Survey conducted in collaboration withThe Federation of Pakistan Chambers of Commerce & IndustryThe TRTA Programme is funded by the European Union

United Nations Industrial Development OrganizationTrade Related Technical Assistance (TRTA) Programme

Trade Related Challenges Facing Exporters

in

Pakistanby

Pakistan Institute of Development EconomicsQuaid-i-Azam University Campus, Islamabad

Trade Related Challenges Facing Exporters in

Pakistan

Copyright Ó UNIDO, 2007. Readers are encouraged to quote and use this material for educational, non-profit purposes,

provided the source is acknowledged.

ACKNOWLEDGMENTS

This study was commissioned by the United Nations Industrial Development Organization (UNIDO) to Pakistan Institute of Development Economics (PIDE) in the framework of the EU-funded Trade Related Technical Assistance (TRTA) programme as part of UNIDO's Technical Cooperation activities in Pakistan.

A UNIDO team, led by Steffen Kaeser including Zawdu Felleke and Badar ul Islam, conceived this study and defined the survey questionnaire, which constitutes the basis of this report. Comments on an earlier version of the questionnaire were received from colleagues within UNIDO's TCB branch including Lalith Goonatilake and Gerardo Patacconi. The International Trade Centre (ITC) provided ideas for the section on trade information and on the multi-lateral trading system.

UNIDO would like to particularly acknowledge Steven Jaffee of the World Bank for his valuable contributions in the development of the survey questionnaire.

The field survey was conducted by PIDE and the draft report was prepared by Dr. A. R. Kemal, Dr. Musleh-ud Din and Dr. Ejaz Ghani. Dr. Nadeem Ul Haque provided valuable advice in the preparation of the final report.

UNIDO and PIDE express their appreciation to the enterprises that participated in the survey. Acknowledgement is also made to public and private sector representatives, who participated in four regional validation workshops and one national seminar.

The active collaboration and contribution of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) have been essential to the successful conduct of the survey.

Special thanks go to Professor Spencer Henson and his team from the University of Guelph, Ontario, Canada, for their assistance in data analysis and interpretation of the survey findings.

(i)

LIST OF ACRONYMS

(ii)

AoA Agreement on Agriculture

APTMA All Pakistan Textiles Mills Association

ASEAN Association of Southeast Asian Nations

CBR Central Board of Revenue

EPB Export Promotion Bureau

EU European Union

EUREPGAP Good Agricultural Practices Protocol

FPCCI Federation of Pakistan Chambers of Commerce & Industry

HACCP Hazard Analysis Critical Control Point

ISO International Organisation for Standardization

ITC International Trade Centre

KESC Karachi Electric Supply Company

MFD Marine Fisheries Department

MRA Mutual Recognition Arrangements

NPSL National Physical and Standards Laboratory

OHSAS Occupational Health and Safety Advisory Services

PARC Pakistan Agriculture Research Council

PCSIR Pakistan Council for Scientific and Industrial Research

PIDE Pakistan Institute of Development Economics

PLGMEA Pakistan Leather Garment Manufacturers and Exporters Association

PNAC Pakistan National Accreditation Council

PRGMA Pakistan Readymade Garment Manufacturers Association

PSQCA Pakistan Standards and Quality Control Authority

PTA Pakistan Tanners Association

SPS Sanitary and Phytosanitary

STANDS Standards

SUPCAP Supply Capacity

TBT Technical Barriers to Trade

TDA Trade Development Authority

TPOLICY Trade Policy and Facilitation

TRIMS Trade Related Investment Measures

TRIPS Trade Related Intellectual Property Rights

TRTA Trade Related Technical Assistance

UNIDO United Nations Industrial Development Organization

WAPDA Water and Power Development Authority

WTO World Trade Organization

CONTENTS

Acknowledgements i

List of Acronyms ii

Contents iii

List of Tables and Appendixes iv

Executive Summary 1

1. Introduction 3

2. Background 4

2.1 The Role and Impact of Standards on Developing Country Exports 4

2.2 Sample Design and Data Collection 4

3. Profile of Exporters 5

3.1 Export Sales 5

3.2 Export Market Diversification 6

4. Trade Capacity 9

4.1 Supply Capacity 9

4.2 Standards Compliance 11

4.3 Trade Policy 12

4.4 Intervention Measures 13

5. Standards and Conformity Assessment 14

5.1 Investment in Standards Technologies 14

5.2 Certification 14

5.3 Product Testing 15

5.4 Cost of Certification and Inspection 16

6. Trade Related Issues and Information Services 19

6.1 Awareness of Trade Agreements 19

6.2 Impact of WTO Agreements on Business 19

6.3 Dialogue with Government 20

7. Export Performance of Firms 21

8. Conclusions and Recommendations 24

8.1 Creating a Conducive Business Environment 24

8.2 Strengthening Supply Capacity 24

8.3 Establishing Conformity Assessment Infrastructure 24

8.4 Trade Facilitation 25

8.5 Sectoral Policy Initiatives 25

References 27

Appendix 28

(iii)

LIST OF TABLES AND APPENDIXES

Table 1: Average Value of Firm Sales by Market and Sector

Table 2: Average Value of Firm Sales by Market and Size of Firm

Table 3: Mean Share of Exports by Region

Table 4: Mean Export Market Diversification Index by Year and Export Sector

Table 5: Correlation between Firm Size and Export Diversification

Table 6: Mean Scores of Perceptions on Trade Supply Capacity Constraints

Table 7: Varimax Rotated Principal Component Matrix of Supply Capacity Challenges Cited by Exporters

Table 8: Mean Scores of Perceptions on Standards Compliance

Table 9: Mean Scores of Perceptions on Trade Policy Challenges

Table 10: Varimax Rotated Principal Component Matrix of Trade Policy Challenges Cited by Exporters

Table 11: Number of Firms that Invested in Technologies by Sector and Size

Table 12: Proportion of Firms that are Certified to Standards

Table 13: Proportion of Firms Certified by Firm Size

Table 14: Proportion of Firms Reporting Testing of Products by Testing Mechanism Used

Table 15: Mean Scores of Disincentives to Product Testing by Sector

Table 16: Mean Scores of Disincentives to Product Testing by Firm Size

Table 17: Proportion of firms Indicating Costs of Certification and Inspection

Table 18: Level of Awareness about Trade Agreements

Table 19: Perceived Impact of WTO Agreements on Business

Table 20: Dialogue between Firms/Association and Government on Trade Issues

Table 21: Ordinary Least Square: Dependent Variable is Value of Sales 2000 to 2004

Appendix I: Number of Surveyed Firms by Sub-sector

Appendix II: Breakdown of Responses (%) by Level of Awareness of WTO Agreements

Appendix III: Breakdown of Responses (%) by Perceived Impact of WTO Agreements on Business

Appendix IV: Percent Responses on Critical Areas of Intervention in Supply Capacity

Appendix V: Percent Responses on Critical Areas of Intervention in Trading Standards

Appendix VI: Percent Responses on Critical Areas of Intervention in Trade Policy and Export Promotion

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Enhanced export trade performance has become more critical to developing countries within the context of a more liberal trading system. Over the last decade Pakistan has liberalized its trade. Total exports responded favorably rising from US$ 6.7 billion in 1992 to US$9.1 billion in 2002, but sustaining this growth is a challenge due to longstanding structural weaknesses in the industrial and exporting sectors.

Thus, helping Pakistani firms develop dynamic exporting capabilities is a key policy objective. Such efforts include reducing exporting challenges and, in particular, raising the trading capacity of exporting firms through plant investments in technologies to meet export market requirements and strengthening institutional infrastructure services for conformity assessment such as product testing, calibration, inspection, enterprise certification and accreditation.

This report discusses the results of a survey of 157 Pakistan exporting firms in Sindh and Punjab industrial regions. It analyses the exporting behavior of firms and the challenges pertaining to trade policy, supply side issues and conformance factors relating to capacity to meet market requirements with proof of compliance both for products and enterprise management systems. It then provides possible options to alleviate them.

During the period 2000 to 2004, average firm export values increased. All sectors maintained a presence in the local market, but there was a trend towards increased exports, particularly in agro-processing and fisheries. The proportion of export sales is correlated with firm size. Small firms maintain a significant presence in the local market, medium firms are moving towards export markets, while larger ones are predominantly export oriented.

Pakistan's exports are concentrated in a few markets. From 2000 to 2004, there was no significant change in the extent of diversification. The major market for the textile and leather sector is the European Union, while that for agro-processing and fisheries is Asia. This exporting pattern underlines concerns within the sector that export growth is hampered by a range of firm and export policy related constraints. Export market diversification is correlated with firm size, where larger firms are more diversified reflecting gains from economies of scope and exporting experience. In addition, gains from such diversification are significant.

Pakistani exporting firms face three broad challenges: a) supply capacity; b) standards and

compliance; and c) trade policy and facilitation. Under supply capacity, firms regard high production and other business costs, low world market price and lean profit margins as impacting their performance. Most present exporters had experienced minor problems in producing to market specifications, getting the right packaging material, production equipment and process technologies, labor skills and productivity. However, supply capacity constraints are greater for small firms and potential exporters relative to medium and large firms. For most firms, export performance could be improved by reducing costs of doing business and raising productive efficiency.

The uptake of new production and process technologies is highest in textiles and leather but very low in agro-processing and fisheries. The bulk of investment have been initiated and/or supported by entrepreneurs and, in a few cases, by government, private sector or technical assistance programmes. Exporters in all sectors plan future investments to build-up their trade capacity, largely in the textiles sector, followed by leather, agro-food processing and fisheries. Most of these firms called for government assistance to overcome investment constraints.

Priority intervention areas highlighted by exporters were certification to ISO 9000, accreditation of local testing laboratories and access to information on packaging, labeling, etc. Constraints to technology uptake and third party certification are inversely related to plant size. These constraints relate to financial costs, administrative and technical capacity. Small firms/ potential exporters stand to gain most from reductions in certification costs and internationally recognized accreditation of local laboratories.

Trade facilitation measures are improving but exporters remain concerned about inefficiency in customs and infrastructure (for example freight, shipping and transport) as well as access to market intelligence. Past efforts at reforming customs procedures have not been considered effective due to weaknesses in customs administration and cumbersome regulatory procedures, while poor infrastructure leads to delays and higher transport costs.

The need for certification tends to be sector specific. However, across the sample the most commonly standard applied by industry was ISO 9000 followed by ISO 14000. Certification to system standards is high in textiles and leather sectors but limited among agro-processors and fisheries, although many firms were in the process

EXECUTIVE SUMMARY

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

1

inadequate information flows from export development agencies and the national WTO enquiry point. The most helpful sources for technical and business information were considered the internet, international trade fairs, overseas market visits and foreign trading partner companies.

Based on a survey of 157 enterprises, the report makes a number of recommendations aimed at the private sector, government departments and other relevant bodies (for example development agencies). These recommendations include the following:

Enhance government efforts at creating a better business environment to spur industrial investment, exports and growth. Consideration should be given to reforming regulatory policy in particularly tax administration, rationalizing customs procedures, anti-corruption and electricity supplies.

Examine ways to increase public and private sector coordination to strengthen capacity in research and development and dissemination of relevant business information, which will reduce the costs of doing business.

