i

DEDICATION

Dedicated to my respectable Parents

And

.
.
.

Resource less Students who could not continue their

study
 ii

ACKNOWLEDGEMENTS
ALHAMD O LILAH! Thanks and all admiration to ALLAH, Who confer me the capability and
endurance to accomplish my PhD thesis.

I would like to express my profound and sincere respect and thanks to my supervisor, Prof. Dr.
Mohammad Afzal, Chairman, Management Sciences Department, COMSATS institute of
Information Technology, Islamabad for providing me opportunity to take admission in M. Phil.
Leading to PhD program and teaching me M. Phil and PhD courses and for his helpful direction,
motivation and supervision, throughout my study.

I am also most grateful to Prof. Dr. Khair uz Zaman and Dr. Ijaz Hussain who also taught me
M.Phil. and Ph. D courses and to Dr. Mahmood Shah, Chairman, Economics Department, Gomal
University D.I.Khan for accomplishing my Ph. D Seminars.

I appreciate and thanks for the help I received from Mr. Shahid Hussain Khan and Mr. Zahid
Hussain Khan (my nephews) to use different computer programs.

I thanks to Mr. Shah Jehan Khan, my brother-in-law, who lead me to contact Mr. Shahbaz Nissar
Khan of Gujranwala (I am especially thankful to him), with the help of whose we deliver the
questionnaire in the registered office of textile manufacturing and exporting companies in Lahore
and Faisal Abad district. Although we were not succeeded in collecting filled in questionnaire
but this help us to arrive at the decision to use annual reports of the public limited companies.

I also desire thanks and acknowledge friendship of Mr. Rafaqet Ali of Lahore (Ph. D scholar),
we together go to the registered office of the companies for collecting filled in questionnaire in
Lahore and meet Mr. Anis-ul-Haq, Secretary - Punjab Region, APTMA, in Lahore.

I am extremely thankful to my family members, all the well-wishers and friends who encouraged
and prayed for me.

I also thankfully acknowledge the sanction of study leave from the education department,
Government of Punjab and the sanction of PhD scholarship from the Higher Education
Commission, Government of Pakistan which made possible for me to complete my PhD.
 iii

Inayatullah Khan

ABSTRACT OF THE STUDY

Pakistan’s economy desperately relies on textile industry. The textile industry of Pakistan has
shown progress not only in production but it has also performed well in export during the last
decades. Textile exports of Pakistan was 5.2 billion US dollar in 1999 and it has been doubled to
10.2 billion US dollar in 2010. In the world open markets defined by the WTO, firms are worried
about utilizing their resources optimally to ensure maximum profit as well as high quality of
their product so that it could compete successfully with rival firms. Policy makers textiles
exporters are giving first priority to improve efficiency and competitive in the textile industry
wanting to beat others in the world market as production efficiency will count more than ever
before. It is expected that textile manufacturing firms in Pakistan will use resources of
production more efficiently and move towards technologically efficient production frontier to
reduce production uncertainty and improve the quality of products to compete with the firms in
the domestic and international textile market. The firms may reduce production uncertainty
effectively but could not reduce market uncertainty. Production uncertainty may have significant
impact on the firm’s export. Taking into account these, we analyzed the technical efficiency and
production uncertainty of Pakistan textile manufacturing and exporting firms during the period
2005-06 to 2008-9. We used Cobb-Douglas (half normal) Stochastic output Frontier Model for
each year. The stochastic frontier production function is measured by the MLE technique. In
addition, we estimated unbalance panel data random effects specification (RES) for investigating
the impact of computed production uncertainty on exports of 109 Pakistan’s textile
manufacturing and exporting firms during the period 2005-06 to 2008-9. To achieve these goals
we used the annual reports data of limited companies registered in the stock exchanges. We used
Stata 12.0 for estimation. On average material cost has the greatest elasticity of production i.e.
0.721, salaries and wages has the second elasticity of output i.e. 0.157 than other inputs during
the period 2005-06 to 2008-09. All the inputs elasticity are inelastic, the firms have maintained
constant returns to scale and were scale efficient during the period. The level of technical
efficiency of the firms is ranged from 66.04 % to 96.81 % with a mean 89.74 %. On average, in
the short run, output of the firms can be increased by more or less 10.26 % by employing the
 iv

