and nationalized commercial banks but the process has to go long way before tangible results can be achieved. Privatizing large utilities, banks, and infrastructure companies and eliminating discretionary powers in the allotment of land and appointments to public offices. Correcting these institutions and strengthening governance structure would allow foreign investors and businesses to carry out their activities in Pakistan due to the fast and easy nature of decision making process. Henceforth, in order to attract investors to Pakistan we have to facilitate them in all possible manners so that they look forward to invest in our country rather than overlook the endless possibilities that could have been availed if it were not for our bad governance.

Tourism
Pakistan is blessed with some of the most breath taking places on earth, especially in the northern areas. Hence, there is a great opportunity for the tourism business here, if these areas are given proper care and refurbishing. Many tourists can be attracted to such places. And there are already so many countries that are availing this type of opportunities such as Thailand, Srilanka, Australia, and Malaysia etc. A considerable amount of funds can be generated through this source.

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SWOT Analysis

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Notable improvements in levels of urbanization. Nonresidential Pakistanis serving as middle men and investors for Pakistan. Productive agricultural sector. Progressing export markets through numerous trading agreements. Cheaper workforce available in Pakistan would serve as a huge incentive for investors. Pak-China and Pak-Iran coalition and trading agreements. Untapped mineral resources e.g. Coal, Uranium, natural gas and petroleum etc.
Opportunities New relevant international market for foreign investor companies seeking market share and first mover advantage Granting India most favored nation to increase trading opportunities with the neighbor country Joint ventures hold great promise in the agricultural and farming sectors through the operation of large-scale farms Tourism business potential Untapped mineral resources Free and decentralized economic decision making.

Strengths

Weaknesses            Disruptive law and order situation Political instability Corruption Load Shedding of gas and electrical sources Job losses and unemployment. Lack of Capital Negative Balance of Payment(Imports greater than exports) Increasing debt on the country by loans through IMF. Inflation Poor Infrastructure Brain drain

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Threats    

Potential interference in decision making by neighboring countries. Terrorism Threat to local businesses from multinationals. Falling rank of Pakistan in World Bank’s annual Doing Business report for 2 times in a row. Currently 107th out of 185 countries. (Tirmiz, 2012)

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PEST Analysis
Political Analysis
The economy and stock exchange of Pakistan is hurting quite as much due to the political unrest in the country. The corruption level is at a peak for the current tenure of the government i.e. Peoples Party. Along with the push and pull of the opposition parties trying to shine their own politics rather than putting their emphasis on the benefit of Pakistan and it civilians. The businessmen are concerned on the fact of an ongoing tussle on the corruption charges on current ministers and parliament members. Pakistan had to face many problems after the 2008 elections, such as, the judiciary freedom and restoration of deposed judges. (Aqeeluddin, 2010)

Economic Analysis
Pakistani economy has been facing chronic fiscal deficit and current account deficit for a very long amount of time. The continuation of these deficits has landed Pakistan in a total debt of more than 100% of GDP. Thus, the expense on servicing of debt has doubled to 11.8% of GDP in these ten years anticipating 55% of total budgetary cost and leaving very little fiscal margin for social spending or development of infrastructure.

Source: World Bank

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Category
Nominal GDP GDP (PPP) GDP Growth Inflation Unemployment Balance of Trade (Imports-Exports) Public Debt HDI Literacy Rate Poverty Rate Educational Expenditure Military Expenditure GDP Composition 2012 Est. Primary/Agriculture Secondary/Industry Tertiary/Service Labor Force
Economic Overview 2012

Year 2012
$240 Billion $514.6 Billion 3.7% 11.3% 5.6% -$16.16 Billion 50.4% of GDP 0.515 55% 22.3% (2005-06 estimate) 2.7% of GDP (2009 Estimate) 3% of GDP (2007 Estimate) 20.1% 25.5% 54.4% 60.36 Million (No. 10 in the World)

Sociocultural Analysis
Partition brought the origination two different economic cultures in Pakistan. People including the Punjabi, Sindhi, Pathan, and Baloch ethnic groups, basically associated as landowning and agrarian people. The other being the migrators from India (Muhajirs), who brought with themselves the Industrial culture. Muhajirs dominated the Karachi area of Pakistan which soon became a host for large industrial activities and further strengthened by trade of stock via KSE. Lahore and Rawalpindi follow closely behind as commercial giants. Pakistan’s society is basically divided into landowners and industrialist people. There are three categories by income level i.e. high, middle and low and social class which include Landowners, industrialists, professionals, and workers. Nonresident Pakistanis who have migrated out of the country to study or for business purposes are a key asset to Pakistan’s foreign exchange for the country through the help of their earnings. Indeed, allowances of some $575 million from workers in the United States alone constitute the largest single section of foreign exchange inflow in 2002, up from $105 million in 2001 (Ministry of Finance, 2003). This was because of the international crackdown on
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unsanctioned modes of funds transfer, conventionally known as the “hundi” or “hawala” system, following the attacks in America of 9/11/2001. NRPs are the most beneficial parts of the population in their respective countries, creating supports for “economic dynamism” (Kotkin, 2002). Many Pakistani people live and work in the Middle East, Britain, Australia, Canada, and the United States, with substantial numbers also in the Far East and portions of Africa. They are an imperative source of market information for businessmen and investors who are keenly considering business opportunities in Pakistan. NRPs regularly aid as appreciated distributors, business partners, and consultants in trade with their host country.