Strengthen the credibility of conformity assessment practices in Pakistan through attainment of international recognition of PNAC. While PNAC becomes the local internationally recognized authority for accreditation, in particular for testing laboratories, the internationally recognized accreditation of public sector laboratories such as those operating under PCSIR, PARC, MFD, NPSL and PSQCA should be pursued so as to reduce, as quickly as possible, the costs associated with testing in accredited foreign/regional laboratories.

The national standards institute should develop a National Enquiry Point to provide information on standards and technical regulations. This service should be linked to the National Reference Centers established at Export Promotion Bureau (EPB), which has now been transformed to Trade Development Authority (TDA).

Ways should be examined to consolidate the role of commercial attachés in particular appointing qualified personnel in foreign missions.

Sectoral policy initiatives should be taken to enhance export capacity in particular increased enterprise certification and technology uptake in the fisheries and-agro processing sectors.

11.

12.

13.

14.

of implementing or planning to implement management system standards in their operations. The lack of certification, especially for food safety such as HACCP and now ISO 22000, and application of other food safety practices explains partially why fishery exports to the European Union countries have been limited.

The Ministry of Science and Technology has set up the Pakistan National Accreditation Council (PNAC), but in the interim till PNAC achieves Mutual Recognition Arrangements (MRAs) with international bodies, there is a need for engagement of foreign accreditation services.

Most exporters felt that, while foreign testing was costly, the benefits in terms of the value of exports were positive. Delays in obtaining test results are generally minimal and firms are committed to testing products for the satisfaction of their customers. Customers generally understand the potential delays with testing. The disincentives to undertake testing, including high testing costs and time delays, are inversely related to firm size. Local internationally recognized testing facilities would be cost-saving for all exporters.

Exporters in Pakistan, especially small and potential exporters, lack the capacity to demonstrate compliance with standards and their poor awareness of rules and standard requirements poses a major challenge. Pakistan still lacks capacity for proving standards compliance as no internationally recognized accredited testing laboratories are available. An export-led growth strategy should therefore include a comprehensive standards and conformity assessment capacity building component, as well as improvements in overall institutional infrastructure to serve the textile, leather, agro-food and fisheries sectors.

The level of awareness of trading agreements including Sanitary and Phytosanitary (SPS) measures, anti-dumping and intellectual property rights tends to be sector specific, ranging from high and positive for textiles and leather to very low for fisheries and agro-processing. Because textiles and leather exporters are better informed, they perceive that trade agreements have positive impacts on their businesses. However, most agro-processors and fisheries firms could not infer the potential impact of trading agreements due to their limited knowledge on such matters.

Exporting firms considered that their limited knowledge on trading issues was due to informational problems. Exporters in all the sectors berated the poor dialogue between businesses and government ministries as well as

15.

16.

2

3

1. INTRODUCTION

Over the last 10 to 15 years, Pakistan has taken concerted efforts to liberalize its international trade. Net exports have been the key driving force behind restoration of growth, but increased consumption and investment have also played a part. Total exports responded favorably to liberalization, rising from US$6.7 billion in 1992 to US$9.1 billion in 2002. Manufacturing makes up 16 percent of Pakistan's GDP, while its exports rose from US$3.6 billion in 1992 to US$5.3 billion by 2002 (World Bank, 2006). Real GDP growth rose from four percent in 1990 to 6.1 percent in 2003 (Lorie and Iqbal, 2005). Following three years of steady decline during 1998 to 2000, the period 2001 to 2005 witnessed significant economic growth.

Pakistan's exports are highly concentrated by commodity; currently the majority of exports originate in the textiles and apparels sectors. The bulk of Pakistan's trade is with countries outside of South Asia. For example, textile exports are concentrated in China, Bangladesh and Hong Kong. Leather exports are concentrated in Hong Kong, Italy and Republic of South Korea. Vegetables and fruits are mainly exported to the United Arab Emirates, India, Japan and Sri Lanka. Fish and fish products are exported to China, Japan, UK and USA, while surgical instruments are largely destined for Germany and the USA (World Bank, 2006). This pattern reflects in part Pakistan's specialization in products that are also exported by its neighbors. Recent analysis by the World Bank indicates the potential for greater trade with India, notably in light manufactured products (for example bicycle components and fans) (World Bank, 2006).

Much has been done in recent years to improve the business climate in Pakistan. Foreign direct investment, as a percent of GDP, increased from 0.3 percent in 1990 to one percent in 2003(Lorie and Iqbal, 2005). However, Pakistan still lags behind other South Asian countries such as India, China and Thailand and further progress can be made. For example, property rights remain weak and there is still too much government intervention with the market in some key commodities. In addition, red tape is still excessive, labor laws inhibit proper functioning of labor markets and corruption is still high. There is much room for improvement in physical infrastructure and current impediments to domestic and foreign investment. The challenge of sustaining this growth hinges on how existing and potential industrial capacity responds to the requirements of importing countries.

Nevertheless, like many developing countries, Pakistan continues to struggle with the task of effectively accessing export markets . In this regard, the role of standards and technical regulations cannot be overlooked, nor can Pakistani exporters' capacity to react effectively to obstacles presented by such standards or regulations. Clearly, the obstacles to trade and capacity to react to these will shape exporting firm's performance. This report discusses the export performance of Pakistan's manufacturing sector within the context of evolving standards and technical regulations in import markets. In particular, the report aims to:

Explore the nature and extent of challenges to the trade capacity of Pakistan exporters.

Determine the factors associated with standards compliance across sub-sectors.

Assess the impact of technical standards and regulations on the value of export sales.

Identify mechanisms through which export performance could be enhanced.

The analysis is based on a survey of Pakistan exporting firms to assess and identify the nature of trade related challenges facing Pakistani exporters. This data was collected as part of UNIDO's trade capacity building support in the framework of the EU-funded TRTA programme, covering four major exports of Pakistan: textiles/apparel, leather, agro-processing and fisheries. Each of these sectors comprises various sub-sectors as follows: textiles (yarn, fabrics, knitwear, garments, bed sheets and towels); leather (tanning, footwear and leather products); agro-processing (horticulture products and rice); and fisheries (fish processing and fish exports).

The report is structured as follows. The next section provides a background to the report, including issues related to the proliferation of standards and their potential impact on developing country exports. Section 3 contains a profile of Pakistani exporters, the pattern of exports and level of market diversification and other supply capacity related challenges, followed by trade capacity challenges facing exporters in Section 4. Section 5 focuses on motivation and extent of certification and product testing. Section 6 examines the level of awareness on trade issues, followed by an evaluation of overall export performance in Section 7, and conclusions and recommendations in Section 8.

4

2. BACKGROUND

2.1 The Role and Impact of Standards on Developing Country Exports

Export success and the ability to enter international trade markets are increasingly critical elements of job creation and poverty alleviation strategies in developing countries. For instance, the welfare gains from increased trade liberalization have been estimated by the World Bank (2002) to be about US$550 billion, of which US$184 billion accrues to developing countries. Presumably, developing countries, through design and choice of appropriate policies and strategies, can utilize these welfare gains as leverage in achieving broader economic and social goals. However, developing country trade performance is still muted by a host of tariff, standards and other technical barriers to trade (TBT). In addition, exporting firms in developing countries often suffer from 'internal' (limited supply capacity) and 'external' (trade policy and facilitation) constraints. Where the benefits have been registered, they have been in favour of certain segments or regions, such as in the ASEAN region.

Standards and technical regulations are but one specific instance where internal and external constraints can limit the performance of developing country exporting firms. While such standards and technical regulations exist to protect consumer safety or to achieve other goals, they can also be detrimental to trade. For example, environment related standards apply to numerous products and a large value of world trade, a significant proportion of which is from developing countries. Out of the 5,134 globally traded products considered by Fontagne et al. (2005), technical barriers that specify product characteristics affect 3,942 products, with a value of US$704 billion of world imports in 2001 (Fontagne et al., 2005). These standards may not be directed a prior

1against developing countries , but their growing complexity and the lack of harmonization between countries can still impede trade flows from developing countries. On a value basis, approximately 50 percent of developing country exports face restrictions, particularly for agro and textile products. Of the latter, 40 percent are directly affected because they are shipped to markets imposing standards (Fontagne, et al., 2005).

Previous research shows that standards and technical regulations affect export performance in many ways. Standards either reduce trade flows, particularly amongst developing country exporters that lack the requisite technical and administrative capacity, or conversely can

act to raise the productivity and competitiveness of complying firms. In addition, due to different preferences of the non enforcement or non availability of international standards, importing countries often impose divergent standards on imports. This affects trade flows particularly of food products (see Jaffee and Henson, 2004; Fontagne et al., 2005). Besides, trade costs are large and variable across countries and goods, ranging from those that are policy based (for example tariffs, quarantine, inspections and bans) to those imposed by the trading environment (for example transport costs, infrastructure, contract enforcement, time costs, etc) (Limao and Venables, 2001; Anderson and van Wincoop, 2004).

2.2 Sample Design and Data Collection

The survey instrument used to develop the data employed in this analysis was developed by UNIDO and utilized for the survey purposes by the Pakistan Institute of Development Economics (PIDE). The survey focused on four major export sectors of Pakistan, namely: textiles, leather, agro-processing and fisheries. A two-stage, stratified random sampling frame was used. During the first stage, a list of all exporters was solicited from the All Pakistan Textiles Mills Association (APTMA), Export Promotion Bureau (EPB) and UNIDO yielding 1,357 firms. The initial sampling criterion was to focus on medium and larger enterprises (firms with more than 49 workers). However, information on employees could not be obtained from some firms and the criterion was changed to consider all firms that had export sales values of one million Rupees or more. In this way, small firms that met the sales criteria were included, resulting in a sample of 393 firms.

In the second stage, the sample design was modified and 2new firms added to compensate for stage-one firms that

had closed, relocated, no longer exported or refused to co-operate. The distribution of the firms in each sector is given in Appendix 1. The questionnaire was pre-tested in Rawalpindi. Face to face interviews were then conducted with firms in Karachi, Lahore, Sialkot and Faisalabad. Preliminary survey results were discussed in validation seminars, and participants informed of the policy recommendations.

1 Fontagne et al. (2005 p.1434) finds that environmental standards are used as hidden protectionism (in textile and clothing) prejudicing developing countries. The EU imposes environment related measures in 431 products (or one in 12 trade products), thereby affecting the value of US$296 billion of world imports, of which only US$32 billion of imports eventually enters the EU.

2 It was decided by UNIDO and PIDE representatives to interview more firms from Karachi. These new firms were identified by the FPCCI. In other cities, new firms were added by consulting the associations and chamber offices (such as APTMA, PLGMEA, PRGMA, PTA, etc.) of the respective industries in these cities.

5

3. PROFILE OF EXPORTERS

This section provides a summary of the information gathered in the survey and profile of exports in the sample over the period 2000 to 2004.

