Journal of Entrepreneurship and Business Venturing

Vol 4, Issue 1, 2024, PP. 317-334

Trade Openness, Market Capitalization and Entrepreneurial Ventures:

Implications for Business and Industrial Growth of Pakistan

Muhammad Ahsan Bhutta

Department of Economics, NCBAE, Multan, Pakistan.
ahsanbhutta1993@gmail.com
Muhammad Ramzan Sheikh
School of Economics, Bahauddin Zakariya University Multan, Pakistan
Irfan Hussain
Department of Economics, GC University Faisalabad, Pakistan
irfansial007@hotmail.com

Corresponding: ramzansheikh@bzu.edu.pk
ARTICLE INFO ABSTRACT
Article History: The activities of entrepreneurs, market capitalization and trade openness have a
Received: 11 Sep, 2023 significant impact on accelerating the process of industrialization in Pakistan.
Revised: 19 Nov, 2023 Economic integration is promoted by trade openness by giving access to new markets
Accepted: 28 Feb, 2024 and technological advancements to local companies that increase competition,
Available Online: 29 Feb, productivity and efficiency. The attractiveness of the business environment and the
2024 confidence of investors are gauged by market capitalization. A strong market
capitalization gives access to funding for growth and innovation by drawing in both
DOI: domestic and foreign investment. Entrepreneurship drives innovation, employment
https://doi.org/10.56536/jebv.v4i1.78 opportunities and diversification by infusing the economy with validity and invention.
Pakistan can unlock its full potential and open the door to sustainable business and
Keywords:
industrial growth. The study aims to seek the effect of trade openness, market
Trade openness, Inflation,
capitalization and entrepreneurial ventures on industrial value added or industrial
Tax, Industrial and Business
growth in Pakistan by taking the time series data over the period 2000-2022. The study
growth, Market
has used the Autoregressive Distributive Lag Model (ARDL). The results point out that
Capitalization.
lending interest rates and taxes have a negative impact on industrial value added while
inflation, trade, market capitalization, secondary school enrollment, private sector
credit, and energy consumption show a favorable influence on industrial value added.
JEL Classification:
The study has suggested that policymakers need comprehensive strategies for the
Q27, L26
expansion of the industry, with fiscal policies to manage inflation, foster
competitiveness, and promote trade openness and market capitalization.
© 2024 The authors, under a Creative Commons Attribution-Non-Commercial No-Derivatives 4.0.

INTRODUCTION
Within Pakistan’s industrial sector, manufacturing has a leading position and accounts for 12.01
percent of the GDP. The manufacturing sector in Pakistan is classified into three primary groups by
the national accounts which make 78.4% of QIM, a metric used to assess LSM performance. The
extraction of building materials and natural resources is included in the mining and quarrying industry,
which accounts for about 1.6% of GDP. For economic growth and development, investment, seamless
commerce, institutions, investor’s skill of capital raising, and government policies are essential, but
the impact of the stock market is critical. The stabilization of capital can be obtained by the stock
market, which supports investment and economic growth. The stock market is essential for proper
economic functioning as it connects the borrowers and savers. For the exchange of equities between
people, government, and corporations, the stock market creates liquidity that plays a vital role in
economic growth and development; that is why the capital market positively impacts growth among
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developed countries (Chikwira and Mohammad,2023). Economic growth is based on financial

