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Q: 1 The business environment of Pakistan.

Give a comprehensive theoretical background of the topic and then analyze its practical application in any private organization of Pakistan.

Pakistan Last update: March 2009 Competitive Advantages

Business Environment

Economic Outlook Investment policies, laws and regulations

Business Environment Located in the heart of Asia, Pakistan is the gateway to the energy rich Central Asian States, the financially liquid Gulf States and the economically advanced Far Eastern tigers. This strategic advantage alone makes Pakistan a marketplace teeming with possibilities. Here the people are mostly English proficient, hardworking and intelligent. They have lesser costs. Well-established infrastructure and legal systems are deep-rooted foundation to lure investment. It includes comprehensive road, rail, sea links; good quality telecommunications and IT services; modern company laws and long-standing corporate culture. A composite scheme of National Industrial Zones engulfing industrial estates, Free Industrial Zones, Free Trade Zones and Export-Oriented Units (EOU) and Estates for small and medium industries within areas of its boundary has been launched to promote exports. In addition, establishment of export-oriented units will be allowed to be set up all over the country. Foreign investors are allowed participation in industrial projects, on the basis of 100% foreign equity, without any permission from the Government. The manufacturing sector was open to foreign investment. Now, the policy regime has been liberalized by opening up other economic sectors to FDI and by mobilizing domestic financial resources to encourage investment. Full repatriation of capital gains, dividends and profits. There is no requirement to obtain a No Objection Certificate (NOC) from the Provincial Governments for the establishment of projects. Top of page Economic Outlook Pakistan is one of the fastest growing economies of the world having touched a GDP growth rate of 8.4% in 2005. Today Pakistan has 160 million consumers with an ever-growing middle class. Foreign investment has risen sharply from an average of $400 million in the 1990s to over $ 3.5 billion in 2005-06. Fiscal deficit has declined from an average 7% of GDP in the 1990s to around 3% in recent years. And FOREX reserves have increased from $3.22 billion in 2000-1 to $13.14 billion in 2005-6. Large and growing domestic market includes 140 million consumers with growing incomes and a growing middle-class moving to sophisticated consumption habits. Abundant land and natural resources exists in Pakistan including extensive agricultural land, crop production; wheat, cotton, rice, fruit and vegetables; mineral reserves; coal, crude oil, natural gas, copper, iron ore, gypsum; and fisheries and livestock production. Tourism has been declared an industry and as such holds great promise for prospective investors interested in exploring the true potential of a land as rich and diverse in its culture as it is in its

geographical distribution. From snow-capped mountains in the north, with vast fertile plains of the Punjab, rugged land of the south, deserts and a long seacoast, Pakistan has all the hall marks to become a major tourist attraction. Top of page Investment policies, laws and regulations Current investment policies have been tailor made to suit investor needs. Pakistan 's policy trends have been consistent, with liberalization, de-regulation, Privatization, and facilitation being its foremost cornerstones. The capital markets are being modernized, and reforms have resulted in development of infrastructure in the stock exchanges of the country. The Securities and Exchange Commission has improved the regulatory environment of the stock exchanges, corporate bond market and the leasing sector. Whilst the Central Board of Revenue has facilitated structural reform in tax and tariffs and the State Bank of Pakistan has invigorated the banking sector into high returns on investment. Pakistan has a liberal foreign exchange regime with few restrictions on holding foreign exchange and bringing it in or out of the country. There are no limits on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or payments for imported inputs. The facility for contracting foreign private loans is available to all those foreign investors who make investment in the approved sectors. Foreign controlled manufacturing concerns are allowed to borrow on the domestic market according to their requirements. There is a greater degree of transparency in procurement practices since the current government took office in October 1999. International tenders are properly advertised and there is no sole sourcing, as contract specifications are not made according to any company's requirements, as was done in the past. Sanctity of contracts, however, remains a major concern for companies. Foreign controlled semi-manufacturing and non-manufacturing concerns can access loans equal to @ 75% & 50%, respectively, of their paid up capital including reserves. There is no restriction on payment of royalty / technical fee etc., in the manufacturing sector, allowed non in non-manufacturing sectors. For non-manufacturing sector, the initial lump sum fee should not exceed US $ 100,000. The maximum rate will be 5% of net sales. Initial period for which such fees may be allowed should not exceed 5 year. Further information can be supplied by BOI. Reducing minimum foreign equity from US$ 0.5 million to US$ 0.3 million. Zero import duties on capital goods, plant and machinery and equipment not manufactured locally. Central Board of Revenue (CBR) can supply a list of locally manufactured good. In case of doubt the investor is invited to consult the Board of Investment (BOI). The import tariff on agriculture machinery (not manufactured locally) for registered corporate agricultural projects will be zero-rated. The investors who invest in the newly opened sectors can import plant, machinery & equipment (not manufactured locally) at discounted rate of customs duty which is 10% and also avail first year allowance @ of 50% of the cost of plant, machinery & equipment. Zero import duties on raw materials used in the production of exports. Remittance of royalty, technology and franchise fee allowed to projects in social, service, infrastructure, agriculture and international chains food franchise. Regulatory reforms have led to the establishment of a legal framework for licensing and regulating private housing lenders. At present, five private housing companies are operating in a regulated environment and offering a variety of loan instruments. In order to mobilize funds, private housing companies may issue certificates of investment. Source: President of Pakistan's website & Pakistan Board of Investment