most efficient procedures. The mean technical efficiency of the firms during the periods remains
approximately the same. The average estimated value of g indicates that approximately 68.96 %
of the variations in the firms’ output are as a result of difference in technical inefficiency. The
trend in the random variations in the firms’ output due to in technical inefficiency is increasing
during the period. We also discovered that the average production uncertainty of the firms
remained between 6.37% and 8.18% and the average of mean production uncertainty is equal to
6.85 %. On average, there was 6.85 % uncertainty (risk) in production due to inefficiency during
the period. The trend in the mean production uncertainty of the firms during the period is
downward i.e. it is decreasing. Furthermore the results of RES for the period 2005-06 to 2008-09
show that a firm having plants in Faisalabad, Karachi and Lahore districts, having their own
electricity generator and spending expenditure on research and development (R&D) increases the
export level the firm but it is insignificant. Larger total sale (larger size of firm) increases exports
of the firms and increase in local sale has strong negative effects on interpreting export output of
the firms and they are strong significant. Increase in intangible asset propensity increases export
level of the firms and it is insignificant. Production uncertainty has strong positive effects on
Pakistan’s textile manufacturing and exporting firms during the period and it is strong significant
i.e. export increases when production uncertainty was high. The reasons may be WTO defined
Quota free open world markets change the demand of textile exports of the firms. The firms have
not ability to be flexible in production to meet the demand. When demand for export decreases,
the firm sort out their inputs and apply efficient inputs and this reduced the Production
uncertainty of the firm. When demand for export increases the firms apply some inefficient
inputs to respond immediately which causes to increase production uncertainty as a result of
technical inefficiency with the increase of export.
 v

TABLE OF CONTENTS

Page No.
Dedication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
Acronyms and terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Chapter 1: Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Overview of Pakistan textile industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Objective and significance of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4 Scheme of this study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Chapter 2: Profile of Pakistan Textile industry. . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Significance of textile industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Growth of Pakistan’s textile industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Chapter 3: Review of Studies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Chapter 4: Methodology and Data Collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4.1 Data collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.2 Methodology to find out technical efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.3 Methodology to find out P.U. and technical inefficiency . . . . . . . . . . . . . . . . . . . . . . . . 28
4.4 Methodology to study impact of P.U. on export a firm . . . . . . . . . . . . . . . . . . . . . . . . . 32

Chapter 5: Efficiency analysis of Pakistan’s textile exporting firms. . . . . . . . . . . . . . . . . . . 39

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
 vi

5.2 Analyzing efficiency of the firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

5.3 Efficiency analysis of the firms: 2005-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Efficiency analysis of the firms: 2006-07 . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 48
5.5 Efficiency analysis of the firms: 2007-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 54
5.6 Efficiency analysis of the firms: 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 60
5.7 Trends in T.E of the firms from 2005-06 to 2008-09 . . . . . . . . . . . . . . . . . . . . . .. . . . . 67
5.8 Trends in random variation of the firms from 2005-06 to 2008-09 . . . . . . . . . .... . . . . 70
5.9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . 71

Chapter 6: P.U. analysis of Pakistan’s textile manufacturing and exporting firms. . . . 73

6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 74
6.2 P.U and T.I.E analysis of the firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 75
6.3 P.U. and T.I.E. of the firms: 2005-06 . . . . . . . . . . . . . . . . . . . . . . . ….. . . . . . . . . . . . .76
6.4 P.U. and T.I.E. of the firms: 2006-07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. .. . . . .83
6.5 P.U. and T.I.E. of the firms: 2007-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
6.6 P.U. and T.I.E. of the firms: 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
6.7 Trends in T.I.E. of the firms from 2005-06 to 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . 105
6.8 Trends in P.U. of the firms from 2005-06 to 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . 107
6.9 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Chapter 7: Impacts of P.U. on Pakistan’s textile manufacturing and exporting firms. . 111
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
7.2 Export propensity function of a firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
7.3 Fixed effects specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
7.4 Fixed effects or least squares dummy variable specification . . . . . . . . . . . . . . . . . . . . . 117
7.5 Random effects Specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
7.6 Random effects or pooled OLS specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
7.7 Fixed effects or random effects specification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
7.8 Results discussion for random effects model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
7.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124

Chapter 8: Summary, Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . 127

 vii

8.1 Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 127

8.2 Policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
8.3 Suggestions for future research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . … 133

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 137
Appendix A Name of firms employed in estimation for 2005-06 . . . . . . . . . . . . . . .. . . . 137
Appendix B Name of firms employed in estimation for 2006-07 . . . . . . . . . . . . . . .. . . . 139
Appendix C Name of firms employed in estimation for 2007-08 . . . . . . . . . . . . . .. .. . . 141
Appendix D Name of firms employed in estimation for 2008-09 . . . . . . . . . . . . . . . . . . 143
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List of Tables

Page No.

