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Transcript of Fdi Telecom Pakistan
FOREIGN DIRECT INVESTMENT IN TELECOM SECTOR OF PAKISTAN
M USMAN AFZAL
07000441
MSc INTERNATIONAL BUSINESS AND MANAGEMENT DISSERTATION
2008
CONFIDENTIALITY STATEMENT
This dissertation has been agreed as confidential between the students, university and sponsoring organisation. This agreement runs for two years from
(20 August 2008)
STATEMENT OF AUTHENTICITY
I have read the University Regulations relating to plagiarism and certify that this dissertation is all my own work and do not contain any unacknowledged work from
other sources.
WORD COUNT: 16,808
ABSTRACT
07000441
FOREIGN DIRECT INVESTMENT IN TELECOM SECTOR OF PAKISTAN
Keywords: FDI, Entry Modes, Determinants, Risks, Pakistan Telecom
Abstract
Pakistan telecom sector has attracted large inflow of foreign direct investment in recent
years. Government policy of deregulation and privatization has created an environment
conducive for foreign direct investment in telecom sector of Pakistan. This paper will
investigate all those factors which have contributed in attracting the foreign direct
investment in telecom sector of Pakistan. However, there are some risks associated with
the foreign direct investment in telecom sector due to the current political instability and
terrorism in the country. This paper will examine the risks associated with the foreign
direct investment in telecom sector of Pakistan. Subsequently it will explore entry
strategy for foreign companies to enter in Pakistan telecom market.
FOREIGN DIRECT INVESTMENT IN TELECOM SECTOR OF PAKISTAN
By
M USMAN AFZAL
07000441
2008
Dissertation submitted to the Bradford University School of Management in partial fulfilment of the requirements for the degree of Master of Science in Finance, Accounting and Management
MSc International Business & Management
Dedication
I would like to thank my supervisor, Mr. Ismo Kuhanen for his insightful and
constructive guidance over the last three months. His generous and disciplinary attitude
encouraged me to complete this dissertation. I would also like to pay special tribute to
my parents who supported and encourage me all through my master’s degree.
List of Abbreviations
3G- Third Generation
BMI- Business Monitor International LTD
FDI - Foreign Direct Investment
GDP- Gross Domestic Product
GSM- Global System for Mobile Communication
IMF- International Monetary Fund
OECD- Organization for Economic Co-operation and Development
PTA- Pakistan Telecom Authority
PTC- Pakistan Telecommunications
PTCL- Pakistan Telecommunication Company Limited
T&T- Telephone and Telegraph
UAE- United Arab Emirates
UNCTAD- United Nations Conference on Trade and Development
WLL- Wireless Local Loop
WTO- World Trade Organization
Table of Contents
List of Tables...................................................................................................................10List of Figures..................................................................................................................11Chapter 1. Introduction....................................................................................................13
1.1 Background............................................................................................................131.2 Research Gap.........................................................................................................151.3 Research Objective................................................................................................151.4 Research Questions...............................................................................................151.5 Research Structure.................................................................................................16
Chapter 2. Research Methodology..................................................................................172.1 Qualitative Method................................................................................................172.2 Philosophy.............................................................................................................172.3 Approach...............................................................................................................182.4 Purpose of the Research........................................................................................182.5 Research Strategy..................................................................................................192.6 Data Sources..........................................................................................................19
2.6.1 Secondary data................................................................................................192.6.2 Evaluation of secondary data..........................................................................202.6.3 Data Collection Sources.................................................................................20
Chapter 3. Literature Review.........................................................................................213.1 Foreign Direct Investment.....................................................................................213.2 Motives for Foreign Direct Investment.................................................................21
3.2.1 Market Seeking Motive..................................................................................213.2.2 Efficiency Seeking Motive.............................................................................223.2.3 Strategic Asset and Resource Seeking Motive...............................................22
3.3 Dunning’s Eclectic Paradigm................................................................................223.3.1 Ownership Advantage....................................................................................233.3.2 Localization Advantage..................................................................................233.3.3 Internationalization Advantage......................................................................23
3.4 Determinants of Foreign Direct Investment in Developing Countries..................243.4.1 Natural Resources...........................................................................................253.4.2 Market Advantages.........................................................................................263.4.3 Political Stability............................................................................................263.4.4 Labour Cost....................................................................................................273.4.5 Policy Variables..............................................................................................273.4.6 GDP Growth Rate...........................................................................................283.4.7 Inflation Rate..................................................................................................283.4.8 Openness of the economy...............................................................................293.4.9 Privatization....................................................................................................293.4.10 Infrastructure................................................................................................293.4.11 Regulatory Authority....................................................................................30
3.5 Entry Modes for Foreign Direct Investment.........................................................303.5.1 Exporting........................................................................................................313.5.2 Licensing........................................................................................................313.5.3 Greenfield.......................................................................................................313.5.4 Acquisitions....................................................................................................31
3.5.5 Joint Ventures.................................................................................................323.6 Factor Influencing the choice of entry mode.........................................................323.7 Foreign Direct Investment Risks...........................................................................34
3.7.1 Economic Risk................................................................................................343.7.2 Political Risk..................................................................................................353.7.2.1 Political Risk Type-1...................................................................................353.7.2.2 Political Risk Type-2...................................................................................353.7.3 Exchange & Currency Risk............................................................................35
3.8 Analysis of the Industry.........................................................................................363.8.1 SWOT Analysis..............................................................................................363.8.2 Competitive Environment..............................................................................36
Chapter 4. FDI in Telecom Sector of Pakistan................................................................374.1 Telecom Sector Overview.....................................................................................37
4.1.1 Fixed Market Overview..................................................................................374.1.2 Internet Market Overview..............................................................................374.1.3 Mobile Market Overview...............................................................................384.1.4 Growth of Telecom Sector in Pakistan...........................................................384.1.5 Major Players in Pakistan Mobile & Fixed Line Sector.................................394.1.5.1 PTCL...........................................................................................................394.1.5.2 Mobilink......................................................................................................394.1.5.5 CMPak.........................................................................................................404.1.6 Investment in Telecom Sector of Pakistan.....................................................414.1.7 Foreign Direct Investment in Telecom Sector of Pakistan.............................41
4.2 Determinants of foreign direct investment in telecom sector of Pakistan.............424.2.1 Market Size & Potential.................................................................................424.2.2 Inflation..........................................................................................................444.2.3 Labour Cost....................................................................................................444.2.4 Government Economic Policies.....................................................................444.2.5 Foreign Direct Investment Policy in Telecom Sector....................................454.2.6 Tariffs and Taxes in Telecom Sector..............................................................464.2.7 GDP Growth Rate & Openness of the economy............................................474.2.8 Infrastructure..................................................................................................484.2.9 Regulatory Authority......................................................................................484.2.10 Privatization..................................................................................................504.2.11 Telecom Related Suppliers in Pakistan........................................................50