MNC's Views of Business Environment in Pakistan


American Business Council of Pakistan (ABC), a formal association of American Multinationals operating in Pakistan conducts informal business survey annually to assess how their members view investment climate in Pakistan. The survey conducted in July August, 2002, shows that Pakistan's economy is picking up and the investment environment is improving. KEY RESULTS OF THE SURVEY 85% of respondents indicated improvement in Pakistan's overall economic prospects while 73% indicated improvement in Domestic Economy. 83% reported increase in their revenues in Rupees while 78% in US $ terms. 79% observed that the policies were more consistent than before while 68% felt that the Government was positively impacting business. 75% indicated increase in their pre-tax profits. 63% indicated improvement in implementation of policies by the Government. 51% of the respondents reported that they were planning to expand investment in Pakistan.

Based on their dealings, most of the responding members indicated that working of the Government departments had generally improved. ::. STATUS OF RESPONSES. Members polled Members responded Response % 58 40 69

State of SMEs in Pakistan


In the industrial development of a country the importance of the SME sector cannot be overemphasized. SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labor force; and their share in the annual GDP is 40%, approximately. However, unlike large enterprises in the formal sector, a small and medium enterprise is constrained by financial and other resources. This inherent characteristic of an SME makes it imperative that there should be a mechanism through which it may get support in different functions of business including technical upgradation, marketing, financial and human resource training & development. SMEDA is the flagship organization of Pakistan which is providing the necessary services to help SMEs overcome the weaknesses that are endogenous to their very nature. It is an autonomous body working under the umbrella of the Ministry of Industries & Production and contributes towards the growth and development of SMEs in Pakistan through: (i) the creation of a conducive and enabling regulatory environment; (ii) development of industrial clusters; (iii) and the provision of Business Development Services to SMEs in all areas of business management. Adhering to a clear mandate and a logical path to achieve quantitatively verifiable targets, SMEDA carries out comprehensive analyses of international trends, national policies and other macroeconomic factors affecting SMEs in Pakistan for a gradual progress towards the creation of a favorable business environment for its key clients the SMEs of Pakistan. At the same time, we also interact with the SMEs working in industrial sectors such as Agriculture, Fisheries, Textiles, Handloom Weaving, Transport, Leather, Marble & Granite, Carpets and Light Engineering. This interaction takes place at the individual as well as collective level to provide proactive and responsive financial, technical, management and marketing services to SMEs. At the collective level SMEDA addresses the problems and needs of SMEs in the form of an industrial cluster a concentration of largely homogenous enterprises within a certain geographical area. SMEDA interacts with the stakeholders operating in such clusters on a regular basis and collects first hand information about their problems and needs. During this interaction, the issues are prioritized and the important problems are selected for detailed working through which the projects/programs are identified. SME support through cluster development program is provided on two fronts: 1. Regulations and policy level support 2. Institutional & networking support In the policy level support, problems related to any Government department or Government policy/regulation are studied and, if found valid, are advocated with the concerned authorities. At the institutional level, SMEDA provides support to SMEs by creating networking amongst the concerned stakeholders or by directly starting development projects in the clusters. Such projects may include establishing a training institute, building a common facility centre, building a model plant with state-of-the-art technology for SMEs to emulate through reverse engineering. These projects also include upgrading technology in a particular industrial sector and starting a programlending scheme for this purpose in collaboration with the financial institutions. Up to now, SMEDA has been involved in cluster development projects in the areas of Boat Modification in Marine Fishery Sector, Credit for Auto Vendors, Carpet Weaving, Marble & Granite, Dates & Apples Processing, Wooden Furniture, Leather Garments, Ceramic Kilns, Cotton Ginning, and Glass Bangles Cluster. Some of the important cluster development projects undertaken by SMEDA are: Textile/Apparel 1. Ginning Technology Up-Gradation 2. Program Lending For Power Looms 3. Computer Aided Design Centre (Common Facility Centre-Sialkot)

