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8/7/2019 Seminar Industrial Competitiveness
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The role of industry in Pakistans economic development
Contribution of industry to GDP and labour force
Pakistans major industries
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The Evolving Policy Framework
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Pre-liberal Era
Restrictions and economic controls in Pakistan during 1947-55
Protection to manufacturing through over valued exchange rates
Import licenses
Quantitative restrictions
Unfavorable exchange rates to agricultural exports
Curtailing import of manufactures
Domestic prices of manufactured goods maintained at a high level
Agricultural goods Prices kept low
Increased the profitability of manufactured goods causing rapid
increase in investment in the manufacturing sector
Impetus to manufacturing :
Devaluation between primary and manufactured goods
The provision made in the export subsidy
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Second five year plan (1959-65) Tendency towards indirect controls
Two liberalization measures Increasing the volume of imports
1. Export bonus scheme(1959) Marginal effect onliberalization
2. Open general license system(1964) Goods to be imported withoutlicense
Licensing system influenced the direction of industrialization in Pakistan
By giving greater protection to consumer goods rather than intermediate &investment goods
Pre-liberal Era
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Pre-liberal Era
Third five year plan (1965-70) Emphasized liberalization and indirect controls
Setbacks to liberalization on account of the indo-pak war,bad harvests during 1965-67 & a decline in foreign aid
Open the economy to competition (1972) Rupee was devalued
Import licensing and export bonus schemes scrapped
tariff rates were reduced
The value added approach (1970) share of manufacturing GDP at world prices is almost
insignificant for Pakistan
Problem no distinction between inefficiency and high profitability
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Exchange rate policy
Influenced manufacturing labor capital
Redistribution of income among income groups accentuating
the already skewed distribution of income
Investment & import license (1960s) Barriers to entry
High aggregate concentration in the economy
Industrial families had great leverage overPICIC and IDBP
by having their representatives on the board of directors
Characteristic of the corporate environment (1960s) Inter-locking directorates between industry, banking,
insurance and trade
Oligopoly in manufacturing market
Resulted in windfall profits for the industrialists in Pakistan
Pre-liberal Era
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Pre-liberal Era
Monopolies and restrictive trade practices
Promulgation of Control and prevention ordinance (1970)
Monopoly control authority (MCA) formation
Rapid industrialization in1960s
Socio-political fallout led to the abandonment of successful growth
strategy
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Pre-liberal Era
Policies Reversal
nationalization of industries including iron, steel, basic metals, heavyengineering, heavy electrical equipment, motor vehicles, tractors, petrochemicals, gas, refineries, cement , electricity, vegetable ghee, banks andinsurance companies
Nationalization
Ineffective in lessening the concentration of income & wealth
Converted private sector monopolies into public monopolies
Burden on the national exchequer
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Growth Performance of Components ofGNP
1978-85 1980's 1982-83 1984-85 1985-86 1986-87 (R ) 1987-88 (E)
Commodity
Producing Sector _ 6.5 5.8 _ _ 5.1 5.7
Agriculture 3.72 5.4 3.8 12 6.48 2.2 4.5
Manufacturing 9.63 8.2 7 8.58 7.84 7.5 7.6
Services Sector 5.74 6.6 7.9 _ 5.74 6.4 5.9
GDP (Constant
Factor Cost) 6.6 6.1 6.7 6.72 6.6 5.7 5.8
GNP (Constant
Factor Cost) 6.48 5.5 8.4 6.97 6.48 4.7 4.9
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The Onset of Liberalism
1987-1990
Removing the barriers to entry and exit of firms
Increase in the investment sanction limit
Removal of non-tariff barriers
Reduction in tariff levels
Only Four industries require government sanction
Arms and ammunition; security printing; currency and mint; highexplosives and radioactive substance
Dis-investment Programme
Denationalization of utilities, infrastructure & energy
Improving efficiency of public manufacturing enterprises
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The Onset of Liberalism
Problems :
SOEs are sold at low prices due to inadequate restructuring
Policy for allocation of certain percentage of the business toforeigners
Selling companies to individual buyers leads worsening alreadyskewed distribution of income & wealth
Foreigner buyers can undermine sovereignty of country
Converting public monopolies into private monopolies leads todeterioration in efficiency, savings, incentive structure etc
Beneficial privatization :
Only if public monopolies are converted into private competition
