Pakistan: Political Risk Factors - Assignment Example

Pakistan: Country Risk Analysis Summary Pakistan presents an interesting investment environment since there have been many American companies who have met with success in Pakistan yet there are some questions that remain important considerations for those who want to invest in the country. From the research conducted about Pakistan and the information gathered about the investment environment, it can be summarized that Pakistan is a legitimate investment opportunity if the risks concerning security and the political environment are handled by the investors. Political Risk Factors The political risk factors for American products being sold in Pakistan are significantly low since companies such as Coke, PepsiCo, Microsoft and Intel have already established their presence. Even before their arrival, American goods had obtained a high level of acceptance in Pakistan to the extent that companies such as Apple Inc. which have no real official presence in Pakistan can find their products such as iPods being displayed on billboards (DOC, 2007). It is certainly an attractive market since it is the seventh most populous country in the world and has a growing middle class which is typically western in taste and style (Li, 2002). Politically, while Pakistan remains a strong ally of the Middle East in cultural and religious leanings, it is essentially a greater ally of America since the people of Pakistan do not identify with the Arabs in nationalistic terms (Stone, 2002). On the other hand, since the start of the war on terror, the Pakistani government has quickly shifted its loyalties from recognizing the Taliban as the valid government of Afghanistan to helping the Americans pursue the Taliban and hunt for Osama Bin Ladin. This shift has brought billions of dollars in economic and military aid to Pakistan and has significantly helped the economic system (Dalrymple, 2007). On the other hand, this shift of the governmental policies has also created a new wave of terrorism in Pakistan along with resentment against the western powers (Dalrymple, 2007). However, that resentment is confined largely to the tribal areas while the larger cities and metropolitan regions such as Karachi, Lahore and Islamabad remain quite safe for business and the tremendous economic growth rate is a testament to that (Lieven, 2008). The Karachi stock exchange has become the fastest growing stock exchange in all of Asia and as such it offers a very attractive investment opportunity for those who are willing to take the risks (Dalrymple, 2007). Recently, Ali Shah who is the country director for Pakistan for the Asian Development Bank reported that Pakistan is encouraging investments in the banking and financial sectors of the economy (Shah, 2003). Moreover, investments in the telecommunications sector, information technology sector as well as other fast growing industries are being encouraged by the government. For international and local companies operating in Pakistan, the state bank does not place any restrictions on the transfer of funds therefore the Pakistani Rupee remains fully convertible to different currencies. Taxes on foreign corporations are similar to taxes on local firms which are significantly lower as compared to taxes in America or elsewhere in the western world (DOC, 2007). In historical terms, Pakistan has engaged in two large scale wars and two limited scale confrontations with its neighbor and long standing rival i.e. India. However, the current situation of both nations as they are both nuclear powers has created a nuclear umbrella of peace where both nations are hesitant to attack each other (Lieven, 2008). Internationally, there have been some questions about Pakistans nuclear armament falling into the hands of terrorists or Islamic extremists but analysts such as Lieven (2008) give strong evidence to show that the nukes are secure while the Islamic parties in Pakistan have only managed to obtain 10% of the vote throughout the history of the country. Even then, political instability remains an important question for Pakistanis as well as those who wish to make investments in Pakistan (Kripalani, 2007). The bureaucracy in Pakistan is also undergoing a change as the ideals of modern governance are coming to Pakistan along with the development that is taking place in economic and social terms. However, the bureaucracy still has some elements in it from the British Raj which often mean a lot of red tape and forms that need to be filled out in triplicate. This red tape also creates room for corruption in which cash can be used to cut through the red tape. Organizations such as the ADB and the World Bank are working towards improving the bureaucratic situation in Pakistan yet a lot remains to be done (DOC, 2007). The interest rate environment in Pakistan is very different from the United States as the inflation levels in Pakistan are very high. In recent times, food inflation and the rising prices