4. Designing Institute for Garments (Peshawar) 5. Accessories Sector Study 6. Development of Handloom Cluster Horticulture/Fruits and Vegetables 7. Establishment of Cool-Chain Agriculture Export Processing Zone 8. Fruit Processing Facility (NWFP in Collaboration with EPB) 9. Assistance to Set Up Horticulture Export Board 10. Revitalization of Sunflo Cit-Russ for Citrus Cluster Development. 11. Apple Treatment Plant in Balochistan (Co-Ordination with EPB) Fisheries 12. Program Lending Boat/Engine Modification, Gwadar District 13. Establishment Of Shrimp Farms 14. Fish Processing Facility In Gwadar (Feasibility Study) Granite & Marble 15. Export Warehouse Marble (Azakhel NWFP) 16. Establishment of Model Quarry and Training Institute Marble 17. Joint Ventures and Technology Transfer Arrangements (NWFP) Gems 18. Five New Gem Mines To Be Operationalized (NWFP) 19. Lapidaries Program Lending (NWFP) 20. Glass & Ceramics 21. Ceramics Kiln Up-Gradation: Common Facility Centre, Gujrat 22. Sanitary Ware & Pottery Sector Kiln Up-Gradation 23. Bangles Kiln Up-Gradation (Hyderabad) Agriculture 24. Agri-Mall One Stop Shop for Agriculture Inputs 25. Support Services for Agricultural Credit (SSAC) 26. Establishment of 3 Private Sector Warehousing & Trade Promotion Facilities in Afghanistan The third area of SMEDAs functioning is the provision of Business Development Services to SMEs. For this purpose we have set up Helpdesks in all four of our regional offices where any SME in need of SMEDAs services can simply walk in and obtain over the counter products such as Project Briefs, Pre-feasibility Studies and Regulatory Procedures, along with advice on specific problems. SMEDA Helpdesk Services include: Assistance in Raising Finance. Financial Advice. Project Identification. Business Plan Development. Technical Advice. Marketing Advice (Branding, Labeling, Packaging, Distribution, Promotion, etc.) Company Incorporation, Export Registration, & Regulatory Advice. Sales Tax, Custom Duty, Excise Duty, etc. Electronic Commerce Support. Business Matchmaking. Accounting & Bookkeeping Services. Information Services (Library, Databases, Project Briefs, Pre-feasibility Studies, Business Guidebooks). As a part of its Business Development Services, SMEDA also provides Human Resource Training services by conducting extensive training need analysis of different SME clusters. SMEDA has so far conducted more than 230 training courses and workshops focusing on developing sector specific skills. SMEDA, envisions to become a model of public-private partnership for better facilitation of the small & medium enterprises in Pakistan through the creation of a more equitable, transparent and

conducive regulatory environment for the businessmen. SMEDA believes in synthesizing homegrown solutions to the problems of SMEs, based on global information and local wisdom achieved through cross-country analysis, experience of indigenous entrepreneurs and constraints of the government.

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