institutions' activities that increase an economy’s production capacity. So, the countries with the best
financial strategies grow faster than those with financial institutes do not work correctly. The stock
market and other banking activities like money supply, private sector credit, and market stabilization
play a vital role in economic growth and development (Evans, 2022).
The indicators of economic growth and development are different for different economists. Many
studies showed that economic growth depends on investment in physical labor and capital, better
financial activities, high employment levels, and high literacy rates. However, policymakers and
researchers divert their attention to entrepreneurship as an economic growth indicator.
Entrepreneurship supports the creation of new employment opportunities, jobs, the emergence of
innovations, enhanced business activity, and the stimulation of competitiveness are important for
economic growth (Stoica et al. 2020).
Entrepreneurial activities are vital in modern globalization as they support economic growth and solve
societal problems. Innovative entrepreneurship is essential to enhance economic growth and
competitiveness through new technology, products, and services. It also helps to provide higher
employment and innovative opportunities (Tahir and Burki, 2023). Entrepreneurship significantly
impacts economic growth, but still, its impact varies due to the diversity of entrepreneurial types and
business environments (Khyareh and Amini, (2021). Many studies indicate that entrepreneurs play a
vital role in the growth of an economy through various means, such as allocating resources to develop
goods and services that satisfy market demands, generating jobs, establishing centers for innovation
and designated economic zones, promoting regional trade and collaboration; investing in research and
development efforts; launching innovations into the market; engaging in social work; enhancing
market competition, which results in improved service quality and pricing; and persistently refining
products and processes (Pradhan et al. 2020).
The notion that ‘foreign trade is an engine of economic growth’ is very old but during the 20th century,
this notion could not get popularity. The majority of developing countries followed the limited trade
openness-based industrialization policies as protectionist theories became dominant for decades.
These policies were commonly known as “import substitution industrialization (ISI)” strategies and
have their origin in the Prebisch-Singer thesis (Edwards, 1993).
Nowadays, trade openness, market capitalization, and entrepreneurial ventures are pivots for business
and industrial growth. Trade openness and entrepreneurial ventures encourage innovation and access
to diverse markets and act as a stimulus by providing prolific grounds for startups and businesses.
Entrepreneurial activities flourish in an environment where restrictions on trade are minimal and these
create easy access to technology and resources. Market capitalization attracts investments and fosters
competitiveness by pervading vigor into entrepreneurial ventures eventually stimulating business and
industrial growth (Lazarove et al. 2016; Kumar et al, 2023).
Globalization has many dimensions, but the economic, social, and political aspects of globalization
are important as these provide a base for maintaining close ties with countries along with sharing their
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growth plans and policies. Over the years, Pakistan’s economy has experienced sectoral shifts due to
financial globalization and trade liberalization (Azam et al. 2016). Many theoretical and empirical
studies highlighted the role of trade openness, a well-functioning stock market, and entrepreneurial
ventures for economic growth through the direct effects and spillover effects, though the path of
growth may vary among countries. An effective market performs many functions, for example, it
lowers investment risks, guarantees sufficient liquidity, permits the best possible resource allocation,
and shapes an economy’s governance practices (Krugman, 2012).
Economists are motivated to examine the development of stock markets and how the openness of trade
affects economies worldwide, keeping the significant increase in international trade and growth of
global financial markets in consideration. It ultimately makes significant contributions to economic
expansion (Shahbaz et al. 2008, Chacholiadas, 2012, Vehapi et al. 2015, Bayar et al. 2014, Azam et
al. 2016, Lazarove et al. 2016, and Kajurova and Rozmahel, 2016, Cave et al. 2020, Khan et al., 2021,
Farooq et al., 2022, Huang et al., 2023). Developing countries are therefore deeming the importance
of the capital market. This research has enlightened the linkage between trade openness, industrial
growth, and stock market development.
This study has novelty in the existing literature in the sense that it is a pioneer study that encapsulates
macroeconomic factors i.e. inflation, interest rate, trade openness and tax, financial factors such as
market capitalization and credit energy-related variables and business environment variables of total
entrepreneurial activity to explore the business growth in case of Pakistan. The remaining part of the
article is organized as follows: Section 2 explains the assorted empirical studies on trade openness,
market capitalization, entrepreneurial ventures, and growth. Section 3 shows the research
methodology while Section 4 discusses the results. Section 5 concludes the study along with policy
recommendations.