Table 1.1: Significance of textile industry . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Table 1.2: Percentage share of major exports of Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 2.1: Cotton production in the world from 2006 - 07 to 2009-10 . . . . . . . . . . . . . . . . . . . 9
Table 2.2: Cotton consumption in the world from 2006 - 07 to 2009-10 . . . . . . . . . . . . . . . . . 11
Table 2.3: Significance of textile industry in Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 2.4: Percentage share of textile manufactures’ export in Pakistan . . . . . . . . . . . . . . . . . . 13
Table 2.5: Province wise expansion of textile industry in Pakistan. . . . . . . . . . . . . . . . . . . . . . 14
Table 2.6: Percentage share of major exports of Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Table 2.7: Main buyers of Pakistan’s textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table 5.1: Descriptive statistics of variables used in estimation (2005-06) . . . . . . . . . . . . . . . . 42
Table 5.2: The MLE results of Cobb-Douglas model for 2005-06 . . . . . . . . . . . . . . . . . . . . . . . 43
Table 5.3: Grading of Pakistan’s textile exporting firms (2005-06) . . . . . . . . . . . . . . . . . . . . . . 44
Table 5.4: F.D of technical efficiency for individual firms (2005-06) . . . . . . . . . . . . . . . . . . . . 47
Table 5.5: Descriptive statistics of variable used in estimation (2006-07) . . . . . . . . . . . . . . . . . 48
Table 5.6: The MLE results of Cobb-Douglas model for 2006-07. . . . . . . . . . . . . . . . . . . . . . . 49
Table 5.7: Grading of Pakistan’s textile exporting firms (2006-07) . . . . . . . . . . . . . . . . . . . . . . 50
Table 5.8: F.D of technical efficiency for individual firms (2006-07) . . . . . . . . . . . . . . . . . . . . 52
Table 5.9: Descriptive statistics of variables used in estimation (2007-08) . . . . . . . . . . . . . . . . 54
Table 5.10: The MLE results of Cobb-Douglas model for 2007-08 . . . . . . . . . . . . . . . . . . . . . . 55
Table 5.11: Grading of Pakistan’s textile exporting firms (2007-08) . . . . . . . . . . . . . . . . . . . . . 57
Table 5.12: F.D of technical efficiency for individual firms (2007-08) . . . . . . . . . . . . . . . . . . . 59
Table 5.13: Descriptive statistics of variables used in estimation (2008-09) . . . . . . . . . . . . . . . 60
Table 5.14: The MLE results of Cobb-Douglas model for 2008-09 . . . . . . . . . . . . . . . . . . . . . . 61
Table 5.15: Grading of Pakistan’s textile exporting firms (2008-09) . . . . . . . . . . . . . . . . . . . . . 63
Table 5.16: F.D of technical efficiency for individual firms (2008-09) . . . . . . . . . . . . . . . . . . . 65
Table 5.17: The concise mean of variables used in MLE from 2005-06 to 2008-09 . . . . . . . . . 67
 ix

Table 5.18: The results MLE of Cobb-Douglas model: 2005-06 to 2008-09 . . . . . . . . . . . . . . . 68

Table 5.19: Minimum, maximum and mean T.E from 2005-06 to 2008-09 . . . . . . . . . . . . . . . . 69
Table 6.1: The MLE results of Cobb-Douglas model (2005-06) . . . . . . . . . . . . . . . . . . . …. . . . 76
Table 6.2: Estimated error εi, T.I.Ei, P.Ui, 95% confidence intervals for ui/ εi (2005-06) . .. . . .78
Table 6.3: The MLE results of Cobb-Douglas model (2006-07) . . . . . . . . . . . . . . . . . . . . . . . . .84
Table 6.4: Estimated error εi, T.I.Ei, P.Ui, 95% confidence intervals for ui/ εi (2006-07) . .. . .. 85
Table 6.5: The MLE results of Cobb-Douglas model (2007-08) . . . . . . . . . . . . . . . . . . . . . . . .. 91
Table 6.6: Estimated error εi, T.I.Ei, P.Ui, 95% Confidence Intervals for ui/ εi (2007-08) . . . .. 93
Table 6.7: The MLE results of Cobb-Douglas model (2008-09) . . . . . . . . . . . . . . . . . . . . . . .. . 98
Table 6.8: Estimated error εi, T.I.Ei, P.Ui, 95% Confidence Intervals for ui/ εi (2008-09) .. . . 100
Table 6.9: Minimum, maximum and mean T.I.E from 2005-06 to 2008-09 . . . . . . . . . . . . . . 105
Table 6.10: Minimum, maximum and mean P.U from 2005-06 to 2008-09 . . . . . . . . . . . . . . 107
Table 7.1: Parameters Estimates of FES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 116
Table 7.2 Parameters Estimates of RES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Table 7.3: Breusch and Pagan Lagrangian multiplier test . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Table 7.4: Difference in estimated parameters for Hausman test . . . . . . . . . . . . . . . . . . . . .. 121
Table 7.5: Parameters estimates of RES by GLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 122

.
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List of Figures

Page No.

