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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 worlds 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 Pakistans 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) 493519 SeptemberOctober 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 Pakistans 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 Pakistans 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 rootsthe 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.
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New International Business Perspectives on Pakistan

Most recently, Pakistan has benefited substantially from its status as a close, English-speaking ally of the United States. Indeed, the Karachi Stock Exchange posted gains of over 50% in 2002by far, the highest in the world (Belfour, 2002), demonstrating renewed confidence in the country by global investors. Pakistan offers investors a rare, dual strategic opportunity, as both a production and export platform and as a growing market in itself. Pakistan has a huge population of about 150 million people, making it the seventh most populous nation in the world (CIA World Factbook, 2002). With a surface area almost twice the size of California, Pakistan occupies a strategic location in the Indus Valley, with easy access to neighboring markets in China, central Asian republics, Iran, the Persian Gulf, and Southeast Asia.

It is also one of the worlds fastest growing markets, with substantial movement toward liberalizaCriteria defining BEMs were established by the U.S. government (see tion and rationalGarten, 1997). Pakistan fits all of these parameters well, having a ization of the large resource base and a large population. It is considered a regioneconomy.

al powerhouse with critical participation in major geopolitical and social events. It is also one of the worlds fastest growing markets, with substantial movement toward liberalization and rationalization of the economy. Pakistans population has immense pent-up demand resulting from economic growth, and consumers have rising disposable incomes. These are two important characteristics of BEMs (see Arnold & Quelch, 1998). Consumer demand exists even in the bottom of the pyramid (BOP) market segment (see Prahalad & Hammond, 2002). Demand in Pakistan covers a broad range of consumer products and services, as well as wide-ranging national needs for industrial products and services to build basic infrastructure.

These positive market indicators of Pakistans progress and potential may surprise some businesspeople who are more familiar with reports about problems in the country. 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. some militant Islamic influence is present, particularly in the areas neighboring Afghanistan, and social infrastructure remains underdeveloped. It was not surprising then that Pakistan should receive an unflattering and unwelcome D-rating for country risk in 2002 (Country Monitor, 2002). This rating draws attention to the inescapable paradox that Pakistan represents, with a subpar risk rating on one hand and real evidence of economic growth and investors confidence on the other hand. Clearly, Pakistan as a market calls for careful analysis and evaluation of business opportunities. First-mover advantages are available to well-prepared investors and manufacturing companies whose objectives are to gain market share and develop performance capabilities (Mascarenhas, 1992).
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Lyn S. Amine


A Strategic Crossroads

Pakistan occupies the fertile Indus Valley, ringed by the Himalayas in the northeast and the Hindu Kush mountains in the north and west of the country. It was through this terrain that the Venetian explorer Although Marco Polo traveled on his way to China. The long coastline gives Pakistan is a rel- access to sea lanes in the Arabian Sea that were made famous in the atively new polit- stories of Sinbad the Sailor. Long ago, the western boundary of Pakistan was the starting point for ancient settlers who moved into ical entity, its the rich farming areas of the Indus and Ganges River Valleys. land is home to one of the most Although the Indus Valley is entirely occupied by present-day Pakistan, the region gave its name to India. ancient civilizations of the world.
Ethnicity and Cultural IdentityHistorys Legacy

Although Pakistan is a relatively new political entity, its land is home to one of the most ancient civilizations of the world. The prehistory of Pakistan is known only through artifacts discovered in the twin capitals of Mohenjo-Daro and Harrapa, which date back about 6,000 years. Table 1 presents an illustrative chronology of key cultural and political eras in the history of the land now known as Pakistan. This review highlights Pakistans character as a complex cultural and ethnic melting pot for some of the most significant civilizations in recorded history. Remains of the Indus Valley civilization, one of the oldest known societies in the world, lie at the heart of culture in present-day Pakistan. The classical history of Pakistan goes back to the conquest by Cyrus, king of Persia in the fifth century BC, who developed the regions labyrinth of river systems for economic and navigational use (Burki, 1999). The Indus Valleys economic and logistical importance was reaffirmed with the arrival of Alexander the Greats armies in 327 BC. Further incursions and settlements were made by Afghans, Persians, and Aryans from the Plains, as well as by numerous tribes from the Central Asian Steppeseach bringing their own religious and cultural tradition. In the seventh century AD, Arab conquests led to the spread of Islam throughout the region. During the Dark Ages, the Mongol hordes broke into the Islamic world, entering through the northeastern part of modern Pakistan. They caused massive destruction and upheaval on their way west to Persia, Baghdad, and beyond. Ultimately, however, the Mongols were absorbed into the local communities and faded as a distinct racial category. Later, a new people called the Mughuls, a mixture of
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New International Business Perspectives on Pakistan