LITERATURE REVIEW
Table I shows the summary of the literature review on studies on trade openness and market
capitalization in industrial and business activities.
Table I: Studies on Trade Openness and Market Capitalization on Industrial and Business Activities
Reference(s) Time Country Methodology Main Results
Period
Covered
Srdelić & 2000Q1- Croatia Bayesian Model The findings of the study indicated that R&D
Fernández 2020Q4 Averaging (BMA) investment and human capital accumulation
(2024) and Weighted improve economic growth.
Average Least
Squares (WALS)
Ayadi and 1991- African Fixed and Random The study shows that stock market
Williams 2017 Economies Effect Models capitalization has a positive impact on gross
(2023) fixed capital formation. The traded market
value has no relationship with gross fixed
capital formation. It shows that the African
stock market promotes capital accumulation
and industrial growth.
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Huang et al., 1990- G20 CS-ARDL The empirical results indicate that additional
(2023) 2020 factors contributing to carbon emissions in G20
countries encompass trade openness, foreign
direct investment, government expenditures on
health and education, research and
development, and information and
communication technology.
Farooq et al., 2010- China, India, and Panel-EGLS A positive and significant effect of market
(2022) 2019 Pakistan GMM capitalization on investment decisions has been
found due to investment.
Khan et al., 2006- 41 Countries OLS The results demonstrate a significant impact of
(2021) 2016 venture capital investments on the creation of
patents. A considerable increase in innovation
has occurred due to venture capital investment.
Cave et al. 1990- 101 Countries system-GMM Stock market development has a positive
(2020) 2014 impact on economic growth up to a threshold
after that the effect is negative
Keho (2017) 1965- Cote d’I voire Multivariate Openness to trade positively influences
2014 framing, ARDL, economic growth in both the short and long
and Granger term. There is a robust and positive correlation
causality between trade openness and capital formation,
contributing to overall economic growth.
Bayar (2016) 1996- Transition Cross-section Economic growth is positively influenced by
2012 Economies dependence, LM, both economic freedom and openness, but it is
Panel Augmented negatively affected by financial openness.
mean group.
Idris et al. 1977- OECD Dynamic panel In the context of the OECD, there is a mutually
(2016) 2012 Organization Of estimation and influential relationship, with openness leading
Economic Co- GMM to a notably positive impact, and a bidirectional
operation And causality observed between trade openness and
Development economic growth.
Ziaullah and 1990- South Asia PCA In both the short run (SR) and the long run
Wizarat 2011 (LR), there exists a direct association between
(2016) stock market development (SMD) and
economic growth (EG).
Bayar (2016) 2005- Turkey ARDL Stock market development (SMD) and market
2015 liquidity exert a direct influence on economic
growth. However, there is no observable
causality among the variables.
Kajurova and 1999- European Union VECM Stock market development (SMD) and market
Rozmahel 2015 liquidity directly impact economic growth,
(2016) although there is no discernible causality
among these variables. A direct association
between stock market development and
economic growth exists for all the countries
under consideration.
Azeem et al. 1991- 4Asian countries ARDL The development of the stock market (SMD)
(2016) 2012 and the level of market liquidity have a direct
impact on economic growth, although there is
no evident causation between these variables.
In all the countries being examined, a direct
correlation is observed between the
development of the stock market and economic
growth.

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A comprehensive analysis has also been carried out where the effects of market capitalization and
trade openness have been demonstrated on business and industrial operations. Where trade openness
drives industrial expansion and promotes economic activity. It provides greater access to markets and
initiates the movement of capital. However, impacts have also been posed on investment decisions by
market capitalization. It serves as an indicator of market confidence. This intricate interplay among
market mechanisms has an impact on business and industrial environments where trade openness
incentivizes economic activities. Here, market capitalization influences business decisions. When it
comes to the influence of entrepreneurial activities on business growth, limited literature exists.
Therefore, this study investigates entrepreneurial activities, along with other significant variables that
contribute to the expansion of business activities.

RESEARCH METHODOLOGY
Model Specification
The study has used an a-theoretic model of business activity which includes inflation, trade
openness, market capitalization, interest rate, energy, tax, credit, and total entrepreneurial activity as
correlates of industrial value added in Pakistan by using the ARDL technique over the period of 2000
to 2022.
IVA=f (INF,TRADE, MC, INT, ENERGY, TAX, CREDIT, TEA) (1)

The econometric representation of the model is:

IVA = 0 + 1 INF + 2TRADE + 3 MC + 4 INT + 5 ENERGY + 6TAX + 7CREDIT + 8TEA +  (2)

Figure 1 shows the various factors which affect the industrial value added in Pakistan. In this figure,
the empirical model has been demonstrated in the form of a figure. These factors are categorized into
the following groups:

• Macroeconomic Factors: Inflation, Interest Rate, Trade openness and tax

• Financial factors: Market capitalization and Credit
• Energy-related variables: Energy
• Business Environment: Total entrepreneurial activity

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Figure 1: Determinants of Industrial Value-added in Pakistan

The following hypotheses are being tested in the specified model:

• There exists a positive relationship between inflation and industrial value-added.