4.3 Foreign Direct Investment Risks in Pakistan........................................................504.3.1 Political Risk..................................................................................................514.3.1.1 Political Risk Type-2...................................................................................514.3.1.2 Political Risk Type-1...................................................................................524.3.2 Currency Risk.................................................................................................52
Chapter 5. Analysis.........................................................................................................535.1 SWOT Analysis of Pakistan Telecom Sector............................................................53
5.1.1 Strengths.............................................................................................................535.1.1.1 Investor Friendly Government Policies.......................................................535.1.1.2 Regulatory Authority...................................................................................545.1.1.3 Labour Cost.................................................................................................54
5.1.2 Weaknesses.........................................................................................................545.1.2.1 Inflation.......................................................................................................545.1.2.2 Infrastructure...............................................................................................555.1.3 Opportunities..................................................................................................55
5.1.3.1 Market Size..................................................................................................555.1.3.2 Implementation of 3G Network...................................................................555.1.3.3 Competition.................................................................................................56
5.1.4 Threats................................................................................................................565.1.4.1 Political Risk Type-II..................................................................................565.1.4.2 Currency Risk..............................................................................................56
5.2 Pakistan Telecom Sector and Porter’s Five Forces...............................................575.2.1 Threats of New Entrants.................................................................................575.2.2 Bargaining Power of Customer......................................................................575.2.3 Bargaining Power of Supplier........................................................................575.2.4 Threat of Substitutes.......................................................................................575.2.5 Level of Existing Rivalry...............................................................................57
5.3 Entry Mode............................................................................................................585.3.1 External Factors..............................................................................................585.3.2 Internal & Home Country Factors..................................................................595.3.3 Choice of Entry Mode....................................................................................59
Chapter 6. Conclusion & Recommendations..................................................................616.1 Summary of the Research......................................................................................616.2 Limitations.............................................................................................................626.3 Future Recommendation.......................................................................................62
Appendix A.....................................................................................................................63Appendix B......................................................................................................................77Bibliography....................................................................................................................78
List of Tables
Table 1: Host Country Determinants of FDI...................................................................24Table 2: External & Internal Factors Influencing the Choice of Entry Mode.................33Table 3: Key Companies in Pakistan Telecom Sector....................................................41Table 4: Key Acquisitions in Pakistan Telecom Sector..................................................42Table 5: Investment Policies by Government of Pakistan...............................................45Table 6: Tariffs and Import Product Groups...................................................................47Table 7: Choice of Entry Mode.......................................................................................60
List of Figures
Figure 1: Cellular Subscriber Growth in Pakistan...........................................................38Figure 2: Telecom Industry Market Size (2005-2012)....................................................43Figure 3: Real GDP Growth of Pakistan.........................................................................47Figure 4: Depreciation of Pakistan Rupee.......................................................................52
Chapter 1. Introduction
This chapter will give a brief overview to the research and will highlight the overall
objectives of the research. It will also cover a review of the previous studies conducted
on this topic and will figure out the research gap. Finally it will review the whole
research structure.
1.1 Background
Foreign direct investment (FDI) is an important source of economic growth in this
globalized world. Foreign direct investment is generally considered as a phenomenon
for developed countries but in recent years the increase in foreign direct investment
flows to developing countries turned out to be higher than the increase in foreign direct
investment inflows to developed countries (Nunnenkamp, 2001). Factors like
availability of the natural resources, cheap labour, infrastructure, privatization, political
stability and government policies on FDI are the main determinants of FDI in
developing countries. Apart from providing a conducive and investor friendly
environment, developing countries pose significant risks such as political risk, exchange
risk, economic risk and neighbourhood risk for foreign investors.
Pakistan is a developing country with the world’s sixth largest population. Pakistan’s
economy is experiencing the longest spell of its economic growth in recent years.
Economic growth accelerated to 7.0 percent in 2006-07 at the back of robust growth in
agriculture, manufacturing and services. Pakistan’s real GDP has grown at an average
rate of 7.0 percent in the last 5 years because of an unprecedented increase in inflow of
FDI.
In the past few years, telecom sector of Pakistan have received record inflows of foreign
direct investment. Telecom sector attracted an estimated US$ 1.8 billion in foreign
direct investment during the fiscal year 2005-06 which accounts for 54% of the total
foreign direct investment in Pakistan (BMI, 2008). In fiscal year 2006-07, telecom
sector received US$ 1.824 million foreign direct investment, which is about 35% of the
total foreign direct investment in Pakistan (BMI, 2008). Pakistan telecom sector has
seen a tremendous cellular growth in recent years (PTA, 2007). According to BMI
(2008), Pakistan telecom sector has emerged as one of the fastest growing telecom
sector especially in relation to South Asian economies such including India, Bangladesh
and Nepal (See Appendix B). This rapid transformation is due to the investor friendly
liberalization measures taken by the government of Pakistan (Inam, 2007).
Privatization of PTCL and open licensing regime has seen a number of foreign telecom
companies investing heavily in telecom sector of Pakistan. Increase in use of cellular
and WLL services has also accounted for the growth of telecom sector in Pakistan.
Pakistan telecom sector grew at a rate of more than 80% (PTC, 2007).
Mergers and acquisitions is the preferred mode of entry for the foreign companies to
invest in the telecom sector of Pakistan. According to BMI (2008), ‘Liberal FDI policy
by the Government of Pakistan and deregulation and privatization of the telecom sector
has triggered a wave of international acquisitions in telecom sector of Pakistan’. During
the fiscal year 2006-07, US$ 2 billion worth of acquisitions were made in the telecom
sector of Pakistan.
However, Pakistan despite of providing an environment conducive for foreign
investment poses significant risks as well. Pakistan is ranked 7 th in political risks study
carried out by Eurasia Group because of the ongoing political instability in the country.
The assassination of former primer minister Benazir Bhutto and sacking of Chief Justice
of Pakistan at the end of 2007 has caused further political instability in the country
which could have an impact on the inflow of foreign direct investment in the country
(BMI, 2008).
Therefore, based on the information above, this research will look into the factors that
have resulted into the large inflow of foreign direct investment in Pakistan telecom
sector. It will also look into the potential risks associated with the foreign direct
investment in telecom sector of Pakistan. Based on the analysis of these two factors, the
research will recommend the suitable entry mode for foreign investors to enter in
Pakistan telecom market.
1.2 Research Gap
Foreign direct investment in telecom industry in Pakistan is still into its initial stages.
Lots of variables have contributed in making Pakistan a better market for foreign direct
investment especially in telecom sector. However, the journal research on this issue has
been under researched. Jahanzeb (2006) assessed the FDI in Pakistan over the last 5
years in services sector. A lot of statistical data on foreign direct investment in Pakistan
is available from the government websites. World Investment Reports by UNCTAD
(2007) also gives an overview on the amount of foreign direct investment in Pakistan.
However, there is insufficient research on determinants of the foreign direct investment
and modes of entry in telecom sector in Pakistan. Some research has been done to
identify the impediments of foreign direct investment in Pakistan (Khan& Kim, 1999)
as they mentioned economic instability, taxation etc. Economic indicators explain
change in the economic situation of Pakistan since it is moving through a recovery
phase. The existing research has not accounted for the new socio-political, socio-
cultural and socio-economic environment of Pakistan. Moreover, there is insufficient
data available on the variables such as political instability and security risks which have
been changed dramatically in recent years and their impact on foreign direct investment.
1.3 Research Objective
To analyze the determinants and risks associated with foreign direct investment in
telecom sector of Pakistan
1.4 Research Questions
The research will answer the following questions:
1. What are the determinants of foreign direct investment in Pakistan telecom
sector?