Table 1. Key Cultural and Political Eras in Pakistans History

30001500 BC 1500522 BC 522326 BC 326300 BC 300200 BC 200100 BC 100 BC70 AD 70450 AD 4501010 AD 10101187 AD 11871227 AD 12271739 AD 17391800 AD 18001848 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, Khiljis, Tughlaqs, Syeds, Lodhis, Suris, and Mughals) Nadir Shah and Abdali periods Sikh rule in Punjab, North West Frontier Province and Kashmir, Talpur rule in Sind, Khanate of Kalat in Baluchistan Member of the British Empire Creation of the sovereign nation of Pakistan in two wingsEast and West Pakistan Creation of Bangladesh (formerly East Pakistan) Emergence of present day Pakistan (formerly West Pakistan)

18481947 AD 19471971 AD 1971present

Afghan and Mongol racial stock, ruled over the Indian subcontinent. Then, during the nineteenth century, these dominions were absorbed into the British Empire. Through this flux of nations, a deeply embedded sense of cultural identity emerged, explaining in many ways how many Pakistanis relate to one another, how social classes are defined, and how political party affiliations are determined. It is critical to understand the wide range of cultural identities in Pakistan when developing market segmentation strategies, pricing policies, and promotional strategies. (These manifestations of cultural identity are addressed further in later sections on the political scene, business culture, and consumer behavior.) As a counterpoint to these separate cultural identities, one must also recognize the homogenizing effects of globalization. Many Pakistani consumers and business people now strive to achieve modern (and sometimes Western) lifestyles along with greater socioeconomic development.
The Effects of Partition

When the British finally accorded the region its independence in 1947, they left a subcontinent divided into two sovereign nations Pakistan and India. This event came to be known simply as partiThunderbird International Business Review SeptemberOctober 2004


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tion. Partition triggered significant changes in national territory and demographics. It also caused immense human suffering, with more than a million deaths on both sides of the line between Pakistan and India. Even after the creation of the modern state of Pakistan on August 14, 1947, bitter rivalry persisted between the two neighbors, resulting in three wars.
The modern nation of Pakistan was carved out of what was then India on the basis of religion

The modern nation of Pakistan was carved out of what was then India on the basis of religion, 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. About 14 million people moved to and fro within the first few tumultuous months of independence. This event was unprecedented in recorded history, in terms of the sheer numbers of people migrating over such a short period of time. 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.


Ethnicity, Income, Social Classes, and Market Segmentation

Partition was the source of two fundamentally different economic cultures in Pakistan. Indigenous peoples, including the Punjabi, Sindhi, Pathan, and Baloch ethnic groups, generally subscribed to a rural, landowning, agrarian culture. In contrast, migrants from India into Pakistan, who are known as Muhajirs, included urban professionals from societies characterized by mercantilism and industrialization. The Muhajirs came to represent the majority in the port city of Karachi, which soon became the major industrial center of Pakistan. Karachis important socioeconomic status was further reinforced by its role as a major regional trading center. Lahore and Rawalpindi in the Punjab province farther north follow Karachi as the major commercial centers in Pakistan. Initially, the agrarian and urban cultures differed markedly in their political beliefs and their notion of statehood, with the Muhajirs favoring secular government. Over the years, these two fundamental cultures have intermingled, rendering the political and economic institutions of Pakistan richer, more complex, and multifaceted. Social class structure in Pakistan is similarly multifaceted, with persistent vestiges of the old dichotomy between landowners and industri498
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New International Business Perspectives on Pakistan

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

(Source: Developed by the authors.)