3.1 Export Sales

Table 1 provides a breakdown of the average value of firm sales by year and nature of market. At the aggregate level, export sales increased consistently from 2000 to 2004. Export market orientation is apparent, even though the average value of firm sales to the domestic market exceeds ten percent. At the sub-sector level, the average share of export sales is very high in textiles, leather and fisheries, but less so in agro-processing. Initially, agro-processors maintained a balanced presence in local and export markets but increasingly shifted to exporting over time. In 2000, domestic sales made up to 56 percent of agro-processors' revenue; by 2004 this share equaled 16

percent. This change in export market importance likely reflects agro-processor's increased capacity to meet importing country quality and supply requirements. When the average value of sales is differentiated by firm

3size , it is evident that small firms maintained a significant presence in the local market, while larger firms focused on exporting (Table 2). As Table 5 shows, small firms concentrated on local markets, perhaps to compensate for their lack of exporting experience and limited capitalization and other competencies. However, as firm size increases, so too does the share of sales going to export markets (and likely reflects increased capacity needed to cope with standards and technical regulations). Moreover, over time, export markets account for a greater share of the average value of sales for both medium and small sized firms. Medium sized firms increased their average share of export sales from 77 percent in 2000 to 91 percent in 2004.

*Figures in parenthesis are percentages of total average.

3 Firm size is defined by the number of workers as follows: Small (10 to 49 workers); Medium (50 to 149 workers); Large (150 or more workers).

Table 1: Average Value of Firm Sales by Market and Sector (US$ ‘000s)

Market 2000 2001 2002 2003 2004

ALL EXPORTERS

Foreign 4267 (90%)

4740 (87.7%)

6752 (89%)

8840 (86.1%)

10053 (85.6%)

Local 573 (10%)

718 (12.3%)

8722 (11%)

1414 (13.9%)

1793 (14.4%)

Foreign 7830 (89%)

8952 (88%)

11607 (89%)

14277 (85%)

17144 (85%)

Local 937 (11%)

1230 (12%)

1486 (11%)

2486 (15%)

3093 (15%)

Foreign 793 (99%)

897 (99%)

2394 (97%)

2700 (98%)

2761 (97%)

Local 5 (1%)

5 (1%)

75 (3%)

61 (2%)

91 (3%)

Foreign 519 (44%)

613 (47%)

1349 (65%)

3326 (80%)

3528 (84%)

Local 668 (56%)

681 (53%)

721 (35%)

820 (20%)

700 (16%)

Foreign 685 (100%)

1354 (97.9%)

3043 (98.8%)

4158 (98.4%)

3741 (98.4%)

Local 0 (0%)

29 (2.1%)

37 (1.2%)

68 (1.6%)

65 (1.6%)

TEXTILES

LEATHER

AGRO-PROCESSING

FISHERIES

Note: Figures in parenthesis are percentages of total average.

6

3.2 Export Market Diversification

Standards and technical regulations impact market diversification, particularly in meeting disparate market requirements. This is because there are standards related fixed costs, forcing firms to be cautious on what markets to enter (Chen et al., 2006). Table 3 shows the average share of exports by importing region (Asia, North Africa and Middle East, Sub-Saharan Africa, European Union, Europe non-EU, North America and Latin America and the Caribbean).

The major market for textiles is the European Union. Indeed, the EU was the most important market for leather over the 2000 to 2004 period, accounting for around 50 percent of exports, followed by North America and Asia. And, while the export share to North America has steadily increased, that for North Africa and Middle East, Sub-Saharan Africa and Latin America and Caribbean has typically been small.

The main market for agro products is North Africa and Middle East, followed by Asia, with the European Union and North America accounting for a very small share. Fishery exports are concentrated in Asia followed by the European Union. The share of fisheries exports to the EU grew remarkably from 2000 to 2002, before stabilizing at 25 percent in 2003 and 2004. This may reflect the growing capacity of fisheries firms in Pakistan to comply with stringent EU import requirements. The growing importance of the Asian market may reflect growing demand (like in China), as well as exporters by-passing stringent requirements in Europe and North America (Fontagne et al., 2005). However, these results may reflect the activity of few firms, particularly the large firms and concentration of exports (Tables 4 and 5).

Table 2: Average Value of Firm Sales by Market and Size of Firm (US$ ‘000s)

Market 2000 2001 2002 2003 2004

SMALL(10 to 49 workers)

Foreign 2477 (65.5%)

2737 (66.7%)

2063 (63%)

2249 (60.4%)

2723 (59.9%)

Local 1307 (34.5%)

1364 (33.3%)

1264 (37%)

1478 (39.6%)

1820 (40.1%)

MEDIUM(50 to 149 workers)

Foreign 493 (75.6%)

699 (81.5%)

1912 (89%)

2610 (91.3%)

2780 (91.2%)

Local 159 (24.4%)

159 (18.5%)

237 (11%)

260 (8.7%)

271 (8.8%)

LARGE(150 or more workers)

Foreign 7021 (93%)

7918 (91.8%)

11238 (91%)

14264 (87.7%)

16748 (87.3%)

Local 591 (7%)

798 (8.2%)

1115 (9%)

1995 (12.3%)

2503 (12.7%)

Note: Figures in parenthesis are standard deviations.

4 where n is the number of export markets served by firm and is the firm's share of total sales in market i.si

7

In order to ascertain the extent of export market diversification, computation of a Herfindhal index of market diversification as the sum of squared export share

4of markets served by that firm was made. Table 4 shows the mean diversification indexes for all sectors by year and sector.

It is apparent that Pakistani exports are concentrated in a few markets and there has not been a significant change in

the level of market diversification. Chen et al. (2006) found that standards impact on firms' capacity to serve disparate markets because standards specific fixed costs lead to diseconomies of scale in production and firms facing such challenges will concentrate on a few markets. In addition, the impact is greater on firms that import their inputs from numerous locations, which are produced without the ultimate markets in consideration (Chen et al., 2006). This is corroborated by results in Section six,

Table 3: Mean Share of Exports by Region

Market 2000 2001 2002 2003 2004

TEXTILES Asia 37

(42.6) 22.4

(32.4) 18.5

(30.0) 20.1

(32.1) 19.2

(32.0) N. Africa & Mid. East 0.9

(3.2) 1.2

(3.7) 1.1 (3)

1.1 (3.6)

0.9 (3.3)

Sub Saharan Africa 4.2 (18.4)

0.9 (4.6)

1.8 (6)

1.2 (5.0)

1.0 (4.6)

EU 30.3 (36.1)

39.4 (37.1)

40.8 (37)

39.1 (37.4)

38.3 (36.6)

European (non EU)

0.6 (2.9)

0.7 (3.3)

0.9 (3)

0.6 (2.4)

1.1 (3.5)

USA & Canada

23.7 (33.8)

31.2 (35.8)

33.7 (37)

34.3 (37.2)

35.1 (36.6)

Latin America & Caribbean

1.6 (8.98)

1.1 (7.4)

0.94 (7)

0.9 (6.9)

0.9 (6.7)

LEATHER Asia 33.7

(43.9) 11.9

(24.0) 16.2 (31)

16.4 (31.7)

24.3 (38.5)

N. Africa & Mid. East 2.7 (10.5)

3.6 (12.1)

3.1 (11)

3.1 (11.3)

3.5 (11.0)

Sub-Saharan Africa 0 (0)

0 (0)

0 (0)

0 (0)

0 (0)

EU 46.0 (39.0)

56.3 (34.0)

54.9 (36)

55.1 (37.5)

47.5 (38.1)

European (non EU)

0 (0)

0 (0)

0 (0)

0 (0)

0.4 (2.1)

USA & Canada 21.2 (32.4)

27.3 (34.1)

25.1 (34)

24.8 (34.1)

23.7 (32.9)

Latin America & Caribbean

0 (0)

0 (0)

0 (0)

0 (0)

0 (0)

AGRO-PROCESSING Asia 56.1

(44.7) 27.5

(28.4) 31.3 (36)

28.4 (35.0)

26.3 (34.4)

N. Africa & Mid. East 29.1 (34.9)

53.3 (30.3)

55.5 (36)

51.9 (37.5)

43.3 (39.9)

Sub-Saharan Africa 5.7 (21.7)

2.1 (7.2)

1. 7 (6)

9.2 (25.5)

16.6 (35.4)

EU 2.5 (8.2)

4.6 (11.2)

3.6 (10)

4.1 (9.7)

5.4 (12.4)

European (non EU)

2.7 (12.8)

5 (17.3)

4 (15)

3 (13.4)

2.8 (13.6)

USA & Canada 5.9 (19.2)

7.5 (18.7)

4 (15)

3.5 (13.5)

3.0 (12.6)

Latin America & Caribbean

0 (0)

0 (0)

0 (0)

0 (0)

0 (0)

FISHERIES Asia 83.6

(33.4) 45.3

(36.3) 50.1 (36)

58.1 (36.7)

54.6 (38.2)

N. Africa & Mid. East 0.5 (2.3)

16.1 (34.4)

13.7 (31)

10.4 (26.3)

15.9 (33.3)

Sub-Saharan Africa 0 (0)

0 (0)

0.22 (1)

0.2 (0.6)

0.1 (0.5)

EU 9.5 (28.6)

30.3 (39.9)

31.1 (37)

25.9 (35.8)

24.9 (34.2)

European (non EU)

3.2 (13.8)

9.3 (22.4)

8.13 (21)

5.91 (18)

5 (16.6)

USA & Canada

3.3 (13.8)

7.4 (19.3)

6.7 (16)

4.6 (9.8)

5 (9.3)

Latin America & Caribbean

0 (0)

1.4 (3.8)

1.3 (4)

2.7 (6.5)

0.8 (2.8)

H = si2( (

n

i=1

Note: Figures in parenthesis are standard deviations.

Notes: *, **correlation significant at 5 and 1 % level respectively (1-tailed).

P-values are in parentheses.

Firm size measured by number of employees: Small (up to 49 worker), medium (50 to 149 workers) and large (150+ workers).

The closer the diversification index it is to one, the less diversified.

8

which highlights the impacts of import restrictions into markets that, prior to 2000, were less restricted; such as fisheries and agro food in the European Union and North America. In addition, poor raw material was cited as a major problem in fisheries and agro food firms.

However, as the results reported below will indicate, export market diversification has a significant and positive relationship with exporter performance. More diversified exporters are not only protected from volatility in importing markets, but also benefit from economies of scope. In addition, diversification is positively and significantly associated with firm size reflecting differences in plant competencies. Large firms tend to be more diversified, more capitalized, and innovative and have greater exporting experience, while small firms tend to specialize in few markets because they tend to have less exporting experience and face greater challenges in raising their technical and other competencies. These effects are illustrated in Table 5, where the correlation between firm size and export market diversification are reported for the three size

classes of firms. It is important to recall, that the close the export market diversification index is to one, the less diverse is the firm's export market portfolio.

The foregoing discussion suggests that export diversification is limited among small firms and those with limited technical and supply capacity. Efforts need to be targeted at broadening market options because there are positive returns to diversification. Firms indicated that they planned to diversify exports to Africa, Middle East and Latin America, without losing traditional markets. Most textile firms prioritized increasing exports to the European Union and North America, but a few prioritized Asia with emphasis on the Chinese market. North America was mentioned as a major future market target for leather, followed by the European Union, Latin America and Caribbean and Asia. About half of agro-food exporters attached high priority to European Union as a future market, followed by Asia. A majority of fisheries exporters indicated high priority to EU, North America and Asia as future markets.