2. What are the potential risks associated with foreign direct investment in telecom
sector of Pakistan?
3. What is the suitable entry mode for foreign direct investment in telecom sector
of Pakistan?
1.5 Research Structure
To achieve the research objectives, this report has been divided into seven chapters.
Chapter I Introduction
This chapter will introduce the research design and explains the
reasons for undertaking this reason. The research questions have
been identified after analyzing the research gap.
Chapter II Research Methodology
A relevant methodology is very important for the collection and
analysis of data. This chapter explains the methodology used in
this research along with the reasons for undertaking the specific
research method.
`Chapter III Literature Review
This chapter will provide the theoretical background to the
research. This chapter will also provide a critical analysis of the
models and theories which are used in this research.
Chapter IV Pakistan Telecom Sector
This chapter will provide the overview of the Pakistan telecom
sector. The determinants and risks of foreign direct investment in
telecom sector will be discussed in detail in relation with the
theoretical framework provided in chapter III.
Chapter V Data Findings and Analysis
This chapter will provide an in-depth analysis to achieve the
objectives of this report, the findings will be presented and
analysed in this section. The analysis will develop a ground for
the overall achievement of the objective.
Chapter VI Discussion and Conclusion
This chapter will present the conclusion based on the findings
and analysis of previous chapter. Also, the limitations of this
research will be discussed along with the some suggestions and
recommendations for future research in this area.
Chapter 2. Research Methodology
This chapter discusses the research methodology including research philosophy,
approach, strategy, purpose of the research, data collection and its analysis. The chapter
ends with the discussion on the limitations of this research thus providing implication
for future study in this area.
The research onion described by Mark Saunders, Philip Lewis and Adrian Thornhill
(2006) is used to analyze the philosophy, approach, purpose and strategy of research.
2.1 Qualitative Method
Qualitative method is a useful tool for research in management and business subjects
(Gummesson, 2000). Chauri & Gronhaug (2002) argue that qualitative method is useful
where the aim is to “uncover and understand a phenomenon about which is little
known”. Furthermore when a social process or event is beyond the study of quantitative
method, qualitative methods are most suitable that leads to the provision of in-depth
understanding of a social phenomenon (Chauri and Gronhaug, 2002). Since, current
research intends to explore the determinants and risks of foreign direct investment in
Pakistan telecom sector where no previous study has been conducted, qualitative
method seems the most suitable method to apply. Qualitative data enables the researcher
to explore and identify a wide range of issues, understand and explore the research more
holistically and deal with ambiguity, multiplicity and contradictions (Mason, 2002).
Apart from a number of advantages, there are a number of challenges associated with
conducting qualitative research. Qualitative research requires high engagement from
researcher and a great deal of effort such as intellectual, practical, physical, emotional
and big responsibility for the quality and result of a research. Furthermore, it requires
lot of resources and time. In contrast to quantitative research qualitative research is very
sensitive in nature that causes ethical and moral dilemmas.
2.2 Philosophy
According to Saunders, Lewis & Thornhill (2007), research philosophy relates to how a
researcher views the world or development of knowledge and the relationship between
knowledge and the process it is developed (Saunders, Lewis & Thornhill, 2007). The
major philosophy used in this research is ‘Positivism’. However, at times the research
will be employing the concepts of ‘Interpretivism’ as well. The reason for choosing the
‘Positivism’ philosophy is that it involves working with an observable social reality and
that the end product of such research can be law-like generalizations similar to those
produced by the physical and natural scientists (Remenyi et al., 1998). Positivism
philosophy involves working with the existing theory to develop hypothesis. According
to Saunders, Lewis & Thornhill (2007), the hypothesis developed will be tested and
confirmed, in whole or part, or refuted, leading to the further development of the theory
which then may be tested by further research. One of the key features of using
positivism philosophy is that research is conducted as far as possible, in a value free
way. According to Saunders, Lewis & Thornhill (2007), ‘The resources researcher
would claim to be external to the process of data collection in the sense that there is
little that can be done to alter the substance of the data collected.’
2.3 Approach
Qualitative research can be both deductive and inductive. Deductive approach involves
the development of a theory that is subject to a rigorous test (Saunders, Lewis &
Thornhill, 2007). Inductive approach on the other hand involves collection of data and
development of theory as a result of data collection. The approach used in this research
is deductive. Deduction approach is much quicker to complete as compared to inductive
which is much more protracted. One of the main features of deductive approach is that it
is a low risk strategy while inductive approach can be risky (Saunders, Lewis &
Thornhill, 2007). Since the research has to be conducted in a short span of time with
limited resources, therefore deductive approach is used.
2.4 Purpose of the Research
The purpose of this research is ‘exploratory’, because of the fact that it is a valuable
means of finding out ‘what is happening; to seek new insights; to ask questions and to
assess phenomenon in a new light’ (Robson, 2002). Since, the main aim of the research
is to analyze the determinants and risks associated with foreign direct in telecom sector
of Pakistan. Hence, exploratory strategy will be more useful as compared to explanatory
type which involves working with two or more variable, which is not the case in this
research. Exploratory strategy is useful because it allows the research to be flexible and
adaptable to change, which may result in the slight change of direction (Saunders,
Lewis & Thornhill, 2007). Also exploratory research is often used in those areas where
few or no studies have been conducted (Robson, 2002). In addition the exploratory
research helps to seek new insights and assess phenomenon, particularly useful to
clarify researcher understanding of a problem.
2.5 Research Strategy
The best suitable strategy for this research is case study. According to Robson (2002),
‘case study is a strategy for doing research which involves an empirical investigation of
a particular contemporary phenomenon within its real time context using multiple
sources of evidence’. There are two types of case study strategies i.e. single case study
and multiple case study. Single case study strategy is used since it gives the opportunity
to observe and analyze a phenomenon that few have considered before (Saunders,
Lewis & Thornhill, 2007). Also the research looks at the determinants and risks
associated with foreign direct investment in Pakistan telecom sector, therefore single
case study will be the most suitable strategy in this case.
2.6 Data Sources
There are two types of data sources i.e. primary and secondary data sources. Secondary
data is used in this research.
2.6.1 Secondary data
Secondary data can be defined as a data collection collected by others not specifically
with research question in hand (Stewart, 1984). The importance and advantage of using
secondary is emphasized by various scholars. The main advantage of using secondary
data is that it saves a lot of time and resources. Secondary data also enables the
researcher to analyze a wide range of data collected by others. In this research
secondary data is used extensively to analyze the determinants and risks associated with
foreign direct investment in Pakistan. However, there are some drawbacks associated
with secondary data method that pose challenges for the research. The data collected for
different sources may not always fit the objective of intended study. Although, it has
been mentioned that secondary data is easily accessible and cost saving some data like
company reports can not be obtained free of charge. In addition, the definition of
terminology may vary with the purpose of the research (Ghauri and Gronhaug, 2002).
Robson (2007) adds that assessing the credibility of secondary data may be complicated
and requires assessing its authenticity and credibility. Therefore, the evaluation of the
data is necessary prior to usage of secondary data.