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Key Economic Indicators
IrregularGrowth (1990s)
- manufacturing sector depicting violent fluctuations
- Worst decline in GDP growth rate in 1996-97 @ 1.3% due to Political uncertainty
- Impact of structural adjustment policies leads to deceleration of growth rate of
manufacturing sector @ 1.2%- Growth performance of the small-scale sector leads to 7% increase causing GDP
registering an increase of 4.3%
- Dismal Growth performance in 1998-99
- Marginal increase in contribution of manufacturing sector 16.7% to 18.6%
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Growth Performance of Components ofGNP
1990's 1993-94 1994-95 1995-96 1996-97 (P) 1997-98 1998-99 1999-00
Commodity Producing Sector 4.6 50.9 5.66 5.6 0.54 5.3 2.2 3
Agriculture 4.4 24 6.57 5.8 0.06 3.8 1.9 6.1
Manufacturing 4.8 18.6 3.6 4.8 1.19 7.9 4.1 1.4
Services Sector 4.6 49.1 4.8 4.76 2.1 3.2 _ 4.8
GDP (Constant Factor Cost) 4.6 _ 5.24 5.15 1.3 4.3 3.2 3.9
GNP (Constant Factor Cost) 4 _ 5.75 _ _ 4.2 3.2 3.5
Source: Pakistan Economic Surveys 1994-95,1997-98, 1999-00, and 2000-01,
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Contribution towards Labor
Share of industrial employment increased until 1987, but declined with the advent
of the liberalization era
Tendency towards premature deindustrialization, with the country moving away
from being a manufacturing nation to being a trading nation
Decline in the industrial labour force and increase in the service sector labour force
is a post-industrial phenomenon
Labor force increased & estimated @ 38.6 million in 1999 - unemployment rate has
been estimated at a little over 6%
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Distribution Of Employed Persons Of 10 Years Age & Above By MajorIndustries
Division - TABLE 2.3
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Decline in growth rate increase in the Gini coefficient
reflecting increase in income inequality
Year GDP Growth Rates Household Gini coefficient
Theil
coefficient
1985-86 6.4 0.355 0.23
1986-87 5.8 0.346 0.22
1987-88 6.4 0.348 0.23
1990-91 5.6 0.407 0.3
1992-93 2.3 0.41 0.27
1993-94 4.5 0.4 0.27
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Small Scale Manufacturing
1,84,000 manufacturing units 1988
Textile, leather share 30% followed by food, beverage & tobacco
Metal products share 16 %
wood and furniture share 10% of the total, followed by mineral products
Small-scale manufacturing units in the rural areas are less than half of those in the
urban areas
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Growth of the Large-Scale
Manufacturing Sector
1960s Spectacular Growth higher than rates of growth of labor
& capital
Lost Decades 1970s - 1980s Lower than the rate of growth of
capital and labor negative productivity growth
textiles (20.1 per cent), wearing apparel (27.7 per cent), leather and
products (19.9 per cent), furniture and fixtures (20.8 per cent), printing
and publishing (21.0 per cent), industrial chemicals (19.9 per cent),
plastic products (24.3 per cent), iron and steel basic industries (20.8 per
cent), non-electric goods (19.9 per cent), transport equipment (19.6 per
cent), sports and athletic goods (32.5 per cent )
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Growth of the Large-Scale
Manufacturing Sector
Compound Annual Rates
of Growth
Period V alue Added Capital Labour
1955-56 to 1959-60 19.5 3.7 15.1
1959-60 to 1969-70 26 17.8 15.1
1969-70 to 1980-81 6.4 9.5 17.1
1980-81 to 1990-91 6.1 9.1 16.8
1955-56 to 1990-91 13 11.3 16.7
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INDUSTRIAL COMPETITIVENESS
THE CHALLENGE FOR PAKISTAN
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WRITERS
Sanjaya Lall( 13 Dec 1940- 18 June 2005)& John Weiss
Development economist, Professor of Economics & Fellow of GreenTempleton College, Oxford University, Senior economist at World Bank
Areas of interest included the impact of FDI in developing countries andthe economics of multinational corporations
33 books
Research Director, Asian Development Bank
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INTRODUCTION
Globalization carries opportunities and threats
Pakistans economy is at crossroads with
domestic policy changes and end of theinternational textile quota regime
The aim of the paper is to benchmark Pakistans
industrial performance against competitoreconomies and highlight the key lessons
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UNDERSTANDING INDUSTRIAL
COMPETITIVENESS
The ability to compete with firms at the international frontie
of best practice.
Government support to attain competitiveness.
Essence is to promote in-firm learning, skill development
and technological effort, supply of information and collectiv
learning processes.
Capabilities relating to physical infrastructure, human
capital, finance and technology.
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UNDERSTANDING INDUSTRIAL
COMPETIT
IVE
NESS
Competitiveness policy for efficiency and entry
into very complex and high technology activities.