Table 4: Mean Export Market Diversification Index by Year and Export Sector

All sectors Textile Leather Agro Fisheries

2000 0.65 (0.27)

0.67 (0.25)

0.7 (0.25)

0.58 (0.27)

0.58 (0.42)

2001 0.68 (0.25)

0.68 (0.25)

0.69 (0.25)

0.6 (0.23)

0.71 (0.3)

2002 0.7 (0.24)

0.69 (0.25)

0.73 (0.24)

0.71 (0.24)

0.7 (0.28)

2003 0.71 (0.24)

0.7 (0.24)

0.75 (0.24)

0.72 (0.23)

0.72 (0.29)

2004 0.71 (0.26)

0.69 (0.25)

0.74 (0.27)

0.72 (0.25)

0.73 (0.27)

Table 5: Correlation between Firm Size and Export Diversification

Firm Size 2000 Index

2001 Index

2002 Index

2003 Index

2004 Index

SMALL 0.132

(0.233)

0.150

(0.171)

0.194*

(0.052)

0.214*

(0.014)

0.215

(0.009)**

MEDIUM -0.078

(0.478)

-0.013

(0.907)

0.062

(0.268)

0.017

(0.863)

0.094

(0.311)

LARGE -0.038

(0.731)

-0.109

(0.322)

-0.210*

(0.017)

-0.187*

(0.026)

-0.254

(0.005)**

n 84 85 101 109 130

4. TRADE CAPACITY

The last section discussed the pattern of export sales and argued that export market diversification is limited across all sectors, reflecting the possible impact of standards specific fixed costs. This section considers the challenges that affect the trading capacity of exporting firms. It highlights the level of awareness amongst the exporters on standards and technical regulations, the institutions that provide such information and the export enhancing factors identified by respondents. It focuses particularly on challenges around supply capacity, standards and compliance and trade facilitation.

4.1 Supply Capacity

The survey elicited information on 18 supply capacity challenges facing exporting firms. Informants were asked to use Likert scale responses (ranging from 0= 'not applicable' to 5 'major problem') to indicate how a particular trade challenge applied to their firms. Mean scores for individual supply capacity issue were obtained (Table 6), although only responses ranging from 1= 'No problem' to 5= 'Major problem' are used in the analysis.

5 Out of a possible count of 2826 responses (18 issues x 157 firms) 230 responses were not applicable.

9

5

Table 6: Mean Scores of Perceptions on Trade Supply Capacity Constraints

Supply capacity Issue Mean Score

World market price 3.15

Profit 3.15

Input quality 2.01

Staff knowledge in SPS 2.01

Working capital 1.95

Labour productivity 1.95

Labour skills 1.92

Production equipment 1.86

On demand deliveries 1.74

Packaging material 1.52

Minimum export quality 1.50

Process controls 1.48

Level of quality 1.45

Packaging equipment/processes 1.42

Consistent quality 1.41

Product specifications 1.38

Product design 1.35

Management 1.35

Exporters across all sectors identified world market price and profit margin as major supply capacity issue. Presumably, this reflects the need to have accurate and timely price information, as well as price stability, to facilitate effective capacity planning. The next highest ranked issues were limited staff knowledge on SPS and TBT regulations, and input problems due to poor raw material quality, while management had the lowest mean score in terms of a challenge.

To fully understand the supply capacity challenges and classify them into subsets, the mean scores were subjected to principal components analysis with varimax rotation. Results produced three principal components with eigenvalues greater than one (Table 7).

Factor loadings on the first principal component (PC1) show the importance of packaging material, packing processes, production equipment, quality of inputs, labor skills, working capital, process controls and ability to produce to specifications, thus suggesting a technological constraint issue. This factor accounted for almost 43 percent of variation across the sample.

Issues loaded on the second principal component (PC2) were output quality, maintaining a given quality and product design reflecting the effect of quality constraint issues. Firms indicated few problems in maintaining existing quality levels, but the need to raise product quality and assurance competencies in all sub-sectors, particularly in the agro-processing and fisheries, where investments have been limited.

10

Table 7: Varimax Rotated Principal Component Matrix of Supply Capacity Challenges Cited by Exporters

Supply Capacity Issue PC1 Technology

PC2 Quality

PC3 Management

Packing material 0.84 0.15 0.01

Packing processes 0.78 0.30 0.06

Production equipment 0.75 0.20 0.16

Quality of inputs 0.62 0.12 0.26

Labor skills 0.58 0.36 0.35

Working capital 0.57 0.07 0.34

Process controls 0.52 0.35 0.46

Product specifications 0.52 0.44 0.32

Output quality 0.19 0.87 0.12

Quality consistency 0.18 0.85 0.23

Product design 0.26 0.70 0.09

Profit 0.23 0.02 0.72

On-time deliveries -0.04 0.36 0.65

Minimum export quantity 0.19 0.10 0.61

Labor productivity 0.48 0.25 0.52

Firm management 0.40 0.23 0.44

% variation 42.80 8.90 7.20

The last principal component (PC3) had large factor loadings on profit, on-time deliveries, minimum export quantity, labor productivity and enterprise management, thus suggesting a management constraint. Most firms cited either no or minor management problems as long as the firm remained small. However, they faced problems when the firm grew into a medium or large enterprise. The latter points to scope for extension/education programmes geared to help small (and medium) firms engage in sustainable growth. In addition, the concern about lean profit margins may be due to depressed world prices and fierce international competition, but also limited labor productivity and plant efficiency.

Because most investments have been initiated and/or supported by entrepreneurs themselves, there is a greater role for the government, private sector associations, or technical assistance programmes. Most exporters identified world market price and profit margin, level of quality, on-time deliveries, ability to produce according to export market product specifications and maintaining a given quality as important areas of intervention. Despite the importance of SPS regulations for agro-food exporters, only about half of the exporters identified staff knowledge in SPS and TBT regulations as important areas for intervention.

4.2 Standards Compliance

Following the same approach as supply capacity issues, respondents were provided with 12 standards and technical regulations challenges and asked to rate each

challenge as a problem to their business on a six-point Likert scale (ranging from 0= 'not applicable' to 5= 'major problem'). Respondents scoring 'not applicable' were

6removed from the analysis . The resulting mean scores are reported in Table 8 and generally suggest standards compliance is not a serious problem.

Because many standards are sector-specific, about 43 percent of responses fell into the 'not applicable' category. For example in textiles, a high proportion of firms cited 'not applicable' for ISO 14000 (62.3%), OHSAS (74.0%) and HACCP (83.1%). Since most textile firms were ISO 9000 certified (see Section 5), 66.2 percent said ISO 9000 was not a problem. Most leather sector firms were ISO 14000 certified, while firms in other sub-sectors said ISO 14000 was not applicable. In the fisheries sector, there were high rates of non-applicability for OHSAS (68.4%), ISO 14000 and ISO 9000 (73.6%). In agro-processing, there were high levels of non-applicability for SA 8000 (73.1%), ISO 14000 (88.5%) and OHSAS (92.3%). As well, about 40 percent of exporters indicated no problem with ISO 9000.

It should be noted that there were too few observations and too little variation among firms not responding 'not applicable' to run principal components analysis. However, results from the remaining cases suggest that standards were not a problem across all issues presented to respondents. The notion that standards were not considered a problem, however, may also suggest that respondents had limited knowledge about those standards and thus inclined to say minor or no problem.

6 Out of a possible count of 1884 responses (12 standards issues x 157 firms) 818 responses were 'not applicable'.

11

Table 8: Mean Scores of Perceptions on Standards Compliance

Compliance Issue Mean Score

SA 8000 1.87

Testing in local labs 1.75

ISO 14000 1.75

OHSAS 1.65

HACCP 1.65

EUREPGAP 1.58

Standards Information 1.51

Testing Overseas 1.45

Packaging information 1.39

Traceability 1.37

ISO 9000 1.36

Testing by local authorities 1.34

Complying with standards, including testing in accredited foreign laboratories, presents greater challenges to small firms and potential exporters. This is because standards related fixed costs may be high and small firms may lack the administrative, technical and other capacities to undertake this in a cost effective manner. Small firms would prefer availability of internationally recognized accredited local laboratories in Pakistan to reduce testing costs in accredited overseas laboratories.

4.3 Trade Policy

As with the supply capacity and standards issues, respondents were provided with 15 trade policy, export support services and trade facilitation challenges and asked to rate the extent to which each issue is a problem for their business on a six point Likert scale. Respondents

7with 'not applicable' were removed from the analysis and are reported in Table 9. Compared to supply challenges, trade policy challenges do not seem to be of such concern (at least in holistic terms), but they are more of a concern than standards.

factors. The analysis produced five principal components with eigenvalues greater than one (see Table 10).

Factor loadings on the first principal component show the importance of export licensing, import licensing and rules of origin, and suggest a licensing problem. This is a major issue for small firms and potential exporters that are inexperienced in exporting, have limited exporting networks and lack the internal organization capacities to apply for and receive the appropriate license. This factor accounted for almost 25 percent of the variation across the sample.

Factor loadings for principal component two are heaviest for corruption in customs, customs formalities in Pakistan and customs procedures in importing country, and suggest a customs procedure challenge. In the textiles and leather sector, the major concerns were that despite efforts at reforming the public sector institutions, red tape in customs remained excessive due to weaknesses in customs administration.This provided an opportunity for customs officials to engage in corrupt practices (see also Das and Pohit, 2006).

Corruption at Pakistan's border post and freight/transport facilities were the two most important problems, while the remaining issues might be classified as ranging from 'minor' to 'no' problems. Das and Pohit (2006) reach the same conclusion in their study of over-land exports from India to Bangladesh, namely key problems included transport delays, inordinate customs procedures and corruption raise the costs of exporting.

Principal components analysis was undertaken to understand fully the trade policy and facilitation challenges faced by firms and to classify these into broad

Tariffs, import quotas, anti-dumping measures and storage were heavily loaded dimensions in the third principal component and suggest a trading restrictions problem. Most firms, textiles in particular, lamented that anti-dumping, countervailing duties and tariffs were affecting their operations.

The fourth principal component can best be characterized as relating to distribution and logistical constraints, with large factor loadings on marketing intelligence and transport/freight/shipping infrastructure. In particular, poor infrastructure was responsible for high transport

7 Out of a possible count of 2355 responses (15 trade policy issues x 157 firms) 123 responses were 'not applicable'.

12

Table 9: Mean Scores of Perceptions on Trade Policy Challenges

Trade policy issue Mean ScoreCorruption 2.93

Freight 2.49Customs 2.30Market intelligence 2.03

Antidumping 2.03Tariffs 1.94Export license 1.73

Import quotas 1.72Pre-shipment inspection 1.71Customs in importing markets 1.67

Storage 1.60Rules of origin 1.48Import license 1.29

Export insurance 1.29Export license 1.26

costs and delays exporters had to incur. Lack of market intelligence on overseas markets, inadequate promotion in export markets and difficulties in identifying overseas distributors and lack of effective communication heightened logistical problems in particular for small firms.

Issues that loaded onto the last principal component were access to export financing and export insurance, suggesting credit constraints. While this issue was least important to exporters, it perhaps did affect small and inexperienced exporters.

It should be borne in mind that these constraints are also sector specific. For example, contrary to fisheries, a majority of firms in the agro-processing, textiles and leather sectors were constrained by local customs procedures, infrastructure, freight/shipping and high transport costs and delays. Import and export licensing were 'not applicable' in textiles (59.7%) and leather (62.9%), while 73.1 percent of agro-food processors said rules of origin were 'not a problem'. In agro-processing, 58 percent of processors did not find problems with storage and the cool chain hygiene, but 16 percent had major problems. About 62 percent of agro-processors were very satisfied with customs formalities in local and importing markets, and pre-shipment inspections.