2.6.2 Evaluation of secondary data
Evaluation of the data through secondary sources is an important part of the research
process. According to Stewart (1984), not all information obtained from secondary
sources is equally reliable and valid. Therefore, in order to provide the robustness of
research, reliability and validity of secondary data should be considered. Stewart (1984)
further argues that in order to evaluate secondary data question concerned “ the sources
of the data, measures used, the time of data collection, and the appropriateness of
analyses and conclusions should be raises routinely” (Stewart 1984, p. 23). Wallace and
Wray (2006) add that it is also important to check the methodology used and number of
evidences provide to make a conclusion.
For the purpose of ensuring the reliability and validity of the current research the above
mentioned were taken into consideration during the data collection process.
2.6.3 Data Collection Sources
Secondary data in this research is collected from a number of sources such as non
statistical sources, academic journals, online literature research and previous
dissertations. In order to ensure validity and reliability of the secondary data
information is acquired from reliable sources. Priority is given to the government
sources such PTA and PTCL annual reports to get the accurate information. Various
reports from Business Monitor Online are also used extensively since they contain most
up to date information. Reports from IMF, World Bank and UNCTAD are also used for
the statistical analysis.
Chapter 3. Literature Review
This chapter will provide the theoretical background to the research. It will provide an
in-depth review of the factors influencing the flow of foreign direct investment in
developing countries and choice of entry mode. It will also discuss the potential risks
associated with the foreign direct investment in developing countries. The second part
will review the findings of the first part in context of Pakistan telecom market.
3.1 Foreign Direct Investment
Foreign direct investment usually involves the establishment of the firm’s own control
over raw materials, components, production, distribution and marketing facilities abroad
(Bartels & Pass, 2000). In other words, foreign direct investment can be defined as,
“An investment involving a long term relationship and reflecting a lasting interest and
control by a resident entity in one economy (foreign direct investor or parent enterprise)
in an enterprise resident in an economy other than that of the foreign direct investor
(FDI enterprise or parent enterprise or foreign affiliate)” (United Nations, 2006). FDI
enables the investor to take control of the activities of enterprise e.g. raw materials,
production, marketing and distribution in the host country (Daniels et al., 2004).
3.2 Motives for Foreign Direct Investment
A number of theories have been presented in order to formalize the motives for foreign
direct investment. Theories of trade, investment and marketing form the basis for these
theories. Each of these theories contribute towards the understanding of the underlying
reasons for foreign direct investment or offers an explanation for a particular kind of
foreign direct investment., but there is no complete theory of foreign direct investment
(Harrison, Dalkiran and Elsey, 2000).
Firm expand internationally for a variety of reasons. Czinkota, Ronkainen and Moffett
(1994) argue that there are three motives for firms to involve in foreign direct
investment. These three motives are:
3.2.1 Market Seeking Motive
Marketing consideration and the corporate desire for growth are the main reason for
multinational enterprises to engage in foreign direct investment. A major cause for the
recent growth in foreign direct investment is because of the fact that multinational
enterprises follow their key clients abroad to pre-empt other vendors from servicing
them (Czinkota, Ronkainen and Moffett, 1994). This foreign direct investment can also
be due to the retaliation among various competitors i.e. competing with the key rivals in
their own country (Daniels et al., 2004).
3.2.2 Efficiency Seeking Motive
Firms often engage in foreign direct investment to restructure their existing investments
in order to gain an efficient allocation of international economic activity. Efficiency
seeking investors are primarily concerned with the input costs such as communication
and transportation costs (Daniels et al., 2004). Efficiency seeking motive can be helpful
to those multinational enterprises who seek to benefit from economies of scale and
scope arising from similarities and differences in consumer tasters. These firms also
seek to benefit from international differences in product and factor prices to diversify
risk.
3.2.3 Strategic Asset and Resource Seeking Motive
Resource seeking companies are after either natural or human resources. Natural
sources are typically based on mineral, agriculture, or oceanographic advantages and
result in firms locating in areas where they are available (Czinkota, Ronkainen and
Moffett, 1994). In case of strategic asset seeking the availability of choices is therefore
tied to the availability of resources sought e.g. firms in the mining, oil and crop growing
industries have little choice but to go where the raw materials are located.
3.3 Dunning’s Eclectic Paradigm
Dunning’s eclectic paradigm is a synthesis of various approaches based on theories of
the firm, international trade, location and industrial organization (Harrison, Dalkiran
and Elsey, 2000). Dunning provided a combined explanation of the major factors which
determine the location of international production through foreign direct investment.
According to Dunning (1973, 1979 and 1981) these factors must be satisfied if the
decision to locate in a particular host country is to be successful. These three factors are:
3.3.1 Ownership Advantage
According to Dunning (1973, 1979 and 1981), multinational enterprises possess some
firm specific competitive advantages over local firms in serving some particular
national market. These advantages may include tangible and intangible control of
certain assets such as knowledge capital, human capital, patents, brand and reputation.
3.3.2 Localization Advantage
Localization advantage provides multinational enterprises with the opportunity to
exploit their ownership advantage by combining them with the host country’s specific
factor endowments, Dunning (1973, 1979 and 1981). These factor endowments
comprise of natural advantages (suitable climate, proximity to markets, availability of
raw materials and minerals) and the availability of relatively low cost input, especially
labour (Harrison, Dalkiran and Elsey, 2000). In order for international production to be
profitable, their must be some benefit to multinational enterprises derived from locating
at least part of their activities in another country rather than remaining at home.
3.3.3 Internationalization Advantage
According to Dunning (1973, 1979 and 1981), it must also be profitable for
multinational enterprises to exploit their ownership and localization advantage through
internalization rather than using arms-lengths markets. The assumption of market
imperfection and market failure provides the basis for the internalization advantage. An
internal transaction reduces the cost of search, buyer’s uncertainty, protects the quality
if intermediate products and can result in the avoidance of government intervention.
Internalization advantage arises because foreign direct investment allows a firm to
remain or become integrated (Harrison, Dalkiran and Elsey, 2000). Firms can achieve
the benefits of skilled labour and technology within the organization.
An important implication for the eclectic paradigm is that, as well as using low cost
locations, multinational enterprises establish a presence in areas where there are clusters
of closely related firms supplying anything from the smallest component to high quality
services (Harrison, Dalkiran and Elsey, 2000). Dunning’s eclectic paradigm gives a
deep insight into the phenomenon of why firm go for foreign direct investment and why
they choose to locate in a particular country. It is a unified approach which incorporates
both the internalization and ownership advantages and which views foreign direct
investment as an effective conduit through which the firm spreads its operations across
national borders and extends the use its ownership advantage through internalization
(Harrison, Dalkiran and Elsey, 2000). Internalization and ownership are firm specific
determinants of foreign direct investment where as the localization factor is location
specific and has a critical influence on host country’s inflow of foreign direct
investment. Markusen and Venables (1995) also worked along the same lines and came
up with the conclusion that foreign direct investment occurs when only these three
factors exist together.
3.4 Determinants of Foreign Direct Investment in Developing
Countries
Foreign direct investment is playing an important role in the economic and social
development of developing countries. Cho (2003) argues that nowadays virtually all
countries are actively seeking to attract foreign direct investment, because of the
expected favourable effect on income generation from capital inflows, advanced
technology, management skills and market know how. Kobrin (2005) argues that a
number of factors led to increased efforts by developing countries to attract flows of
foreign direct investment. A lot of research has been conducted in recent years to
indentify the determinants of foreign direct investment in developing countries.
