New International Business Perspectives on Pakistan

Omar J. Khan

Lyn S. Amine

Executive Summary What image comes to mind when one thinks of Pakistan? Prior to the attacks of September 11, 2001, and the subsequent invasion of Afghanistan, many businesspeople had little information about this ancient land. Recently, Pakistan has come to the world’s attention as a powerful ally in the U.S.-led war against terrorism. Situated at the crossroads of the Middle East, Southeast Asia, China, and member nations of the former Soviet Union, Pakistan has long been a leading player in regional political and economic activity. This article presents some new perspectives on Pakistan as a market worthy of a closer look. We survey Pakistan’s history and geography, as well as its sociocultural, political-legal, economic, and competitive environments with a view to identifying new opportunities for foreign investors and global marketers. Current business trends and marketing opportunities are discussed, concluding with an outlook for future growth and development. Valuable insights are offered to businesspeople interested in doing business in Pakistan, a little-studied but vitally important newly industrializing country (NIC) and big emerging market (BEM). © 2004 Wiley Periodicals, Inc.



he purpose of our study of Pakistan is to assess business and marketing opportunities at the present time and in the future. We argue that Pakistan should be given a “second look” as a target for foreign direct investment (FDI) based on two important reasons: its internal market opportunities and its strategic significance as an export platform for doing business in other southwest Asian markets. The contribution of this article is a probing, honest, and detailed examination of a key big emerging market (BEM) from the point of view of strategic foreign direct investors and global marketing managers.
Omar J. Khan is a PhD student at Saint Louis University, currently in his final year. He has three journal publications and numerous conference papers to his credit, as well as a First Place Award in academic research from the University. E-mail: Lyn S. Amine, PhD, is a professor of marketing and international business at Saint Louis University. She is also Distinguished Fellow of the Academy of Marketing Science and president of the Women of the Academy of International Business. E-mail:
Thunderbird International Business Review, Vol. 46(5) 493–519 • September–October 2004 © 2004 Wiley Periodicals, Inc. • Published online in Wiley InterScience ( DOI: 10.1002/tie.20022


Omar J. Khan


Lyn S. Amine

…the present government has implemented incentives for FDI that are generous by Western standards.

We start our analysis with a brief general background section, before familiarizing the reader with Pakistan’s ancient history at the crossroads of Europe and Asia. This historical knowledge is critical to a full understanding of the mind of the Pakistanis, with their deep-seated sense of identity as an ancient people with a rich and diverse cultural tradition. We emphasize the important advantages of Pakistan’s geographic location, which has played such an important role in the past and promises to be an essential source of competitive advantage in the future. In the next section, we use the well-established and widely cited template of five marketing environments (first developed by Cateora, 1993) to discuss the sociocultural, political-legal, economic, and competitive environments in modern-day Pakistan. This environmental analysis lays the foundation for a micro-level discussion of business culture and consumer behavior, after which we identify appropriate marketing strategies and profitable business opportunities. We close with a detailed discussion of the strategic implications of doing business in Pakistan and lay out some expectations for future market developments.

GENERAL BACKGROUND When Mikhail Gorbachev and Ronald Reagan first sat down to discuss a plan to thaw the Cold War, they did so at the Geneva home of the Aga Khan. For the preceding two decades, Pakistan had played a front-line role in the Cold War between the two superpowers of the Soviet Union and the United States. Pakistan had been a dedicated American ally from the beginning of the Cold War, while its archrival India built its own niche as a friend of the Soviets. It was therefore fitting that the beginning of the thaw should take place at the home of a Westernized spiritual leader with Pakistani roots—the Aga Khan (note: while a very common last name in Pakistan due to Afghan and Mongol influences, “Khan” in this case denotes a leadership title). Since its creation as a sovereign nation over a half-century ago, Pakistan has embarked on an often-interrupted path toward industrialization and emergence as a free market economy. Building upon the efforts of its predecessor, the present government has implemented incentives for FDI that are generous by Western standards. Recent positive moves toward reconciliation between Pakistan and India augur well for improved business relations between these two BEMs. In the larger regional context, Pakistan is a major player and facilitator in numerous economic trade agreements and political treaties.
Thunderbird International Business Review • September–October 2004

2002). Demand in Pakistan covers a broad range of consumer products and services. Pakistan has a huge population of about 150 million people. 2002). 1997). It is also one of the world’s fastest growing markets. with substantial movement toward liberalization and rationalization of the economy. dual strategic opportunity. Pakistan’s population has immense pent-up demand resulting from economic growth. making it the seventh most populous nation in the world (CIA World Factbook. These are two important characteristics of BEMs (see Arnold & Quelch. having a ization of the large resource base and a large population. al “powerhouse” with critical participation in major geopolitical and social events. Pakistan fits all of these parameters well. and social infrastructure remains underdeveloped. 1992). 1998). the Karachi Stock Exchange posted gains of over 50% in 2002—by far. 2002). Pakistan has benefited substantially from its status as a close. Thunderbird International Business Review • September–October 2004 495 . Pakistan occupies a strategic location in the Indus Valley. Iran. government (see tion and rationalGarten.S. This rating draws attention to the inescapable paradox that Pakistan represents.New International Business Perspectives on Pakistan Most recently. English-speaking ally of the United States. It is also one of the world’s fastest growing markets. with substantial movement toward liberalizaCriteria defining BEMs were established by the U. the Persian Gulf. Indeed. It was not surprising then that Pakistan should receive an unflattering and unwelcome D-rating for country risk in 2002 (Country Monitor. and Southeast Asia. These positive market indicators of Pakistan’s progress and potential may surprise some businesspeople who are more familiar with reports about problems in the country. some militant Islamic influence is present. With a surface area almost twice the size of California. “First-mover” advantages are available to well-prepared investors and manufacturing companies whose objectives are to gain market share and develop performance capabilities (Mascarenhas. Clearly. as both a production and export platform and as a growing market in itself. the highest in the world (Belfour. with a subpar risk rating on one hand and real evidence of economic growth and investors’ confidence on the other hand. as well as wide-ranging national needs for industrial products and services to build basic infrastructure. demonstrating renewed confidence in the country by global investors. 2002). Consumer demand exists even in the “bottom of the pyramid” (BOP) market segment (see Prahalad & Hammond. with easy access to neighboring markets in China. Pakistan as a market calls for careful analysis and evaluation of business opportunities. and consumers have rising disposable incomes. It is true that the persistent threat of war with India over the disputed territory of Kashmir has long been a thorn in the side of both countries. central Asian republics. It is considered a regioneconomy. particularly in the areas neighboring Afghanistan. Pakistan offers investors a rare.

