pakistan shadow economy 19

T493

New International BusinessPerspectives on Pakistan

Omar J. Khan Lyn S. Amine

Executive Summary

What image comes to mind when one thinks of Pakistan? Prior to the attacks ofSeptember 11, 2001, and the subsequent invasion of Afghanistan, many businesspeo-ple had little information about this ancient land. Recently, Pakistan has come to theworlds attention as a powerful ally in the U.S.-led war against terrorism. Situatedat the crossroads of the Middle East, Southeast Asia, China, and member nations ofthe former Soviet Union, Pakistan has long been a leading player in regional politi-cal and economic activity. This article presents some new perspectives on Pakistan as amarket worthy of a closer look. We survey Pakistans history and geography, as well asits sociocultural, political-legal, economic, and competitive environments with a viewto identifying new opportunities for foreign investors and global marketers. Currentbusiness trends and marketing opportunities are discussed, concluding with an out-look for future growth and development. Valuable insights are offered to businesspeo-ple interested in doing business in Pakistan, a little-studied but vitally importantnewly industrializing country (NIC) and big emerging market (BEM). 2004Wiley Periodicals, Inc.

INTRODUCTION

he purpose of our study of Pakistan is to assess business and marketing opportu-nities at the present time and in the future. We argue that Pakistan should begiven a second look as a target for foreign direct investment (FDI) based ontwo important reasons: its internal market opportunities and its strategic signifi-cance as an export platform for doing business in other southwest Asian markets.The contribution of this article is a probing, honest, and detailed examination ofa key big emerging market (BEM) from the point of view of strategic foreigndirect investors and global marketing managers.

Thunderbird International Business Review, Vol. 46(5) 493519 SeptemberOctober 2004

2004 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com).

DOI: 10.1002/tie.20022

Omar J. Khan is a PhD student at Saint Louis University, currently in his final year. He has threejournal publications and numerous conference papers to his credit, as well as a First Place Awardin academic research from the University. E-mail: [email protected]. Lyn S. Amine, PhD, is a profes-sor of marketing and international business at Saint Louis University. She is also DistinguishedFellow of the Academy of Marketing Science and president of the Women of the Academy ofInternational Business. E-mail: [email protected].

We start our analysis with a brief general background section, beforefamiliarizing the reader with Pakistans ancient history at the cross-roads of Europe and Asia. This historical knowledge is critical to a fullunderstanding of the mind of the Pakistanis, with their deep-seatedsense of identity as an ancient people with a rich and diverse culturaltradition. We emphasize the important advantages of Pakistans geo-graphic location, which has played such an important role in the pastand promises to be an essential source of competitive advantage inthe future. In the next section, we use the well-established and wide-ly cited template of five marketing environments (first developed byCateora, 1993) to discuss the sociocultural, political-legal, econom-ic, and competitive environments in modern-day Pakistan. This envi-ronmental analysis lays the foundation for a micro-level discussion ofbusiness culture and consumer behavior, after which we identifyappropriate marketing strategies and profitable business opportuni-ties. We close with a detailed discussion of the strategic implicationsof doing business in Pakistan and lay out some expectations for futuremarket developments.

GENERAL BACKGROUND

When Mikhail Gorbachev and Ronald Reagan first sat down to dis-cuss a plan to thaw the Cold War, they did so at the Geneva homeof the Aga Khan. For the preceding two decades, Pakistan hadplayed a front-line role in the Cold War between the two super-powers of the Soviet Union and the United States. Pakistan hadbeen a dedicated American ally from the beginning of the ColdWar, while its archrival India built its own niche as a friend of theSoviets. It was therefore fitting that the beginning of the thawshould take place at the home of a Westernized spiritual leader withPakistani rootsthe Aga Khan (note: while a very common lastname in Pakistan due to Afghan and Mongol influences, Khan inthis case denotes a leadership title).

Since its creation as a sovereign nation over a half-century ago,Pakistan has embarked on an often-interrupted path toward industri-alization and emergence as a free market economy. Building upon theefforts of its predecessor, the present government has implementedincentives for FDI that are generous by Western standards. Recentpositive moves toward reconciliation between Pakistan and Indiaaugur well for improved business relations between these two BEMs.In the larger regional context, Pakistan is a major player and facilita-tor in numerous economic trade agreements and political treaties.


494 Thunderbird International Business Review SeptemberOctober 2004

the presentgovernment hasimplementedincentives forFDI that aregenerous byWesternstandards.

Most recently, Pakistan has benefited substantially from its status as aclose, English-speaking ally of the United States. Indeed, the KarachiStock Exchange posted gains of over 50% in 2002by far, the high-est in the world (Belfour, 2002), demonstrating renewed confidencein the country by global investors. Pakistan offers investors a rare, dualstrategic opportunity, as both a production and export platform and asa growing market in itself. Pakistan has a huge population of about150 million people, making it the seventh most populous nation in theworld (CIA World Factbook, 2002). With a surface area almost twicethe size of California, Pakistan occupies a strategic location in theIndus Valley, with easy access to neighboring markets in China, cen-tral Asian republics, Iran, the Persian Gulf, and Southeast Asia.

Criteria defining BEMs were established by the U.S. government (seeGarten, 1997). Pakistan fits all of these parameters well, having alarge resource base and a large population. It is considered a region-al powerhouse with critical participation in major geopolitical andsocial events. It is also one of the worlds fastest growing markets,with substantial movement toward liberalization and rationalizationof the economy. Pakistans population has immense pent-up demandresulting from economic growth, and consumers have rising dispos-able incomes. These are two important characteristics of BEMs (seeArnold & Quelch, 1998). Consumer demand exists even in the bot-tom of the pyramid (BOP) market segment (see Prahalad &Hammond, 2002). Demand in Pakistan covers a broad range of con-sumer products and services, as well as wide-ranging national needsfor industrial products and services to build basic infrastructure.