• Trade openness positively influences industrial value-added.
• There exists a positive relationship between market capitalization and industrial value-added.
• Changes in interest rates and taxes negatively influence industrial value-added.
• Energy positively impacts industrial value-added.
• Improved credit access stimulates industrial value-added.
• Higher levels of entrepreneurial activity positively affect industrial value-added.
ARDL Model Specification
The model in ARDL form is:

( IVA)t = 0 + 1 ( IVA)t −1 + 2 ( INF )t −1 + 3 (TRADE )t −1 +  4 ( MC )t −1 + 5 ( INT )t −1 +

1
6 ( ENERGY )t −1 + 7 (TAX )t −1 + 8 (CREDIT )t −1 + 9 (TEA)t −1 +  1( IVA)t −1
t =1
2 3 4 5
+ 2 ( INF )t −1 +  3 (TRADE )t −1 +  4 ( MC )t −1 +  5 ( INT )t −1 +
t =0 t =0 t =0 t =0
6 7 8 9
+ 6  ( ENERGY )t −1 +  7  (TAX ) t −1 +  8  (CREDIT ) t −1 +  9 (TEA)t −1 +  t
t =0 t =0 t =0 t =0

(3)
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Data: Description and Measurement

Table II shows the description of the variables, their measurements and sources of data.
Table II: Description &Measurement of Variables
Notation Variable Description Unit of Source
Measurement
IVA Industrial Value It refers to the percentage of Industrial In percentage World
Added a % of GDP Value Added to GDP. Development
INF Annual Inflation It represents the annual percentage change In percentage Indicators
Rate in the general price level of goods and
services, reflecting the rate of inflation over
a given period.
TRADE Trade as a % of The percentage of a country's GDP is In percentage
GDP represented by its total trade activities,
including exports and imports.
MC Market The total market value of all publicly traded In percentage
Capitalization a % securities as a % of GDP.
of GDP
INT Annual Interest Rate The annual percentage represents the cost In percentage
of borrowing or the return on investment.
ENERGY Energy as KG of Oil It refers to the energy consumption In percentage
Equivalent per measured in kilograms of oil equivalent per
Capita capita.

TAX Tax as a % of GDP It shows the proportion of total taxes to the In percentage
GDP, indicating the level of fiscal revenue
relative to the overall economic output.
CREDIT Domestic Credit to The fraction of domestic credit allocated to In percentage
the Private Sector a private sector is expressed as a % of GDP.
% of GDP
TEA Total The proportion of individuals within the age In percentage GEM Adult
entrepreneurial range of 18 to 64 who are either initiating a Population
activity new business or serving as owner-managers Surveys
of a recently established business, which is
less than 42 months old.

RESULT AND DISCUSSION

Summary Statistics and Correlation Analysis
This section explains the variable’s descriptive and correlation analysis. Table III presents
descriptive statistics for key variables spanning 2000 to 2022. Among the key variables, trade
openness (TRADE) exhibits the highest mean value at 33.50 emphasizing its substantial average
percentage contribution to total economic activity. In contrast, tax (TAX) has the lowest mean at 11.32,
indicating a comparatively lower average level of taxation.

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Table III: Descriptive Statistics of Key Variables (2000-2022)

IVA INF TRADE MC INT ENERGY TAX CREDIT TEA
Mean 23.43 8.91 33.50 15.22 11.95 53.28 11.32 23.88 6.30
Median 23.55 7.88 33.24 12.44 11.84 55.43 11.32 24.18 6.20
Maximum 27.10 26.66 38.91 46.11 15.42 70.16 37.05 29.79 14.11
Minimum 20.20 -0.76 27.72 4.78 6.99 35.29 1.87 15.44 1.90
Std. Dev. 1.53 5.51 2.75 10.76 1.95 10.29 4.90 3.32 2.28
Skewness 0.12 1.25 -0.15 1.06 -0.57 -0.30 3.17 -0.54 0.94
Kurtosis 3.00 4.89 2.68 3.36 3.08 1.93 18.51 3.26 4.10
Jarque-Bera 0.12 18.91 0.38 8.94 2.52 2.86 538.01 2.33 5.47
Probability 0.94 0.00 0.83 0.01 0.28 0.24 0.00 0.31 0.07

The standard deviations reveal the extent of variability within each variable. Total entrepreneurial
activity (TEA) has a maximum standard deviation of 2.28, indicating substantial dispersion around its
mean. In contrast, Industrial value-added (IVA) with a standard deviation of 1.53 exhibits lower
variability, suggesting relative stability in industrial output. The variables (IVA, INF, MC, TAX, and
TEA) exhibit positive skewness, indicating a long tail towards higher values. In contrast, the variables
(TRADE, INT, ENERGY, and CREDIT) display negative skewness, suggesting a long tail towards
lower values. INF, TRADE, INT, ENERGY, and CREDIT exhibit normal distribution tendencies
while the variables IVA, MC, TAX, and TEA deviate significantly from normal distribution
assumptions.
Table IV exhibits correlation analysis. There is a moderate positive correlation between IVA and MC
(0.61), indicating a potentially strong relationship between IVA and MC.