Harrison, Dalkiran and Elsey, (2000) in their research findings figure out that it is
highly unlikely that foreign direct investment will be determined by a single factor. Cho
(2003) reviewed the key determinants and factors of foreign direct investment based on
the theories of international investment and listed three key determinants and factors
associated with the extent and pattern of foreign direct investment in developing host
countries: attractiveness of the economic conditions in host country; the policy
framework towards the private sector, trade and industry, and foreign direct investment
and its implementation by host governments; and the investment strategies by
multinational enterprises. Harrison, Dalkiran and Elsey (2000) argue that potential
investor consider a wide range of factors before taking such an important step. These
factors include the overall desirability of investing abroad or general suitability of a
particular country.
Table 1: Host Country Determinants of FDI
Key determinants that form the basis of foreign direct investment decisions are as
follows;
3.4.1 Natural Resources
Availability and access to natural resources play an important role in foreign direct
investment decision making process. Harrison, Dalkiran and Elsey (2000) argue that the
location of resources may affect foreign direct investment decisions where raw
materials, energy, or labour are required in large quantities, where specialized resources
are immobile, or where access to resources is a company’s core business. Dunning
(1993) also emphasized the importance of natural resources in attracting the foreign
direct investment and argued that natural resources play an important role especially
when resource rich countries do not have enough financial and technological
capabilities to extract these resources. Addison & Heshmati in their research findings
found a strong relationship between availability of natural resources and inflow of
foreign direct investment. However, the importance of natural resources as a
determinant of foreign investment has declined in last few years (Baniak, Cukrowski &
Herczynnski, 2002). For a lot of firms, availability of resources is no longer a limiting
factor in their investment decisions.
A positive relationship exits between the availability and access to natural resources and
inflow of foreign direct investment.
3.4.2 Market Advantages
As the importance of natural resources has declined, access to markets has become more
important in recent years. Many markets in developed countries have been growing
more slowly in recent years and some markets are even reaching saturation (Harrison,
Dalkiran and Elsey, 2000). This situation has created an opportunity for the foreign
investors to invest in the foreign markets of rapidly developing countries. Market
advantages include market size and growth rates. Market potential is commonly
measured by the size and growth of GDP and sometimes by the size and growth of
population, over urbanization or government consumption (Dunning, 1993 and
Crenshaw, 1991). UNCTAD (2000) emphasize that domestic market size and market
potentials are the main drivers of foreign investment in developing countries. Anamarr
(1996) conducted a research on the determinants of foreign direct investment in low
income economies and figured out that market size with low labour cost and high
capital return is one of the important factors considered by the foreign investors before
investing. Lucas (1993) on the other hand stated that the importance of market size as a
foreign direct investment determinant is overstated. However empirical literature often
found the size of the market and the market potentiality, typically driven by the level of
GDP and GDP growth rate; significantly affect foreign direct investment inflow
(Nunnenkamp, 2001).
A positive relationship exits between the market size and inflow of foreign direct
investment.
3.4.3 Political Stability
Political instability in the developing countries poses the biggest threat to attract the
foreign direct investment. Political instability provides a hostile environment for foreign
corporations, discouraging their investment (Bennett and Green, 1972). Basi (1963)
argues, executives report that political instability is the most important variable
influencing their foreign investment decisions aside from market potential. Kwang and
Singh (1999) in their findings indicate that a qualitative index of political risk has been
a significant determinant of foreign direct investment flows for countries that have
attracted historically sizeable investment flows and for countries that have not been very
successful in attracting such investment, socio political instability, proxies by negative
impact on investment flows. Addison & Heshmati (2004) also showed a positive
relationship between the political stability and foreign direct investment inflow.
A positive relationship exits between political stability and inflow of foreign direct
investment.
3.4.4 Labour Cost
Aqeel and Nishat (2004) argue that high nominal wages discourage foreign direct
investment, especially for firms who are in labour intensive production. Multinational
enterprises transfer all or part of a production process to low cost countries in order to
reduce overall production costs and improve their international competitiveness
(Harrison, Dalkiran and Elsey, 2000). However, some researchers have figured out that
high labour cost does not always discourage foreign direct investment (Moore, 1993).
Some companies can achieve cost reduction by taking advantage of external economies
of scale in a country where clusters of highly skilled labour or technical support are in
abundance (Harrison, Dalkiran and Elsey, 2000). Nunnenkamp (2002) argue that cheap
and skilled labour play an important role in attracting the foreign direct investment.
While low cost labour remains a locational advantage, the increasingly sought after
advantages are competitive combinations of wages, skills and productivity (UNCTAD,
2000).
A negative relationship exists between high labour cost and inflow of foreign direct
investment.
3.4.5 Policy Variables
Potential foreign investors are attracted by financial incentives or tax concessions from
the host government (Harrison, Dalkiran and Elsey, 2000). Supportive government
policies which include low corporation taxes and policies such as tax credits provide
conducive environment for foreign investors. Tax rates can have impact on the
profitability of the firms. Therefore, foreign investors tend to invest in countries having
low tax rates regimes. A lot of developing countries offer various tax break regimes to
multinational as an incentive to attract foreign direct inflows. Providing incentives for
capital formation, special investment allowances and investment tax credits increase the
inflow of foreign direct investment (OECD, 2003). Studies have shown a negative
relationship between tax rates and inflow of foreign direct investment in developing
countries (Shah & Masood, 2002). However, some studies have shown a positive effect
of taxes on inward foreign direct investment (Aqeel & Nishat, 2004).
Foreign direct investment policies also play an important role and are considered as an
important determinant of foreign direct investment to the host country. These policies
include the rules and regulations with regard to business operations. Foreign direct
investment policies are considered as a host country determinant (Asiedu, 2002).
3.4.6 GDP Growth Rate
A lot research has been conducted to find out the relation between GDP growth rate and
foreign direct investment and nearly all of them come to the conclusion that a positive
relationship exists between economic growth and foreign direct investment
(Chakrabarti, 2001). Countries that implement stable and credible macroeconomic
policies attract large amount of foreign direct investment.
A positive relationship exists between GDP growth rate and foreign direct investment
inflow.
3.4.7 Inflation Rate
One of the key economic determinants of foreign direct investment is the inflation rate.
Inflation increases the user cost of capital, and thus affects the profitability of foreign
direct investment in a negative way (de Mello, 1997). Excessive money supply, budget
deficits and a poorly managed exchange rate regime results in a high inflation rate. It
also reflects the poor economic conditions in the country, conditions that discourage the
flow of foreign direct investment (Calvo, Leiderman & Reinhart, 1995).
A negative relationship exists between the inflation rate and inflow of foreign direct
investment.
3.4.8 Openness of the economy
The ease with which investors can move capital in and out of a country (openness of the
economy) is also an important determinant of foreign direct investment flows
(Chakrabarti, 2001). This implies that countries with capital controls and restrictive
trade policies discourage inflows of foreign direct investment, compared with liberal
policies. Most of the studies on foreign direct investment in developing countries have
identified a positive relationship between openness and foreign direct investment
(Morisset, 2000).
Hence positive relationship exists between openness of the economy and inflow of
foreign direct investment.