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

Between social classes, there are recognizable patterns of behavior originating from ancient patterns of social relationships between landowners and peasants. 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, in turn, may seem arrogant by Western standards. These traditions of overt domNRPs frequently inance and subservience extend even to relationships between serve as valuable employers and employees in the corporate setting. Foreign businessmiddlemen, people should be careful, therefore, to avoid reliance on oversimplified segmentation schemas that may not accurately reflect these social business partners, and consul- complexities and traditions of deference.
tants in trade with their home country.
Nonresident Pakistanis

A key facet of Pakistani society, as in India, is the large number of individuals who have migrated abroad to study and work. These nonresident Pakistanis (NRPs) represent a very substantial source of foreign exchange for the nation through their repatriated earnings. Indeed, remittances of some $575 million from workers in the United States alone made up the largest single segment of foreign exchange inflow in 2002, up from $105 million in 2001 (Ministry of Finance, 2003). This sharp rise was due in large part to the international crackdown on unofficial modes of funds transfer, traditionally known as the hundi or hawala system, following the attacks in America of 9/11/2001. NRPs often count among the most successful segments of the population in their adopted countries, creating bastions of economic dynamism (Kotkin, 2002). Large Pakistani populations live and work in the Middle East, Britain, Australia, Canada, and the United States, with significant numbers also in the Far East and parts of Africa. They are an important source of market information for businesspeople and investors who are actively considering business opportunities in Pakistan. NRPs frequently serve as valuable middlemen, business partners, and consultants in trade with their home country.


Type of Government

Pakistan is a federal republic set up under the constitution of 1956. There are four provinces (Punjab, Sindh, Baluchistan, and NorthWest Frontier Province), one territory (the Federally Administered Tribal Areas [FATA]), the capital territory of Islamabad (seat of the federal government), and the disputed federally administered area of
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Kashmir and the Northern Areas ( The President is the Chief of State, and the Prime Minister is the Head of Government. The parliament, or Majlis-e-Shoora, is bicameral, with a Senate of 100 seats and a National Assembly of 342 seats. The judicial branch is also bicameral and the Supreme Court has justices appointed by the President. The Federal Islamic, or Sharia, Court currently acts only in an advisory role, with no real powers of enforcement. At the provincial level, Sharia law has been recently introduced and enforced in only one area, the North-West Frontier Province, to deal primarily with criminal acts (such as murder or burglary) and limited civil matters (like marriage). The other provinces in Pakistan have neither implemented nor enforced Sharia law.
The Political Scene Today

The Musharraf government has firmly backed free market incentives and continued privatization.

The military is, by far, the most potent political force in the country. Military rulers, including the present one, President General Pervez Musharraf, have led the country for most of its modern history as a sovereign nation. The two most popular political parties are the Muslim League and the Pakistan Peoples Party. Several religious parties have consolidated into a significant but still minority political force. There are also numerous other political parties with narrower, more parochial agendas. In all, a total of 95 political parties sought registration in the 2002 national elections (Global News Wire, 2002). It is important to note that the two leading parties, and even the consolidated religious parties, all exhibit tendencies generally in favor of free market policies. The Musharraf government has firmly backed free market incentives and continued privatization (Mangi, 2002). A well-established regulatory framework exists, favoring both private and foreign direct investment. Table 2 presents a summary comparison of the current regulatory package for investment in Pakistans manufacturing and nonmanufacturing sectors.
External Relations with India

Political debate in Pakistan is still dominated by the hostile rivalry between India and Pakistan. 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. 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. Aziz, personal communication, September 2003).
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Table 2. A Comparison of Regulatory Packages for Investment in the Manufacturing and Nonmanufacturing Sectors (2003) Nonmanufacturing Sectors
Omar J. Khan

Manufacturing Sector Priority Industries Engineering & Chemicals, Agribusiness, Housing & Construction, Other Tourism Cat(C&D) Industries Agriculture Infrastructure & Social

V.A. Export Cat (A)

Hi-Tech & IT Cat(B)

Services including IT & Telecom Services

Govt. permission Allowed

Not required except in 4 specified industries

Not required except specific licenses from concerned agencies.

Lyn S. Amine

Remittance of capital, profits, dividends, etc. 60% 100%


Upper limit of foreign equity allowed 0.3


Initially 100% but will be diluted to 60% within five years. 0.3 0.3

Minimum investment Amount (M $) 525% 0% 10%


Customs duty 5% on import of PME




Tax relief (IDA, % of PME cost)


50% Allowed as per guidelines. Initial lump-sum up to $100,000 Max rate 5% of net sales Initial period of 5 years

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Royalty and technical fee

No restriction for payment of royalty & technical fee.