These positive market indicators of Pakistans progress and potentialmay surprise some businesspeople who are more familiar with reportsabout problems in the country. It is true that the persistent threat ofwar with India over the disputed territory of Kashmir has long been athorn in the side of both countries. some militant Islamic influence ispresent, particularly in the areas neighboring Afghanistan, and socialinfrastructure remains underdeveloped. It was not surprising then thatPakistan should receive an unflattering and unwelcome D-rating forcountry risk in 2002 (Country Monitor, 2002). This rating drawsattention to the inescapable paradox that Pakistan represents, with asubpar risk rating on one hand and real evidence of economic growthand investors confidence on the other hand. Clearly, Pakistan as amarket calls for careful analysis and evaluation of business opportuni-ties. First-mover advantages are available to well-prepared investorsand manufacturing companies whose objectives are to gain marketshare and develop performance capabilities (Mascarenhas, 1992).

New International Business Perspectives on Pakistan

495Thunderbird International Business Review SeptemberOctober 2004

It is also one ofthe worlds

fastest growingmarkets, with

substantialmovement

toward liberaliza-tion and rational-

ization of theeconomy.

GEOGRAPHIC AND HISTORICAL PROFILE OF PAKISTAN

A Strategic CrossroadsPakistan occupies the fertile Indus Valley, ringed by the Himalayas inthe northeast and the Hindu Kush mountains in the north and westof the country. It was through this terrain that the Venetian explorerMarco Polo traveled on his way to China. The long coastline givesaccess to sea lanes in the Arabian Sea that were made famous in thestories of Sinbad the Sailor. Long ago, the western boundary ofPakistan was the starting point for ancient settlers who moved intothe rich farming areas of the Indus and Ganges River Valleys.Although the Indus Valley is entirely occupied by present-dayPakistan, the region gave its name to India.

Ethnicity and Cultural IdentityHistorys LegacyAlthough Pakistan is a relatively new political entity, its land is home toone of the most ancient civilizations of the world. The prehistory ofPakistan is known only through artifacts discovered in the twin capitalsof Mohenjo-Daro and Harrapa, which date back about 6,000 years.

Table 1 presents an illustrative chronology of key cultural and politicaleras in the history of the land now known as Pakistan. This review high-lights Pakistans character as a complex cultural and ethnic meltingpot for some of the most significant civilizations in recorded history.Remains of the Indus Valley civilization, one of the oldest known soci-eties in the world, lie at the heart of culture in present-day Pakistan.

The classical history of Pakistan goes back to the conquest by Cyrus,king of Persia in the fifth century BC, who developed the regionslabyrinth of river systems for economic and navigational use (Burki,1999). The Indus Valleys economic and logistical importance wasreaffirmed with the arrival of Alexander the Greats armies in 327BC. Further incursions and settlements were made by Afghans,Persians, and Aryans from the Plains, as well as by numerous tribesfrom the Central Asian Steppeseach bringing their own religiousand cultural tradition. In the seventh century AD, Arab conquests ledto the spread of Islam throughout the region.

During the Dark Ages, the Mongol hordes broke into the Islamicworld, entering through the northeastern part of modern Pakistan.They caused massive destruction and upheaval on their way west toPersia, Baghdad, and beyond. Ultimately, however, the Mongolswere absorbed into the local communities and faded as a distinctracial category. Later, a new people called the Mughuls, a mixture of



AlthoughPakistan is a rel-atively new polit-ical entity, itsland is home toone of the mostancient civiliza-tions of theworld.

Afghan and Mongol racial stock, ruled over the Indian subcontinent.Then, during the nineteenth century, these dominions were absorbedinto the British Empire.

Through this flux of nations, a deeply embedded sense of cultural iden-tity emerged, explaining in many ways how many Pakistanis relate toone another, how social classes are defined, and how political partyaffiliations are determined. It is critical to understand the wide range ofcultural identities in Pakistan when developing market segmentationstrategies, pricing policies, and promotional strategies. (These manifes-tations of cultural identity are addressed further in later sections on thepolitical scene, business culture, and consumer behavior.) As a coun-terpoint to these separate cultural identities, one must also recognizethe homogenizing effects of globalization. Many Pakistani consumersand business people now strive to achieve modern (and sometimesWestern) lifestyles along with greater socioeconomic development.

The Effects of PartitionWhen the British finally accorded the region its independence in1947, they left a subcontinent divided into two sovereign nationsPakistan and India. This event came to be known simply as parti-



Table 1. Key Cultural and Political Eras in Pakistans History

30001500 BC Indus Valley civilization1500522 BC Settlements by Aryans522326 BC Rise of independent states326300 BC Eastern-most conquest of Alexander the Great300200 BC Part of Mauryan Empire 200100 BC Graeco-Bactrian period100 BC70 AD Saka-Parthian period70450 AD Part of Kushan dynasty4501010 AD Rule of the White Huns10101187 AD Ghaznavid period11871227 AD Ghorid and Kubacha periods12271739 AD Muslim Dynasties (Slave dynasty, Khiljis, Tughlaqs,

Syeds, Lodhis, Suris, and Mughals)17391800 AD Nadir Shah and Abdali periods18001848 AD Sikh rule in Punjab, North West Frontier Province

and Kashmir, Talpur rule in Sind, Khanate of Kalat in Baluchistan

18481947 AD Member of the British Empire19471971 AD Creation of the sovereign nation of Pakistan in two

wingsEast and West Pakistan1971present Creation of Bangladesh (formerly East Pakistan)

Emergence of present day Pakistan (formerly West Pakistan)

tion. Partition triggered significant changes in national territory anddemographics. It also caused immense human suffering, with morethan a million deaths on both sides of the line between Pakistan andIndia. Even after the creation of the modern state of Pakistan onAugust 14, 1947, bitter rivalry persisted between the two neighbors,resulting in three wars.

The modern nation of Pakistan was carved out of what was then Indiaon the basis of religion, in order to give Muslims in India a homelandof their own. Homogeneity of religious belief was further consolidat-ed after partition with the massive migration of Pakistani Hindus out-ward toward India and Indian Muslims inward into Pakistan. About14 million people moved to and fro within the first few tumultuousmonths of independence. This event was unprecedented in recordedhistory, in terms of the sheer numbers of people migrating over sucha short period of time. Only the movement of the Hutu-Tutsi popu-lations in the late 1990s in central Africa has come close to this uniqueand urgent relocation of vast numbers of people.