Table IV: Correlation Matrix of Key Variables (2000-2022)

Correlation IVA INF TRADE MC INT ENERGY TAX CREDIT TEA
IVA 1.00
INF -0.27 1.00
TRADE 0.19 0.47 1.00
MC 0.61 -0.06 -0.09 1.00
INT -0.30 0.36 0.19 0.01 1.00
ENERGY 0.02 -0.15 -0.33 0.72 0.29 1.00
TAX -0.18 -0.08 0.45 -0.31 0.23 -0.35 1.00
CREDIT 0.18 0.04 0.25 -0.08 -0.42 -0.39 -0.19 1.00
TEA 0.73 0.02 -0.43 0.69 0.19 0.89 -0.43 -0.43 1.00

Conversely, negative correlations exist between IVA and INF (-0.27), TRADE (0.19), INT (-0.30),
and TAX (-0.18) suggesting some level of inverse relationships with Inflation, Trade, Interest Rates,
and Taxes respectively. Moreover, a strong positive correlation exists between IVA and TEA (0.73),
implying a robust connection between IVA and TEA. The correlation between IVA and ENERGY
(0.02) as well as IVA and CREDIT (0.18) seems to be quite weak.

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Unit Root Analysis

Table V gives the results of Augmented Dickey-Fuller (ADF) unit root test for key variables. The
results exhibit that IVA, INF, MC, INT, ENERGY, TAX, CREDIT, and TEA are all integrated of
order 1, implying the presence of no unit root in their first differences. However, TRADE is found to
be stationary in levels, indicating no unit root. These results suggest that most variables require
differencing to achieve stationarity, essential for further time-series analysis, except for TRADE,
which is already stationary. In a nutshell, there are mixed results.
Table V: ADF Unit Root Test (on Level)
Variables Drift Lags Drift Lags None Lags Summary
and Trend

-2.7092 -2.6265 0.0850

0 0 0 I(1)
IVA (0.0818) (0.2715) (0.7038)
-2.6374 -2.6428 -1.2935
6 6 0 I(1)
INF (0.0946) (0.2648) (0.1773)
-3.0863 -3.4893 -0.1279
0 0 1 I(0)
TRADE (0.0361) (0.0549) (0.6331)
-2.1557 -4.8684 -0.0381
0 3 1 I(1)
MC (0.2251) (0.0018) (0.6637)
-2.5272 -2.6093 -0.2182
1 1 0 I(1)
INT (0.1172) (0.2786) (0.6010)
-1.2437 -2.5359 3.5708
0 0 0 I(1)
ENERGY (0.6452) (0.3102) (0.9998)
-1.1295 -0.5601 0.1573
0 0 0 I(1)
TAX (0.6914) (0.9758) (0.7261)
-2.0701 -2.3900 -0.4565
0 0 0 I(1)
CREDIT (0.2573) (0.3786) (0.5106)
-0.5879 -1.2398 2.7800
0 0 0 I(1)
TEA (0.8615) (0.8874) (0.9982)

Bounds Test Analysis

Table VI displays the outcomes of the Bounds test. With an F-Statistic of 14.87 surpassing the
critical values at both the 5% and 10% levels for both I(0) and I(1), it signifies a noteworthy presence
of a long-term relationship among the variables.
Table VI: Bounds Test Results
5% Critical Value 10% Critical Value
Model F- Statistic I(0) I(1) I(0) I(1)
IVA/ INF, TRADE, 14.87 2.43 3.56 2.16 3.24
MC, INT, ENERGY,
TAX, CREDIT, TEA,
MC*TRADE
Long Run Analysis
This section delves into the long-run outcomes of the model. Table VII presents the results of
industrial growth of Pakistan. The dependent variable in this model is Industrial Value Added (IVA),
while the explanatory variables include Inflation (INF), Trade (TRADE), Stock Market Capitalization
(MC), lending Interest rate (INT), Energy, Tax, Credit, and Total entrepreneurial activity (TEA).