which date back about 6. the region gave its name to India. the Mongols were absorbed into the local communities and faded as a distinct racial category. Ultimately. ringed by the Himalayas in the northeast and the Hindu Kush mountains in the north and west of the country. The prehistory of Pakistan is known only through artifacts discovered in the twin capitals of Mohenjo-Daro and Harrapa. Further incursions and settlements were made by Afghans. Arab conquests led to the spread of Islam throughout the region. 1999). The Indus Valley’s economic and logistical importance was reaffirmed with the arrival of Alexander the Great’s armies in 327 BC. Khan I Lyn S.000 years. Amine GEOGRAPHIC AND HISTORICAL PROFILE OF PAKISTAN A Strategic Crossroads Pakistan occupies the fertile Indus Valley. Ethnicity and Cultural Identity—History’s Legacy Although Pakistan is a relatively new political entity.access to sea lanes in the Arabian Sea that were made famous in the atively new polit.stories of Sinbad the Sailor. its the rich farming areas of the Indus and Ganges River Valleys. In the seventh century AD. Persians. Later. Table 1 presents an illustrative chronology of key cultural and political eras in the history of the land now known as Pakistan. king of Persia in the fifth century BC. The classical history of Pakistan goes back to the conquest by Cyrus. land is home to one of the most Although the Indus Valley is entirely occupied by present-day Pakistan. and Aryans from the Plains. Baghdad. entering through the northeastern part of modern Pakistan. however. Long ago. a mixture of 496 Thunderbird International Business Review • September–October 2004 . who developed the region’s labyrinth of river systems for economic and navigational use (Burki. and beyond. as well as by numerous tribes from the Central Asian Steppes—each bringing their own religious and cultural tradition. the western boundary of Pakistan was the starting point for ancient settlers who moved into ical entity. It was through this terrain that the Venetian explorer Although Marco Polo traveled on his way to China. During the Dark Ages. the Mongol hordes broke into the Islamic world. This review highlights Pakistan’s character as a complex cultural and ethnic “melting pot” for some of the most significant civilizations in recorded history. a new people called the Mughuls. Remains of the Indus Valley civilization. one of the oldest known societies in the world. its land is home to one of the most ancient civilizations of the world. They caused massive destruction and upheaval on their way west to Persia. The long coastline gives Pakistan is a rel. lie at the heart of culture in present-day Pakistan.Omar J. ancient civilizations of the world.

and consumer behavior. Through this flux of nations. North West Frontier Province and Kashmir. Syeds. business culture. and how political party affiliations are determined. Many Pakistani consumers and business people now strive to achieve modern (and sometimes Western) lifestyles along with greater socioeconomic development. Talpur rule in Sind. a deeply embedded sense of cultural identity emerged. and promotional strategies. Tughlaqs. The Effects of Partition When the British finally accorded the region its independence in 1947. (These manifestations of cultural identity are addressed further in later sections on the political scene. Khanate of Kalat in Baluchistan Member of the British Empire Creation of the sovereign nation of Pakistan in two wings—East and West Pakistan Creation of Bangladesh (formerly East Pakistan) Emergence of present day Pakistan (formerly West Pakistan) 1848–1947 AD 1947–1971 AD 1971–present Afghan and Mongol racial stock. they left a subcontinent divided into two sovereign nations— Pakistan and India. these dominions were absorbed into the British Empire. how social classes are defined. and Mughals) Nadir Shah and Abdali periods Sikh rule in Punjab. during the nineteenth century. Lodhis. ruled over the Indian subcontinent. Khiljis. This event came to be known simply as “partiThunderbird International Business Review • September–October 2004 497 . It is critical to understand the wide range of cultural identities in Pakistan when developing market segmentation strategies. Suris. pricing policies.) As a counterpoint to these separate cultural identities.New International Business Perspectives on Pakistan Table 1. Then. Key Cultural and Political Eras in Pakistan’s History 3000–1500 BC 1500–522 BC 522–326 BC 326–300 BC 300–200 BC 200–100 BC 100 BC–70 AD 70–450 AD 450–1010 AD 1010–1187 AD 1187–1227 AD 1227–1739 AD 1739–1800 AD 1800–1848 AD Indus Valley civilization Settlements by Aryans Rise of independent states Eastern-most conquest of Alexander the Great Part of Mauryan Empire Graeco-Bactrian period Saka-Parthian period Part of Kushan dynasty Rule of the “White Huns” Ghaznavid period Ghorid and Kubacha periods Muslim Dynasties (Slave dynasty. explaining in many ways how many Pakistanis relate to one another. one must also recognize the homogenizing effects of globalization.