Figure 2.1: Pakistan and world’s cotton production during 2006-07 to 2009-10 . . . . . . . . . . . . 10
Figure 2.2: Pakistan and world’s cotton consumption during 2006-07 to 2009-10 . . . . . . . . . . 11
Figure 2.3: Pakistan’s export of cotton cloths (in quantity and values) . . . . . . . . . . . . . . . . . . . 14
Figure 2.4: Expansion of Cotton Textile Units in Pakistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 5.1: F.D of T.E of Individuals Firms for 2005-06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Figure 5.2: F.D of T.E of Individuals Firms for 2006-07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Figure 5.3: F.D of T.E of Individuals Firms for 2007-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Figure 5.4: F.D of T.E of Individuals Firms for 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Figure 5.5: Trends in Max., Min. and mean T.Ei from 2005-06 to 2008-09 . . . . . . . . . . . . . . . . 69
Figure 5.6: Trends in average γ from 2005-06 to 2008-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Figure 6.1: Graph of T.I.Ei against estimated random error for 2005-06 . . . . . . . . . . . . . . . . . . 78
Figure 6.2: Upper and lower confidence bounds of T.I.Ei for 2005-06 . . . . . . . . . . . . . . . . . . . . 82
Figure 6.3: Graph of T.I.Ei against estimated random error for 2006-07 . . . . . . . . . . . . . . . . . . 85
Figure 6.4: Upper and lower confidence bounds of T.I.Ei for 2006-07 . . . . . . . . . . . . . . . . . . . 90
Figure 6.5: Graph of T.I.Ei against estimated random error for 2007-08 . . . . . . . . . . . . . . . . . . 92
Figure 6.6: Upper and lower confidence bounds of T.I.Ei for 2007-08 . . . . . . . . . . . . . . . . . . . 97
Figure 6.7: Graph of T.I.Ei against estimated random error for 2008-09 . . . . . . . . . . . . . . . . . . 99
Figure 6.8: Upper and lower confidence bounds of T.I.Ei for 2008-09 . . . . . . . . . . . . . . . . . . 105
Figure 6.9: Trends in Max., Min. and mean T.I.Ei from 2005-06 to 2008-09 . . . . . . . . . . . . . . 106
 xi

Acronyms and Terms

APTMA All Pakistan Textile Mills Association

CMI Censuses of Manufacturing Industries
CPI Consumer Price Index
Di Dummy variable for ith firm
F.D Frequency distribution
FES Fixed Effects Specification
GLS Generalized Least Square
GOP Government of Pakistan
H0 Null Hypothesis
Ha Alternative Hypothesis
LCBi Confidence Bound for ith Firm
LDCs Less Developed Countries
LFS Labour Force Survey
LSDV Least Squares with Dummy Variables
MFA Multi-Fiber Agreement
MLE Maximum Likelihood estimation
OLS Ordinary Least Square
OP Output of the firm
P.U Production Uncertainty
P.Ui Production Uncertainty for ith firm
PACRA The Pakistan Credit Rating Agency Limited
PRGMEA Pakistan readymade garments export association
R&D Research and Development
RDACELL Research, Development & Advisory Cell, Ministry of Textile Industry, Pakistan
RES Random effects
T.E Technical Efficiency
T.Ei Technical Efficiency for ith Firm
 xii

T.I.Ei Technical Inefficiency for ith Firm

UCBi Confidence Bound for ith Firm
WTO World Trade Organization
Xit The value of explanatory variables X for ith firm at time period “t”

TERMS AND DEFINITION

1. Export propensity or the propensity to export of the firm is measured as exports over
output or production.
2. Production uncertainty: A production frontier describes the highest level of output
possible by a specified technology and an input bundle. The absolute displacement by
which a firm lies below its production frontier is a measure of the firm’s technical
efficiency. The standard error of the firm’s technical efficiency is called production
uncertainty.