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The coefficient of INF has appeared with a positive sign. The positive relationship between inflation
and Industrial Value Added (IVA) can be attributed to several factors. Firstly, the Price-Output Effect
suggests that inflation could result in a rise in the price of goods, which would higher revenues and
profit margins for industrial producers. As the general price level rises, firms may experience an
increase in the nominal value of their output which contributes positively to Industrial Value Added
(Ersin and Bildirici, 2017). Debt relief and financing conditions play a role as inflation can erode the
real value of debt providing relief to firms with outstanding loans. This can improve the financial
conditions of industries, leading to increased investment and production (Massooma et al., 2020).
Lastly, demand expansion driven by moderate inflation can stimulate industrial production as
businesses strive to meet the rising consumer needs and therefore, the positive relationship between
inflation and Industrial Value Added may reflect the broader industrial activity (Banikhalid, 2017;
Maroof et al., 2019).
The coefficient for the second explanatory variable, TRADE, has positive sign with statistical
significance. Trade not only provides employment opportunities for skilled labor and generates income
but also plays a crucial role in determining foreign exchange. Trade plays a pivotal role in fostering a
positive relationship with Industrial Value Added (IVA) for various compelling reasons. The
expansion of trade horizons provides industries with broader market access both domestically and
internationally. As proposed by Ellahi et al., 2011, the rising penetration of the market leads to a rise
in the demand for industrial goods. This in turn boosts production levels. Additionally, it also impacts
the overall value added by the industry positively. Trade enables specialization which in turn allows
sectors to produce more goods. They provide services in which they possess a comparative advantage
(Ali et al., 2016). This specialization enhances industrial value added as it streamlines operating
procedures and increases output. The promotion of global commerce facilitates the interchange of
resources, expertise, and technological advancements between nations. Enhanced accessibility to
cutting-edge technologies and superior inputs is advantageous for industries as it results in improved
manufacturing processes and, as a consequence, a rise in industrial value added (Stehrer, 2010).
Industry value added and trade are positively correlated due to market expansion, efficiency gains
driven by specialization, and the facilitation of input and technology transfers. The results of this
research are consistent with those of Yanikkaya (2003), Khoury and Savvidas (2006), and Singh
(2010), among others.
Market capitalization (MC) has a positive coefficient with substantial statistical significance. Multiple
pivotal factors contribute to the positive correlation between market capitalization and industrial value
added. Generally, greater market capitalization signifies enhanced investor confidence in a specific
sector or organization. The increased level of confidence results in more favorable funding prospects
and investments that can be directed toward industrial endeavors, ultimately causing a surge in value-
added production (Yartey and Adjasi, 2007). Organizations that possess a significant market
capitalization are granted improved opportunities to obtain capital to expand. The aforementioned
financial flexibility empowers them to engage in endeavors that foster industrial expansion, such as
the augmentation of manufacturing capacities or the integration of cutting-edge technologies. An
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increasing market capitalization indicates a favorable market sentiment and anticipations of further
expansion. An atmosphere of optimism fosters increased business opportunities and partnerships,
thereby establishing a favorable environment for the advancement of industry. The expansion of
corporations with greater market capitalization has a beneficial impact on industrial value added as it
enhances production capacities and overall economic output (Nwaolisa and Chijindu, 2016). The
findings of our study are consistent with those of Yartey and Adjasi (2007), which strengthens the
validity of our conclusions concerning the effect of MC on the expansion of the industrial sector.
The coefficient for lending interest rate is negative is statistically significant. It, therefore, suggests
that the lending interest rate has a substantial influence on the value created by the industrial sector in
Pakistan. A rise in lending interest rates has the potential to influence Industrial Value Added (IVA)
negatively. Industries are confronted with a financial encumbrance in the form of increased interest
rates. It drives the cost of capital. It also restricts their ability to invest and lastly in expanding their
operations. It consequently results in a decline in industrial production. In addition to this, consumer
spending patterns are impacted by the ripple effect. This is because the rising interest rates result in
greater financing expenses for individuals. As a result of the decline in disposable income, consumer
spending may be curtailed. This in turn may result in declining demand for industrial products and
services. Lastly, the rising expense of financing could potentially dissuade organizations from starting
fresh ventures. It also impedes the expansion of current operations, thereby hindering industrial
expansion (Idris et al., 2016).
Table VII: Long Run Results
Dependent Variable: IVA
Variable Coefficient Std. Error t-Statistic Prob.
INF 0.6569 0.1121 5.8587 0.0011
TRADE 0.2323 0.1183 1.9627 0.0973
MC 0.8163 0.1997 4.0867 0.0065
INT -0.3848 0.1322 -2.9097 0.0270
ENERGY 0.1838 0.0655 2.8052 0.0309
TAX -0.3258 0.1367 -2.3830 0.0545
CREDIT 0.1028 0.0509 2.0187 0.0901
TEA 0.2457 0.0429 5.7219 0.0012
MC*TRADE 0.0106 0.0143 0.7364 0.4893
C 0.1727 0.1041 1.6589 0.1482
The variable of energy variable has a positive sign. The rise in per capita energy consumption can
