Analysis of Pakistan’s Industry

LECTURE 1 : Basic concepts , classification and theories

of Firms

Masood Ahmed Siddiqui

What this course will be about
• Basics concepts about Industry , Firm and Business
• Refresher of Economics of Industry
• Firm theories
• Firms' characteristics
• Firms and markets
• Comparative advantage , Firm productivity , competitiveness
• Trade and globalization and role of Industry in growth

• Analysis of key Pakistani industries

• Writing of an industry policy paper
What will we do ?
• Collection and analysis of industry and firm data to see patterns and trends (descriptive
analysis of data).
• To compare what are the best industrial practices worldwide that make industry globally
competitive and how far behind Pakistan’s industry are from these global practices.
• A comprehensive review of the major industrial Policies in Pakistan in order to analyse
how effective these policies are.
• Talk with industry experts in order to gain a firsthand knowledge about the problems
industries are facing in this country.
• Visit of some factory/company in Karachi
• Open house poster session on different industries in Pakistan.
• I will require students to make groups and each group should work on some particular
industry of their choice right from the beginning of the course
Definitions and key concepts
• What Is an Industry?
• An industry is a group of companies that are related based on their
primary business activities.
• Similar businesses are grouped into industries based on the primary
product produced or sold.
• Stocks of companies operating within the same industry tend to
have similar stock price movements. Stocks within the same
industry often rise and fall as a group because the same
macroeconomic factors impact all members of an industry.
Definitions and key concepts
• Difference between industry and sector
• The terms industry and sector are often used interchangeably to describe a
group of companies that operate in the same segment of the economy or share a
similar business type. The term sector often refers to a larger, general part of the
economy, while the word industry is much more specific.
• Essentially, industries are created by breaking down sectors into more defined
groupings.
• Example :
• The services sector can be broken down into several different industries such as
banks and financial insititutions, asset management companies, ICT industry, or
transport and health industry. The companies that fall into the same industry
compete for customers by offering similar services.
Classification of Sectors
• A sector is one of a few general segments in the economy within which economic activity is
caried out and economic agents interact. There are four different sectors in an economy:
• Primary Sector: This sector deals with the extraction and harvesting of natural resources
such as agriculture and mining.
• Secondary Sector: This sector comprises construction, manufacturing, and processing.
Basically, this sector comprises industries that relate to the production of finished goods
from raw materials.
• Tertiary Sector: Retailers, entertainment, and financial companies make up this sector.
These companies provide services to consumers.
• Quaternary Sector: The final sector deals with knowledge or intellectual pursuits including
research and development (R&D), business, consulting services, and education.
•
Classification system of Industry
• The fundamental unit of an industry is an ESTABLISHMENT or an ENTERPRISE
• Establishment or an Enterprise is the statistical unit in an industry from which
data is collected regarding PRODUCTION , RAW MATERIAL & INPUTS , LABOR &
WAGES etc
• Establishments (or statistical units) that produce the same good or type of good
regardless of material and techniques are grouped in the same industry in
classification codes
• EXAMPLE:
• such as “the furniture industry”, which would refer to all units classified in
Pakistan’s classification system called PSIC division 31 (Manufacture of
furniture), or the “construction industry”, which would refer to all units classified
in PSIC section F (Construction).
INTERNATIONAL STANDARD
INDUSTRIAL CLASSIFICATION SYSTEM
– ISIC
• Pakistan’s system of industrial classification is based on the international standard of
industrial classification (ISIC).
• Economic activities are subdivided in a hierarchical, generally five-level categories at the
highest level are called sections, which are alphabetically coded categories e.g
“Agriculture, forestry and fishing” (section A),
“Manufacturing” (section C)
“Information and communication” (section J).