Not surprisingly, import licensing was 'not applicable' to 58 percent of agro-processors. In addition, obtaining export licensing was 'no problem' for 31 percent of agro-processors and 'not applicable' for 62 percent. About 58 percent of fisheries firms were not concerned about 'importing licenses' because they relied on local inputs while 42 percent said export licensing was not a problem. It is surprising, however, that 37 percent of fisheries firms regarded export licensing as 'not applicable'. There are two possible interpretations of these results. Exporters in

agro-processing and fisheries are either by-passing markets with stringent import requirements (such as the EU and North American markets) or that regulation and enforcement in these sectors are poor.

4.4 Intervention Measures

Appendixes IV to VI provide a breakdown of the critical areas of intervention by sub-sector. Appendix IV shows that the most urgent supply capacity interventions in both the textiles and leather sectors were profit, price and product quality. In the agro-processing sector the most critical needed interventions were technology, product quality and on-time deliveries. In the fisheries sector, the priorities were consistency of quality, price and technology. Appendix V focuses on critical intervention areas related to standards. This again shows that standards are sector specific. In the textiles sector, firms wanted more help with ISO 9000 because it is required by most customers, while EUREPGAP, traceability and OHSAS were not needed. The leather sector urgently requires assistance with information on standards, making local and foreign testing easier, as well as ISO 9000 certification.

Agro-processors and fisheries firms were more concerned about HACCP certification, information on standards and product testing. Surprisingly, traceability was not a top priority, suggesting that less exacting markets were being targeted. In Appendix VI, textile firms were more concerned about corruption at customs and transport and infrastructure. In the leather sector, the main trade issues deserving immediate attention were corruption at customs, complicated customs procedures in Pakistan, lack of export finance and market information. Agro-processors and fisheries firms were more concerned about transport facilities, market information and export finance.

13

Table 10: Varimax Rotated Principal Component Matrix of Trade Policy Challenges Cited by Exporters

Policy Issue PC1 Licensing

PC2 Customs

PC3 Restrictions

PC4 Logistics

PC5 Credit

Export license 0.96 0.03 0.06 0.03 0.03

Import license 0.91 0.01 0.11 0.0 0.09Rules of origin 0.43 0.33 0.33 0.26 0.11Corruption in local customs 0.02 0.84 0.10 0.18 0.01

Local customs procedures 0.11 0.78 0.01 0.23 0.15Foreign customs procedures 0.10 0.53 0.18 0.33 0.44Tariffs 0.07 0.02 0.78 0.17 0.07

Import quotas 0.30 0.09 0.67 0.14 0.04Antidumping measures 0.03 0.21 0.54 0.02 0.36Storage 0.15 0.15 0.51 0.24 0.36

Market Intelligence 0.21 0.06 0.17 0.78 0.23Freight/shipping/transport 0.14 0.28 0.18 0.76 0.07Export Financing 0.09 0.19 0.13 0.02 0.74Export Insurance 0.41 0.12 0.08 0.19 0.68% variance 24.69 15.08 10.48 8.96 7.14

5. STANDARDS AND CONFORMITY ASSESSMENT

Standards and technical regulations are intended to ensure safety and quality of products and processes. Firms have to demonstrate compliance with standards. However, standardization and conformity assessment, particularly based on the very latest developments, can impose considerable demands on the infrastructural, technical and administrative capacity of developing country exporters. This section discusses the issues related to standards compliance focusing on certification, product testing and inspection across exporting firms.

5.1 Investment in standards technologies

Firms make conscious self-selection decisions to invest in production equipment and process technologies in order to comply with market requirements. Table 11 shows that investments were predominantly among large exporting firms. However, the trend does not distinguish between new investors and those that had continued investing from previous years.

5.2 Certification

Certification status varies between firms and within sectors by firm size, technological capacity and export market orientation. In order to determine the incentives to certification, firms were asked to rate the reasons for certification on a six-point Likert scale ranging from

8'don't know' (0) to 'very high importance' (5) . Using

ordered mean scores, the most important factors for certification across all standards in the textiles and leather sectors were to meet international market requirements, improving sales and firm reputation. In agro-processing, certification is largely adopted to enhance reputation of the firm and product quality, while in the fisheries sector certification is to improve firm reputation and access to better markets.

Table 12 provides the distribution of firms by certification status across a range of standards. Certification is either sector specific (for example HACCP) or universal (for example ISO 9000). In the textiles sector, about 62 percent of firms are certified to ISO 9000, followed by ISO 14000 at 15.2 percent; further, 22 and 19 percent of textile firms were planning to implement ISO 9000 and ISO 14000, respectively.

Because of the reason that implementation of management systems is closely linked to industry characteristics, one would expect certification to HACCP and application of Traceability systems to be high in agro-processing and fisheries firms due to the high food safety risks involved. However, the low level of certification in this respect suggests limited industry incentives for adoption in general and quite possibly firms' lack of capacity to adopt HAACP and Traceability in a cost effective manner.

14

*Figures in parenthesis are percentages of firms in the sector.

8Responses with 'don't know' were removed from the analysis.

Table 11: Number of Firms that Invested in Technologies by Sector and SizeFirm Size 2002 2003 2004

TEXTILE Small 1

(1.3%)

0 (0.0%)

1 (1.3%)

Medium 13 (16.9%)

10.0 (13.0%)

11 (14.3%)

Large 52 (67.5%)

39 (50.6%)

50 (64.9%)

Total 66 (85.7%)

49 (63.6%)

62 (80.5%)

LEATHER Small 0

(0%)

0 (0%)

0 (0%)

Medium 11

(31.4%)

9

(25.7%)

8

(22.9%)

Large 11 (31.4%)

10.0 (28.6%)

11 (31.4%)

Total 22

(62.9%)

19 (54.3%)

19 (54.3%)

AGRO-PROCESSINGSmall 3

(11.5%)

2.0 (1.7%)

1 (4.0%)

Medium 9 (34.6%)

7 (26.9%)

9 (36.0%)

Large 5 (19.2%)

5 (19.2%)

5 (20.0%)

Total 17 (63.0%)

14 (51.9%)

15 (55.6%)

FISHERIES Small

1 (5.3%)

2 (10.5%)

3 (15.8%)

Medium

4 (21.1%)

6 (31.6)

6 (31.6%)

Large

0 (0.0%)

2 (10.5%)

2 (10.5%)

Total

5

(26.3%)

10

(52.6%)

11

(57.9%)

is.

Table 13 shows the pattern of certification by firm size suggesting that certification is correlated with firm size. In order to probe drawbacks to certification, firms were asked to rate the reasons for not being certified on a six point Likert scale ranging from 'don't know' (0) to 'very

9high importance' (5) . Based on the ordered means, cost of certification was the key deterrent to certification systems in Pakistan. In the textiles sector, most firms did not report major problems in becoming certified, as is clear from the fact that the highest factor was the cost of system upgrade and establishment (mean score 2.4), followed by cost of consultancy (mean score 2.3). Most firms in the leather sector responded to 'don't know'. In agro-processing, cost and system upgrades were the key factors. In the fisheries sector, consultancy costs and set up costs were key impediments.

5.3 Product testing

The level of product testing is affected by firm characteristics, regulatory pressures, the nature of the products, level of export orientation and customer requirements. Firms were asked to indicate three main products and the export markets (specifying the regions and destination countries within those regions) and the associated product testing in each. Table 14 shows the average proportion of firms that tested their products with Column 2 indicating the aggregate percentage, while Columns 3 to 6 give a breakdown by testing mechanism.

From Column 1, it is apparent that an average of 29.4 percent of firms tested their products, with the smallest

10percent in fisheries . One would expect testing to be correlated with the level of product risk such that high risk products (for example food and fisheries products) should have a higher proportion of firms testing relative to others, such as leather and textiles. However, it is surprising that, across all of the products, fisheries had the lowest proportion of firms reporting testing their products. This suggests that fisheries have limited in-house testing capabilities or financial capacity to use external facilities such as national/industry or foreign laboratories. It may also mean that fisheries might have access to less regulated markets, where the intensity and frequency of inspection is lax, as suggested in Section 3.2.

To compensate for limited local testing facilities, firms use multiple testing services as indicated in Columns 2 to Column 6. Averaging across the three products shows that 20 percent of firms used their customers' laboratory facilities, 40 percent used their own laboratories, while 45 percent used local laboratories. Close to 23 percent of firms used accredited regional and foreign laboratories in Singapore, Hong Kong, or Germany due to lack of such facilities in Pakistan, often at high cost. For example, textile and leather firms said the average cost of national

11laboratories was about 50 percent of the direct cost of foreign laboratories, excluding transportation and associated costs.

9 Responses with 'don't know' were removed from the analysis.10 Note that in the survey, firms may not have indicated the products according to the level of importance.11The average cost of testing in national labs was highest in the leather sector followed by textiles, agro-food and fisheries.

15

Table 12: Proportion of Firms that are Certified to Standards

Sector StatusISO9000

ISO14000

HACCPSA

8000OHSAS EUREPGAP Traceability Others

% % % % % % % %

Textile Certified 62.0 15.2 2.5 7.6 1.3 1.3 5.1 10.1

Planning 21.5 19.0 0.0 16.5 2.5 0.0 3.8 5.1

Leather Certified 57.1 8.6 0.0 5.7 2.9 0.0 14.3 5.7

Planning 14.3 8.6 0.0 8.6 0.0 0.0 0.0 0.0

Agro-processing Certified 30.8 3.8 7.7 3.8 7.7 19.2 3.8 0.0

Planning 26.9 0.0 26.9 0.0 0.0 0.0 7.7 0.0

Fisheries Certified 5.3 21.1 21.1 10.5 10.5 10.5 5.3 5.3

Planning 31.6 78.9 15.8 0.0 0.0 0.0 10.5 0.0

Table 13: Proportion of Firms Certified by Firm Size

StatusISO9000

ISO14000

HACCPSA

8000OHSAS EUREPGAP Traceability Others

% % % % % % % %

SMALL Certified 25.0 0.0 4.2 0.0 0.0 0.0 0.0 0.0

Being developed 16.7 0.0 4.2 0.0 0.0 0.0 0.0 0.0

MEDIUM

Certified 37.5 5.0 12.5 0.0 0.0 0.0 0.0 0.0

Being developed 27.5 17.5 20.0 15.0 12.5 12.5 12.5 0.0

LARGE Certified 60.6 12.1 6.1 6.1 1.5 0.0 4.5 0.0

Being developed 21.2 21.2 6.1 15.2 1.5 4.5 1.5 0.0

For most firms, foreign testing involved larger transportation and testing costs and delays in test results, but they cited the pay-off from product quality assurance and value of exports to be significant. The least important benefit from testing and certification to firms was

12meeting domestic requirements . In general, firms found that customers who demanded testing were patient in cases of test results delays because they understood the process. Respondents were provided with 15 disincentives to testing to rate on a six point Likert scale ranging from 'not applicable' (0) to 'major problem' (5). Respondents with 'not applicable' were removed from the

13analysis . Table 15 reports the disincentives to testing by sector.