3.4.9 Privatization
Privatization also plays an important role in attracting the inflow of foreign direct
investment in developing countries. Harrison, Dalkiran and Elsey (2000) argue that
privatization often accompanies market liberalization and this provides an opportunity
for the foreign investors to acquire an established enterprise and its markets. A study
conducted by UNCTAD (2000) figured out that privatization plays an important role in
attracting the foreign direct investment in some countries, as in the case of Chile, where
privatization contributed considerably to attract foreign direct investment. According to
World Bank (1995), ‘Privatization is predicted to promote more efficient operations,
reduce the financial burden on government budget expand service delivery, and increase
the level of foreign and domestic investment’.
Hence a positive relation exists between privatization and inflow of foreign direct
investment.
3.4.10 Infrastructure
Infrastructure facilities such as well developed networks of roads, airports, water supply,
uninterrupted power supply, telephones and internet access are important ingredients for
a business environment conducive to foreign investment (Khan & Kim, 1999).
Production costs tend to be higher in countries having less developed infrastructure.
Morisset (2000) argue that countries having good infrastructure facilities attract more
foreign direct investment as compared to countries having poor infrastructure facilities.
A well developed infrastructure increase the productivity of investments and therefore
increase the inflow of foreign direct investment (Asiedu, 2002).
A positive relationship exists between infrastructure and inflow of foreign direct
investment.
3.4.11 Regulatory Authority
Presence of a sound regulatory framework and regulatory authority to enforce the
relevant laws and regulations are very important for inflow of foreign direct investment
(Sun, 2002). A country’s free and fair regulatory framework helps in assuring the
foreign investors that their investment is permitted and once they enter into the market
their investment will be protected (Sun, 2002). The role of the regulatory body is to
provide a conducive and investor friendly environment and also to administrator the
different kind of difficulties and problems associated with the foreign investment in the
host country.
3.5 Entry Modes for Foreign Direct Investment
In exploiting its competitive advantages on an international scale a firm have a number
of broad options, including exporting, entering into strategic alliances with foreign firms
through, for example, cross-licensing deals and joint venture investments and wholly-
owned green field and takeover investments (Buckley and Casson, 1976). Each of these
modes has its own pros and cons and the selection of the an appropriate mode of entry
will depend not only on the firm-specific advantages, but also on the structural
characteristics of the target market (size and growth of primary demand, level of
supplier concentration, extent of product differentiation, complexity and ownership of
distribution channels, etc.) and in host country trade and investment policies
(investment incentives and foreign ownership limitations), (Bartels & Pass, 2000).
3.5.1 Exporting
Exporting is a low risk strategy and foreign companies employ this strategy to test out
an overseas market. Exporting requires little investment. Small companies normally
employ exporting on an international level mainly because of their comparative lack of
capital resources and marketing clout (Deresky, 2003).
3.5.2 Licensing
An international licensing agreement allows the right to a firm in the host country to
either produce or sell a product or both (Deresky, 2003). Licensing is mainly used by
small and medium sized enterprises and is used as a complement to exporting. The
greatest advantage of licensing is that it avoids the quotas and tariffs imposed on exports
(Deresky, 2003). But on the other hand licensing is the least profitable way of entering a
market.
3.5.3 Greenfield
Greenfield project involves building a subsidiary from bottom up to enable foreign sale
and/or production. This includes purchase of local/ host real estate, hiring and training
of employees using investors’ management, technology, know-how and capital.
Greenfield project gives the opportunity to create entirely a new organization by
combining the resources of investor and an asset acquired in host market. Greenfield
investment involves a gradual entry into the market.
3.5.4 Acquisitions
Acquisitions are ‘purchase of stock in an already existing company in an amount
sufficient to confer control’ (Kogut and Singh 1988, p.412). This involves the
integrations of investing company managerial skills with host company that possesses
production facilities, sales force, and market share. This facilitates speedy entry and
immediate access to local resources such as access to local networks, business licences
and reducing transaction costs. In some acquisitions in developing economies, the
control over assets is so extensive that the new operation almost resembles a Greenfield
investment, which Meyer and Estrin (2001) called ‘Brownfield’. According to
UNCTAD (2000), Cross- country acquisitions have become a prevailing facet of FDI
and approach of inward FDI in developing countries.
3.5.5 Joint Ventures
Joint Ventures (JVs) involve establishment of a new organisation with resource
contributions from two or more parent firms (Nakata & Sivakumar, 1997). The parents
share strategic and operational control of the firm. It is created as a new legal entity in
cooperation with two or more firms that both contribute resources. JVs facilitate the
smooth and quick access to resources; nature and type of JVs vary depending upon the
resource availability, concerns for control, and bargaining power of the coopering firms.
Partial acquisitions share some characteristics with both acquisitions and joint ventures.
The investor becomes involved with an existing firm rather than a newly created one,
but control is shared with other shareholders (Nakata & Sivakumar, 1997).
In practice, there are various obstacles in the way of firms attempting to enter a market
and can have an impact on choosing a particular type of entry mode (George et al.,
1992, Lowes et al., 1994). Access to key raw materials, component sources or
distribution channels may be controlled by established firms and therefore can limit
access to inputs or market outlets for foreign investors. Cost of financing investment in
plant and product differentiation and meeting initial operating loss may be prohibitively
high (Bartels and Pass, 2000). One or a combination of these factors may pose a
problem for a small scale, green-field type of entrant.
3.6 Factor Influencing the choice of entry mode
The choice of selecting a particular mode is influenced by a number of factors and
companies need substantial planning process to choose the right mode of entry.
According to Cateora & Ghuari (2006) the crucial factors influencing the choice of
entry mode is influenced by the market potential in the host country and it has to be
assessed against the company capabilities and resources available. The choice of entry
mode is a company decision but according to Franklin (1998) some factors need to be
considered before deciding an entry mode. He categorized these factors into external
and internal factors. According to Hollensen (2001) internal factors refer to firm’s size
and international experience. Firm’s have the influence on internal factors. External
factor’s are related to the target market and are beyond firm’s control. They play an
important role in choosing a particular mode of entry in the target market. External
factors include market potential, country risk, and investment policy, level of
competition and infrastructure facilities of the target market. According to Franklin
(1998), internal and external factors affect the company’s decision making process
either by encouraging and discouraging but no single factor can influence the decision
making process.
Franklin (2008) formulated a table to show which entry mode is favourable based on the
analysis of external and internal factors. The column with the highest number of factors
will determine the most suitable mode of entry.
Source: Franklin (1998)Table 2: External & Internal Factors Influencing the Choice of Entry Mode
3.7 Foreign Direct Investment Risks
Developing countries despite their investor friendly policies pose different kind of risks
and threats for foreign investors. According to Meldrum (2000), when foreign direct
investment takes place between two countries it involves various kinds of risks because
of the differences in national business systems of the countries. Meldrum (2000)
classified these risks as ‘Country Risks’. Warner (2002) in his research findings
presented the definition of country risk;
“Country risk incorporates all these sources of uncertainty in cross border trade that are
not present in domestic trade. Country risk arises from the potential changes in the
economic or political conditions within a particular country (or group of countries)”
(Warner, 2002)
According to Chan & Gemayel (2004), political and social disturbance, currency risk,
country financial risk and government regulations are most critical risks that affect the
investment decisions. Country risk can be broadly classified into three categories;
1) Political Risk
2) Economic Risk
3) Currency Risk
3.7.1 Economic Risk
Economic risk involves a sudden change in the economic structure and the growth rate
thus causing a significant change in the profitability of the investment (Meldrum, 2000).