of consumable goods around the world have created a lot of hardship for the people of Pakistan as the staple food prices have risen tremendously along with fuel prices. As reported by Khan (2008), “Food prices rose at least 35% in 2007, compared with an 18% rise in minimum wages, cutting the purchasing power of the poor by almost 50% (Khan, 2008, Pg. 1)”. In these situations, Pakistan has a rising negative balance of trade with America which is also reflected in the currency exchange rate graph (Figure 1) that shows a rising trend for the US dollar and points to the fact that the purchasing power of the dollar is increasing in Pakistan. Figure 1. PKR to USD Exchange Rate for the past 6 months (http://www.exchange-rates.org/history/PKR/USD/G/180) Discussion There are several things which make the country unattractive for investment coming from an American company and the first concern is security. Even the Department of Commerce notes that, “The threat to Western diplomats, executives and tourists in Pakistan is likely to remain high for at least the medium term. Most Western businesses operating in Pakistan will require extra security measures and should budget accordingly (DOC, 2007, Pg. 47)”. In such an environment, it becomes unlikely that western executives can be asked to stay in Pakistan for any significant period of time. Therefore, the use of local representatives or local partners can be strongly recommended as the guiding force for the operations of an American company in Pakistan. As recommended by Bartlett & Ghoshal (1998), local partnerships become very important when dealing with a new culture and a new environment therefore a lot of the risks of doing business in Pakistan can be mitigated through regional partnerships with other companies and local recruitment for human resources up to the executive level. Culturally, Pakistan seems to be going in the right direction and that makes it attractive for American investors since the culture of consumerism is becoming quite strong in the cities and urban areas . People are demanding better quality goods and rows upon rows of shops, shopping malls and other temples of capitalism seem to be quite evident on the streets of Pakistan (Dalrymple, 2007). In such an environment, getting the first mover advantage can be quite beneficial for any American company in order to get brand name recognition and public acceptance of their product. Even though the metropolitan regions of the country show signs of strong development, many regions in rural areas remain uneducated, illiterate and underdeveloped for the most part (Dalrymple, 2007). Education and lack of quality human resources in many areas outside the cities mean that many of the business operations have to take place near major cities. Plant operations in such cases may suffer since tax free industrial zones in Pakistan are set up in rural areas. Again, this problem can be mitigated through the use of local human resources rather than moving individuals from America to Pakistan. At the same time, the population of the country as well as its growing status as an American ally has made Pakistan a very attractive place to invest. Other American companies have successfully started and established their operations in Pakistan and there is no reason why we can not to do the same. The future prospects of Pakistan are quite bright since democracy is firmly in place and the relationship between America and the Pakistan has only improved with time. Given the brightening political, economic and social scenario of Pakistan, it is clear that there would be great advantages to investing in the country if the risks are successfully managed. Word Count: 1,538 Works Cited Stone, L. 2002, ‘The Islamic Crescent: Islam, Culture and Globalization’, The European Journal of Social Sciences, vol. 15, no. 2, pp. 121-131. Bartlett, C. & Ghoshal, S. 1998, Managing Across Borders: The Transnational Solution to Managing Across Borders, Hutchinson. Li, X. 2002. Dichotomies and Paradoxes: The West and Islam. Journal of Interdisciplinary International Relations, vol. 16, no. 4, pp. 401-418. Lieven, A. 2008, ‘Pakistan: Real and Imaginary Risks’, [Online] Available at: http://www.newamerica.net/publications/articles/2008/pakistan_real_and_imaginary_risks_6713 Dalrymple, W. 2007, ‘Pakistan: the ‘poor’ neighbour’, [Online] Available at: http://www.hindu.com/2007/08/15/stories/2007081554601300.htm Kripalani, M. 2007, ‘Musharraf Gambles with Pakistans Future’, [Online] Available at: http://www.businessweek.com/globalbiz/content/nov2007/gb2007115_453729.htm?campaign_id=rss_daily Department of Commerce (DOC). 2007, Doing Business in Pakistan: A Country Commercial Guide for U.S. Companies. US Commercial Service Shah, M. 2003, ‘Foreign Investment in Pakistan’, [Online] Available at: http://www.adb.org/documents/speeches/2003/ms2003043.asp Khan, I. 2008, ‘Price of Pakistans economic woes’, [Online] Available at: http://news.bbc.co.uk/2/hi/south_asia/7346111.stm Read More