(Source: Board of Investment, Government of Pakistan;

New International Business Perspectives on Pakistan

Government Policies and Priorities

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


Omar J. Khan

Lyn S. Amine

Micro-loans distributed through the Khushali Bank target specific communities for development.

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


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New International Business Perspectives on Pakistan

mobilize private-sector resources for future investment; reduce substantially the size and scope of the public sector; develop capital markets for mobilization of domestic savings; and decrease opportunities for misuse and corruption of public property by government officials and public sector managers (Privatization Commission, 1998). Foreign direct investment (FDI) is rapidly increasing in new technology sectors such as telecommunications, and in traditional, revenuegenerating stalwarts such as power generation and banking. Other industries touched by the privatization process include shipping, insurance, road construction, and airlines. After the first green revolution of the 1960s, 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, 2002). Incentives were made available for private investment in most areas of industry and agriculture. Local operators have shown themselves more than willing to partner with foreign investors in exploiting these opportunities (Pakistan Embassy, 2003). 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.), equivalent to U.S.$1,000U.S.$500,000. It targets primarily export-oriented SMEs and has branches across the nation. Along with this access to credit, small businesspeople also receive professional business advice and support services (Small and Medium Enterprise Development Authority Pakistan, 2003).

Incentives were made available for private investment in most areas of industry and agriculture.


Unequal Socioeconomic Development

Pakistan is ranked among lower-middle income countries. The Pakistani model for economic growth since independence was described above as elitist growth (Husain, 1999). Social development has lagged behind economic growth, resulting in unequal social development and notable deficiencies in education, health services, sanitation, and gender equality (Easterly, 2001). While
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Lyn S. Amine

vast amounts of disposable income are available to the ruling elite, a third of the population presently lives below the poverty line. Per-capita income is about $2,100 after incorporation of purchasing power parity ( A large underground economy (black market) persists despite efforts to incorporate it into the mainstream. As a counterbalance to these rather pessimistic charthe Pakistani acteristics, there are numerous important positive indicators that agricultural sec- encourage a more optimistic view of the country in the future. tor has actually Indicators for three promising sectors of activity are discussed in done well com- the following sections.
pared to other countries in the region.
The Agricultural Sector

Agriculture presently accounts for only 25% of GDP. At the time of independence in 1947, it was considered to be the core economy, generating a major part of GDP. Despite this shrinkage, the Pakistani agricultural sector has actually done well compared to other countries in the region. As a result of the second green revolution of the 1990s, Pakistan has tripled its world market share of cotton, reaching about 10%, which is almost the same level as neighboring Indias (Federal Bureau of Statistics, 2003). This fact is especially remarkable considering the large difference in size between the two economies.
Capital Markets

Despite past inefficiencies, capital markets in Pakistan are reappearing in the private sector as important instruments of economic growth (Hardy & di Patti, 2001). As noted earlier, as foreign capital poured into the country, the major Pakistani stock exchange in Karachi (KSE) became the best performing stock market in the world in 2002 (Chowdhury, 2002). Pakistans renewed status as a U.S. ally in the war against terrorism has led to a marked easing of trading restrictions with Western nations. This factor, coupled with renewed induction of World Bank and IMF loans, has had a positive effect on capital availability in Pakistan. A market in futures contracts has been introduced, and audit and accounting practices have been strengthened to minimize any attempts at unethical manipulation. The Securities and Exchange Commission in Pakistan plays an active role in safeguarding the interests of investors. Other major sources of capital in Pakistan include the publicly integrated Development Finance Institutions and the National Savings Organization. Private-sector financing is available through the major commercial banks in the country, of which Habib Bank, United
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New International Business Perspectives on Pakistan