Income. rendering the political and economic institutions of Pakistan richer. Even after the creation of the modern state of Pakistan on August 14.” included urban professionals from societies characterized by mercantilism and industrialization. 1947.Omar J. in terms of the sheer numbers of people migrating over such a short period of time. It also caused immense human suffering. generally subscribed to a rural. landowning. Pathan. In contrast. and Market Segmentation Partition was the source of two fundamentally different economic cultures in Pakistan. migrants from India into Pakistan. and multifaceted. which soon became the major industrial center of Pakistan. The modern nation of Pakistan was carved out of what was then India on the basis of religion… The modern nation of Pakistan was carved out of what was then India on the basis of religion. Indigenous peoples. The Muhajirs came to represent the majority in the port city of Karachi. agrarian culture. including the Punjabi. This event was unprecedented in recorded history. Sindhi. Initially. the agrarian and urban cultures differed markedly in their political beliefs and their notion of statehood. Karachi’s important socioeconomic status was further reinforced by its role as a major regional trading center. Social Classes. Khan I Lyn S. THE SOCIOCULTURAL ENVIRONMENT Ethnicity. who are known as “Muhajirs. in order to give Muslims in India a homeland of their own. Homogeneity of religious belief was further consolidated after partition with the massive migration of Pakistani Hindus outward toward India and Indian Muslims inward into Pakistan. more complex. Only the movement of the Hutu-Tutsi populations in the late 1990s in central Africa has come close to this unique and urgent relocation of vast numbers of people. About 14 million people moved to and fro within the first few tumultuous months of independence. Over the years. resulting in three wars. Amine tion. these two fundamental cultures have intermingled. and Baloch ethnic groups.” Partition triggered significant changes in national territory and demographics. bitter rivalry persisted between the two neighbors. with persistent vestiges of the old dichotomy between landowners and industri498 Thunderbird International Business Review • September–October 2004 . with the Muhajirs favoring secular government. Social class structure in Pakistan is similarly multifaceted. with more than a million deaths on both sides of the line between Pakistan and India. Lahore and Rawalpindi in the Punjab province farther north follow Karachi as the major commercial centers in Pakistan.

Market segmentation is further complicated by the many ethnic divisions. This is no longer the case. professional.” these two social classes in Pakistan today represent important new target markets for global marketers of status-oriented and luxury items. and low) and social class (landowner. just like dominant families in other developing countries such as Mexico. Pathans and Baluchs are generally more conservative than Punjabis or Muhajirs.and lower-income landowners. We define these categories by income level (high. For example. and Venezuela. Model on Income and Social Class Segments in Pakistan (Source: Developed by the authors. it was widely accepted that just 22 families controlled the vast majority of wealth in Pakistan. Any attempt to segment consumers in the Pakistani market must factor in these complex social identities. the middle class is growing significantly. large variations in attitudes and behavior within each group. Up until the 1970s. and worker). there are clear differences in values and behaviors between upper-income professionals and upper-income industrialists. of course. Figure 1 suggests a graphic representation of these complex and unusual consumer segments in Pakistan.) alists. middle. because consumer behavior differs markedly across these intricate income and social class segments. it is vital to understand that wealth in Pakistan exists in two overlapping social categories. Brazil. as well as between upper. For the outsider looking in.New International Business Perspectives on Pakistan Figure 1. For example. industrialist. Thunderbird International Business Review • September–October 2004 499 . While still relatively small. although there are. Together with the small class of social “elite.

and consultants in trade with their home country. one territory (the Federally Administered Tribal Areas [FATA]). These traditions of overt domNRPs frequently inance and subservience extend even to relationships between serve as valuable employers and employees in the corporate setting. NRPs frequently serve as valuable middlemen. business partners. and consul. remittances of some $575 million from workers in the United States alone made up the largest single segment of foreign exchange inflow in 2002. as in India. the capital territory of Islamabad (seat of the federal government). traditionally known as the “hundi” or “hawala” system. there are recognizable patterns of behavior originating from ancient patterns of social relationships between landowners and peasants. They are an important source of market information for businesspeople and investors who are actively considering business opportunities in Pakistan. up from $105 million in 2001 (Ministry of Finance. following the attacks in America of 9/11/2001. to avoid reliance on oversimplified segmentation schemas that may not accurately reflect these social business partners. 2003). may seem arrogant by Western standards.Omar J. in turn.complexities and traditions of deference. THE POLITICAL-LEGAL ENVIRONMENT Type of Government Pakistan is a federal republic set up under the constitution of 1956. creating bastions of “economic dynamism” (Kotkin. Sindh. 2002). and the disputed federally administered area of 500 Thunderbird International Business Review • September–October 2004 . Australia. Foreign businessmiddlemen. The visitor will find it remarkable how selfeffacing people of lower social or income class can be in their interactions with a person of high social or income class who. Britain. These “nonresident Pakistanis” (NRPs) represent a very substantial source of foreign exchange for the nation through their repatriated earnings. Canada. Large Pakistani populations live and work in the Middle East. Nonresident Pakistanis A key facet of Pakistani society. Amine Between social classes. There are four provinces (Punjab. is the large number of individuals who have migrated abroad to study and work. people should be careful. therefore. and the United States. Khan I Lyn S. Baluchistan. with significant numbers also in the Far East and parts of Africa. and NorthWest Frontier Province). NRPs often count among the most successful segments of the population in their adopted countries. Indeed. This sharp rise was due in large part to the international crackdown on unofficial modes of funds transfer. tants in trade with their home country.

more parochial agendas. or “Shari’a. by with no real powers of enforcement. with a Senate of 100 seats and a National Assembly of 342 seats. President General Pervez Musharraf. External Relations with India Political debate in Pakistan is still dominated by the hostile rivalry between India and Pakistan.” is bicameral. to deal primarily with criminal acts (such as murder or burglary) and limited civil matters (like marriage). The Political Scene Today The Musharraf government has firmly backed free market incentives and continued privatization. Several religious parties have consolidated into a significant but still minority political force. At the provincial level. The two most popular political parties are the Muslim League and the Pakistan Peoples Party. A well-established regulatory framework exists. Aziz. Thunderbird International Business Review • September–October 2004 501 . The Musharraf government has firmly backed free market incentives and continued privatization (Mangi. and the Prime Minister is the Head of Government. There are also numerous other political parties with narrower. Military rulers. The judicial branch is also bicameral and the Supreme Court has justices appointed by the President. The other provinces in Pakistan have neither implemented nor enforced Shari’a law. a total of 95 political parties sought registration in the 2002 national elections (Global News Wire. The military is. have led the country for most of its modern history as a sovereign nation. Recent talks about economic imperatives between the two countries offer hope that both countries will soon be actively seeking a resolution to this old problem (T. The Federal Islamic. all exhibit tendencies generally in favor of free market policies. Shari’a law has been recently introduced and enforced in only one area.” Court currently acts only in an advisory role. It is important to note that the two leading parties. the most potent political force in the country. The parliament. The President is the Chief of State. In all. Table 2 presents a summary comparison of the current regulatory package for investment in Pakistan’s manufacturing and nonmanufacturing sectors. 2002). Both countries are nuclear powers and regularly engage in “contained conflict” along the Kashmir border— a problem that grew out of differing opinions about the partition agreement. personal communication. favoring both private and foreign direct investment. including the present one. and even the consolidated religious parties. or “Majlis-e-Shoora. the North-West Frontier Province.cia.New International Business Perspectives on Pakistan Kashmir and the Northern Areas (www. September 2003). 2002).