contribute to the expansion of industrial value added (IVA). The heightened energy availability is
often associated with increased industrial productivity. Industries heavily reliant on energy-intensive
processes such as manufacturing and production stand to benefit from improved efficiency which leads
to raised output levels and subsequently boosts Industrial Value Added (Oh and Lee, 2004). The link
between increased energy consumption and technological advancements is noteworthy. Industries that
invest in more energy-efficient technologies and machinery are likely to experience enhanced
production processes thereby elevating the value-added outputs (Lee et al., 2007). Greater energy
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availability enables industries to expand their production capacities, meeting growing demand and
exploring new markets. This expanded industrial capacity is poised to result in a proportional increase
in Industrial Value Added as production levels and economic output surge (Apergis and Payne, 2009).
Studies conducted by Oh and Lee (2004), Lee et al. (2007), Apergis and Payne (2009), Hondroyiannis
et al. (2009), and Odhiambo (2009) are consistent with our findings.
The Tax-related coefficient has a negative sign which means that a rise in taxes would indirectly
impact Industrial Value Added (IVA) via various pathways. Industries experience reduced profit
margins as a result of the increased tax burden. It results in a substantial portion of revenue being
redirected towards tax obligations. A financial imposition on companies hinders their ability to
allocate resources. This financial burden is imposed on vital sectors including research, development,
and technological progress. Resultantly, innovation and efficiency improvements are impeded which
are deemed essential for long-term industrial expansion (Huang et al., 2019). A contraction in
consumer expenditure results in a decline in the demand for products and services. Consequently, it
affects IVA (Zou et al., 2019). A rise in tariffs could decline potentially in both domestic and foreign
investments in the manufacturing industry.
A lack of investment prospects may hinder the progress of new ventures, modernization, and
expansion. It, therefore, constrains the overall growth potential of sectors. It also contributes to
reducing the Industrial Value Added (Vedder, 2001). The findings of our study are also consistent
with those undertaken by Lee and Gordon (2004).
The coefficient of the total entrepreneurial activity (TEA) has a positive sign. Multiple mechanisms
exist by which an increase in overall entrepreneurial activity can substantially boost industrial value-
added. The rising entrepreneurial involvement promotes technological progress and innovation across
industries. Entrepreneurs often implement innovative concepts, goods, or procedures. It generates a
rise in productivity and efficiency. It, therefore, augments the value added in industrial sectors (Haq
et al., 2014). Entrepreneurial pursuits serve as catalysts for job creation. It cultivates employment
prospects and propels overall economic expansion. The growth of enterprises results in heightened
levels of production and consumption. It augments the aggregate value-added within industrial sectors.
Innovations garner capital and investment inflows. The rising financial resources have the potential to
be directed towards industrial sectors. It enables them to expand, modernize, and scale up their
operations. Resultantly, it would enhance the value-added outputs of the industry (Saleem, 2011).
The parameter of domestic private sector credit has a positive value. Multiple factors significantly
influence it. Credit inflows provide enterprises with the necessary capital to augment their activities.
It invests in emerging technologies. It also enhances their current infrastructure. It fosters rising
efficiency and productivity in the industrial sector. It possesses a positive contribution to value-added
outputs (Anwar et al., 2020). Rising credit accessibility empowers businesses to engage in research
and development endeavors. It fosters innovation. It also facilitates the implementation of
manufacturing processes. Technological progress results in enhanced competitiveness. It improves the
quality of production. It also contributes to the overall value added in the industrial sector (Odhiambo,
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2018). Additionally, an expansion of scale inclines industrial value added significantly (Lee et al.,
2015; Rad and Etemadmoghaddam, 2014; Naysha and Odhiambo, 2014). The incorporated interaction
term takes the form of MC*TRADE, exhibiting a positive coefficient value. However, its associated
probability value indicates insignificance suggesting that the interaction term does not significantly
contribute to the model.
Error Correction Analysis
The error correction results have been displayed in Table VIII. It shows the presence of a
cointegrating equation with a coefficient of -1.6319. The t-statistic for the cointegrating equation is -
5.2895, and the corresponding p-value is 0.0018. The negative error correction term indicates that
there is convergence of equilibrium in the specified model. This finding suggests it takes 1.6 years to
diverge toward the steady state.
Table VIII: Error Correction Results
Dependent Variable: IVA
Variable Coefficient SE t-Stat P-value
D(IVA(-1)) 0.9802 0.2366 4.1423 0.0061
D(IVA(-2)) 0.5278 0.1935 2.7269 0.0343
D(INF) -0.0724 0.0857 -0.8442 0.4309
D(INF) 0.0824 0.0538 1.5330 0.1762
D(TRADE) 0.1217 0.1710 0.7115 0.5035
D(TRADE(-1)) -0.1710 0.1457 -1.1735 0.2851
D(MC) 0.1108 0.2955 0.3750 0.7206
D(MC(-1)) 0.5449 0.3783 1.4406 0.1998
D(INT) -0.3258 0.1367 -2.3830 0.0545
D(INT(-1)) 0.5344 0.1450 3.6853 0.0103
D(ENERGY) -0.1928 0.1050 -1.8366 0.1159
D(TAX) 0.5220 0.2713 1.9237 0.1027
D(TAX(-1)) 0.7913 0.1504 5.2608 0.0019
D(CREDIT) -0.0388 0.0945 -0.4109 0.6954
D(TEA) 0.1727 0.1041 1.6589 0.1482
D(TEA(-1)) 0.6569 0.1121 5.8587 0.0011
D(MC * TRADE) -0.0020 0.0084 -0.2327 0.8238
D(MC(-1) * TRADE(-1)) -0.0163 0.0107 -1.5212 0.1790
CointEq(-1) -1.6319 0.3085 -5.2895 0.0018