Meldrum (2000) argues that economic risks arise from the unfavourable changes in the
economic policy variables (fiscal, monetary, international or wealth distribution or
creation) or due to significant change in a country’s comparative advantage ( resource
depletion, industry decline, demographic shift). In some developing countries, economic
risks are often driven by the political risks since both deal with the policy making.
Therefore, investors carefully examine the economic risks before making their
investment decision.
3.7.2 Political Risk
Tung (1998) defines, ‘Political risk is a general term referring to a variety of political
and quasi-political threats to the ownership or operation of foreign direct investment’.
Political risks pose threat to the profitability as a result of the forces external to the
industry and which may involve the role of government action as well (Wells, 1998).
These risks involve the risk of losing revenue or incurring costs due to changes in the
political environment of the country (McDonald, 2007). McDonald (2007) categorized
the political risk into two types;
3.7.2.1 Political Risk Type-1
Political risk type-1 involves dramatic changes in the political system of the host
country thus leading to radical change in policies towards the business community
(McDonald, 2007). This type of risk may lead to arbitrary governmental seizure of
assets, discriminatory regulations against the foreign companies and radical changes in
taxation system. McDonald (2007) argues that even politically stable systems can pose
political risk type-1. Political risk type-1 is difficult to measure in countries that are
political unstable.
3.7.2.2 Political Risk Type-2
Political risk type-2 involves changes forced on governments that affect the business
environment (McDonald, 2007). These changes include terror attacks, consumer and
investor pressure, ethnic and sectarian violence, social breakdown and dramatic changes
in public opinion (McDonald, 2007). Because of the above mentioned factors, political
risk type-2 is not restricted only to developing countries but also pose significant
challenges to developed economies of the world. McDonald (2007) argues that political
risk type-2 can be pronounced in countries undergoing radical political and economic
changes.
3.7.3 Exchange & Currency Risk
Meldrum (2002) defines exchange risk as, ‘An unexpected adverse movement in the
exchange rate’. Exchange risk involves a sudden change in the currency regime of a
country such as a change from a fixed to a floating exchange rate (Meldrum, 2000).
Currency risk involves the depreciation of home country’s currency and can have a
negative impact on the profitability of the firms. Exchange risk can have an uncertain
effect on the value and profitability of the firm (Alhajhouj, 2002). Foreign investors’
use hedging to reduce the effects of exchange risk in developing countries. Some of the
hedging techniques are as follows:
Future contract hedging
Forward contract hedging
Money market hedging
Currency option hedging (Alhajhouj, 2002)
3.8 Analysis of the Industry
In order to analyze the potential of the industry following tools is used;
3.8.1 SWOT Analysis
SWOT analysis is a strategic tool used to analyze the strengths, weaknesses,
opportunities and threats of a particular company, industry or a business. This can help
the companies in making the right choice before entering into any particular market.
3.8.2 Competitive Environment
Porter’s five forces model is used to analyze the industry environment. According to
Porter (1998), five forces determine the ultimate profit potential of an industry which
can help the company to identify the right strategic action.
Porter’s five forces are as follows:-
1. Barriers to Entry
2. Bargaining Power of Customers
3. Bargaining Power of Suppliers
4. Available Substitutes
5. Existing Rivalry
Chapter 4. FDI in Telecom Sector of Pakistan
4.1 Telecom Sector Overview
Since the birth of Pakistan in 1947, Telephone and Telegraph department was
responsible for providing the telecom services in Pakistan (PTA, 2007). Government of
Pakistan was overlooking the administration of T&T. T&T played the roles of regulator,
policy maker, operator and service provider in the country until 1990. PTC took
administrative control of T&T in year 1990 (BMI, 2008). In 1996, PTC became PTCL
as a result of part privatization of the operator monopolistic control of the
telecommunication services in Pakistan. But in December 2002, PTCL lost its
monopoly because of the deregulation of the telecommunication sector (BMI, 2008).
PTCL was privatized in year 2006 and UAE based Etisalat group now controls the
largest stake in PTCL (PTA, 2007). Pakistan telecom market is categorized in to fixed
line, internet and mobile sectors.
4.1.1 Fixed Market Overview
Pakistan fixed line market remained under the monopoly of PTCL until 2003. In 2004-
05 PTA issued 12 international long distances licenses, 35 fixed local loop licenses and
17 wireless local loop licenses (BMI, 2008). Currently there are 37 fixed local loop
licenses, 14 long distances licenses and 16 wireless local loop licenses issued to various
companies. The fixed line penetration in the country stands at 4.2 percent providing a
huge opportunity for expansion. The fixed line subscriber increased from 6.7 million at
the end of 2007 to 609 million at the end of March 2008.
4.1.2 Internet Market Overview
Pakistan internet market is still underdeveloped but it has grown considerably over the
last few years. By the end of 2008 there are 3.6 million subscribers and BMI (2008)
forecasts an increase of 5.7 million by the end of 2012. Introduction of WLL and
WiMax will further internet coverage around the country.
4.1.3 Mobile Market Overview
Pakistan mobile market has seen a rapid growth in recent years and mobile density in
Pakistan has risen to 48 percent BMI (2008). There are currently 77 million mobile
subscribers in Pakistan. Currently there are six telecom companies operating on GSM
network in Pakistan.
4.1.4 Growth of Telecom Sector in Pakistan
Pakistan telecom sector has seen a tremendous cellular growth in recent years (PTA,
2007). According to BMI (2008), Pakistan telecom sector has emerged as one of the
fastest growing telecom sector especially in relation to South Asian economies such
including India, Bangladesh and Nepal. This rapid transformation is due to the investor
friendly liberalization measures taken by the government of Pakistan (Inam, 2007).
Privatization of PTCL and open licensing regime has seen a number of foreign telecom
companies investing heavily in telecom sector of Pakistan. Increase in use of cellular
and WLL services has also accounted for the growth of telecom sector in Pakistan.
Pakistan telecom sector grew at a rate of more than 80% (PTA, 2007). The major factor
behind this impressive growth is the addition of the valued services and reduction in the
prices of the telecom services which has created an atmosphere of competition among
operators.
Source: PTA (2007)
Figure 1: Cellular Subscriber Growth in Pakistan
4.1.5 Major Players in Pakistan Mobile & Fixed Line Sector
4.1.5.1 PTCL
PTCL is the leading telecom operator in Pakistan with a strong presence in fixed line,
mobile and internet sectors (BMI, 2008). PTCL was privatized in year 2006 and UAE
based Etisalat group controls the largest stake in PTCL. Despite financial difficulties
PTCL remains the dominant leader in fixed line market with a share of 95%. PTCL
also owns Ufone which is the second ranked mobile operator in the country. Increase in
mobile usage and stiff competition from other telecom companies has resulted in a net
loss of PKR 9.5 billion in the first six months. Etisalat group after their takeover
restructured PTCL’s pricing and marketing policies in order to increase their market
share in broadband and mobile markets.