• Detailed categories, which are numerically coded:

two-digit divisions;
three-digit groups;
four-digit level classes and,
the greatest level of detail, five-digit subclasses
The input and product data required to homogenize establishments is obtained from National
accounts
Broad industrial
classification in
Pakistan
Detailed
industrial
classification in
Pakistan
Detailed
industrial
classification in
Pakistan
Major Industrial Data sources:
• Pakistan bureau of statistics (PBS)
• UNIDO (United nations industrial development organization)
• World enterprise survey
• UNCTAD , COMTRADE
• https://www.trade.gov/country-commercial-guides/pakistan-market-
overview
• http://www.moip.gov.pk
• Easydata.sbp.gov.pk
 BASIC FACTS OF
INDUSTRIALISATION AND
INDUSTRIAL GROWTH
AN OVERVEIW OF THE CONCEPTS OF GROWTH & DEVELOPMENT AND
ROLE OF INDUSTRIALISATION
GROWTH AND DEVELOPMENT
• Development Definition: Development is characterized by income growth,
improvements in social indicators, and structural economic change.
• Growth vs. Development: Short-term growth can happen without structural
change (e.g., due to an export boom), but true development is expected to
include lasting economic transformations and sectoral shifts.
• Developing vs. Developed: Based on development level usually countries are
divided into developed and developing
• Terminology Shifts: The term 'developing countries' is being revisited to be
more specific, and 'newly industrialized economies' (NIEs) refers to countries
with significant manufacturing sectors, including nations like China,
economies of East and Southeast Asia, and large Latin American countries.
• Emerging Economies: The term is applied to countries similar to NIEs that
have opened their financial sectors to international capital and stock market
participation, attracting foreign investors.
• Classification by Income: The World Bank classifies countries by income
levels: low, lower-middle, higher-middle, and high-income.
• Income and Change: Income increases that lead to changes in production
structure represent an improvement 'developing countries' classification.
• Variation at Similar Income Levels: Countries with similar income levels
can face different developmental challenges, exemplified by Mexico and
Macedonia, which both have around USD 7,000 per capita but are quite
distinct economically.
CHARACTERSTICS OF NEWLY
INDUSTRIALISED ECONOMIES
• NIEs Classification: Economies with significant manufacturing
sophistication and income are often classified as newly industrialized
economies (NIEs).
• Graduation of Economies: Several economies previously considered
developing have now graduated to higher income levels and are grouped
with developed economies. Notable examples include high-growth
countries of East Asia, Korea, Singapore, and Taiwan.
• Manufacturing Value-Added: In 2005, the three East Asian economies
along with other NIEs contributed significantly to the developing
world's manufacturing, accounting for 17% of its total value-added.
Technological capabilities and economic development,
emphasizing the role of R&D in manufacturing
• Technology Definition: Technology is the knowledge of ways to produce
commodities, encompassing both physical equipment and intellectual expertise.
• Technological Capability: This refers to the ability to create or modify
technology.
• Forms of Technology: Technology can be tangible (embodied in equipment) or
intangible (knowledge), and either protected by patents or available as a public
good.
• Global R&D Concentration: Most research and development (R&D) occurs in
high-income economies, making poorer economies dependent on importing or
adapting technology for technical advancements.
• Manufacturing Sub-divisions: Different branches of manufacturing invest in
R&D to varying degrees, relative to their final product value.
• Impact of R&D Investment: High R&D levels are correlated with
significant changes in cost or quality, driving dynamic growth in demand
both domestically and internationally.
• High-Technological Sophistication: Industries like electronics, office
equipment, and precision equipment have high R&D investment and are
considered dynamic.
• Low-Technological Sophistication: Industries such as clothing, footwear,
food products, and basic intermediates like paper and glass are less R&D
intensive, with slower changes in production technology.
• Economic Correlation: Wealthier economies tend to have a higher share of
high-technology products in their manufacturing and export sectors.
Some trends in Growth of NIE
• Manufacturing Growth: Countries like Malaysia and Thailand have seen substantial
manufacturing growth, with the sector comprising a significant portion of their economic
activity.
• Technological Sophistication and Exports: The share of medium- and high-technology
goods in total manufactured exports is a measure of technological sophistication. The table
lists countries like Argentina, Malaysia, and China, with varying degrees of technological
goods as part of their exports.
• Variation Among NIEs: There's a considerable range among NIEs concerning
manufacturing growth and technological sophistication. For instance, Malaysia and
Thailand have experienced substantial growth, while Mexico has seen a decline in MVA per
capita.
• Comparison with High-Income Economies: The table also compares the NIEs with high-
income economies such as Singapore, the United States, Taiwan, Korea, and the United
Kingdom to provide context regarding manufacturing and technological sophistication.
EXPORTS and TRADE IMPACT ON
INDUSTRIALISATION
• Paths to Industrialization:
• Different strategies and institutional forms have been adopted by countries for
industrial development.
• European economies in the 19th century relied more on banks to mobilize
savings for investment.
• In the 20th century, Japan and Korea saw large conglomerates as key
industrial drivers, whereas in Taiwan, the private sector and government
played more significant roles.
• Southeast Asia and China have benefited from foreign investment.
• Latin America's industrialization has been linked with national conglomerates
and foreign direct investment.
• Export Patterns by Product Category:
• Developing countries account for over 50% of world exports in labor-
intensive, simple-technology categories like textiles, footwear, and
leather goods.
• They also dominate over 60% of clothing and travel goods exports.
• These countries are significant exporters of higher-technology
electronic products, including over 50% of the world's office machines
and telecommunications equipment exports.
• East and Southeast Asia, particularly due to China and first-tier NIEs,
lead these figures.
• Policy and Economic Liberalization:
• Developed economies today, such as the UK and US, applied protectionist
measures during their take-off stages.
• Free trade has been adopted by economically strong nations to gain from open
competition.
• Countries' approaches to industrialization vary in terms of openness to trade,
reliance on market versus planning, and technology choices.
• Catch Up Growth:
• Developing economies can achieve rapid growth by adopting technologies from
more established economies, a process termed 'catch up growth.'
• This has contributed to the success of NIEs, although industrialization has
spread unevenly across developing countries.
ROLE OF TECHNOLOGY