In general, the most important deterrents to testing were the high costs of testing, followed by high transport costs and the high opportunity costs of delays in obtaining results. The least important deterrent was that the local demand for testing was low. At a sub-sector level, leather and textiles firms cited high costs of testing, transportation and delays as the most important deterrents. However, in the agro-processing sector, the most important deterrent was lack of awareness of benefits of testing and surprisingly lack of foreign demand for testing. In the fisheries sector, lack of foreign

demand was the key deterrent followed by lack of enterprise competence/experience, while lack of local accredited laboratories was the least deterrent. This gives credence to the above discussion that regulation in agro-processing and the fisheries sector appears lax or the firms are by-passing markets with stringent food safety requirements.

In addition, deterrents are negatively correlated with firm size (Table 16). Small firms are affected more by lack of local testing facilities. Test fees and the costs of delays as a proportion of exports can be significantly large for small firms relative to large firms. Nevertheless, all the producers would welcome testing in the local laboratories to reduce time and costs. Thus, Pakistan needs to implement comprehensive measures that will facilitate the development of internationally recognized testing and certification facilities to serve the exporting sector.

5.4 Cost of Certification and Inspection

Lack of certification remains a barrier to export performance despite the fact that the average cost of certification has fallen over time due to competition in the provision of certification services. For example, in the textiles sector, the cost of initial ISO 9000 certification has dropped from US$ 8300 in 1990 to US$ 2120 in 2004;

16

12 Firms were asked to state the potential benefits of testing on a six point Likert scale ranging from 0=don't know to 5=very high importance. The most important benefit of certification and testing was to meet foreign market requirements (mean score 4.2), followed by accessing remunerative markets (3.8), accessing remunerative supply chains (3.7), reducing product recall (3.4), others (3.1) and meeting domestic requirements (2.6).

13 Out of a possible count of 2355 responses (15 trade policy issues x 157 firms) 675 responses were 'not applicable'.

Table 14: Proportion of Firms of Reporting Testing of Products by Testing Mechanism Used

Sector Tested Customer Laboratory

Own Laboratory

Local Laboratory

Foreign

Accredited Laboratory

Product 1

% % % % %

Textile 26.6 25.3 60.8 51.9 36.7

Leather 42.9 31.4 37.1 42.9 42.9

Agro 26.9 23.1 34.6 61.5 23.1

Fisheries 21.1 21.1 57.9 84.2 15.8

Textile 35.4 22.8 54.4 43.0 34.2

Leather 51.4 25.7 31.4 40.0 40.0

Agro 38.5 23.1 30.8 38.5 15.4

Fisheries 31.6 15.8 52.6 73.7 10.5

Textile 65.8 15.2 29.1 20.3 17.7

Leather 74.3 11.4 14.3 28.6 20.0

Agro 76.9 11.5 15.4 15.4 7.7

Fisheries 52.6 10.5 36.8 57.9 10.5

Product 2

Product 3

and for SA 8000 from US$ 8300 in 2001 to US$ 3720 in 2005. Likewise in the leather sector, ISO 9000 certification costs have declined from US$ 8330 in 1997 to US$ 5900 in 2004. In the agro-processing and fisheries sectors, a series of historical data on certification costs is not available. In 2001, however, the costs of

implementing ISO 9000 averaged US$ 3,670, while the cost of applying HACCP in 2004 was US$ 2210. In the fisheries sector, ISO 9000 certification costs averaged US$ 2500 in 2002, while HACCP implementation costs were US$2500 in 2003.

Note: To allow for comparison across firm size, mean scores are not ordered.

17

Note: To allow for comparison across firm size, mean scores are not ordered.

Table 15: Mean Scores of Disincentives to Product Testing by Sector

Disincentive for testing

Textiles Leather Agro Fisheries

Mean score

Mean score

Mean score

Mean score

High transportation costs 1.83 2.17 2.11 1.73

Testing fees are too high 1.91 2.08 2.05 1.75

Delays in obtaining test results 1.84 2.04 1.88 1.75

No management commitment 1.53 1.38 1.71 1.83

No local internationally recognized laboratories

1.77 2.09 1.76 1.40

No regional internationally recognized laboratories

1.54 1.35 1.88 1.00

Lack of information on market requirements

1.51 1.79 2.00 1.83

Lack of awareness of benefits 1.47 1.48 2.16 1.58

Lack of local demand 1.34 1.63 1.63 1.00

Lack of foreign demand 1.60 1.83 2.11 2.18

Lack of enterprise competence/experience 1.41 1.63 1.95 1.83

Low commercial return 1.69 2.00 2.05 1.58

Impracticalities of testing 1.34 1.17 1.83 1.25

Others 1.04 1.00 1.40 1.00

Table 16: Means Scores of Disincentives to Product Testing by Firm Size

Disincentive for testing SMALL MEDIUM LARGE

Mean score Mean score Mean score

High transportation costs 2.07 1.89 1.93

Testing fees are too high 1.88 1.78 2.06

Delays in obtaining test results 2.33 1.72 1.86

No management commitment 1.73 1.57 1.52

No local internationally recognized laboratories 1.71 1.54 1.95

No regional internationally recognized laboratories 1.20 1.38 1.63

Lack of information on market requirements 1.64 1.62 1.71

Lack of awareness of benefits 1.69 1.57 1.58

Lack of local demand 1.13 1.32 1.55

Lack of foreign demand 1.80 1.76 1.79

Lack of enterprise competence/experience 2.13 1.49 1.50

Low commercial return 1.80 1.74 1.83

Impracticalities of testing 1.33 1.43 1.36

Others 1.00 1.14 1.05

The survey asked firms to state the total costs of upgrades and inspection, but few firms answered this question. To get a proxy for costs of certification and inspection, another question in which firms were asked to state the costs of certification and inspection as a proportion of total annual sales of the three main products they

exported was utilized (see Table 17). The cost of both certification and inspection are largely within the 1 to 3 percent of annual sales of that product. However, this analysis does not take into account firm size; these costs are likely to be significant for small firms relative to the value of their output/exports.

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Table 17: Proportion of Firms Indicating Costs of Certification and Inspection

Sector CERTIFICATION COSTS INSPECTION COSTS

1 to 3% of total annual sales

Product1 Product2 Product3 Produc1 Product2 Product3

Textiles 21.5 20.3 12.7 46.8 38.0 17.7

Leather 28.6 28.6 17.1 40.0 45.7 20.0

Agro 34.6 26.9 15.4 34.6 30.8 15.4

Fisheries 21.1 21.1 21.1 36.8 31.6 26.3

4 to 5 % of total annual sales

Textiles 1.3 1.3 0.0 1.3 1.3 0.0

Leather 2.9 2.9 2.9 2.9 2.9 2.9

Agro 0.0 0.0 0.0 0.0 0.0 0.0

Fisheries 5.3 5.3 5.3 0.0 0.0 0.0

6 to 10% of total annual sales

Textiles 1.3 1.3 0.0 6.3 6.3 2.5

Leather 0.0 0.0 0.0 0.0 0.0 0.0

Agro 0.0 0.0 0.0 0.0 0.0 0.0

Fisheries 0.0 0.0 0.0 0.0 0.0 0.0

11 to 15% of total annual sales

Textiles 0.0 1.3 0.0 1.3 1.3 0.0

Leather 0.0 0.0 0.0 0.0 0.0 0.0

Agro 0.0 0.0 0.0 3.8 3.8 0.0

Fisheries 0.0 0.0 0.0 0.0 0.0 0.0

16 to 20% of total annual sales

Textiles 1.3 0.0 0.0 0.0 0.0 0.0

Leather 0.0 0.0 0.0 11.4 5.7 0.0

Agro 0.0 0.0 0.0 0.0 0.0 0.0

Fisheries 0.0 0.0 0.0 0.0 0.0 0.0

6. TRADE RELATED ISSUES AND INFORMATION SERVICES

Recent studies have expressed concerns over the potentially negative impact of escalating trade reforms on developing country exports in food safety and ethical standards in particular those countries with limited scientific and administrative capacity. This section assesses the role and perceived impact of trade related agreements and information on business performance.

6.1 Awareness of Trade agreements

The survey elicited information to gauge the overall awareness and understanding of firms across a range of WTO trade agreements and their impression on the working relationship between government and other players in export markets. Using a five-point Likert scale ranging from 'fully unaware' (1) to 'fully aware' (5), respondents were asked to indicate the level of their knowledge on various elements of the Uruguay Round Agreement and the WTO (Table 18).

In general, awareness of trade agreements ranges from average in the textiles and leather sectors to very poor in fisheries. There is no significant difference in the level of awareness between textile and leather firms, save with respect to the textile agreement and anti-dumping, where textile firms know significantly more than firms in the leather sector. However, the awareness of specific trade issues is sector specific, reflecting products and standards that apply in those sectors. Firms in the textiles and

leather sectors are largely unaware of the Agreement on Agriculture, SPS, subsidies and countervailing measures and safeguard actions. There is a general lack of awareness about all the WTO agreements in the agro-processing and fisheries sectors.

Appendix II suggests that the proportion of fisheries firms that are aware and fully aware of trade issues averages 8.1 percent across all agreements. This is significantly low compared to 33.7 percent in the textiles sector, 31 percent in the leather sector and 29 percent in the agro-processing sector. This limited knowledge in the fisheries sector could be due to the fact that these firms generally rely on the initiatives of their associations in sourcing market information and resolving their problems. It also gives credence to the finding that technological investments are still limited in agro-processing and fisheries. This calls for greater attention to raise awareness among these firms.

6.2 Impact of WTO Agreements on Business

The survey also elicited information on plant managers' perceptions of the potential business impacts of trade agreements. Using a six-point Likert scale ranging from 'Don't know' (0) to 'Very positive' (5), respondents were asked to state how they perceived the impact of trade agreements across 12 issues. Firms that indicated 'don't know' were removed from the analysis and results in Table 19.

Notes: To allow for comparison across sectors, mean scores are not ordered.*, **, *** significantly different at 10, 5 and 1% level based on a two-sized Wilcoxon signed rank test.

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Table 18: Level of Awareness about Trade Agreements

Element Textile Leather Agro-Processing Fisheries

Mean Score -stat Mean Score -stat

TBT 3.1 2.91 1.195 2.38 1.65 1.613

SPS 2.7 2.57 0.418 2.50 1.76 1.594

Agriculture 2.5 2.21 1.309 2.69** 1.50** 2.116

Textiles 3.5*** 2.51*** 2.833 1.92* 1.40* 1.769

Rules of origin 3.0 2.83 1.409 2.44 1.75 1.542

Pre-ShipmentInspection

3.1 2.91 1.619 2.84 2.33 1.229

Subsidies 2.8 2.69 0.443 2.46* 1.59* 1.853

Safeguards 2.8 2.89 0.057 2.40* 1.65* 1.910

Antidumping 3.1** 2.74** 2.090 2.58 2.11 0.597

Customs valuation 3.0 3.06 0.540 2.69** 2.00** 2.405

Investment measures

2.7 2.74 -0.101 2.50* 1.94* 1.756

Property rights 2.7 2.80 -0.322 2.58** 1.72** 2.329

zz

Note: To allow for comparison across sectors, mean scores are not ordered. Statistical significance tests not performed for the agro and fisheries due to limited responses.*Significantly different from each other at 10% level based on a two-sided Wilcoxon signed rank test

The impression of firms on the impact of the WTO trade agreements varied. Firms in the textiles and leather sectors were not concerned that WTO agreements could harm their businesses, perhaps because they had benefited from the removal of quota regime. As Appendix III shows, an average of 41.1 percent of textile firms felt 'positive' to 'very positive' about the impact of trade agreements on their businesses, compared to 39.8 percent of agro-processing firms and 3.3 percent of firms in the fisheries sector. In addition, only 50 percent of agro-processors and 28 percent of fisheries firms were able to assess the potential effects of trade agreements on their business, clearly showing a lack of knowledge on the issues, even though the mean scores in Table 19 above and distribution of responses in Appendix III indicate less concern about trade agreements. Indeed, this may reflect

lack of understanding rather than real analysis of the likely impacts.