Bank, and Allied Bank are the largest. The requirement for minimum capital has been enhanced to Rs. 1 billion (approximately $20 million) to encourage consolidation of smaller banks. Together, these banks provide the bulk of domestic financing required by investors.
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, 2003), producing notable improvements in levels of urbanization. Basic industries like textiles, leather, and sporting goods account for the bulk of export revenues. Textile manufacturers alone accounted for a massive 64% of total export revenues in fiscal year 20012002 (Ministry of Finance, 2003). Export diversification is a priority for the Pakistani economy, and government incentives have been structured to achieve this goal. Exports of manufactured goods are replacing exports of primary commodities, while still retaining links to key industries producing tobacco, textiles, and apparel. The agricultural sector has done well in recent years, but industry has done even better. Thus, the two major engines of economic growth, agriculture and industry, are effectively working together to generate economic growth. New areas of economic activity, such as software development in the technology sector, are receiving special governmental attention and support through expedited approvals and developmental capital schemes (Board of Investment, 2003). Consequently this is an opportune time for foreign investors to get in on the ground floor in growth industries.
Global Trading Relations

Basic industries like textiles, leather, and sporting goods account for the bulk of export revenues.

The United States, Germany, and Japan are currently the largest export markets for Pakistani goods. Pakistans participation in numerous regional and bilateral trading agreements offers potential for building bilateral relationships and diversifying export markets in the future. Reciprocal trade agreements are already in place with China, the Gulf countries, Turkey, Iran, and several major markets in Southeast Asia (Ali, 2000). Pakistan enjoys a special relationship with China that dates back to the early 1960s. The two countries were brought together initially by motives of political expediency, shared borders and ethnicities, and common interests stemming from border disputes with India. This relationship grew into a long-standing friendship. Pakistan, therefore, presents a valuable production platform for exports to China, particularly for apparel and software.
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Omar J. Khan

Lyn S. Amine

In the future, greater freedom to trade with India will immediately benefit a small number of industries through the creation of new export opportunities, and subsequently grow to benefit industry and commerce in general. If bilateral relations improve, and there are some indications of this intent, there would also be a significant improvement in Pakistans overall country-risk rating.
investors and foreign business partners have made significant use of exporting and equity methods of FDI.


Growth of the Industrial Base

At the time of partition, only 11 major corporations were engaged in five sectors of industry. Today, Pakistans industrial base has expanded to around 3,000 companies. Notably, this base is defined by the Board of Investment as only those sectors and companies that employ a majority of the industrial workforce. In 2003, there were 43,618 companies incorporated in Pakistan (Board of Investment, 2003). These are heavily concentrated in traditional manufacturing sectors such as textiles, chemicals, agricultural products, and steel, with considerable numbers in the newer sectors of information systems processing and software development. The Board of Investment indicates that foreign companies operate in 14 key sectors and represent a variety of corporate nationalities. Clearly, the competitive environment in Pakistan is healthy and supports a lively free market economy.
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, see Erramilli & Rao, 1993; Leonidou & Katsikeas, 1996). Similarly, the growing literature on BEMs offers guidelines on competing in this type of marketplace (for details, see Arnold & Quelch, 1998; Garten, 1997; Ramamurti, 2000). Traditional modes of foreign market entry include exporting, contractual methods such as licensing and franchising, cooperative methods such as joint ventures and strategic alliances, and equity methods of FDI through wholly owned subsidiaries (for further discussion of these options, see Czinkota, Ronkainen, Moffett, & Moynihan, 2001). In the case of Pakistan, investors and foreign business partners have made significant use of exporting and equity methods of FDI (United States-Pakistan Business Council, 2003). Two favorite points of entry into Pakistan are through the port city of Karachi and the Punjab province. Other points of entry for consideration include the provinces of Baluchistan and Sind, where land
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New International Business Perspectives on Pakistan

and labor costs are modest and incentives are available to set up production facilities. These two provinces have been generally overlooked by foreign investors, except in the case of large-scale industries such as power-generation and chemicals. This is largely a result of the relatively primitive state of national infrastructure, which has, in the past, rendered physical distribution of goods difficult. This situation should however be regarded as a business opportunity to participate in profitable public-sector and infrastructure projects requiring con- FDI opportunities are particularly struction of roads, bridges, and telecommunications.
FDI, Hot New Sectors, and Global Company Participation