• Technology is central to production processes and improvement, influencing

modern economic growth theories.
• The application and development of technology help differentiate between
industrialization approaches.
• Comparative Advantage and Technology:
• Aligning technology with a country's resource endowments enhances its
comparative advantage.
• Low-income countries, with abundant labor and scarce capital, benefit from
labor-intensive technologies.
• If factor prices reflect actual scarcities, these countries will be cost-competitive
in labor-intensive goods.
Specialization in Labour vs. Capital Intensive
Activities:

• Countries specializing in labor-intensive industries (like clothing) have seen growth

in exports of these products.
• Nations that maintained cheap capital costs through policy measures have inclined
towards capital-intensive sectors (like chemicals and steel), often growing more
slowly and with less employment creation.
• Comparative Advantage Strategies in NIEs:
• The success of East Asian NIEs, such as Korea and Taiwan, is attributed to their
comparative advantage-based strategies.
• In contrast, some countries followed second-import substitution strategies, producing
capital-intensive goods domestically.
• Policies in China post-opening-up have shifted the economy towards a comparative
advantage growth path.
Technological Depth Measurement:

• Evolution of Comparative Advantage:

• Comparative advantage changes over time, with economies transitioning from labor-intensive to
capital and technology-intensive goods.
• The shift reflects the dynamic response to global market demands and opportunities.
• Industrial Policy and Technological Rents:
• Some NIEs invested in developing their own technology with state support, while others relied on
foreign technology imports.
• Technological rents (extra profits from technology) are significant for countries that can develop or
adapt existing technology.
• UNIDO uses the share of medium- and high-technology products in manufacturing value-added and
total exports as an indicator of technological depth.
• Rankings show East Asian NIEs leading, with Latin American NIEs and China at more modest
positions.
• Singapore, Malaysia, and Korea are among the top-ranked countries for technological advancement.
• China, despite its growth, has a moderate ranking, below Mexico and Brazil.
The importance of technology for industrial
growth
• Technology is central to manufacturing growth interpretations.
• Successful economies have often relied on importing, copying, adapting, and improving foreign
technologies.
• Foreign Direct Investment (FDI) has sometimes been a crucial factor in technology transfer and
development, but domestic firms have also played a lead role in this process.
• A key strength of East Asian NIEs, as distinct from Latin American NIEs, is their technological capability
and mastery.
• East Asian NIEs have been able to diversify their exports into higher-technology products due to this
technological expertise.
• This technological advancement has given East Asian firms an advantage in creating and participating in
global production networks.
• Developing technological capabilities is typically associated with significant investment from governments
in education, infrastructure, and basic research facilities to support R&D in firms.
FIRM PRODUCTIVITY AND
GROWTH
Theory of Firms