Technological Analysis
One of the concerning proceedings during the last three decades has been negligence to producing scientific manpower of worthiness in the country. According to a study on scientific education in the country the proportion of the graduates opting for scientific disciplines has in fact declined since 1960s. The Government has recently formed a Task Force (TF) to deal with this problem and asked the TF; to bring up specific advises to improve the higher education sector in the country especially in the grounds of Science & Technology (S&T). S&T policy also wants to expand the applications of scientific knowledge for solving problems faced by the country in selected departments for example, biotechnology, Material Sciences, Renewal energy, Pharmaceuticals and Chemicals and bring about research and development to the country’s economic needs so that the large scale use of new product, processes and techniques can bring a distinct advantage to our country. The Government understands that unless the governance and incentive structure of the universities, research laboratories, scientific establishments and technological organizations are drastically improved and larger allocations are made by the private and public sector towards R & D, Pakistan may be facing a serious risk of becoming a laggard. For the first time in 30 years, steps are taken to apply these ingredients of science and technology policy. Insufficient past attention to S&T in Pakistan will continue to remain a struggle for some time to meet the high technology export demands or exporting skilled manpower to other countries. Yet another problem is our lack of production techniques and resources which hinder a quality production and benchmark in all of our produced commodities which inhibit or discourages our export demands. This is mainly due to lack of modern productive methods and still using manual labor instead of automated machines which can perform more consistently, although there has been seen a shift in this trend towards more technical labor techniques but still a lot has to be done and it requires greater financial resources which the country is lacking in due to fiscal deficits and negative balance of trade. In order to meet these requirements National Accreditation Council has been formed so that benchmark on quality of products can be set and tested, hence making it acceptable in the international community standards. ISO
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certificates have also been drawn with a positive response from the Private sectors where more than 2000 companies have developed their ISO 9000 certification. Therefore, it has increased the acceptance of our products in the international markets. In the coming times, The Pakistani companies have to be prepared to the standards of social audit and environmental audit in order to sell their goods in the OECD markets. The sooner they do this they will have a head start over their competition.

Key Findings and Recommendations
All in all Pakistan has great potential for investors seeking to do business in the country, if the political conditions become stable and favorable to investors, the security issues of the country are resolved such as bombings and target assassinations. Also if the tariff and duties on commodities are fairly reduced to increase trade among the countries and along the same time the domestic industry sectors is made potential enough to compete with the international markets so that our local industries are not harmed, Pakistan can excel in global business. Development of human resource and technology in our agricultural sector shall also play a major role in reinforcing exports through quality agricultural commodities that meet the international standards and are produced in quantities which are proportionate with the amount of input served regarding the production of the commodities, in other words increasing the efficiency and minimizing the wastage of crops etc.

Conclusion
Now, Pakistan has to choose whether it wants to be a potential competitor in the global markets by drastically changing its foreign and economic policies and capitalize on the opportunities available to it or rather go for a steady approach by first trying to make its local business industries capable of competing with international to an extent that if it may pursue creating incentives for global investors, they might not disrupt or overcome the local businesses. (Dr. Ishrat Husain, 2001)

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Bibliography
Amine, O. J. (2004, September-October). New International Business Perspectives in Pakistan. St. Louis, Missouri, United States: Wiley InterScience (www.interscience.wiley.com). Ali, M. S. (2000). Trade and industrial policy in Pakistan: Post-Uruguay round challenges. White Paper, World Bank WTO-2000 Project. Islamabad, Pakistan: Planning Commission, Government of Pakistan. Aqeeluddin, M. (2010, February 27). pakbizjournal. Retrieved March 26, 2013, from http://pakbizjournal.wordpress.com: http://pakbizjournal.wordpress.com/tag/impacts-ofpolitical-instability-in-pakistan/ Dr. Ishrat Husain. (2001, October 29). http://ishrathusain.iba.edu.pk/ishrathusain/papers.html. Retrieved March 26, 2013, from http://ishrathusain.iba.edu.pk: http://ishrathusain.iba.edu.pk/ishrathusain/speeches/globalization/How_is_Pakistan.pdf Tirmiz, F. (2012, October 24). http://tribune.com.pk/story/456093. Retrieved March 28, 2013, from Express Tribune: http://tribune.com.pk/story/456093/pakistans-ease-of-doing-businessranking-drops-to-107th/ Mascarenhas, B. (1992). Order of entry and performance in international markets. Strategic Management Journal, 13, 499–510 Pakistan Embassy. (2003), Washington DC: Policy briefs. Retrieved October 1, 2003, from http://www.pakistan-embassy.com

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