FDI in Pakistan has been implemented by a large number of global companies in major industries such as consumer products, processed foods, pharmaceuticals, financial services, chemicals, textiles, petroleum, and software. Familiar brand-name companies include Colgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unilever, Nestl, Ciba-Geigy, American Express, Citibank, BPAmoco, and Microsoft. In the first half of fiscal year 2001, American investment alone in Pakistan represented nearly 75% of the countrys $200 million total in foreign direct investment (United StatesPakistan Business Council, 2003). Notably, most of these global leaders are planning to expand their investments in Pakistan. FDI opportunities are particularly attractive for those firms seeking specialized market niches. The Board of Investment (2003) identified a number of sectors as hot areas for FDI and joint ventures that employ local talent and expertise. Of particular interest is the information technology (IT) sector, where the government is working to promote growth of a domestic version of Silicon Valley. Since 1995, the Pakistani Software Export Board has been facilitating production and export of software by establishing IT parks, call centers, and joint venture relationships between local and foreign firms (Pakistan Software Export Board, 2003). These types of operations draw on a workforce that is highly skilled, with large numbers of graduates from local business and technical schools. As an example, the California company Align Technology has set up a customer service call center in Lahore. Lahorites answer toll-free numbers from the United States, providing product support and service 24 hours a day (Lagerquist, 2002). Despite some concern in the West that this type of business is draining white-collar jobs away from national markets, the competitive advantage of a cheap, well-qualified, and sophisticated labor supply in Pakistan ensures that this type of new business will continue to grow.
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Omar J. Khan

Lyn S. Amine

Joint ventures hold great promise in the agricultural and farming sectors through the operation of large-scale farms.

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


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As indicated by the foregoing examples, a range of market-entry modes are available and appropriate for doing business in Pakistan. Both small- and large-size foreign companies across a range of industries are already active in the Pakistani market, taking advantage of the countrys strategic location in southwest Asia, government incentives for FDI, industries targeted for growth assistance, natural resource factors, local labor, and domestic market demand.
Dealing with Corruption in the Business World

Local business culture in Pakistan presents foreign businesspeople with two major ethical challenges: bribery and nepotism. 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, 2003). Moreover, government officials have demonstrated a lack of transparency in handling bidding processes, despite serious efforts by the Privatization Commission to combat this problem (Ali, 2000). Staying within official channels may reduce, but not eliminate, exposure to these problems when initially entering the Pakistani market. The temptation to engage in corrupt practices is part of the very culture of business in Pakistan and, in some ways, is institutionalized. Nevertheless, if a foreign company is to establish a reputation for strict ethical conduct, total consistency will be needed. Although cumbersome and mind-numbingly verbose, business regulations and laws are published and easily accessible. Any suggestion of deviation from these published rules and procedures should be met with resolute rejection. It is recommended that foreign managers assert a business culture of their own, consistent with standards in their home country. This demonstration of a clear commitment to resist corrupt practices should eventually yield beneficial results, by reducing pressure to conform to questionable patterns of local business behavior. Even though corruption is widely accepted as a cost of doing business in Pakistan, it is nevertheless widely and vehemently disdained.

Local business culture in Pakistan presents foreign businesspeople with two major ethical challenges: bribery and nepotism.

CONSUMER SEGMENTATION AND MARKETING STRATEGIES IN PAKISTAN Keeping in mind the earlier discussion about the many geographic origins, ethnic identities, and different value systems of people in Pakistan, care should be taken when targeting consumers.
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Lyn S. Amine

Standardized global strategies will, in many instances, need rethinking in order to reach the wide range of consumer market segments in Pakistan.
Family Decision Making and the Status of Women

The professional status of women is better than it has ever been.

The family unit still dominates Pakistani society, and the extended family is the main source of rampant nepotism among the political elite. Households are traditionally hierarchical and patriarchal with gender-specific spheres of activity and decision making, particularly in rural areas. The professional status of women is better than it has ever been. Indeed, Pakistan is proud to boast of having already elected a female prime minister, Benazir Bhutto. Women are well-respected and the female employment rate has increased rapidly, from 5.6% in 1981 to over 20% in 2002 (Federal Bureau of Statistics, 2003). However, when compared to Western nations, women are still well behind in terms of leadership positions in industry. At work, the fashion for women is one of modesty in dress and custom, whether through some limited forms of veiling or through individual style of social interaction. For example, women seldom maintain eye contact with men during conversation, even in a professional setting. Handshakes between sexes, although gaining some acceptance, are still not the norm. Of course, people of the same sex shake hands and frequently hug or hold hands as a sign of friendship. When in doubt, foreign businesspeople should rely on simple, polite, verbal acknowledgements.
Market Segmentation