6.3 Dialogue with GovernmentRespondents were asked to rate the level of dialogue or consultation on trade related issues between themselves, or their associations, and government using a six-point Likert scale 'Don't know' (0) to Very strong dialogue' (5). Firms that indicated 'don't know' were removed from the analysis. From the results in Table 20, it is apparent that there is very little dialogue between the government and firms or their associations, though the level of dialogue is better in the textiles and leather sectors, especially related to the textiles agreement and rules of origin. There was virtually no variation in the level of dialogue in the fisheries sector by trade issue.

Note: To allow for comparison across sectors, mean scores are not ordered. Statistical significance tests not performed for the agro and fisheries due to limited responses.*Significantly different from each other at 10% level based on a two-sided Wilcoxon signed rank test

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Table 19: Perceived Impact of WTO Agreements on Business

Trade Issue Textile Leather Agro Fisheries Mean Score z-stat Mean Score

TBT 3.14 3.19 -0.925 3.8 2.50 SPS 3.30 3.12 -0.160 3.8 2.50 Agriculture 3.31* 2.86* 1.987 2.8 3.00

Textiles 3.28 2.86 1.194 3.5 3.00 Rules of origin 3.28 3.20 0.781 3.5 3.00 Pre-ship inspection 3.34 3.15 0.246 3.6 3.40

Subsidies 3.19 2.83 0.937 3.4 3.00 Safeguards 3.27 2.94 0.324 3.8 3.25 Antidumping 2.93 2.75 0.128 3.0 3.00

Customs valuation 2.96 2.95 -0.575 3.1 3.00 Trade invest measures 3.19 3.06 0.000 3.6 3.00 Intellectual Property rights 3.16 3.06 0.000 3.5 3.00

Table 20: Dialogue between Firms/Association and Government on Trade Issues

Trade Issue Textile Leather Agro-food Fisheries Mean Score Mean Score

TBT 1.66 1.93 1.44 1.69

Customs Valuation 1.63 2.11 1.72 1.69 TRIMS 1.48 1.93 1.67 1.69 TRIPS 1.49 1.93 1.67 1.62

SPS 1.54 1.81 1.39 1.69 Agriculture 1.40 1.50 1.65 1.62 Textiles and Clothing 1.82 1.36 1.18 1.62

Rules of Origin 1.70 1.70 1.53 1.69 Pre-Shipment Inspection 1.66 2.00 1.71 1.69 Subsidies 1.58 1.96 1.61 1.69

Safeguards 1.55 1.81 1.56 1.69 Antidumping 1.68 1.50 1.89 1.69 N 65 25 15 13

7. EXPORT PERFORMANCE OF FIRMS

This section considers the linkage between the participation of firms in export markets and their performance, as measured by the change in value of firm sales between 2000 and 2004. Interest in the change in performance stems from previous research, which shows that faster growing firms differ from slower growing firms in many dimensions (Baldwin and Gu, 2003). Moreover, the level of performance is not necessarily of primary importance when concerned with economic development, rather primary focus is often placed on factors which foster positive change. As such, focus was made here on the change in firm sales.

A change in performance results from a number of key factors including capital accumulation, adoption of new technologies and changes in the organization of a firm. During the five years covered under the survey, there were major changes in the trading landscape in particular increasing stringency of standards in importing markets that potentially impacted on firm exports. To this end, the empirical model used to illustrate export firm performance should reflect these various dimensions.

Firm structure effects are captured through the nature of firm ownership, firm size, and age. Nature of firm ownership is represented using a dummy variable (LOCAL PRIVATE) which assumes a value of one if the firm is a private, locally owned firm, and zero otherwise. Firm size is captured by two dummy variables, one for medium sized firms MEDIUM and another for large firms (LARGE), with small firms being the omitted

14dummy variable , while firm age (FIRM_AGE) is captured by the firm's age in years.

To control for regional performance effects, SINDH is used to represent industrial region, and assumed a value of one if the firm is located in Sindh and Punjab regions and zero otherwise. The variable INVEST reflects investment in standards related technologies. The impact of access to information from public/quasi public and private agents is captured through AWARENESS, which is calculated as a mean score of trade and policy issues

15that were provided to firm managers . The role of trade related challenges is measured through supply capacity (SUPCAP), standards (STANDS) and trade policy and facilitation (TPOLICY) by a six point Likert scale with

16mean scores used in the regression . The sector in which a firm operates (TEXTILES, LEATHER [the omitted variable for this group], AGRO, FISH) is also included. In Model 2, agro- processing and fisheries are aggregated (AGFISH).

Learning effects are accounted for by inclusion of a variable reflecting whether the firm exported continuously from 2000 to 2004 (PERM_EXP). In addition, firms that started exporting at the start of 2000 are compared to those that started exporting at some point after 2000 (LATE_ENTRY) to determine if learning effects are concentrated in firms that entered exporting recently (as in Alvarez and Lopez 2005). The impact of market diversification is measured by a market diversification index (INDEX) for each firm, as computed in Section 3.2. Four markets are included to capture role of market requirements, these are NORTH AMERICA (the omitted variable), AFRICA, EU and ASIA. Lastly, different types of standards are used to test if performance is sensitive to specific standards.

Two models are estimated. In the first model, factors included are firm characteristics, the diversification index, trade challenges and the four sectors. In the second model, additional regressors for four markets and an aggregation of fisheries and agro-food firms (AGFISH) are included. Results are presented in Table 21.

Analysis showed that not controlling for the regressors included in Model 2 could generate misleading results. Using small firms as a reference, larger firms achieved significantly superior export performance (in Model 2), which reflects the differences in plant competences and growth strategies firms and quite possibly scale-effects related to size in 2000. Relative to small firms, large firms have greater access to finance which enables them to invest more in skills-training and innovative activities related to products, processes and organizational administration that raise productivity and bring efficiency gains.

Locally-owned, private firms registered inferior performance compared to foreign owned and other firms. This effect has been measured previously in the literature and attributed to differential access to information and technology and thus productivity (Baldwin and Gu, 2003). For local firms, the learning curve for exporting can be steep, involving considerable experimentation, the results of which can take time to come to fruition (Katsikeas and Morgan, 1993). This gives credence to the finding that foreign-controlled firms have a greater propensity to expand into and remain active in export markets than their domestically owned counterparts (Baldwin and Gu, 2003).

14 Note employees are used to group firms into three sizes: small (up to 49 workers); Medium (50 to 149 workers); Large (more than 150 workers). 15 The survey asked respondents to state the level of access to and awareness of 12 trade policy and technical issues through a Likert scale ranging from 1= 'fully unaware' to 5= 'fully aware'.

16 Respondents were asked to state the extent to which each trade issue was a problem on a six point Likert scale from 0= 'not applicable' to 5 'major problem'.

21

† is Reference category T -statistics in parenthesisStandard errors are robust to heteroskedacity but not reported in the table*,**, *** significant at the 10%, 5% and 1% levels

22

Table 21: Ordinary Least Squares: Dependent Variable is Value of Sales 2000 to 2004

VariableModel 1 Model 2

Estimate Estimate MEDIUM -775.969

(-0.49)191.1206

(0.14)

LARGE 2922.379 (1.3)

4110.432** (2.14)

LOCAL PRIVATE -7074.86* (-2.1)

-6896.65** (-2.48)

FIRM_AGE -31.9401(-0.59)

-73.8655* (-1.76)

SINDH -2925.86(-1.33)

-2917.91 (-1.46)

INVEST 4401.791*** (2.71)

2994.303* (1.71)

AWARENESS 1017.069 (1.46)

952.8201 (1.51)

PERM EXP 8425.056*** (2.65)

10918.97** (2.62)

LATE_ENTRY 14908.4*** (4.07)

17107.56*** (3.7)

SUPCAP -6844.84* (-1.82)

-7886.32** (-1.99)

STANDS 4866.863 (0.92)

6923.837 (1.28)

TPOLICY 3771.474 (1.58)

2969.605 (1.56)

TEXTILE 2845.012 (1.17)

-

AGRO -1923.02(-0.8)

-

-62.5958(-0.02)

-

AGFISH -3464.78** (-1.83)

INDEX -7620.81*** (-2.77)

-5094.69*** (-2.06)

AFRICA - -140.008 (-0.05)

- -357.457 (-0.16)

ASIA - 5553.084** (1.93)

HACCP - 3084.335 (1.31)

ISO 9000 - 1279.4 (0.69)

SA 8000 - 12691.55** (2.55)

ISO 14000 - 1607.754 (0.37)

CONSTANT 713.4513 (0.11)

-2423.41 (-0.41)

0.403 0.492

F-statistic 3.1*** 3.62***

111 111

-

EU

FISH

2R

N

The positive and significant coefficient INVEST shows that firms that make a conscious self-selection decision to invest in productivity and quality-raising technology to meet market requirements achieve greater export performance (as in Alvez and Lopez 2005). The effective use of relevant, accurate and timely trade information is an important way of responding to exporting problems (Katsikea and Morgan, 1993). In Model 2 the INVEST coefficient drops due to the inclusion of AGFISH. The coefficient AWARENESS was positive though statistically insignificant; suggesting that awareness of trading issues may not yield significant gains, but is critical to exporting strategy.

There is significant learning by exporting effects as reflected by the positive coefficient of PERM_EXP relative to inconsistent exporters. In Model 2, the coefficient PERM_EXP rises substantially with the inclusion of AGFISH. There are even greater gains to late entrants perhaps suggesting that late entrants are more successful at acquiring or gaining from new productivity enhancing technologies, or market information that is associated with exporting than longstanding exporters (Baldwin and Gu, 2003; Alvez and Lopez 2005). Firms that are more diversified (INDEX) in terms of markets, register greater export performance, suggesting gains from economies of scope by spreading and managing risk and changes in organization of production to cater for different market exigencies.

Of the specific investments included in Model 2, only SA 8000 certification is positive and significant, though the others have the expected signs. This result deserves more explanation. From the survey, leather and textiles firms are generally aware of ISO 9000 and ISO 14000, and indeed over 50 percent of firms indicated that they

are required by their buyers to implement ISO 9000 and ISO 14000 but not to implement SA 8000 and OHSAS.

This suggests that there may be gains to be had from voluntary implementation of standards such as SA 8000 and OHSAS. In the fisheries and agro-processing sectors, more than 50 percent of firms said that HACCP is required and ISO 9000 is essential, but a majority of them were unaware of OHSAS and SA 8000. The level of EUREPGAP awareness and certification in the agro-

17processing sector was low .