THE SOCIOCULTURAL ENVIRONMENT

Ethnicity, Income, Social Classes, and Market SegmentationPartition was the source of two fundamentally different economiccultures in Pakistan. Indigenous peoples, including the Punjabi,Sindhi, Pathan, and Baloch ethnic groups, generally subscribed to arural, landowning, agrarian culture. In contrast, migrants from Indiainto Pakistan, who are known as Muhajirs, included urban profes-sionals from societies characterized by mercantilism and industrializa-tion. The Muhajirs came to represent the majority in the port city ofKarachi, which soon became the major industrial center of Pakistan.Karachis important socioeconomic status was further reinforced byits role as a major regional trading center. Lahore and Rawalpindi inthe Punjab province farther north follow Karachi as the major com-mercial centers in Pakistan.

Initially, the agrarian and urban cultures differed markedly in theirpolitical beliefs and their notion of statehood, with the Muhajirsfavoring secular government. Over the years, these two fundamentalcultures have intermingled, rendering the political and economicinstitutions of Pakistan richer, more complex, and multifaceted.

Social class structure in Pakistan is similarly multifaceted, with persis-tent vestiges of the old dichotomy between landowners and industri-



The modernnation ofPakistan wascarved out ofwhat was thenIndia on the basisof religion

alists. Up until the 1970s, it was widely accepted that just 22 familiescontrolled the vast majority of wealth in Pakistan, just like dominantfamilies in other developing countries such as Mexico, Brazil, andVenezuela. This is no longer the case. While still relatively small, themiddle class is growing significantly. Together with the small class ofsocial elite, these two social classes in Pakistan today representimportant new target markets for global marketers of status-orientedand luxury items.

For the outsider looking in, it is vital to understand that wealth inPakistan exists in two overlapping social categories. We define thesecategories by income level (high, middle, and low) and social class(landowner, industrialist, professional, and worker). Figure 1 sug-gests a graphic representation of these complex and unusual con-sumer segments in Pakistan.

Any attempt to segment consumers in the Pakistani market must fac-tor in these complex social identities, because consumer behavior dif-fers markedly across these intricate income and social class segments.For example, there are clear differences in values and behaviorsbetween upper-income professionals and upper-income industrialists,as well as between upper- and lower-income landowners.

Market segmentation is further complicated by the many ethnic divi-sions. For example, Pathans and Baluchs are generally more conser-vative than Punjabis or Muhajirs, although there are, of course, largevariations in attitudes and behavior within each group.



Figure 1. Model on Income and Social Class Segments in Pakistan

(Source: Developed by the authors.)

Between social classes, there are recognizable patterns of behaviororiginating from ancient patterns of social relationships betweenlandowners and peasants. The visitor will find it remarkable how self-effacing people of lower social or income class can be in their inter-actions with a person of high social or income class who, in turn, mayseem arrogant by Western standards. These traditions of overt dom-inance and subservience extend even to relationships betweenemployers and employees in the corporate setting. Foreign business-people should be careful, therefore, to avoid reliance on oversimpli-fied segmentation schemas that may not accurately reflect these socialcomplexities and traditions of deference.

Nonresident PakistanisA key facet of Pakistani society, as in India, is the large number ofindividuals who have migrated abroad to study and work. Thesenonresident Pakistanis (NRPs) represent a very substantial sourceof foreign exchange for the nation through their repatriated earnings.Indeed, remittances of some $575 million from workers in theUnited States alone made up the largest single segment of foreignexchange inflow in 2002, up from $105 million in 2001 (Ministry ofFinance, 2003). This sharp rise was due in large part to the interna-tional crackdown on unofficial modes of funds transfer, traditionallyknown as the hundi or hawala system, following the attacks inAmerica of 9/11/2001.

NRPs often count among the most successful segments of the popu-lation in their adopted countries, creating bastions of economicdynamism (Kotkin, 2002). Large Pakistani populations live and workin the Middle East, Britain, Australia, Canada, and the United States,with significant numbers also in the Far East and parts of Africa. Theyare an important source of market information for businesspeople andinvestors who are actively considering business opportunities inPakistan. NRPs frequently serve as valuable middlemen, business part-ners, and consultants in trade with their home country.

THE POLITICAL-LEGAL ENVIRONMENT

Type of GovernmentPakistan is a federal republic set up under the constitution of 1956.There are four provinces (Punjab, Sindh, Baluchistan, and North-West Frontier Province), one territory (the Federally AdministeredTribal Areas [FATA]), the capital territory of Islamabad (seat of thefederal government), and the disputed federally administered area of



NRPs frequentlyserve as valuablemiddlemen,business part-ners, and consul-tants in tradewith their homecountry.

Kashmir and the Northern Areas (www.cia.gov). The President is theChief of State, and the Prime Minister is the Head of Government.The parliament, or Majlis-e-Shoora, is bicameral, with a Senate of100 seats and a National Assembly of 342 seats.

The judicial branch is also bicameral and the Supreme Court has jus-tices appointed by the President. The Federal Islamic, or Sharia,Court currently acts only in an advisory role, with no real powers ofenforcement. At the provincial level, Sharia law has been recentlyintroduced and enforced in only one area, the North-West FrontierProvince, to deal primarily with criminal acts (such as murder or bur-glary) and limited civil matters (like marriage). The other provincesin Pakistan have neither implemented nor enforced Sharia law.

The Political Scene TodayThe military is, by far, the most potent political force in the country.Military rulers, including the present one, President General PervezMusharraf, have led the country for most of its modern history as asovereign nation. The two most popular political parties are theMuslim League and the Pakistan Peoples Party. Several religious par-ties have consolidated into a significant but still minority politicalforce. There are also numerous other political parties with narrow-er, more parochial agendas. In all, a total of 95 political partiessought registration in the 2002 national elections (Global NewsWire, 2002).