Consumer markets in developing countries have traditionally been segmented according to consumer demographic factors such as social class, religion, language, and urban versus rural populations (Jain, 1989; Terpstra & David, 1991). Alternatively, countries have been clustered using macro-level variables such as geography, politics, economic factors, and aspects of national culture (Hofstede, 1987; Kale, 1995). As mentioned earlier with reference to our new framework of consumer segmentation in Figure 1, in terms of sheer numbers the largest consumer market segment in Pakistan consists of lowerincome, lower-class workers. In order to serve this potentially profitable segment, we recommend use of the innovative method of bottom of the pyramid (BOP) marketing (Prahalad & Hammond,
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New International Business Perspectives on Pakistan

2002). This mass-market, high-volume, very low-price, and very low-margin strategy represents a key opportunity for marketers, not only in Pakistan but also in other BEMs.
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. Examples include dailyuse packets of shampoo, soap, toothpaste, razor blades, chewing may prove to be less complex gum, and so on. Penetration pricing is essential to success of this strategy, so production costs must be kept low. In-country pro- than subsequent efforts to duction is therefore the most appropriate strategy for holding down production and transportation costs. Unilever and Colgate- achieve market expansion. Palmolive have both had considerable success with the BOP marketing strategy (Prahalad & Hammond, 2002), as have Coca-Cola and Pepsi-Cola in India (Amine & Kumar, in press). Another successful strategy is targeting niche segments, defined according to the multiple ethnicities in Pakistan. For example, Pathans in the North-West and Baluchs in Baluchistan are generally more conservative and less receptive to Western-style marketing efforts, so a straightforward presentation of product benefits and low price is the most effective and persuasive promotional approach. In contrast, the people of Karachi and urban Punjabis are much more receptive to Westernized marketing messages that emphasize quality and status. Ciba-Geigy has successfully implemented communication strategies targeted to different ethnic groups in the various provinces. 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. As Craig and Douglas (1996) pointed out, initial entry may prove to be less complex than subsequent efforts to achieve market expansion. As in other major urban centers around the world, globalized segments can be identified, such as teenagers, working women, young urban professionals (yuppies), upscale consumers, and others. These segments are receptive to globalized product and promotional strategies consistent with the values and purchasing power of the middle and upper classes. Middle- 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.
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Omar J. Khan

Lyn S. Amine

EXPORTING FROM PAKISTAN Pakistans regional trade and political affiliations, low-cost factors of production, 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. 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. Other global companies are following their lead (see Board of Investment, 2003). Most SMEs in Pakistan are also involved in production for export ( Marketing issues arising from country-of-origin (COO) considerations need to be carefully considered when choosing Pakistan as an export platform. (For a complete discussion on COO issues, see Peterson & Jolibert, 1995.) Despite the many positive factors identified earlier, Pakistan suffers from a range of perceived negative COO effects. These are a function of both macro-level and micro-level factors: for example, an image of political instability persists as a result of successive changes of government, and questions about quality and reliability are associated with some industries. However, vibrant export sectors such as textiles, sporting goods, leather, and surgical instruments enjoy a decidedly positive COO effect. This is a result of clearly demonstrated high-quality standards and high export profit margins.

Figure 2. Export Processing Zones in Pakistan (2003)

(Source:; please see web site for color picture)


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Potential investors need to weigh both positive and negative COO factors when deciding to do business in Pakistan. An important affirmative consideration in any decision should be the nationwide availability of special industrial zones (SIZs) and export processing zones (EPZs), which have been created to serve export-oriented industries (Export Processing Zones Authority, 2003). A detailed comparison of some regulatory packages designed to encourage investment in the manufacturing and nonmanufacturing sectors (2003) is presented in Figure 2. Information on market operating conditions in individual sectors and industries is provided by the Board of Investment, the Ministry of Finance and Economic Affairs, the Federal Bureau of Statistics, the State Bank of Pakistan, the annual Economic Survey of Pakistan, and the Small and Medium Enterprise Development Authority (SMEDA).

