Risk of Expropriation Involved in Pakistan - Essay Example

Its relationships with the India are not good whereas the current situation in Afghanistan and future political risks involved in Iran can also increase the overall risk involved in the country. The political risk is on the higher side because it neighbors the violent Afghanistan. Apart from that it has also a history of Nationalization process under which private businesses were nationalized during 1970s. Apart from that a fragile political system in the country poses a greater risk to the foreign firms considering investing into the country.

Pakistan has traditionally been an agriculture based country with most of the GDP coming from this sector. On industrial front, the country has a sound textile manufacturing base however after the emergence of WTO country is facing difficulties in keeping its traditional superiority in terms of textile exports as the neighboring countries of Bangladesh, China as well as India are offering much cheaper prices as compared to Pakistan in International Markets. "Pakistan's advantages include relatively low wages - amounting to as little as half the level of salaries in India - as well as reasonable real estate costs, plentiful government incentives and a readily available supply of worker"(Thibodeau,2007).

"The textile sector exports have been stagnant for the past five years. Exports have oscillated between US $4.5 - 5.5 billion. US $5 billion has been a psychological barrier for the textile industry of Pakistan."(SMEDA, 2005). Investment into Textile sector of the country therefore is a very lucrative option however there are risks involved in it also.Where does the Risk Come FromThere are various sources of Risks in this country. The Law and Order situation is one very critical risk which companies looking to work in the country may have to face however the risk of expropriation comes from the Government itself.

The mounting pressures on the economy as well as having a history of nationalization, the government of Pakistan seems to be the biggest source of risk for companies willing to work and invest into the country. There are different reasons for that. The general attitude of the public in country is not so in favor of the external players working in the market therefore social pressures on the government may force them to take actions such as expropriation that may not serve the interests of the companies willing to work in the country.(ADB,2001)Further to that Textile market in Pakistan is really going through a bad patch as neighboring countries have almost captured the market which was once the traditional markets for Pakistan.

This lost space may further create pressures on the government to protect the local industry and do not allow foreign investors to consolidate themselves.Further, Pakistan is a key ally of US in its war on terrorism and the situation in Afghanistan and its tribal areas may provide US a credible opportunity to enter into Pakistan also. Further many believe that changing priorities of the US government could further deteriorate the risk profile of the country.(Rogers,2006)Thus the sources of the risks are multiple in nature as not only emerge