It is important to note that the two leading parties, and even the con-solidated religious parties, all exhibit tendencies generally in favor offree market policies. The Musharraf government has firmly backedfree market incentives and continued privatization (Mangi, 2002). Awell-established regulatory framework exists, favoring both privateand foreign direct investment. Table 2 presents a summary compari-son of the current regulatory package for investment in Pakistansmanufacturing and nonmanufacturing sectors.

External Relations with IndiaPolitical debate in Pakistan is still dominated by the hostile rivalrybetween India and Pakistan. Both countries are nuclear powers andregularly engage in contained conflict along the Kashmir bordera problem that grew out of differing opinions about the partitionagreement. Recent talks about economic imperatives between thetwo countries offer hope that both countries will soon be activelyseeking a resolution to this old problem (T. Aziz, personal commu-nication, September 2003).



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Government Policies and PrioritiesUpon partition in 1947, resources for the fledgling nation werescarce. Industrialization was seen as the path out of poverty, so theeconomy was immediately opened to private investment. The govern-ment took responsibility for defense, basic infrastructure, power, andother areas considered unattractive to private investors due to risk orthe requirement for large capital outlays. Government incentives forindustrial investors were generous, but agricultural development wasleft to stagnate through the 1950s and 1960s (Burki, 1999).

Industrial assets were bought by a relatively small number ofentrepreneurs, thereby creating the aforementioned phenomenon ofthe 22 ruling families. This concentration of wealth in the hands of aminority existed alongside widespread poverty among the rest of thepopulation. Pakistans free market economy grew during the 1950sand 1960s, exemplifying the model of economic development calledelitist growth. According to this model, economic and politicalpower is held by a small social elite. Although economic growth maybe rapid, its benefits are delivered unequally to members of the totalpopulation (Husain, 1999). Not surprisingly, popular dissatisfactiongrew at this time, leading to rapid changes of government. Duringthe 1950s alone, Pakistan had seven prime ministers, until FieldMarshal Ayub Khan declared martial law in 1958.

Ayub Khan ruled for another ten years. Economic growth wasimpressive, but social inequalities continued to worsen. Popular dis-satisfaction and unrest persisted throughout the 1960s and 1970s,favoring the development of socialist policies under Zulfiqar AliBhutto. At that time, the East Pakistan wing of the country was lost,becoming the independent nation of Bangladesh.

Embarking on a policy of promoting social equity, Bhuttos govern-ment appropriated large parcels of land from owners and dividedthese among laborers. Workers rights were greatly enhanced with theintroduction of a minimum wage and collective bargaining. Large-scale nationalization took place. Not surprisingly, private investmentdropped dramatically throughout the 1970s, and a massive braindrain took place as individuals sought better prospects abroad(becoming NRPs). While possibly well-intentioned, Bhuttos policieslacked thorough analysis and planning and ultimately led to a slow-down in economic growth.

In 1977, General Zia ul-Haq came to power through a coup dtatand reintroduced private enterprise into the economy. Nationalization



Industrializationwas seen as the

path out ofpoverty, so theeconomy was

immediatelyopened to private

investment.

was severely limited, thereby reassuring private investors. During the1980s, government initiatives included the introduction of twoIslamization measures, zakat and ushr. These are effectively aform of taxation and, although relatively light in their financial bur-den, proved difficult to implement. Islamic interest-free banking wasalso introduced, representing a form of profit- and loss-sharing withbank customers. These measures had only limited success and weresignificant only for their cosmetic appeal.

More sophisticated, smaller-scale government measures have beenintroduced in recent years in order to promote the well-being of indi-vidual households and encourage growth of cottage industries. Thesemeasures include an interesting experiment in alternative micro-financing systems, alongside use of established Western systems ofinterest-based financing.

Micro-finance refers to small amounts of capital that are made avail-able to individuals and community groups among impoverished seg-ments of the population. In the late 1990s, the World Bank andInternational Monetary Fund (IMF) sponsored loans that were ear-marked for this type of disbursement (Pakistan Economic Report,1999). In 2000, the Pakistani government established a micro-finance bank, the Khushali Bank, whose explicit role is to providefinancial services to poor people, particularly women, in order to pro-mote social welfare (Kemal, 2001). The Asian Development Bank hasalso participated in similar targeted efforts.

Micro-loans distributed through the Khushali Bank target specificcommunities for development. A grass-roots organization from eachcommunity is trained to prioritize needs of their members, who worktogether to identify suitable borrowers and monitor the use of funds.Recovery rates have been extremely high for these types of micro-loans. It is hoped that this innovation will effectively reduce povertyand promote development of a lower middle class in Pakistan(Ministry of Finance, 2003).

In the 1990s, structural impediments to private investment werelargely removed. Foreign firms are allowed to issue shares in Pakistanienterprises, and foreign banks can underwrite securities. Restrictionson portfolio and foreign direct investment were eased with the estab-lishment of the Privatization Commission, whose objectives are to:

encourage competition by abolishing monopolies and inte-grating the domestic economy into the world economy;



Micro-loans dis-tributed throughthe KhushaliBank target spe-cific communi-ties for develop-ment.

mobilize private-sector resources for future investment; reduce substantially the size and scope of the public sector; develop capital markets for mobilization of domestic savings;

and decrease opportunities for misuse and corruption of public

property by government officials and public sector managers(Privatization Commission, 1998).

Foreign direct investment (FDI) is rapidly increasing in new technol-ogy sectors such as telecommunications, and in traditional, revenue-generating stalwarts such as power generation and banking. Otherindustries touched by the privatization process include shipping,insurance, road construction, and airlines.

After the first green revolution of the 1960s, very high growthrates were again achieved in the agricultural sector in the 1990sthrough the use of new technologies that improved productivity(Mubarak & Byerlee, 2002). Incentives were made available for pri-vate investment in most areas of industry and agriculture. Localoperators have shown themselves more than willing to partner withforeign investors in exploiting these opportunities (PakistanEmbassy, 2003).

A more recent government policy promotes efficiency in small andmedium-sized enterprises (SMEs) by consolidating several existingfinancing institutions into a new SME Bank. The SME Bank is a devel-opment project with the capacity to extend loans ranging from 50thousand to 30 million Rupees (Rs.), equivalent toU.S.$1,000U.S.$500,000. It targets primarily export-oriented SMEsand has branches across the nation. Along with this access to credit,small businesspeople also receive professional business advice and sup-port services (Small and Medium Enterprise Development AuthorityPakistan, 2003).