Limited Government interventions to tackle clear
and well understood market failures
In Pakistan, there is a need for support of firmlevel upgrading and technical change.
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THE CHANGING NATURE OF
COMPETITIVENESS
Globalization is altering the environment facing developing countryenterprises
Competition requires use of new technologies and bestorganizational methods
International competition is bringing new market opportunities
Need to constantly upgrade technology
Need to shift the economy, its human capital and technology base,its institutions and infrastructure from a low to a highcompetitiveness path
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NEW DYNAMICS OF WORLD
MARKETS
High technology activities have grown faster inboth production and trade
Technology intensive industrial activities aredynamic and offer export possibilities.
Promote structural change
Developing countries export of manufacturedproducts grew faster than industrial ones
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The reasons for growing exports of technologically complex products in
developing countries are:
1. Domestic capabilities in high technology driven by strong industrial policy,
protection of infant industries, allocation of credit and promotion of localR&D.
2. Countries have become major high tech exporters through integrated
production systems, starting by performing relatively simple assembly.
3. Limited export growth in labor-intensive activities due to the very
demanding skill, design and branding requirements.
4. Growth of some resource-based and low tech products held back by trade
barriers, tariff escalation and subsidies in industrialized countries.
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Pakistan: the current policy
environment for manufacturing
International competitiveness requires ready access tointernational inputs and domestic market subject tocompetitive pressure
Highly protected domestic markets penalize the economy byallowing inefficient domestic producers
Infant industry support policy should be time-bound andperformance linked
Pakistan has liberalized its trade policies and it is one of themore open trade regime in South Asia.
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Pakistan: the current policy
environment for manufacturing
Average import tariff was 20% in 2001-2, 56% in 1995 andaround 80% in 1985
Investment policy introduced in 1997
Foreign investors are guaranteed national treatment, facelow import duties on plant and equipment and receive afirst year profits tax allowance
FDI inflows and domestic investment low due to nationaland regional political situation
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Pakistans current policy environment
Pakistan is a low wage, labor surplus economy
Wages are significantly higher than Bangladeshand slightly higher than India.
Higher cost location than China, India andBangladesh
Slow growth in private investment has been oneof the key constraints on Pakistans economicgrowth
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REGULATIONS
Heavily regulated business environmentindicated by the number of Governmentinspection visits to a factory in one year and thenumber of days to clear customs
Lengthy delay in customs clearance makes itdifficult for business to keep optimal level ofinventories
Regulation also judged by the time and costrequired to start up a new business
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Infrastructure Deficiencies
Infrastructure in the power sectorimpeding the operation of enterprises
Shortage of fixed line connections in thetelecom sector
Waiting time and connection costs forphone lines are both high by international
standards High transportation costs affecting
exports
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Benchmarking Pakistans
Performance
Manufacturing grew at a compound real annual rate of 5.5% between1980 and 20000 and per capita GDP at 2.2%
Value added grew at 7.2% in 1980s and at 3.8% in 1990s
Growth of around 3% in both 2001 and 2002
A very low share of medium and high tech products with very slowupgrading overtime
Largest export product in 2001 was made-up of textile articles
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Benchmarking Pakistans
Performance
Pakistan gained world market in cotton fabrics andlost in the textile yarn
Textile yarn is dynamic in world trade but mostapparel products are in the non-dynamic segmentof trade.
Pakistan requires upgrading of productioncapabilities , quality and marketing relative tocompetitors.
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Benchmarking Pakistans Skills &
Technological Capabilities
By most common indicators of skill creation, Pakistan performs poorly byregional standards. Pakistan ranks below all other South Asian economieseven Nepal.
By indicator of Government expenditure on education as percentage of GDP,
in 2001 Pakistan spent less on human capital than its comparators.
Per capita R&D spending is also the lowest and enterprise financial R&D isnegligible.
The no. of scientists engaged in R&D per million inhabitants, the no. of
technicians in R&D, the no. of scientific and technical journals and technicalfees per capita also highlights the weak position
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Lessons from East Asia
Newly industrialized economies like Korea, China, Hong Kong, Singapore,Malaysia & Thailand have each succeeded in diversifying out of traditionalprimary exports into more dynamic manufactured goods.
Governments using additional measures for promotion to raise theprofitability of exporting
Pakistan needs to diversify export structure and establish links with globalvalue chain.
Instead of direct intervention and involvement of Government in enterprisedecisions, Pakistan needs to undertake industrial promotion and support.
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Lessons from East Asia
Skill formation and training in Singapore
Stimulation & support for local technology
development in Korea ,Taipei and China
Initiatives of public-private collaboration and
suitable alliances to foster technological capability
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CONCLUSIONS The development of industrial strategies involve five main
steps.