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CONCLUSION AND POLICY IMPLICATION

In conclusion, the study undertook a comprehensive investigation into the complex dynamics
surrounding the impact of trade openness, stock market development, and entrepreneurial endeavors
on the industrial growth of Pakistan. We have specified the model by encapsulating the four types of
variables. Macroeconomic factors are inflation, interest rate, trade openness and tax, financial factors
are market capitalization and credit while energy related variable is energy consumption and business
environment is measured through total entrepreneurial activity.
The study has taken data ranging from 2000 to 2022. The Auto Regressive Distributed Lag (ARDL)
technique has been employed. The industrial value added has been used as the dependent variable.
The findings of the study point out that lending interest rates and taxes have a negative impact on
industrial value added while inflation, trade, market capitalization, secondary school enrollment,
private sector credit and consumption of energy illustrate a favorable effect on industrial value added.
The study adds practical insights for researchers regarding industrial development and economic
policy.

• Policymakers might implement a comprehensive strategy for stimulating the expansion of

industries and businesses.
• The implementation of judicious fiscal policies is required for managing inflation effectively.
• Promoting trade openness would foster competitiveness and market diversification. Market
capitalization can be promoted through transparent regulations.
• For investment opportunities to be provided, adaptable interest rate policies are deemed
crucial.
• For energy policy, innovation and efficiency should be encouraged while prioritizing
sustainable sources.
• Tax reforms should be fostered by entrepreneurship and investment. This can be done by
attaining a balance between economic stimulation and revenue generation.
• For enhancing the accessibility of credit, such policies should be adopted that prioritize
financial inclusion and risk mitigation.
Limitation And Agenda for Future Research
Although the study has used a broad spectrum of macroeconomic factors affecting industrial
value-added yet some other factors such as labor productivity, exchange rates, government spending,
infrastructure investment, technological innovation, political stability, regulatory environment, and
access to international markets etc. can also be taken for more elaboration. The study has used first
generation econometric technique, second generation econometric techniques can also be used to test
the determinants of industrial value-added.

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