% of PME cost) 50% 50% Allowed as per guidelines. http://www.3 0.A. (Source: Board of Amine Remittance of capital. permission Allowed Not required except in 4 specified industries Not required except specific licenses from concerned agencies. Initial lump-sum up to $100. Government of Pakistan.html) . profits. 0. Other Tourism Cat(C&D) Industries Agriculture Infrastructure & Social V.502 Table 2. dividends. Export Cat (A) Hi-Tech & IT Cat(B) Services including IT & Telecom Services I Govt. 60% 100% Allowed Upper limit of foreign equity allowed 0. Lyn Khan Manufacturing Sector Priority Industries Engineering & Chemicals. A Comparison of Regulatory Packages for Investment in the Manufacturing and Nonmanufacturing Sectors (2003) Nonmanufacturing Sectors Omar J.pakboi.000 Max rate 5% of net sales Initial period of 5 years Thunderbird International Business Review • September–October 2004 Royalty and technical fee No restriction for payment of royalty & technical fee. etc. Housing & Construction.3 100% Initially 100% but will be diluted to 60% within five years. Agribusiness.3 Minimum investment Amount (M $) 5–25% 0% 10% No Customs duty 5% on import of PME 5% 10% 0–10% Tax relief (IDA.

economic and political power is held by a small social elite. Ayub Khan ruled for another ten years. The government took responsibility for defense. 1999). 1999). favoring the development of socialist policies under Zulfiqar Ali Bhutto. At that time. the East Pakistan wing of the country was lost. Bhutto’s policies lacked thorough analysis and planning and ultimately led to a slowdown in economic growth. so the economy was immediately opened to private investment. thereby creating the aforementioned phenomenon of the 22 ruling families. its benefits are delivered unequally to members of the total population (Husain. basic infrastructure. Pakistan had seven prime ministers. While possibly well-intentioned. Government incentives for industrial investors were generous. Embarking on a policy of promoting social equity. Nationalization Thunderbird International Business Review • September–October 2004 Industrialization was seen as the path out of poverty. Although economic growth may be rapid. and a massive “brain drain” took place as individuals sought better prospects abroad (becoming NRPs). Popular dissatisfaction and unrest persisted throughout the 1960s and 1970s. private investment dropped dramatically throughout the 1970s.New International Business Perspectives on Pakistan Government Policies and Priorities Upon partition in 1947. Workers’ rights were greatly enhanced with the introduction of a minimum wage and collective bargaining.” According to this model. During the 1950s alone. 503 . Not surprisingly. Industrial assets were bought by a relatively small number of entrepreneurs. so the economy was immediately opened to private investment. This concentration of wealth in the hands of a minority existed alongside widespread poverty among the rest of the population. becoming the independent nation of Bangladesh. Pakistan’s free market economy grew during the 1950s and 1960s. leading to rapid changes of government. Largescale nationalization took place. popular dissatisfaction grew at this time. but agricultural development was left to stagnate through the 1950s and 1960s (Burki. power. exemplifying the model of economic development called “elitist growth. but social inequalities continued to worsen. and other areas considered unattractive to private investors due to risk or the requirement for large capital outlays. resources for the fledgling nation were scarce. until Field Marshal Ayub Khan declared martial law in 1958. In 1977. General Zia ul-Haq came to power through a coup d’état and reintroduced private enterprise into the economy. Not surprisingly. Industrialization was seen as the path out of poverty. Bhutto’s government appropriated large parcels of land from owners and divided these among laborers. Economic growth was impressive.

whose objectives are to: • encourage competition by abolishing monopolies and integrating the domestic economy into the world economy. Micro-finance refers to small amounts of capital that are made available to individuals and community groups among impoverished segments of the population. alongside use of established Western systems of interest-based financing. These measures had only limited success and were significant only for their “cosmetic appeal.” These are effectively a form of taxation and. Khan I Lyn S. The Asian Development Bank has also participated in similar targeted efforts. During the 1980s. Recovery rates have been extremely high for these types of microloans. These measures include an interesting experiment in alternative microfinancing systems. In the late 1990s. 1999). although relatively light in their financial burden. government initiatives included the introduction of two Islamization measures. Micro-loans distributed through the Khushali Bank target specific communities for development. In the 1990s. thereby reassuring private investors. smaller-scale government measures have been introduced in recent years in order to promote the well-being of individual households and encourage growth of cottage industries. Islamic interest-free banking was also introduced. A grass-roots organization from each community is trained to prioritize needs of their members. was severely limited. Amine Micro-loans distributed through the Khushali Bank target specific communities for development. the Pakistani government established a microfinance bank. 2003). 504 Thunderbird International Business Review • September–October 2004 . 2001). “zakat” and “ushr. It is hoped that this innovation will effectively reduce poverty and promote development of a lower middle class in Pakistan (Ministry of Finance.and loss-sharing with bank customers. who work together to identify suitable borrowers and monitor the use of funds. In 2000.” More sophisticated. the World Bank and International Monetary Fund (IMF) sponsored loans that were earmarked for this type of disbursement (Pakistan Economic Report. proved difficult to implement. particularly women. and foreign banks can underwrite securities. in order to promote social welfare (Kemal. Restrictions on portfolio and foreign direct investment were eased with the establishment of the Privatization Commission. representing a form of profit. the Khushali Bank. whose explicit role is to provide financial services to poor people. structural impediments to private investment were largely removed.Omar J. Foreign firms are allowed to issue shares in Pakistani enterprises.