• Two goals of a firm :

• Short term goal = profit maximization
• Long term goal = sustainability in the market
Cost & Revenue
Profit maximization occurs where there is the
maximum distance between the slopes of the two
TC curves. At this point the slopes of the two curves
are equall so the
MR
R
PROFIT MAXIMISING POINT IS MC= MR
T R The OR-OC is the maximum profit , after which the
C
MC profits keeps on declining when TC = TR at this
point the firm is earning zero profits.
O Q
Theory of Firms
• But firms and businesses do not have profit maximization as the main
goal. There is lot of criticism on the profit maximizing firm theory
• If firms maximize profits they won’t be investing in capital. Utlimatley, they
have to survive in the market only if they make capital investments in their
business
• Most industries are oligopolistic : don’t maximise profits but collude on
certain profits among them. Automobile , sugar , flour industry in Pakistan is
an example
• Managers and BOGs control and manage businesses not the actual owners in
today’s corporate world. Profit maximization is not the goal of these
managers but company prestige , market competition and innovation
How do Firms and industry grow
1) Static cost curve theory
• Firm will grow to U-Cost curve- Means it will grow until cost declining to scale. If cost started rising it will stop to grow
further. Also until when profit maximize
• Thus, firm grow to relation C= αXβ when β> 0; increasing return to scale
• Physical Capital inputs have no limits so firm can grow due to economies of scale
• Human capital input/Managerial less limits or when exhausted creates diseconomies of scale.

2) Dynamic cost curve

• Firm reduces cost size due to learning new technologies not by expanding from given resources (economies of scale)
• Firms grow when they explore rather exploit resources, managers came up with new ideas and new technologies to do
business (whether or not they are same about their success)
• Learning curve is useful to calculate cost/unit of output.
LC is steeper because employees are not able to produce
more output because they are learning (although AVC is
declining)
Then when they learn the slope get more flater as output
increases more or cost/output declines faster. Then it
became completely flat when no more cost reduction is
possible
Marginal and average product: two important
decisions in firm productivity
• The marginal product (MP) of a variable factor
• measures the increase in output from a small increase
in the variable factor.
MPl = q/ l
MPl is the slope of the short-run production function.
• The average product (AP) of a variable factor, measures how much output each unit of input yields
• on average.
APl = q / l
• APl is the slope of the line from the origin to the corresponding point on the production function.
Example of MP and AP
• Imagine you're running a lemonade stand. You have one person
working for you, and they can make 30 cups of lemonade an hour. You
decide to hire a second person. With two people, they can make 60
cups an hour together. The Marginal Product of hiring the second
person is the additional cups made thanks to the second worker –
which is 30 more cups (60 cups with both - 30 cups with one = 30
extra cups).
• So, Marginal Product is all about the extra output (more lemonade)
you get by adding one more unit of input (a worker, in this case).
MP and AP explained
• Now let's say you have those two workers, and they make 60 cups in an hour.
To find the Average Product, you'd divide the total output (60 cups) by the
number of workers (2). So, each worker is, on average, making 30 cups an hour.
• There's a point where the average productivity of your workers is at its highest.
If you add one more worker here, the MP will be exactly the same as the AP.
This is usually the most efficient scale of production with the current setup.
• f you keep adding more workers beyond this point, they start getting in each
other's way because there's not enough for everyone to do, or they're waiting on
each other to finish tasks. The extra output you get from each additional worker
starts to decrease, which is the principle of diminishing marginal returns.
Scaling desicison depend upon MP & AP and
other factors as well:
• In a hospital, there is an optimal number of staff required to efficiently attend to patients. If there are too
few nurses, patient care may suffer. As more nurses are hired, the quality and speed of patient care can
increase. However, if a hospital hires more nurses than there are tasks or space allows for, the additional
nurses will not contribute as much to caring for patients (diminishing MP), and they may even obstruct
each other due to limited space in patient rooms and corridors.
• Scaling Decisions in Industry:
• In real-world industries, decisions to scale up are not made solely based on MP and AP. They also consider:
• Market conditions: Is there enough demand to justify increasing production?
• Costs: Are the costs of additional inputs (like labor) lower than the revenue they will generate?
• Capacity: Is there enough physical space and are there enough machines to accommodate more workers?
• Supply chain: Can the supply chain handle an increase in production?
• Regulations: Are there any legal or regulatory constraints to expanding production?
• Strategic goals: Does scaling align with
Firm production decision based on marginal
and average productivity to maximise profits
Firm production decision based on marginal
and average productivity to maximise profits
 Labour productivity: an important
measure of industrial effeciency
• Dividing the value added (a measure of output) by the number of
employees (a measure of input, in this case, labor) in an industry, gives
"labor productivity" for that industry.
• Labor productivity measures the output per unit of labor input. It's a
measure of how efficiently labor input is converted into output.
• The formula can be written as:
Labor Productivity = Total Value Added / Number of Employees
Relationship of Average productivity and
labor productivity
• The Average Product of an input, like labor, is the total quantity of output produced divided by the
quantity of the input used. In the context of labor, it would be the total output in physical units divided
by the number of labor units used (e.g., number of employees or total labor hours).
• Labor productivity and the Average Product of labor are conceptually similar since both measure the
output per unit of labor input. However, labor productivity is more commonly expressed in terms of
monetary value, while Average Product is traditionally expressed in terms of physical units.
• In practical terms, especially within economic analysis, when we talk about productivity in an industry,
we're often referring to labor productivity, because it's useful for comparing the efficiency of different
industries or economies, which might have very different types of outputs that can't easily be compared
on a physical basis.
• If a factory produces $1 million worth of goods with 100 workers, its labor productivity would be
$10,000 per worker.
• If those 100 workers produced 200,000 widgets, then the AP would be 2,000 widgets per worker.
COMPARISON OF DIFFERENT
PRODUCTIVITY MEASURES
• LABOR PRODUCTIVITY measures economic efficiency. Higher labor productivity means that each worker is
contributing more to the economic value of the goods or services produced. It is a key indicator used to assess the
economic performance of an industry, sector, or entire economy.