1. A detailed assessment of the industrial sector and main sub-sectors
2. The development of a national strategic vision
3. To design policies and programs
4. To implement these policies & programs
5. To monitor the progress of the strategy, assessing theirsuccess and adjusting them as necessary.
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RECOMMENDATIONS
Setting up an industrial competitiveness agency by
combining the work of the EPB & the Board ofInvestment
Allocating resources and deciding on the main engines ofindustrial competitiveness
Examine closely the experience of countries successful in
developing competitive bases with the help of benchmarking& policy analysis
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RECOMMENDATIONS
Public investment in relevant technical and general education
as well as the strengthening of public R&D activities
Improve physical infrastructure, reduce bureaucraticrestrictions and ensure continued macro stability
Address critical competitiveness problems at the firm level
through Government support like cost sharing for variousconsultancy services
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Industrial Concentration & Aggregation
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Introduction
Industrial concentration concerns the distribution
of production within an industry
1960, Industrial policy led to rapidindustrialization
Rise to concentration of income & wealth
Study reveals the origin of concentration in
Pakistans various sector of economy.
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Earlier Studies
Sobhan (1965) - 75 manufacturing unitsreceive 43.8% of all value added.
Papanek (1967) - 7 individuals andcompanies controlled 25% of all privateindustrial assets, while 24 controlled nearly50%.
Mahboob-ul-Haq's (1968) - 20 familiescontrolled 66% of industrial efforts, 70% ofinsurance funds and 80% of total bankassets
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Earlier Studies
White (1974) - study on market/seller concentration,aggregate industrial, manufacturing, banking andinsurance concentration levels, their origin and effects.
33% concentration ratio is taken as the starting point ofoligopoly formation, over three -fifths of manufacturingvalue added originated in oligopolistic industries inPakistan.
Liberalization and privatization of Pakistans economyduring the 1990s might have affected the concentration
level of the economy.
The study aims at computing concentration for individualmarkets as well as for the entire economy for two points oftime i.e. 1992 and 2000
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Methodology
Market/Seller concentration is measured by
Concentration Ratio Where CRn = top 3 firm concentration ratio, and
Si = share of fixed assets of top 3 firms in industry fixed assets
Herfindahl Index
Si = share of fixed assets of each firm in total industry fixed assets squared.
For computing Aggregate Concentration the measure willbe;
AC = aggregate concentration / concentration of economic power.
n = 100
Si = proportion of fixed assets of top 100 financial, non-financial andservice sector firms in total fixed assets of these sub-sectors.
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Data Source
Data for computing market and aggregate
concentration have been taken from the balance
sheets of companies listed on the Karachi Stock
Exchange (KSE).
24 Financial, Manufacturing and service Sector
For computing aggregate concentration the top
100 firms in finance, industry and service
sectors fixed assets were added together.
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Estimates of Market/Seller
Concentration for Pakistan
For the 18 manufacturing industries Concentration level has increase
69.75 percent in 1992 to 78.64 percent in 2000 interms the CR3.
While according to the HI the overall increase hasbeen from .2464 to .3402.
For the financial sector Concentration level has increased
From 49.91 percent in 1992 to 60.04 percent in 2000in terms of the CR3.
But in terms of the HI the overall concentration levelhas declined slightly from .1946 to .1931 during thesame period
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Estimates of Market/Seller
Concentration for Pakistan
Overall concentration level during 1992 to 2000 for the twoservice sector industries declined
from 93.93 percent to 82.71 percent in terms of CR3.
But the overall trend revealed by the HI reflects increase in the
overall concentration level from .4235 to .5605 during the same period.
Industries recording high and increasing levels of concentration
leather and leather products, tobacco, cotton weaving, textilecomposites, glass and ceramics, woolen and woolen textiles,chemicals, transport and communication (declining level
according to CR3) pharmaceuticals, cables and electricgoods, paper and board.
Industries recording high but declining levels of concentration
synthetic and rayon, fuel and energy, food, engineering,cement and mutual funds
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Estimates of Market/Seller
Concentration for Pakistan
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Estimates of Market/Seller
Concentration for Pakistan
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Estimates of Market/Seller
Concentration for Pakistan -
Comparison A comparison was also made for changes inconcentration level during the last three decades
There is an overall rising trend in the level of concentration for the last several decades .
Industries with a high level and rate of growth of marketconcentration edible oil, cigarettes, cotton spinning, cotton weaving, cotton
composites, leather goods, pharmaceuticals, woolen textilesand electric goods.
Iindustries with high initial levels but declining trends sugar, glass, paper and board and rayon textiles.