• reduce substantially the size and scope of the public sector. 1998). equivalent to U. While Thunderbird International Business Review • September–October 2004 505 .S. THE ECONOMIC ENVIRONMENT Unequal Socioeconomic Development Pakistan is ranked among lower-middle income countries. • develop capital markets for mobilization of domestic savings. insurance.New International Business Perspectives on Pakistan • mobilize private-sector resources for future investment. Incentives were made available for private investment in most areas of industry and agriculture. road construction. 1999). 2002). Local operators have shown themselves more than willing to partner with foreign investors in exploiting these opportunities (Pakistan Embassy.). resulting in unequal social development and notable deficiencies in education. and • decrease opportunities for misuse and corruption of public property by government officials and public sector managers (Privatization Commission. and gender equality (Easterly. very high growth rates were again achieved in the agricultural sector in the 1990s through the use of new technologies that improved productivity (Mubarak & Byerlee. health services. A more recent government policy promotes efficiency in small and medium-sized enterprises (SMEs) by consolidating several existing financing institutions into a new SME Bank. The SME Bank is a development project with the capacity to extend loans ranging from 50 thousand to 30 million Rupees (Rs.000. Other industries touched by the privatization process include shipping. After the first “green revolution” of the 1960s. Along with this access to credit. revenuegenerating stalwarts such as power generation and banking. 2003). and in traditional.S. small businesspeople also receive professional business advice and support services (Small and Medium Enterprise Development Authority Pakistan. Social development has lagged behind economic growth. Foreign direct investment (FDI) is rapidly increasing in new technology sectors such as telecommunications.000–U. It targets primarily export-oriented SMEs and has branches across the nation. sanitation. and airlines.$500. The Pakistani model for economic growth since independence was described above as “elitist growth” (Husain.$1. Incentives were made available for private investment in most areas of industry and agriculture. 2001). 2003).

ally in the war against terrorism has led to a marked easing of trading restrictions with Western nations. tor has actually Indicators for three promising sectors of activity are discussed in done well com. This fact is especially remarkable considering the large difference in size between the two economies. Khan I Lyn S. Per-capita income is about $2. A market in futures contracts has been introduced. At the time of independence in 1947. coupled with renewed induction of World Bank and IMF loans.cia. the major Pakistani stock exchange in Karachi (KSE) became the best performing stock market in the world in 2002 ( pared to other countries in the region. reaching about 10%. has had a positive effect on capital availability in Pakistan.the following sections. there are numerous important positive indicators that agricultural sec.S. Other major sources of capital in Pakistan include the publicly integrated Development Finance Institutions and the National Savings Organization. capital markets in Pakistan are reappearing in the private sector as important instruments of economic growth (Hardy & di Patti. The Agricultural Sector Agriculture presently accounts for only 25% of GDP. Amine vast amounts of disposable income are available to the ruling elite. as foreign capital poured into the country. it was considered to be the “core economy. 2001).Omar J. and audit and accounting practices have been strengthened to minimize any attempts at unethical manipulation. the Pakistani agricultural sector has actually done well compared to other countries in the region. Pakistan has tripled its world market share of cotton. United 506 Thunderbird International Business Review • September–October 2004 . which is almost the same level as neighboring India’s (Federal Bureau of Statistics. A large underground economy (“black market”) persists despite efforts to incorporate it into the mainstream. a third of the population presently lives below the poverty line. Private-sector financing is available through the major commercial banks in the country. The Securities and Exchange Commission in Pakistan plays an active role in safeguarding the interests of investors. Despite this shrinkage.100 after incorporation of purchasing power parity (www.encourage a more optimistic view of the country in the future. 2002).” generating a major part of GDP. As a counterbalance to these rather pessimistic char…the Pakistani acteristics. of which Habib Bank. Pakistan’s renewed status as a U. As a result of the second “green revolution” of the 1990s. 2003). This factor. Capital Markets Despite past inefficiencies. As noted earlier.

and several major markets in Southeast Asia (Ali. while still retaining links to key industries producing tobacco. The agricultural sector has done well in recent years. presents a valuable production platform for exports to China. The requirement for minimum capital has been enhanced to Rs. 2000). Consequently this is an opportune time for foreign investors to “get in on the ground floor” in growth industries. This relationship grew into a long-standing friendship. agriculture and industry. leather. and Japan are currently the largest export markets for Pakistani goods. therefore. and Allied Bank are the largest. the two major engines of economic growth. Pakistan enjoys a special relationship with China that dates back to the early 1960s. Global Trading Relations Basic industries like textiles. Thunderbird International Business Review • September–October 2004 507 . and sporting goods account for the bulk of export revenues. and apparel. particularly for apparel and software. and sporting goods account for the bulk of export revenues. Exports and Growth Industries The ratio of exports to GDP has doubled from 8% 30 years ago to 16% in the late 1990s (Ministry of Finance. Thus.New International Business Perspectives on Pakistan Bank. The United States. Germany. Iran. 2003). are effectively working together to generate economic growth. Exports of manufactured goods are replacing exports of primary commodities. 1 billion (approximately $20 million) to encourage consolidation of smaller banks. and common interests stemming from border disputes with India. 2003). Reciprocal trade agreements are already in place with China. Pakistan’s participation in numerous regional and bilateral trading agreements offers potential for building bilateral relationships and diversifying export markets in the future. but industry has done even better. shared borders and ethnicities. and government incentives have been structured to achieve this goal. Textile manufacturers alone accounted for a massive 64% of total export revenues in fiscal year 2001–2002 (Ministry of Finance. Pakistan. are receiving special governmental attention and support through expedited approvals and developmental capital schemes (Board of Investment. Together. the Gulf countries. textiles. such as software development in the technology sector. Basic industries like textiles. The two countries were brought together initially by motives of political expediency. New areas of economic activity. Turkey. producing notable improvements in levels of urbanization. Export diversification is a priority for the Pakistani economy. 2003). leather. these banks provide the bulk of domestic financing required by investors.

