Getting globally connected (Appeared in today’s Dawn)
By Shahid Javed Burki (for “about the author”, see footnote)
Two recent visits to my Washington office by the senior management of foreign firms gave me great hope about Pakistan’s economic future. The conversations I had with these people - and, with one exception, the six people I met were not expatriate Pakistanis - seemed to suggest that foreign capital and foreign entrepreneurship had begun to realize that Pakistan had considerable economic potential.
The managers who visited me would be classified as those who believe in “first mover’s advantage.” These are people who make great amount of money for themselves and for their companies by leading rather than following the pack.
There are, of course, risks in being at the head of the pack. Assumptions made about an economic opportunity may not prove to be correct. Or unexpected things may happen that were not fully anticipated at the time the investment was made.
The first set of visitors had an impressive track record in pioneering what has come to be called “outsourcing” in the West. They concentrated their efforts on India at a time when that country was considered to be even more risky than Pakistan is today. They were the first movers. They recognized that a combination of three things had made India an extremely attractive place for foreign investment.
The first, of course, was the availability of a large number of engineers and scientists - the graduates of the now famous Indian Institutes of Technology, or IITs - who were prepared to work at a fraction of a cost being charged by their counterparts in America.
Some of them had migrated to the US and proven that the skills they possessed were not inferior to those acquired by the graduates of American schools and colleges.
The question was how to make use of the skilled workforce that was still in India for the benefit of foreign investors? Or, in the words of finance, how to do “wage arbitrage” - make profit from the enormous wage differential between skilled workers in America and India?
These questions would have remained unanswered for long had the second development not occurred - an enormous amount of investment by foreign companies in improving the capacity of telecommunications cables to carry data.
The need for this capacity was seriously over-estimated and some of the companies that made those bets ultimately went bankrupt. One such company is Global Crossing whose bankruptcy ranks with those of Enron and WorldCom in the annals of American corporate history.
These investments were made at a time when the technology for increasing the capacity of the existing network of fibre-optic cables was increasing. The ultimate consequence of all this was to lower the cost of transmitting data over long distances to the point where it did not figure prominently in doing work overseas.
The scene was set for outsourcing work to India and my visitors, sensing the opportunity, made investment in a series of start-up companies that set up back-offices for several large corporations in and around Bangalore. For a decade and a half they built successfully businesses and then made their exit after selling their enterprises to large transitional corporations.
The third was the development of the IT sector outside the sphere of influence of the Indian government. This sector grew unhindered by all manner of regulations under which other parts of the Indian economy had to operate.
Even after the dismantling of the licence raj, the state continued to keep its hold over entrepreneurship. The grip has now been lightened but the economy is still not entirely released. There are no such controls on the IT sector. It flourished and matured without the Indian state paying any attention to it.
It was the confluence of these major developments that made India such an attractive place to do back-office work for large American corporations. The Indian success has now begun to raise the question whether other, similarly endowed countries, could jump on the bandwagon. That could happen if the same conditions that helped India were around in other places.
My visitors told me that they were now looking at some new frontiers in this outsourcing activity. They had identified two of them - South Africa and Pakistan. Why wouldn’t these entrepreneurs who had scored such successes not continue to expand in India? There are still hundreds of thousands of well trained workers waiting to be employed doing back-office work.
Foreign corporations have come to know India and have developed a high level of comfort locating their back-office activities there. India has also begun to improve its physical infrastructure - in particular roads and energy supply - that had begun to constrain its development. Why, with all these and many more advantages, would venture capitalists seek new lands of opportunity?
The answer is that the Indian “back-office” industry has matured and the wages of the workers employed in it have begun to rise. In other words, the “wage arbitrage” on which the old business models were based was now less attractive.
It was much more advantageous in Pakistan where technically skilled people did not demand the kinds of compensation that had become commonplace in India. Once again, these entrepreneurs were looking to the rewards available to the first movers. They wanted to be at the head of the herd that they sensed was on the move towards Pakistan.
I asked my visitors if they were thinking of establishing call centres in
Pakistan, an activity that had begun to draw some foreign investment. A
company headed by a group of Pakistani investors had already raised capital in the Karachi Stock Market and begun to buy some call centres in the US and locate them in Pakistan.
From all accounts, that business model was succeeding and Pakistan was becoming a destination for those who wished to expand outsourcing in activities such as call centres.
My visitors were looking for considerably higher value-added work, I was told, not just answering telephone calls or even doing medical and legal transcription.
They wished to exploit a reasonably large pool of Pakistani engineers,
doctors, pharmacists, accountants and lawyers to do higher paying tasks for American corporations.
The activities they had in mind included things such as computer-assisted design work, reading x-rays and other diagnostic materials that could be sent over the internet, testing drugs, doing tax returns and so forth.
These people had studied the Pakistani market for skills and had come to the conclusion that while the numbers may be considerably small compared to those in India, the quality of some of the graduates was as good.
They could form the back-bone of the new knowledge-based industry in the country. They were also of the view that Pakistan’s telecommunications network was, in some ways, better than that of India. And, they had come to the conclusion that the financial sector in the country had developed and matured to the extent that foreign capital could easily be augmented by domestic resources flowing in from the banks or raised in the capital market.
Pakistan, in other words, was ready for the kind of development that had revolutionized the Indian economy and put that country on the world map. They wanted to profit from the change in the perception about Pakistan.
The other group of visitors to my office had an entirely different set of
ideas in their mind. They were not working on wage-arbitrage but on adding value to Pakistan’s largest industry, both in terms of its contribution to the gross domestic product as well as exports.
The reference here, of course, is to textiles. This group is hoping to get a Pakistani textile group to acquire a business in Europe that would help it integrate with the global market.
The industry they are working with in Pakistan is already vertically
integrated in the sense that it produces yarn, fabrics as well as finished
garments. Some 80 per cent of the targeted venture’s product is exported.
The idea is to acquire a business that has extensive retail outlets in Europe with a well established brand name and design capacity. In that way the question of staying in step with a rapidly changing market place would get addressed.
The most attractive part of this particular initiative is that it would create
the first multinational corporation based in Pakistan but with a reasonable presence in the developed world. This would then be Pakistan’s entry into the field of transnational corporations, or TNCs, that have begun to dramatically restructure the international production system.
India has already gone on this route and several large firms from that country have made acquisitions abroad in order to become TNCs. The Tata Group, for instance, acquired Tetley, a British tea brand, which has given it a sizeable presence in the world’s beverage market.
These then are two very different examples of some initiatives that are being taken by international financiers to connect Pakistan’s economy with the global market place. As already discussed, the two approaches are very different. The first builds on the shake-up of global services through outsourcing to the countries that have the skills needed for this kind of work.
The other seeks to build on top of an already mature industry an
organizational structure that Pakistan currently lacks. The choice to turn a local and successful domestic textile company into a transnational corporation producing, exporting and marketing a globally recognized brand name would bring a new dimension to the Pakistani industry.