THE ECONOMIC ENVIRONMENT

Unequal Socioeconomic DevelopmentPakistan is ranked among lower-middle income countries. ThePakistani model for economic growth since independence wasdescribed above as elitist growth (Husain, 1999). Social devel-opment has lagged behind economic growth, resulting in unequalsocial development and notable deficiencies in education, healthservices, sanitation, and gender equality (Easterly, 2001). While



Incentives weremade available

for privateinvestment inmost areas of

industry andagriculture.

vast amounts of disposable income are available to the ruling elite,a third of the population presently lives below the poverty line.Per-capita income is about $2,100 after incorporation of purchas-ing power parity (www.cia.gov). A large underground economy(black market) persists despite efforts to incorporate it into themainstream. As a counterbalance to these rather pessimistic char-acteristics, there are numerous important positive indicators thatencourage a more optimistic view of the country in the future.Indicators for three promising sectors of activity are discussed inthe following sections.

The Agricultural Sector Agriculture presently accounts for only 25% of GDP. At the time ofindependence in 1947, it was considered to be the core economy,generating a major part of GDP. Despite this shrinkage, the Pakistaniagricultural sector has actually done well compared to other countriesin the region. As a result of the second green revolution of the1990s, Pakistan has tripled its world market share of cotton, reachingabout 10%, which is almost the same level as neighboring Indias(Federal Bureau of Statistics, 2003). This fact is especially remarkableconsidering the large difference in size between the two economies.

Capital MarketsDespite past inefficiencies, capital markets in Pakistan are reappearingin the private sector as important instruments of economic growth(Hardy & di Patti, 2001). As noted earlier, as foreign capital pouredinto the country, the major Pakistani stock exchange in Karachi(KSE) became the best performing stock market in the world in 2002(Chowdhury, 2002).

Pakistans renewed status as a U.S. ally in the war against terrorismhas led to a marked easing of trading restrictions with Westernnations. This factor, coupled with renewed induction of WorldBank and IMF loans, has had a positive effect on capital availabili-ty in Pakistan. A market in futures contracts has been introduced,and audit and accounting practices have been strengthened tominimize any attempts at unethical manipulation. The Securitiesand Exchange Commission in Pakistan plays an active role in safe-guarding the interests of investors.

Other major sources of capital in Pakistan include the publicly inte-grated Development Finance Institutions and the National SavingsOrganization. Private-sector financing is available through the majorcommercial banks in the country, of which Habib Bank, United



the Pakistaniagricultural sec-tor has actuallydone well com-pared to othercountries in theregion.

Bank, and Allied Bank are the largest. The requirement for minimumcapital has been enhanced to Rs. 1 billion (approximately $20 mil-lion) to encourage consolidation of smaller banks. Together, thesebanks provide the bulk of domestic financing required by investors.

Exports and Growth IndustriesThe ratio of exports to GDP has doubled from 8% 30 years ago to 16%in the late 1990s (Ministry of Finance, 2003), producing notableimprovements in levels of urbanization. Basic industries like textiles,leather, and sporting goods account for the bulk of export revenues.Textile manufacturers alone accounted for a massive 64% of totalexport revenues in fiscal year 20012002 (Ministry of Finance, 2003).Export diversification is a priority for the Pakistani economy, and gov-ernment incentives have been structured to achieve this goal. Exportsof manufactured goods are replacing exports of primary commodities,while still retaining links to key industries producing tobacco, textiles,and apparel. The agricultural sector has done well in recent years, butindustry has done even better. Thus, the two major engines of eco-nomic growth, agriculture and industry, are effectively workingtogether to generate economic growth.

New areas of economic activity, such as software development in thetechnology sector, are receiving special governmental attention andsupport through expedited approvals and developmental capitalschemes (Board of Investment, 2003). Consequently this is anopportune time for foreign investors to get in on the ground floorin growth industries.

Global Trading RelationsThe United States, Germany, and Japan are currently the largestexport markets for Pakistani goods. Pakistans participation innumerous regional and bilateral trading agreements offers potentialfor building bilateral relationships and diversifying export markets inthe future. Reciprocal trade agreements are already in place withChina, the Gulf countries, Turkey, Iran, and several major markets inSoutheast Asia (Ali, 2000).

Pakistan enjoys a special relationship with China that dates back tothe early 1960s. The two countries were brought together initially bymotives of political expediency, shared borders and ethnicities, andcommon interests stemming from border disputes with India. Thisrelationship grew into a long-standing friendship. Pakistan, therefore,presents a valuable production platform for exports to China, partic-ularly for apparel and software.



Basic industrieslike textiles,leather, and

sporting goodsaccount for the

bulk of exportrevenues.

In the future, greater freedom to trade with India will immediatelybenefit a small number of industries through the creation of newexport opportunities, and subsequently grow to benefit industry andcommerce in general. If bilateral relations improve, and there aresome indications of this intent, there would also be a significantimprovement in Pakistans overall country-risk rating.

THE COMPETITIVE ENVIRONMENT

Growth of the Industrial BaseAt the time of partition, only 11 major corporations were engaged infive sectors of industry. Today, Pakistans industrial base has expandedto around 3,000 companies. Notably, this base is defined by the Boardof Investment as only those sectors and companies that employ amajority of the industrial workforce. In 2003, there were 43,618 com-panies incorporated in Pakistan (Board of Investment, 2003). Theseare heavily concentrated in traditional manufacturing sectors such astextiles, chemicals, agricultural products, and steel, with considerablenumbers in the newer sectors of information systems processing andsoftware development. The Board of Investment indicates that foreigncompanies operate in 14 key sectors and represent a variety of corpo-rate nationalities. Clearly, the competitive environment in Pakistan ishealthy and supports a lively free market economy.