Potential investors need to weigh both positive and negative COO factors when deciding to do business in Pakistan.

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. A wide range of international business opportunities has been identified, while also giving due consideration to the risks, competitive threats, and costs of investing in this BEM. In assessing the strategic implications for investing in Pakistan, we find a number of pertinent factors on both the plus and minus sides.
The Plus Side

Pakistan has a rapidly developing infrastructure; well-established legal systems; comprehensive road, rail, and sea links; and good-quality telecommunications and IT services. The country is strategically located and serves as a regional hub for access to the Middle East, Southeast Asia, China, Turkey, and the Central Asian republics (Board of Investment, 2003). Pakistan also has many physical, cultural, administrative, and business advantages that are important to foreign investors. These include extensive agricultural land; efficient production of wheat, cotton, rice, fruits, and vegetables; and extensive reserves of coal, crude oil, natural gas, copper, iron ore, and gypsum, as well as large-scale fisheries and livestock production. Pakistan possesses valuable human resources, with an educated and relatively low-cost workforce. There is a very large domestic market, with 150 million consumers in a variety of income classes. The growing middle class
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Omar J. Khan

Lyn S. Amine

is moving toward sophisticated global lifestyles and consumption habits, consistent with high levels of education, professional expertise, and global awareness. Recently, Pakistan has benefited greatly from its status as a front-line ally of the United States. Expected directions for economic developAs a nation, ment include continuing trends toward liberalization, deregulation, Pakistan is mak- and privatization. Incentives for foreign investment are among the ing consistent most generous in the world, and all economic sectors are now open to foreign ownership. efforts to
integrate itself into the global economy.
The Minus Side

Critical questions still remain to be considered about the future of international business in Pakistan, not least of which is the political instability caused by the long-standing dispute with India over Kashmir, as well as by the instability of Pakistans neighbor, Afghanistan. Some minority elements of the Pakistani population are engaged in trying to rebuff the establishment of Western assets in the country, and sectarian violence has surfaced periodically. On the social front, there are some serious delays in social development, and quality of life for most consumers is still low by world standards.

OUTLOOK FOR THE FUTUREWEIGHING THE OPPORTUNITIES AND THREATS As a nation, Pakistan is making consistent efforts to integrate itself into the global economy (Country Monitor, 2003). The government has successfully turned around the deteriorating economic situation of a few years ago, and the nation is enjoying a rapidly improving economy (Federal Bureau of Statistics, 2003; World Bank, 2002). Pakistans external creditworthiness improved dramatically in 2002 and 2003 as a combined result of increased exports, increased overseas workers remittances, increased aid disbursements, and substantial debt reduction. The current domestic economic climate is positive for investment. FDI in Pakistan grew dramatically from $1 billion to $5 billion in just the five months following the events of September 11, 2001 (Business Asia, 2002). Generally, the economic forecast is bright, and prospects for sectoral growth are attractive. Genuine first-mover advantages can be achieved through careful planning and appropriate market entry. The Pakistani government is taking seriously its role in promoting social responsibility and higher ethical conduct in business. Fundamental
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transformations are taking place in the political, institutional, economic, social, and gender-equality spheres in order to ensure transition to a modern Islamic state. Women have a more significant voice in the national legislature, and new education and health reform strategies are in place. Even environmental concerns are being addressed in the areas of natural resource use and conservation (Faruqee, 1996). Remarkable progress is taking place in infrastructure development, with new highways between Karachi, Lahore, and Islamabad. This is a direct result of private-sector investment driven by the promise of attractive rates of return. Continuing public and private investment is needed to bring infrastructure facilities up to a level that is competitive with more industrialized countries. Specific sectorsin particular, the IT industryare being promoted as engines of national economic growth.

CONCLUSION This commentary has provided comprehensive and current information about Pakistan and has presented new perspectives for international business participation in the country. Foreign producers, marketers, and direct investors are strongly encouraged to take another look at this ancient land that is both an NIC (newly industrializing country) and a BEM (big emerging market). The available evidence shows that Pakistan is moving in the right direction for sustained economic development. It is enhancing its attractiveness not only as a consumer market with huge demand for products and services, but also as a base for large-scale industrial investment and production, as well as a platform for exporting to other countries across the Middle East and Asia.

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