• AVERRAGE PRODUCITIVITY measures process and physical efficiency. It tells you how much output (in physical
units) is produced per unit of input, without necessarily assigning a monetary value to that output. It is a useful metric
within the production process, helping to understand the relationship between inputs and outputs in physical terms.

• Average productivity, on the other hand, is particularly useful for operational decision-making within a firm or
industry. It can help identify inefficiencies in the production process and inform strategies to optimize the use of inputs
to increase the output. It is also critical for technical analysis within industries where output is more effectively
measured in physical terms (like agriculture or manufacturing).

• Marginal Productivity is essential for the decision of industry to grow and scale up or to shift inputs from one
technology to the other
RELATIONSHIP OF LABOR
PRODUCTIVITY & GROWTH
• Empirical studies on economic growth often find a strong correlation
between productivity measures and economic performance. Increases
in labor productivity are associated with higher wages, better
standards of living, and economic growth.
• Analysis of labor markets often reflects that industries with higher
average productivity per worker tend to pay higher wages, which
correlates with higher labor productivity. This is partly because
workers in more productive industries add more economic value and
are therefore compensated more.
Computing labor productivity of Pakistan’s
industries
• Using CMI data base to compute value added of different industries
and number of person employed and hours worked
• Labor Productivity = Value added (i) / number of employee(i)
Value added (i) / hours worked(i)
Trends & comparison of labor productivity
• To show how labor producitivity of different industrial sectors change
over the time. A line graph shows the trend of labor productivity over
time
• The value of labor productivity is not very informative of trend we
need to compute growth rates and then plot the line chart
• For comparison we plot different sectors labor productivity in one
graph
• Another important measure is capital intensity given as
• Capital intensity = Investment (Gross fixed capital formation)/ number of employeed
Important data sources:

5O years of statistics: Pakistan bureau of statistics

pbs.gov.pk

statistical yearbook of Pakistan : Pakistan bureau of statistics

pbs.gov.pk

https://www.pbs.gov.pk/content/all-reports-and-publications