Modes of Market EntryThe international business and international marketing literatures area rich source of insight into modes of market entry and aspects of mar-ket-entry strategy (for more information, see Erramilli & Rao, 1993;Leonidou & Katsikeas, 1996). Similarly, the growing literature onBEMs offers guidelines on competing in this type of marketplace (fordetails, see Arnold & Quelch, 1998; Garten, 1997; Ramamurti,2000). Traditional modes of foreign market entry include exporting,contractual methods such as licensing and franchising, cooperativemethods such as joint ventures and strategic alliances, and equitymethods of FDI through wholly owned subsidiaries (for further dis-cussion of these options, see Czinkota, Ronkainen, Moffett, &Moynihan, 2001). In the case of Pakistan, investors and foreign busi-ness partners have made significant use of exporting and equity meth-ods of FDI (United States-Pakistan Business Council, 2003).

Two favorite points of entry into Pakistan are through the port cityof Karachi and the Punjab province. Other points of entry for con-sideration include the provinces of Baluchistan and Sind, where land



investors andforeign businesspartners havemade significantuse of exportingand equity meth-ods of FDI.

and labor costs are modest and incentives are available to set up pro-duction facilities. These two provinces have been generally over-looked by foreign investors, except in the case of large-scale industriessuch as power-generation and chemicals. This is largely a result of therelatively primitive state of national infrastructure, which has, in thepast, rendered physical distribution of goods difficult. This situationshould however be regarded as a business opportunity to participatein profitable public-sector and infrastructure projects requiring con-struction of roads, bridges, and telecommunications.

FDI, Hot New Sectors, and Global Company ParticipationFDI in Pakistan has been implemented by a large number of globalcompanies in major industries such as consumer products, processedfoods, pharmaceuticals, financial services, chemicals, textiles,petroleum, and software. Familiar brand-name companies includeColgate-Palmolive, Johnson & Johnson, Procter & Gamble,Unilever, Nestl, Ciba-Geigy, American Express, Citibank, BP-Amoco, and Microsoft. In the first half of fiscal year 2001, Americaninvestment alone in Pakistan represented nearly 75% of the countrys$200 million total in foreign direct investment (United States-Pakistan Business Council, 2003). Notably, most of these global lead-ers are planning to expand their investments in Pakistan.

FDI opportunities are particularly attractive for those firms seekingspecialized market niches. The Board of Investment (2003) identi-fied a number of sectors as hot areas for FDI and joint venturesthat employ local talent and expertise. Of particular interest is theinformation technology (IT) sector, where the government is work-ing to promote growth of a domestic version of Silicon Valley. Since1995, the Pakistani Software Export Board has been facilitating pro-duction and export of software by establishing IT parks, call centers,and joint venture relationships between local and foreign firms(Pakistan Software Export Board, 2003).

These types of operations draw on a workforce that is highly skilled,with large numbers of graduates from local business and technicalschools. As an example, the California company Align Technologyhas set up a customer service call center in Lahore. Lahorites answertoll-free numbers from the United States, providing product supportand service 24 hours a day (Lagerquist, 2002). Despite some concernin the West that this type of business is draining white-collar jobsaway from national markets, the competitive advantage of a cheap,well-qualified, and sophisticated labor supply in Pakistan ensures thatthis type of new business will continue to grow.



FDI opportunitiesare particularly

attractive forthose firms

seeking special-ized market

niches.

Special incentives are in place to encourage FDI in the IT sector. Forexample, IT now enjoys the status of being an industry as opposedto a segment. One hundred percent foreign ownership is allowed,and processing of licensing applications now takes only a few days inthis deregulated industry. IT training institutions are income-taxexempt for five years, and most IT and networking equipment isexempt from import duties. Domestic banks are allowed to extendcredit to foreign principals, and concessionary export financing isavailable through the State Bank. The cost of Internet bandwidth hasbeen drastically reduced by 65%, and both DSL and cable facilities areavailable (Board of Investment, 2003).

This massive deregulatory effort is spurring one of the best environ-ments in the developing world for technological advancement. Twoother hot new sectors are biotechnology and medical engineering.Direct or portfolio investment is suggested as an appropriate mode ofmarket entry for these sectors, because local concerns are not yet wellestablished.

Opportunities for large-scale FDI include hydroelectric power gener-ation, roads and highway development, ports and handling activities,and urban mass transitas seen in China, Indonesia, and otherBEMs. The oil and gas industries, and particularly pipeline develop-ment, require massive outlays of capital but have quickly attracted theattention of global investors. Major Western energy companies, suchas El Paso Energy, have already established operations in Pakistan.Recent discoveries of natural gas reserves could bring substantialimprovement to Pakistans balance of payments through substitutionof local gas for imported oil. Export receipts of an estimated $500million or more from this source have been predicted (Stern, 2001).

Joint ventures hold great promise in the agricultural and farming sec-tors through the operation of large-scale farms. Incentives are partic-ularly good for producing, processing, packing, and exportingvegetables, fruits, and flowers (Board of Investment, 2003). ForeignSMEs should actively consider setting up joint ventures and strategicalliances in the leather products and value-added textile industries.Domestic Pakistani financing is readily available for these sectors, andcooperative market entry arrangements are welcome. The fledglingsector of organic farming holds great promise for growth of exportsto target markets in the European Union (see www.pakboi.gov.pk forfurther details). Additionally, there is great demand for production ofgenetically modified, high-yielding, and disease-resistant seeds suchas those currently being marketed by Monsanto.



Joint ventureshold greatpromise in theagricultural andfarming sectorsthrough theoperation oflarge-scalefarms.

As indicated by the foregoing examples, a range of market-entrymodes are available and appropriate for doing business in Pakistan.Both small- and large-size foreign companies across a range of indus-tries are already active in the Pakistani market, taking advantage ofthe countrys strategic location in southwest Asia, government incen-tives for FDI, industries targeted for growth assistance, naturalresource factors, local labor, and domestic market demand.

Dealing with Corruption in the Business WorldLocal business culture in Pakistan presents foreign businesspeople withtwo major ethical challenges: bribery and nepotism. The existence ofan unwieldy and complex government bureaucracy has created manyopportunities for unscrupulous behavior under the guise of specialattention and expedience (Haider, 2003). Moreover, governmentofficials have demonstrated a lack of transparency in handling biddingprocesses, despite serious efforts by the Privatization Commission tocombat this problem (Ali, 2000).