While the concentration level in the cement industry hasremained almost constant,
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Estimates of Market/Seller
Concentration for Pakistan -
Comparison
E ti t f M k t/S ll
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Estimates of Market/Seller
Concentration for Pakistan -
Comparison
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Estimates on Aggregate Concentration
of the Publicly Incorporated Sector Aggregate concentration was estimated for Pakistans economy
by the use of equation 3 discussed in Methodology. Top 100firms in terms of fixed assets were identified and the gross valueof their fixed assets added togetherin 1992.
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Impact of Concentration on
Performance
Impact on Research and Development
(R&D) and Innovations.
The question of whether competition or
monopoly is more conducive to technologicalprogress
The general consensus seems to be that by
and large, competition generates moreprogress for a given R&D, as it confers
higher rewards as well as forces firms to
innovate.
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Impact of Concentration on
Performance
Shephard (1997) states that though the replacement effect of innovations, through
destroying the value of existing products and capitalgoods operates on all firms, but for a monopolist theeffect falls entirely on its own products.
On account of this, a monopolist will bring newproducts and processes more slowly than the sociallyoptimal rate.
For a competitive firm on the other hand, thereplacement effect of innovations falls on products and
processes which are shared by many producers. Soinnovations take market share from other firms and notjust from the innovative competitive firm itself.
Such a firm is therefore likely to innovate at maximumspeed in order to capture maximum profits before thecompetitors do so.
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Impact of Concentration on
Performance
Innovations therefore tend to be led by smaller
firms in a market. The dominant firms invents
actively, but delays the innovation phase
The adverse impact of market power on
technological progressiveness is not likely to
afflict Pakistans manufacturing sector.
Most of the domestic companies do not engage in
meaningful R&D activities and the subsidiaries oftransnational corporations undertake R&D at their
home offices abroad.
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Impact of Concentration on
Performance
Impact on Efficiency, Profits and Prices Micro-economic theory states that prices are higher under
monopoly than under competition.
These high prices might be on account of X-inefficiency andor higher profitability. X-inefficiency is closely related tomarket power.
Research relating profit margins to concentration waspioneered by Bain (1951) and focused on relating price-costmargins to concentration ratios at the industry level.
The concentration profitability relationship is reinforced by astrong correlation between profit rates and market share atthe firm level in studies using this approach.
The interpretation of a positive concentration coefficient inthe profitability equation reflects market power according toCowling (1982) and luck according to Mancke (1974). Butthe new-Chicago school attributes it to efficiency. TheEfficient Structure Hypothesis states that larger firms higherrates of return reflects greater efficiency (Demsetz 1973).
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Impact of Concentration on
Performance
For Pakistan, White (1974), Sharwani (1976), Amjad (1977) and
(1982) and Wizarat (1992 and 2002) foundconcentration to be a significant determinant of profitability for Pakistans large-scale manufacturing
sector. The high profitability results in transferring income
from a large segment of the society to a few.
Ahmed (1980) and Wizarat (1989 and 2002) henceattributed the decline in the wage share of income tohigh profit margins for the period 19551991. Thewage share of income in Pakistans large-scalemanufacturing sector declined from 37.3 percentin1955-56 to 23.9 percent during 1990-91. There is,therefore, a causal link from concentration to profitmargin to wage share of income. High concentrationlevels causing high profitability and worsening theskewness in the distribution of income in Pakistan.
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Summary & Conclusion
This study has tried to fill the gap in the availability of estimates on market and aggregate concentration forPakistan.
Market concentration was computed using CR3 and HI for18 manufacturing, two service and four financial sectors
for the years 1992 and 2000. The overall increase in manufacturing concentration
For the financial sector the overall concentration level hasincreased
In the service sector the overall concentration level hasdeclined
Increase in the level of market and aggregateconcentration has ominous consequences on thedistributing of income in the country. In line with theexpectations of the Monopolistic Pricing theory there isevidence that high levels of market concentration lead tohigh profitability, thus adversely affecting the labor shareof income.
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Summary & Conclusion
And finally, the fear that keeps lurking the heart and mindof a research on account of the reliability of the estimates.
Do changes in concentration computed in this paper trulyreflect the competitive forces in the economy?
This concern is all the more pressing in view of Daviesand Geroski (1997) that changes in concentration usingindustry level data conceal as much as it reveals aboutthe nature of the competitive process. They find thatchanges in market share of surviving firms are thedominant influence on changes in industry concentration.
And while concentration is fairly stable, this stabilityconceals a great deal of turbulence in market shares ofthe leading firms. In view of this, further research onmarket shares of leading firms is called for, which wouldthrow more light on the nature of competitive forces inPakistans economy.