Traditional modes of foreign market entry include exporting. Clearly. 1997. and there are some indications of this intent. Today. the growing literature on BEMs offers guidelines on competing in this type of marketplace (for details. Similarly. investors and foreign business partners have made significant use of exporting and equity methods of FDI (United States-Pakistan Business Council. 1998. 2003). cooperative methods such as joint ventures and strategic alliances. THE COMPETITIVE ENVIRONMENT Growth of the Industrial Base At the time of partition. Moffett. see Czinkota. 2001). see Arnold & Quelch.000 companies.Omar J. only 11 major corporations were engaged in five sectors of industry. Amine In the future. 2000). chemicals. Garten. with considerable numbers in the newer sectors of information systems processing and software development. Notably. there would also be a significant improvement in Pakistan’s overall country-risk rating. Khan I Lyn S. & Moynihan. Ronkainen. and equity methods of FDI through wholly owned subsidiaries (for further discussion of these options. Ramamurti. Modes of Market Entry The international business and international marketing literatures are a rich source of insight into modes of market entry and aspects of market-entry strategy (for more information. agricultural products. 2003). this base is defined by the Board of Investment as only those sectors and companies that employ a majority of the industrial workforce. and steel. 1993. If bilateral relations improve. The Board of Investment indicates that foreign companies operate in 14 key sectors and represent a variety of corporate nationalities. see Erramilli & Rao. These are heavily concentrated in traditional manufacturing sectors such as textiles. the competitive environment in Pakistan is healthy and supports a lively free market economy. where land 508 Thunderbird International Business Review • September–October 2004 . Pakistan’s industrial base has expanded to around 3. Two favorite points of entry into Pakistan are through the port city of Karachi and the Punjab province.618 companies incorporated in Pakistan (Board of Investment. and subsequently grow to benefit industry and commerce in general. …investors and foreign business partners have made significant use of exporting and equity methods of FDI. greater freedom to trade with India will immediately benefit a small number of industries through the creation of new export opportunities. In the case of Pakistan. there were 43. In 2003. Other points of entry for consideration include the provinces of Baluchistan and Sind. Leonidou & Katsikeas. 1996). contractual methods such as licensing and franchising.

Lahorites answer toll-free numbers from the United States. Johnson & Johnson. FDI. with large numbers of graduates from local business and technical schools. Ciba-Geigy. and sophisticated labor supply in Pakistan ensures that this type of new business will continue to grow. American Express. Familiar brand-name companies include Colgate-Palmolive. the Pakistani Software Export Board has been facilitating production and export of software by establishing IT parks. financial services. well-qualified. “Hot” New Sectors. These two provinces have been generally overlooked by foreign investors. FDI opportunities are particularly attractive for those firms seeking specialized market niches. Of particular interest is the information technology (IT) sector. and Global Company Participation FDI in Pakistan has been implemented by a large number of global companies in major industries such as consumer products. and software. This situation should however be regarded as a business opportunity to participate in profitable public-sector and infrastructure projects requiring con. most of these global leaders are planning to expand their investments in Pakistan. pharmaceuticals. 2002). except in the case of large-scale industries such as power-generation and chemicals. Notably. call centers. Unilever. processed foods. Thunderbird International Business Review • September–October 2004 attractive for those firms seeking specialized market niches. Since 1995. in the past. the California company Align Technology has set up a customer service call center in Lahore. These types of operations draw on a workforce that is highly skilled. textiles. rendered physical distribution of goods difficult.New International Business Perspectives on Pakistan and labor costs are modest and incentives are available to set up production facilities. 509 . Procter & Gamble. bridges. American investment alone in Pakistan represented nearly 75% of the country’s $200 million total in foreign direct investment (United StatesPakistan Business Council. and joint venture relationships between local and foreign firms (Pakistan Software Export Board. chemicals. the competitive advantage of a cheap. which has. The Board of Investment (2003) identified a number of sectors as “hot” areas for FDI and joint ventures that employ local talent and expertise. As an example. Nestlé. 2003). Despite some concern in the West that this type of business is draining white-collar jobs away from national markets. 2003). BPAmoco. where the government is working to promote growth of a domestic version of Silicon Valley. This is largely a result of the relatively primitive state of national infrastructure.FDI opportunities are particularly struction of roads. and telecommunications. In the first half of fiscal year 2001. and Microsoft. Citibank. providing product support and service 24 hours a day (Lagerquist. petroleum.

and urban mass transit—as seen in China. IT now enjoys the status of being an “industry” as opposed to a “segment. and most IT and networking equipment is exempt from import duties. Joint ventures hold great promise in the agricultural and farming sectors through the operation of large-scale farms. and particularly pipeline development. such as El Paso Energy. high-yielding.Omar J. 2003). roads and highway development. and exporting vegetables. The oil and gas industries. require massive outlays of capital but have quickly attracted the attention of global investors. and processing of licensing applications now takes only a few days in this deregulated industry. and disease-resistant seeds such as those currently being marketed by Monsanto. processing. Domestic banks are allowed to extend credit to foreign principals. Opportunities for large-scale FDI include hydroelectric power generation. Amine Joint ventures hold great promise in the agricultural and farming sectors through the operation of large-scale farms. fruits. have already established operations in Pakistan. Recent discoveries of natural gas reserves could bring substantial improvement to Pakistan’s balance of payments through substitution of local gas for imported oil. there is great demand for production of genetically modified. packing. Additionally. Major Western energy companies.pakboi. Special incentives are in place to encourage FDI in the IT” One hundred percent foreign ownership is allowed. 2001). and cooperative market entry arrangements are welcome. 2003). Indonesia. Domestic Pakistani financing is readily available for these sectors. and other BEMs. Direct or portfolio investment is suggested as an appropriate mode of market entry for these sectors. Khan I Lyn S. Two other hot new sectors are biotechnology and medical engineering. This massive deregulatory effort is spurring one of the best environments in the developing world for technological advancement. and flowers (Board of Investment. The cost of Internet bandwidth has been drastically reduced by 65%. The fledgling sector of organic farming holds great promise for growth of exports to target markets in the European Union (see for further details). because local concerns are not yet well established. Export receipts of an estimated $500 million or more from this source have been predicted (Stern. Foreign SMEs should actively consider setting up joint ventures and strategic alliances in the leather products and value-added textile industries. For example. ports and handling activities. 510 Thunderbird International Business Review • September–October 2004 . and both DSL and cable facilities are available (Board of Investment. and concessionary export financing is available through the State Bank. Incentives are particularly good for producing. IT training institutions are income-tax exempt for five years.

