As I look at the business headlines these days, they are full of potential investors from countries like Saudi Arabia and UAE flocking to Pakistan. A few years earlier, it was the story of the Chinese finding business opportunities in the land of the pure. Perhaps we can also add a few Turkish and Korean ones to the list.
My mind can’t help returning to when my generation started our respective careers. Those were the days of the multinational corporation (MNC). Foreign-owned businesses operating in Pakistan were mainly Western – from the USA, UK, Europe and Asia was represented by a handful of Japanese organisations.
What happened to these companies? Some of them may still be around but most went away. Where did they go and why? And if this has anything to do with persistent conditions in Pakistan, what makes these new investors think they will stay for long?
The reasons the multinationals cited for their exits were all too familiar: failing or inexistent infrastructure, consumer markets with limited buying power, struggling institutions, and corruption. In effect, what they experienced in Pakistan was a disabling environment for business–as opposed to an enabling one.
This is in line also with the general impression we get from drawing-room conversations–that the adverse law and order and poor governance that has prevailed in Pakistan for many decades is the main reason we do not attract foreign investment. We regularly read or listen to newspaper writers and television anchors beating their chests for the shoddy performance of various governments and state institutions. Not that I am defending that performance as woeful as it is. But are those the only reasons for MNC exits?
To answer this, we must first try to understand the evolution of the Western multinational corporation itself. To a large extent, the MNCs of the 80’s, other than the banking institutions, were engaged in manufacturing – chemicals, pharmaceuticals, paints, agrochemicals, fertilizers, consumer goods and other similar industries. Globally, since then, most of these industries have undergone significant changes in their structures and ownership resulting from either break up of diversified businesses or acquisition by new owners.
Many of the older companies, such as ICI (where I started my career) do not exist anymore, after having divested or shut most of its businesses. Likewise, many of the pharmaceutical and chemical industry giants of yesteryears as well as banks have shut their doors globally. Their exit from Pakistancould therefore be attributed to the evolution of industry structures in their immediate spheres.
Second, and more importantly, is the business model MNCs deployed in developing countries like Pakistan. A majority of their investments were based upon protection offered via government assurances for import tariffs or lower tax and other concessions. However, this model was found to be unsustainable as soon as markets were opened to competition and state grants became unfeasible for the government.
It is critical to keep this in mind for Pakistani policymakers as they try to woo the next breed of potential investors. Any future investments tied into rent-seeking of any sort are detrimental to the country as well as to the investors. We have seen the adverse impact of concessions offered to the plethora of energy businesses recently.
Third, the advent of China as a manufacturing hub became a deterrent for production to be done in Pakistan. Most MNCs requiring enhanced production capacities,invested via joint ventures in China as they could cater to the large Chinese market as well as have the scale to competitively ship their products to Pakistan and other similar markets. The liberal import environment in Pakistan naturally supported this phenomenon.
What about the ones which have stayed – thus far at least? We see some large FMCG, Sugary drinks and food businesses staying and thriving mainly based on the large population which continues todemand these products. I cannot recollect any other industrial sector to have any significant MNC presence.
How do we learn from the above – to prevent new investments suffering from the fate of the older MNCs? We need to look at this from both perspectives –as a country, we need foreign investment to help us achieve economic growth – as well as with the lens of foreign investors who need to grow their businesses and make decent returns on their investments.
As Pakistanis, policymakers should pay attention to the basic fact that capital seeks returns from businesses. The best measure of business viability is the size and strength of the market and in this case – the attraction of the domestic Pakistani market.
We have a sizeable population albeit with low purchasing power and until this is enhanced, we need to offer our population products and services which complement their purchasing power.
In the past, this has not been so, with investments in sectors such as real estate and automobiles andsimilar sectors encouraged for the consumption of the few. The policy design this time around must showcase viable markets instead of rents from the government.
Affordable and accessible transport and medical care, good education and availability of nutritious food are some basic needs that most people in Pakistan still find missing. Anyone investing to solve these problems and provide even half-decent products and services in similar areas will find long-term viability.
The onus is really on the foreign investors themselves – the new ones should realize that Pakistan is not a country where quick returns can be made. It will require patience and a long-term commitment to creating markets for their goods and services.
More specifically, they will need to reduce the barriers to consumption by offering lower costs, enabling consumers to access the product or service with ease, making it simple to use and reducing the time required.
They should deploy innovative technologies and processes and create new value networks while still providing adequate returns and a path to profitability for their businesses.
One of the great services that the older MNCs provided to Pakistan and similar countries is the development and training of management talent. This not only built the capability for Pakistani management to undertake leadership roles globally but in doing so, created prosperity for themselves and their families.
In this regard, any future investors (local or international) must continue to invest in cultures which build high-performing management teams, that in turn, provide the building blocks for the future success of their businesses.
Last, but not the least, new investors must again be warned against accepting government incentives as the “raison d’eter” for their investments. Any business built on rent-seeking and not on viable markets is unlikely to succeed.
The Saudis and the Chinese, as well as any other foreign investors, need to look hard at the type of international businesses which have stayed and prospered in Pakistan. Without this critical analysis, we will be talking about another mass exodus of global investors and their companies from Pakistan in ten years or so.