Staying within official channels may reduce, but not eliminate, expo-sure to these problems when initially entering the Pakistani market.The temptation to engage in corrupt practices is part of the very cul-ture of business in Pakistan and, in some ways, is institutionalized.Nevertheless, if a foreign company is to establish a reputation forstrict ethical conduct, total consistency will be needed.

Although cumbersome and mind-numbingly verbose, business reg-ulations and laws are published and easily accessible. Any sugges-tion of deviation from these published rules and procedures shouldbe met with resolute rejection. It is recommended that foreignmanagers assert a business culture of their own, consistent withstandards in their home country. This demonstration of a clearcommitment to resist corrupt practices should eventually yield ben-eficial results, by reducing pressure to conform to questionable pat-terns of local business behavior. Even though corruption is widelyaccepted as a cost of doing business in Pakistan, it is neverthelesswidely and vehemently disdained.

CONSUMER SEGMENTATION AND MARKETING STRATE-GIES IN PAKISTAN

Keeping in mind the earlier discussion about the many geographicorigins, ethnic identities, and different value systems of people inPakistan, care should be taken when targeting consumers.



Local businessculture in

Pakistan pre-sents foreign

businesspeoplewith two major

ethical chal-lenges: briberyand nepotism.

Standardized global strategies will, in many instances, need rethink-ing in order to reach the wide range of consumer market segmentsin Pakistan.

Family Decision Making and the Status of WomenThe family unit still dominates Pakistani society, and the extendedfamily is the main source of rampant nepotism among the politicalelite. Households are traditionally hierarchical and patriarchal withgender-specific spheres of activity and decision making, particularlyin rural areas.

The professional status of women is better than it has ever been.Indeed, Pakistan is proud to boast of having already elected a femaleprime minister, Benazir Bhutto. Women are well-respected and thefemale employment rate has increased rapidly, from 5.6% in 1981 toover 20% in 2002 (Federal Bureau of Statistics, 2003). However,when compared to Western nations, women are still well behind interms of leadership positions in industry.

At work, the fashion for women is one of modesty in dress and cus-tom, whether through some limited forms of veiling or throughindividual style of social interaction. For example, women seldommaintain eye contact with men during conversation, even in a pro-fessional setting. Handshakes between sexes, although gaining someacceptance, are still not the norm. Of course, people of the same sexshake hands and frequently hug or hold hands as a sign of friendship.When in doubt, foreign businesspeople should rely on simple,polite, verbal acknowledgements.

Market SegmentationConsumer markets in developing countries have traditionally beensegmented according to consumer demographic factors such associal class, religion, language, and urban versus rural populations(Jain, 1989; Terpstra & David, 1991). Alternatively, countries havebeen clustered using macro-level variables such as geography, poli-tics, economic factors, and aspects of national culture (Hofstede,1987; Kale, 1995).

As mentioned earlier with reference to our new framework of con-sumer segmentation in Figure 1, in terms of sheer numbers thelargest consumer market segment in Pakistan consists of lower-income, lower-class workers. In order to serve this potentially prof-itable segment, we recommend use of the innovative method ofbottom of the pyramid (BOP) marketing (Prahalad & Hammond,



The professionalstatus of womenis better than ithas ever been.

2002). This mass-market, high-volume, very low-price, and verylow-margin strategy represents a key opportunity for marketers, notonly in Pakistan but also in other BEMs.

Consumer Marketing StrategiesBOP marketing serves the basic needs of ordinary consumers byproviding everyday products that are packaged and sold in verysmall quantities at accessible price points. Examples include daily-use packets of shampoo, soap, toothpaste, razor blades, chewinggum, and so on. Penetration pricing is essential to success of thisstrategy, so production costs must be kept low. In-country pro-duction is therefore the most appropriate strategy for holdingdown production and transportation costs. Unilever and Colgate-Palmolive have both had considerable success with the BOP mar-keting strategy (Prahalad & Hammond, 2002), as have Coca-Colaand Pepsi-Cola in India (Amine & Kumar, in press).

Another successful strategy is targeting niche segments, definedaccording to the multiple ethnicities in Pakistan. For example,Pathans in the North-West and Baluchs in Baluchistan are gener-ally more conservative and less receptive to Western-style market-ing efforts, so a straightforward presentation of product benefitsand low price is the most effective and persuasive promotionalapproach. In contrast, the people of Karachi and urban Punjabisare much more receptive to Westernized marketing messages thatemphasize quality and status. Ciba-Geigy has successfully imple-mented communication strategies targeted to different ethnicgroups in the various provinces. In contrast, Coca-Cola did poor-ly in the North-West and Baluchistan because the company tried toimplement a standardized approach across the whole Pakistanimarket. As Craig and Douglas (1996) pointed out, initial entrymay prove to be less complex than subsequent efforts to achievemarket expansion.

As in other major urban centers around the world, globalized seg-ments can be identified, such as teenagers, working women, youngurban professionals (yuppies), upscale consumers, and others.These segments are receptive to globalized product and promo-tional strategies consistent with the values and purchasing powerof the middle and upper classes. Middle- and upper-class Pakistaniconsumers are becoming increasingly sophisticated and respondpositively to appropriate global marketing campaigns that empha-size cosmopolitan values and lifestyles and promote the benefits ofupscale brand-name products and services.



initial entrymay prove to be

less complexthan subsequent

efforts toachieve market

expansion.

EXPORTING FROM PAKISTAN

Pakistans regional trade and political affiliations, low-cost factors ofproduction, and skilled English-speaking workforce are very importantpositive characteristics supporting a strategy of using Pakistan as anexport production platform for outward trade with neighboring coun-tries. Global sporting goods companies like Adidas and chemical giantDuPont both have large-scale export production facilities that servemarkets in China and Western Europe. Other global companies are fol-lowing their lead (see Board of Investment, 2003). Most SMEs inPakistan are also involved in production for export (www.smeda.org).