is institutionalized. ethnic identities. care should be taken when targeting consumers. The existence of an unwieldy and complex government bureaucracy has created many opportunities for unscrupulous behavior under the guise of “special attention” and “expedience” (Haider. industries targeted for growth assistance. It is recommended that foreign managers assert a business culture of their own. Even though corruption is widely accepted as a cost of doing business in Pakistan. Although cumbersome and mind-numbingly verbose. Both small. despite serious efforts by the Privatization Commission to combat this problem (Ali. Local business culture in Pakistan presents foreign businesspeople with two major ethical challenges: bribery and nepotism. it is nevertheless widely and vehemently disdained. a range of market-entry modes are available and appropriate for doing business in Pakistan. in some ways. natural resource factors. CONSUMER SEGMENTATION AND MARKETING STRATEGIES IN PAKISTAN Keeping in mind the earlier discussion about the many geographic origins. This demonstration of a clear commitment to resist corrupt practices should eventually yield beneficial results. Staying within official channels may reduce. The temptation to engage in corrupt practices is part of the very culture of business in Pakistan and. Nevertheless. and different value systems of people in Pakistan. taking advantage of the country’s strategic location in southwest Asia. government officials have demonstrated a lack of transparency in handling bidding processes. business regulations and laws are published and easily accessible.New International Business Perspectives on Pakistan As indicated by the foregoing examples. Moreover. and domestic market demand. 2003). government incentives for FDI. local labor. if a foreign company is to establish a reputation for strict ethical conduct.and large-size foreign companies across a range of industries are already active in the Pakistani market. Any suggestion of deviation from these published rules and procedures should be met with resolute rejection. Dealing with Corruption in the Business World Local business culture in Pakistan presents foreign businesspeople with two major ethical challenges: bribery and nepotism. total consistency will be needed. consistent with standards in their home country. 2000). but not eliminate. by reducing pressure to conform to questionable patterns of local business behavior. Thunderbird International Business Review • September–October 2004 511 . exposure to these problems when initially entering the Pakistani market.

people of the same sex shake hands and frequently hug or hold hands as a sign of friendship. Households are traditionally hierarchical and patriarchal with gender-specific spheres of activity and decision making. foreign businesspeople should rely on simple. need rethinking in order to reach the wide range of consumer market segments in Pakistan. and aspects of national culture (Hofstede. Kale. in terms of sheer numbers the largest consumer market segment in Pakistan consists of lowerincome. When in doubt.6% in 1981 to over 20% in 2002 (Federal Bureau of Statistics. Women are well-respected and the female employment rate has increased rapidly. 1989. In order to serve this potentially profitable segment. Amine Standardized global strategies will. However. For example. 1987. 512 Thunderbird International Business Review • September–October 2004 . particularly in rural areas. Market Segmentation Consumer markets in developing countries have traditionally been segmented according to consumer demographic factors such as social class. from 5. we recommend use of the innovative method of “bottom of the pyramid” (BOP) marketing (Prahalad & Hammond. although gaining some acceptance. Benazir Bhutto. religion. even in a professional setting. and urban versus rural populations (Jain. verbal acknowledgements. when compared to Western nations. Family Decision Making and the Status of Women The professional status of women is better than it has ever been. 2003). language. polite. politics. the fashion for women is one of modesty in dress and custom. Pakistan is proud to boast of having already elected a female prime minister. Terpstra & David. women are still well behind in terms of leadership positions in industry. Indeed. whether through some limited forms of veiling or through individual style of social interaction. The professional status of women is better than it has ever been. Of course. countries have been clustered using macro-level variables such as geography.Omar J. Khan I Lyn S. As mentioned earlier with reference to our new framework of consumer segmentation in Figure 1. lower-class workers. 1991). in many instances. are still not the norm. The family unit still dominates Pakistani society. Alternatively. 1995). women seldom maintain eye contact with men during conversation. and the extended family is the main source of rampant nepotism among the political elite. At work. economic factors. Handshakes between sexes.

so production costs must be kept low. such as teenagers.and upper-class Pakistani consumers are becoming increasingly sophisticated and respond positively to appropriate global marketing campaigns that emphasize cosmopolitan values and lifestyles and promote the benefits of upscale brand-name products and services. Middle. globalized segments can be identified. chewing may prove to be less complex gum. very low-price. In contrast. Examples include dailyuse packets of shampoo. For example. high-volume. As in other major urban centers around the world.achieve market expansion. defined according to the multiple ethnicities in Pakistan. Penetration pricing is essential to success of this strategy. This mass-market. in press).than subsequent efforts to duction is therefore the most appropriate strategy for holding down production and transportation costs. As Craig and Douglas (1996) pointed out.New International Business Perspectives on Pakistan 2002). and very low-margin strategy represents a key opportunity for marketers. Unilever and Colgate. soap. as have Coca-Cola and Pepsi-Cola in India (Amine & Kumar. and others. razor blades. so a straightforward presentation of product benefits and low price is the most effective and persuasive promotional approach. These segments are receptive to globalized product and promotional strategies consistent with the values and purchasing power of the middle and upper classes. initial entry may prove to be less complex than subsequent efforts to achieve market expansion. toothpaste. Another successful strategy is targeting niche segments. Thunderbird International Business Review • September–October 2004 513 . not only in Pakistan but also in other BEMs. 2002). the people of Karachi and urban Punjabis are much more receptive to Westernized marketing messages that emphasize quality and status. and so on. In contrast. Coca-Cola did poorly in the North-West and Baluchistan because the company tried to implement a standardized approach across the whole Pakistani market. working women. Consumer Marketing Strategies BOP marketing serves the basic needs of ordinary consumers by providing everyday products that are packaged and sold in very …initial entry small quantities at accessible price points. Palmolive have both had considerable success with the BOP marketing strategy (Prahalad & Hammond. young urban professionals (yuppies). In-country pro. Ciba-Geigy has successfully implemented communication strategies targeted to different ethnic groups in the various provinces. Pathans in the North-West and Baluchs in Baluchistan are generally more conservative and less receptive to Western-style marketing efforts. upscale consumers.