The implications of the above are that, when standards are mandatory, as in the case of ISO 14000, ISO 9000 and HACCP, firm entry into export markets requires initial investment. The reward to firms comes through the ability to export, improve product quality, raise firm reputation and stay in the market, but not necessarily acceleration in export performance at least in the short run. Presumably, other firms in the market are required to have implemented these same standards. In contrast, firms that consciously invest in voluntary standards are rewarded with enhanced export performance through product differentiation and increased demand for products. This is the case with SA 8000 in the textiles and leather sectors. This could also reflect that benefits from application of standards are sector specific.

Firms were sensitive to the requirements of specific markets over the period 2000 to 2004 as reflected by the negative coefficient on EU and Africa and the significant increase in exports to Asia. The coefficient AGFISH is negative and significant, which gives credence to the deleterious effects of EU market requirements on agro-processing and fish exports as has happened in Kenya (Henson and Mitullah, 2004; Jaffee and Henson, 2005), and indeed more recently in Pakistan.

17 The share of agro-food exports to European countries is very low (11 percent in 2004 according to the survey). This could be due to the unawareness of the agro-food stakeholders about EUREPGAP certification.

23

8. CONCLUSIONS AND RECOMMENDATIONS

Multilateral trade reforms hold the promise of economic growth for both developed and developing countries, but many developing countries including Pakistan still lack capacity to take full advantage of the opportunities. In particular, trading standards set by importing markets remain a key barrier. There is need for substantive structural and institutional reforms to alleviate supply side constraints. These should be incorporated into the Medium Term Development Framework 2005-2010 recently approved by the government of Pakistan. This concluding section discusses the survey findings and their policy implications.

8.1 Creating a Conducive Business Environment

A key concern for firms was the impact of lean profits on trading capacity. While profits are a complex function of firm, trading and macro economic factors, a good business environment is important for increased investment and industrial and export activity. In the recent past, government has tried to deal with these constraints, but more effort should go towards reforming tax administration, relaxing duty and tax rates, and addressing corruption, red tape and energy (electricity) prices. Specifically:

Recent efforts at CBR restructuring are commendable and should continue so that there is increased contact between CBR and the businessmen.

Optimal, predictable and transparent regulatory reforms particularly in labor, health and environment will help boost investor confidence.

Institutional and market reforms are needed in the electricity market. Electricity is expensive and the frequent outages and long power connection times are inefficient. Reforms in WAPDA and KESC are central to this process.

Improvement in the rule of law and enforcement of property rights are important to reducing corruption and arbitrary government intervention.

Upgrading the transport infrastructure and port facilities will reduce transaction costs, and providing incentives for private sector participation in infrastructural development through public private partnerships will enhance sustainability.

Development of export processing zones and industrial zones with modern infrastructure would impact on enhancement of exports.

8.2 Strengthening Supply Capacity

Pakistan's export supply capacity is still limited and correcting this will require a broad-based, dynamic and globally competitive export sector. The private sector and government should play complementary roles. Firms do better at investing in private capital (human and technology) to enhance internal productivity and efficiency, with government providing the orthodox public goods type investments (basic scientific research, regulatory and policy framework). More specifically, the public sector should prioritize the following:

Increase incentives for scientific research and skills development at the firm or industry level through better property rights and labor laws that ensure firms a return on their investments, and in the public sector and universities through more public expenditure in science and technology research and training.

Unlike textiles and leather, fisheries and agro-processing sectors showed limited capacity to comply with a range of process and system standards. This is worrying and questions the ability of these sectors to survive the proliferation of standards in the food sector, unless they grow in size and adopt new technologies. The capacity of advisory services to (exporting) industries on technology upgrading, in particular to strengthen competitive position through upgrading production efficiency and for better meeting international market requirements should be built up.

Investment and technology acquisition should be facilitated.

Business partnerships should be encouraged and facilitated with partners in main targeted export markets.

8.3 Establishing Conformity Assessment Infrastructure

Ensuring internationally recognized conformity assessment services available for the exporting sector is critical. Pakistan should promote the growth of competitive and internationally recognized laboratory testing, certification and accreditation services as well as supporting facilities including internationally traceable measurement and calibration services. Cost is a major barrier to proving standards compliance and smaller firms

24

should benefit more from a credible local testing facility. The following should be prioritized:

Work towards international recognition of the Pakistan National Accreditation Council (PNAC)

Work towards internationally recognized accreditation of the measurement laboratories of the National Physical and Standards Laboratory (NPSL) and other testing laboratories such as those under PCSIR, PARC, MFD, PSQCA so that they can serve exporters better.

The Pakistan Standards and Quality Control Authority (PSQCA) should develop a National Enquiry Point to provide information services on standards and technical regulations, and technical aide to exporters.

Certification of management systems, and in particular, new certification requirements such as EUREPGAP, traceability or organic certification, etc. should be promoted and made more accessible at local level, while being internationally recognized.

8.4 Trade Facilitation

Trade facilitation, which needs to be addressed alongside other more endemic constraints, can be enhanced by streamlining custom procedures, taming corruption at customs and considerable improvements in infrastructure. There is a clear need, however, for awareness raising among firms, especially in the agro-processing and fisheries sector.

8.5 Sectoral Policy Initiatives

A range of potential sector mechanisms have been identified through which constraints to exporting can be alleviated. These relate to actions by firms and the government that will create a more dynamic exporting sector as well as increase the coordination between the government and the private sector and other parties. Some suggestions, based on the survey findings and validation seminars, are as follows:

Textiles:

All imported dyes to be verified and local firms involved in dying to be certified to ISO 14000 and SA 8000.

Establish textiles processing institute, garment and knitting technology centre.

Foster operation of accredited local textile laboratories to perform tests on raw materials, intermediary and finished textile products;

Establish common facility centers.

Leather:

Raise leather quality through either engaging foreign technical experts that will work through sector associations and the government or sourcing technical assistance through various international agencies. Technology upgrades through joint ventures with leading foreign firms will ensure cleaner tanning processes and should be accompanied by certification to ISO 9000, ISO 14000, OHSAS and SA 8000.

Establish accredited local leather testing laboratories and worker training programmes, jointly between government and the private sector. The sharing of risk and costs between the government and private sector will enhance coordination and trust.

Agro-processing:

Raw material quality is a major problem that can be alleviated through improved post-harvesting methods and better supply chain coordination from the farm, post-harvest handling, processing, storage and exporting. The cool chain is important facility that is required to be developed.

In the meat sector, disease prevention, treatment and surveillance should be improved through better research, technology adoption and veterinary services.

Establish and enforce national grades and standards including packaging and labeling.

Establish accredited local laboratories to cater for testing needs of exporters and producers engaged in agro-food processing.

Encourage private and public sector partnerships in research, technology uptake and information dissemination and skills upgrading.

Create clusters of fruit industries in the farming regions to economize on transport and other costs and generate employment in the hinterland. For example, citrus fruit processing in Sargodha, Mango in Sindh and Southern Punjab, dates in Khairpur, and of apples in Balochistan.

The export market information database should be upgraded and made accessible through electronic networking.

25

Fisheries:

Enhance the credibility of the sector. It is important to strengthen the institutional and technical (inspection and testing) capabilities of the Marine Fisheries Department (which is the EU designated Competent Authority).

Strengthen scientific research and skills training in aquaculture through joint efforts between the government and the private sector. The following areas should be prioritized: genetic improvements, fish nutrition, fish disease prevention and control, environmental management of marine resources and fish harvesting methods.

Adoption of new technologies in fisheries is very low. Efforts should be made at raising incentives for processing plants and fresh fish traders (for example medium and large) to apply hygienic practices including HACCP, ISO 22000 and ISO 9000.

26

Raw material quality is a problem but can be potentially alleviated through joint ventures for deep sea harvesting and better utilization of the fish landing and processing facilities.

Substantially improve fishing facilities and infrastructure including landing sites and fish harbors and fishing boats.

Promote upstream value-adding activities in sea products.

Reduce pollution and improve waste management at harbors, coastline and sea.

This report has suggested a number of recommendations which collectively can enhance the institutional structure and performance of Pakistan's export sector. It is important that these broad and sector specific initiatives are coordinated and pursued within a national policy for trade development.

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Anderson, J.E. and E. van Wincoop. 2004. Trade Costs. Journal of Economic Literature, XLII, 691-751

Baldwin J.R and W. Gu. 2003. Export market participation and productivity performance in Canadian Manufacturing. Canadian Journal of Economics, 36(3), 634-657.

Chen. M. X., T. Otsuki, and J. S. Wilson. 2006. Do Standards Matter for Export Success? World Bank Policy Research Working Paper 3809. The World Bank, Washington DC.

Das, S. and S. Pohit. (2006). Quantifying Transport, Regulatory and other costs of Indian overland exports to Bangladesh. The World Economy, 29 (9), 1227-1242..

Fontagne, L., F. von Kirchbach and M. Mimouni. 2005. An Assessment of Environmentally related non-tariff measures. The World Economy, 28 (10), 1417-1439.

Henson, S and W. Mittulah. 2004. Kenyan Exports of Nile Perch: The Impact of Food Safety Standards on an Export-Oriented Supply Chain. World Bank Policy Research Working Paper 3349, June. Washington DC.

Jaffee, S and S. Henson. 2004. Standards and Agro-food exports from Developing countries: Rebalancing the Debate. World Bank Policy Research Working Paper 3348, June.

Katsikeas, C.S and R.E. Morgan. 1993. Differences in Perceptions of Exporting Problems based on Firm Size and Export Market experience. European Journal of Marketing, 28(5),17-35.

Limao, N. and A.J. Venables. 2001. Infrastructure, Geographical Disadvantage, Transport Costs and Trade. The World Bank Economic Review, 15(3), 451-479.

Lorie, H and Z. Iqbal. 2005. Pakistan's Macro Economic Adjustment and Resumption of Growth,1999-2004. International Monetary Fund. Working Paper 05/139.

World Bank. 2002. Global Economic Prospects and the Developing Countries: Making Trade Work for the World's Poor. Washington D.C.

World Bank. 2006. Pakistan Country Assistance Evaluation, Country Evaluation and Regional Relations Independent Evaluation Group Report No. 34942. February 6. Washington DC.

World Bank. 2006. Pakistan Growth and Export Competitiveness. Povertv Reduction and Economic Management Sector Unit, South Asia Region. The World Bank, Washington DC.

27

28

Ap

pen

dix

I:

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mb

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31

Ap

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IV

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in

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Market

price

Profit Margin

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quality

Level ofquality

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skills

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information

Labor

productivity

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capital

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Packaging material

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Process control

Meet market requirements

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%

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32

Ap

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33

Ap

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VI:

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10.5

Delegation of the European Commission to PakistanHouse # 9, Street # 88, Sector G-6/3,Islamabad, PakistanTelephone: (+92-51) 2271828Fax: (+92-51) 2822271

United Nations Industrial Development Organization (UNIDO)Trade Related Technical Assistance (TRTA) ProgrammeHouse # 35 B, College Road, F-7/2Islamabad (Pakistan)Telephone: (+92-51) 2655092Fax: (+92-51) 2655094Website: http://www.un.org.pk/unido