Marketing issues arising from country-of-origin (COO) considerationsneed to be carefully considered when choosing Pakistan as an exportplatform. (For a complete discussion on COO issues, see Peterson &Jolibert, 1995.) Despite the many positive factors identified earlier,Pakistan suffers from a range of perceived negative COO effects. Theseare a function of both macro-level and micro-level factors: for example,an image of political instability persists as a result of successive changesof government, and questions about quality and reliability are associat-ed with some industries. However, vibrant export sectors such as tex-tiles, sporting goods, leather, and surgical instruments enjoy adecidedly positive COO effect. This is a result of clearly demonstratedhigh-quality standards and high export profit margins.



Figure 2. Export Processing Zones in Pakistan (2003)

(Source: www.epza.gov.pk; please see web site for color picture)

Potential investors need to weigh both positive and negative COOfactors when deciding to do business in Pakistan. An important affir-mative consideration in any decision should be the nationwide avail-ability of special industrial zones (SIZs) and export processing zones(EPZs), which have been created to serve export-oriented industries(Export Processing Zones Authority, 2003). A detailed comparisonof some regulatory packages designed to encourage investment in themanufacturing and nonmanufacturing sectors (2003) is presented inFigure 2. Information on market operating conditions in individualsectors and industries is provided by the Board of Investment, theMinistry of Finance and Economic Affairs, the Federal Bureau ofStatistics, the State Bank of Pakistan, the annual Economic Survey ofPakistan, and the Small and Medium Enterprise DevelopmentAuthority (SMEDA).

STRATEGIC IMPLICATIONS OF DOING BUSINESS IN PAKISTAN

The foregoing discussion has presented some new perspectives onPakistan and provided a solid rationale for doing business in Pakistan.A wide range of international business opportunities has been identi-fied, while also giving due consideration to the risks, competitivethreats, and costs of investing in this BEM. In assessing the strategicimplications for investing in Pakistan, we find a number of pertinentfactors on both the plus and minus sides.

The Plus SidePakistan has a rapidly developing infrastructure; well-established legalsystems; comprehensive road, rail, and sea links; and good-qualitytelecommunications and IT services. The country is strategicallylocated and serves as a regional hub for access to the Middle East,Southeast Asia, China, Turkey, and the Central Asian republics(Board of Investment, 2003).

Pakistan also has many physical, cultural, administrative, and busi-ness advantages that are important to foreign investors. Theseinclude extensive agricultural land; efficient production of wheat,cotton, rice, fruits, and vegetables; and extensive reserves of coal,crude oil, natural gas, copper, iron ore, and gypsum, as well aslarge-scale fisheries and livestock production. Pakistan possessesvaluable human resources, with an educated and relatively low-costworkforce. There is a very large domestic market, with 150 millionconsumers in a variety of income classes. The growing middle class



Potentialinvestors need toweigh both posi-tive and negative

COO factorswhen deciding to

do business inPakistan.

is moving toward sophisticated global lifestyles and consumptionhabits, consistent with high levels of education, professional exper-tise, and global awareness.

Recently, Pakistan has benefited greatly from its status as a front-lineally of the United States. Expected directions for economic develop-ment include continuing trends toward liberalization, deregulation,and privatization. Incentives for foreign investment are among themost generous in the world, and all economic sectors are now opento foreign ownership.

The Minus SideCritical questions still remain to be considered about the future of inter-national business in Pakistan, not least of which is the political instabili-ty caused by the long-standing dispute with India over Kashmir, as wellas by the instability of Pakistans neighbor, Afghanistan. Some minorityelements of the Pakistani population are engaged in trying to rebuff theestablishment of Western assets in the country, and sectarian violencehas surfaced periodically. On the social front, there are some seriousdelays in social development, and quality of life for most consumers isstill low by world standards.

OUTLOOK FOR THE FUTUREWEIGHING THE OPPORTUNITIES AND THREATS

As a nation, Pakistan is making consistent efforts to integrate itselfinto the global economy (Country Monitor, 2003). The governmenthas successfully turned around the deteriorating economic situationof a few years ago, and the nation is enjoying a rapidly improvingeconomy (Federal Bureau of Statistics, 2003; World Bank, 2002).Pakistans external creditworthiness improved dramatically in 2002and 2003 as a combined result of increased exports, increased over-seas workers remittances, increased aid disbursements, and substan-tial debt reduction. The current domestic economic climate ispositive for investment. FDI in Pakistan grew dramatically from $1billion to $5 billion in just the five months following the events ofSeptember 11, 2001 (Business Asia, 2002). Generally, the economicforecast is bright, and prospects for sectoral growth are attractive.Genuine first-mover advantages can be achieved through carefulplanning and appropriate market entry.

The Pakistani government is taking seriously its role in promoting socialresponsibility and higher ethical conduct in business. Fundamental



As a nation,Pakistan is mak-ing consistentefforts tointegrate itselfinto the globaleconomy.

transformations are taking place in the political, institutional, economic,social, and gender-equality spheres in order to ensure transition to amodern Islamic state. Women have a more significant voice in thenational legislature, and new education and health reform strategies arein place. Even environmental concerns are being addressed in the areasof natural resource use and conservation (Faruqee, 1996).

Remarkable progress is taking place in infrastructure development,with new highways between Karachi, Lahore, and Islamabad. This isa direct result of private-sector investment driven by the promise ofattractive rates of return. Continuing public and private investment isneeded to bring infrastructure facilities up to a level that is competi-tive with more industrialized countries. Specific sectorsin particu-lar, the IT industryare being promoted as engines of nationaleconomic growth.

CONCLUSION

This commentary has provided comprehensive and current informa-tion about Pakistan and has presented new perspectives for interna-tional business participation in the country. Foreign producers,marketers, and direct investors are strongly encouraged to takeanother look at this ancient land that is both an NIC (newly indus-trializing country) and a BEM (big emerging market). The availableevidence shows that Pakistan is moving in the right direction for sus-tained economic development. It is enhancing its attractiveness notonly as a consumer market with huge demand for products and ser-vices, but also as a base for large-scale industrial investment and pro-duction, as well as a platform for exporting to other countries acrossthe Middle East and Asia.

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