Khan I Lyn S. sporting goods.smeda. Marketing issues arising from country-of-origin (COO) considerations need to be carefully considered when choosing Pakistan as an export platform. Other global companies are following their lead (see Board of Investment. Pakistan suffers from a range of perceived negative COO effects. low-cost factors of production. These are a function of both macro-level and micro-level factors: for example. Figure 2.epza. see Peterson & 2003).Omar J. an image of political instability persists as a result of successive changes of government. Most SMEs in Pakistan are also involved in production for export (www. Amine EXPORTING FROM PAKISTAN Pakistan’s regional trade and political leather. This is a result of clearly demonstrated high-quality standards and high export profit margins. please see web site for color picture) 514 Thunderbird International Business Review • September–October 2004 .) Despite the many positive factors identified earlier. Global sporting goods companies like Adidas and chemical giant DuPont both have large-scale export production facilities that serve markets in China and Western Europe. and surgical instruments enjoy a decidedly positive COO effect. and skilled English-speaking workforce are very important positive characteristics supporting a strategy of using Pakistan as an export production platform for outward trade with neighboring countries. 1995. vibrant export sectors such as textiles. Export Processing Zones in Pakistan (2003) (Source: www. and questions about quality and reliability are associated with some industries. (For a complete discussion on COO issues.

Turkey. fruits. we find a number of pertinent factors on both the “plus” and “minus” sides. and business advantages that are important to foreign investors. natural gas. The growing middle class Thunderbird International Business Review • September–October 2004 515 . Potential investors need to weigh both positive and negative COO factors when deciding to do business in Pakistan. well-established legal systems. rice. the annual Economic Survey of Pakistan. iron ore. An important affirmative consideration in any decision should be the nationwide availability of special industrial zones (SIZs) and export processing zones (EPZs). administrative. There is a very large domestic market. and the Central Asian republics (Board of Investment. These include extensive agricultural land. the Ministry of Finance and Economic Affairs. Information on market operating conditions in individual sectors and industries is provided by the Board of Investment. The country is strategically located and serves as a regional hub for access to the Middle East. A detailed comparison of some regulatory packages designed to encourage investment in the manufacturing and nonmanufacturing sectors (2003) is presented in Figure 2. and good-quality telecommunications and IT services. the Federal Bureau of Statistics. copper. cotton. which have been created to serve export-oriented industries (Export Processing Zones Authority. and costs of investing in this BEM. with 150 million consumers in a variety of income classes. STRATEGIC IMPLICATIONS OF DOING BUSINESS IN PAKISTAN The foregoing discussion has presented some new perspectives on Pakistan and provided a solid rationale for doing business in Pakistan. China. Southeast Asia. the State Bank of Pakistan. with an educated and relatively low-cost workforce. rail. competitive threats. and the Small and Medium Enterprise Development Authority (SMEDA).New International Business Perspectives on Pakistan Potential investors need to weigh both positive and negative COO factors when deciding to do business in Pakistan. crude oil. In assessing the strategic implications for investing in Pakistan. and sea links. 2003). 2003). and extensive reserves of coal. comprehensive road. while also giving due consideration to the risks. as well as large-scale fisheries and livestock production. Pakistan also has many physical. cultural. Pakistan possesses valuable human resources. A wide range of international business opportunities has been identified. efficient production of wheat. and vegetables. and gypsum. The “Plus” Side Pakistan has a rapidly developing infrastructure.

OUTLOOK FOR THE FUTURE—WEIGHING THE OPPORTUNITIES AND THREATS As a nation. FDI in Pakistan grew dramatically from $1 billion to $5 billion in just the five months following the events of September 11. not least of which is the political instability caused by the long-standing dispute with India over Kashmir. deregulation. Pakistan is mak. Pakistan’s external creditworthiness improved dramatically in 2002 and 2003 as a combined result of increased exports. and all economic sectors are now open to foreign ownership. Fundamental 516 Thunderbird International Business Review • September–October 2004 . Recently. Khan I Lyn S. Generally. The “Minus” Side Critical questions still remain to be considered about the future of international business in Pakistan. Afghanistan. 2003). Incentives for foreign investment are among the ing consistent most generous in the world. ment include continuing trends toward liberalization. The Pakistani government is taking seriously its role in promoting social responsibility and higher ethical conduct in business. increased overseas workers’ remittances. the economic forecast is bright. as well as by the instability of Pakistan’s neighbor. 2002). professional expertise. and substantial debt reduction.and privatization. The government has successfully turned around the deteriorating economic situation of a few years ago. Expected directions for economic developAs a nation. and the nation is enjoying a rapidly improving economy (Federal Bureau of Statistics. Some minority elements of the Pakistani population are engaged in trying to rebuff the establishment of Western assets in the country. Pakistan has benefited greatly from its status as a front-line ally of the United States. efforts to integrate itself into the global economy. and quality of life for most consumers is still low by world standards. consistent with high levels of education. and global awareness. On the social front. Amine is moving toward sophisticated global lifestyles and consumption habits. Pakistan is making consistent efforts to integrate itself into the global economy (Country Monitor. 2001 (Business Asia. and prospects for sectoral growth are attractive. and sectarian violence has surfaced periodically. 2002). The current domestic economic climate is positive for investment. Genuine first-mover advantages can be achieved through careful planning and appropriate market entry. World Bank.Omar J. increased aid disbursements. there are some serious delays in social development. 2003.

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