4.1.5.2 Mobilink
Mobilink is leading mobile operator in Pakistan with a market share of 40% and 30
million subscribers (BMI, 2008).Mobilink is a wholly owned subsidiary of Egyptian
based telecom group Orascom. Orascom initially had 88 percent stake in Mobilink but
in 2007, Orascom acquired the remaining 12 percent stake for US$ 290 million from a
local investor (BMI, 2008). Mobilink operates on the GSM network and provides a
number of value added services such as post-paid, prepaid, voice, data and multimedia
services. Mobilink provides the largest network coverage in Pakistan. Mobilink is
facing a stiff competition from other mobile operators and is losing its market share
gradually. In order to combat the threat of its competitors Mobilink launched the service
of BlackBerry in Pakistan, to gain a distinctive advantage in corporate market (BMI,
2008).
4.1.5.3 Warid Telecom
Warid telecom is the fourth largest mobile operator in Pakistan with a market share of
around 17 percent. Warid telecom was launched in year 2005 when UAE based group
Warid acquired the license for US$ 291 million. Warid telecom has faced a stiff
competition from other telecom companies but still managed to attract over 13 million
subscribers since its launch. In June 2007 Warid telecom sold 30 percent of its stake to
Sing Tel for US$ 2.9 billion. In order to gain a significant edge in a highly competitive
telecom market in Pakistan, Warid telecom has decided to launch streamed mobile TV
to its users and has signed an agreement with UK based ROK Entertainment to provide
this facility (BMI, 2008).
4.1.5.4 Telenor Pakistan
Telenor is the third largest mobile operator in Pakistan with a market share of
approximately 19 percent. Telenor Pakistan was established in year 2005 when a
Norway based group Telenor acquired the license for US$ 291 million. In nearly 3
years, Telenor has managed to attract over 15 million subscribers because of its
competitive pricing structure (BMI, 2008). In year 2007, Telenor became the first
mobile operator to provide mobile TV services, enabling the users to watch live TV
including local and international channels on their handsets (BMI, 2008). Telenor
Pakistan has pledged to invest US$ 1 billion for the development of its network in
Pakistan by year 2013.
4.1.5.5 CMPak
CMPak which was previously Paktel is 100% subsidiary of China Mobile. Paktel has
the honour of the first cellular service provider in Pakistan. In March 2007, China
Mobile acquired 88.86 percent stake in Paktel for US$ 284 million in cash (BMI, 2008).
In May 2007, China Mobile acquired the outstanding shares of Paktel and changed its
name to CMPak. CMPak launched a new brand name Zong in 2008 and since then it
has added 3 million more subscribers.
Source: BMI (2008)
Table 3: Key Companies in Pakistan Telecom Sector
4.1.6 Investment in Telecom Sector of Pakistan
Pakistan telecom sector has attracted a large amount of investment in recent years
because of the investor friendly environment created by Government Pakistan (BMI,
2008). PTA is responsible for awarding the licenses in a fair and transparent
environment through bidding process. Pakistan telecom sector attracted an investment
of nearly US$ 8 billion during the last four years (BMI, 2008). Mobile sector accounted
for nearly 66% of the total investment. LDI and WLL has also attracted large amount
of investment in year 2006-07.
4.1.7 Foreign Direct Investment in Telecom Sector of Pakistan
Telecom sector of Pakistan is the largest recipient of foreign direct investment in recent
years. Government of Pakistan’s economic policies of liberalization and privatization is
paying rich dividends in attracting the foreign companies to expand their infrastructure
in Pakistan. In the past few years, telecom sector of Pakistan received record inflows of
foreign direct investment. Telecom sector attracted an estimated US$ 1.8 billion in
foreign direct investment during the fiscal year 2005-06 which accounts for 54% of the
total foreign direct investment in Pakistan (BMI, 2008). In fiscal year 2006-07, telecom
sector received US$ 1.824 million foreign direct investment, which is about 35% of the
total foreign direct investment in Pakistan (BMI, 2008). Mergers and acquisitions is the
preferred mode of entry for the foreign companies to invest in the telecom sector of
Pakistan. According to BMI (2008), ‘Liberal FDI policy by the Government of Pakistan
and deregulation and privatization of the telecom sector has triggered a wave of
international acquisitions in telecom sector of Pakistan’. During the fiscal year 2006-07,
US$ 2 billion worth of acquisitions were made in the telecom sector of Pakistan.
Some of the key acquisitions in telecom sector of Pakistan are as follows;
China mobile acquired 100 percent stake in Paktel Limited. Initially China
mobile bought 88.6 percent share in Paktel for US$ 460 million (Inam, 2007).
Qatar Telecom has acquired 75 percent shares of Burraq Telecom for
Nationwide and International Telephony Networks (Inam, 2007).
Source: BMI (2008)Table 4: Key Acquisitions in Pakistan Telecom Sector
4.2 Determinants of foreign direct investment in telecom sector of Pakistan
4.2.1 Market Size & Potential
Because of the particular nature of the telecom industry, Pakistan with a population of
161 million offers vast potential for the foreign investors to invest in the telecom sector
of Pakistan (BMI, 2008). There are approximately 77 million mobile subscribers in
Pakistan by the end of 2007 (BMI, 2008). BMI (2008) indicated that there was an
increase of 28.5 million net additions to Pakistan’s wireless market, an average of 2.4
million per month and despite shadows over the sustainability of growth in Pakistan’s
mobile market, BMI (2008) forecasts an annual growth rate of 15% each year until
2012, when there will be around 135 million subscribers and a penetration of around
78%. Technology advancements such WLL and WiMax services and launch of mobile
TV services can provide an extra incentive for foreign investors to capture the market
share. PTA (2007) indicated that Pakistan telecom sector will continue to grow because
of the increase in demand for technologies such as VoIP and satellite access
technologies.
In a major development government of Pakistan has decided to open the telecom sector
of Azad Jammu & Kashmir and Northern Areas to private operators (PTA, 2007). Azad
Jammu & Kashmir boasts a population of nearly 4.5 million and provide an opportunity
to the telecom companies to gain the market share.
Introduction of 3G technology in Pakistan also offers market potential for foreign
investors to invest in the Pakistan telecom sector. The current technology in use is GSM
and PTA will run an auction for three 3G licenses by the end of this year (BMI, 2008).
BMI (2008) expects a rapid increase in 3G mobile subscribers in Pakistan in next few
years and predicts that the 3G market will account 11.9% of the entire mobile market by
year 2012. BMI (2008) in its report indicated that Pakistan telecom market offers a
potential return of 55% (see Appendix B).
Source: BMI (2008)
Figure 2: Telecom Industry Market Size (2005-2012)
The above mentioned findings illustrate that there is a positive relationship between
market size and inflow of foreign direct investment in telecom sector of Pakistan.
4.2.2 Inflation
Inflation in Pakistan has started to rise again. Government of Pakistan has been able to
maintain a low inflation rate in recent years but higher oil and gas prices has seen
inflation rise to 19.3 percent in May 2008 (BMI, 2008). BMI (2008) predicts the
inflation to rise further in coming months because of recent fuel and gas price hikes (of
10% and 30% respectively). High inflation will further deteriorate the economic
situation of the country and can have a negative impact on the inflow of foreign direct
investment in the country.
4.2.3 Labour Cost
Pakistan is the world’s sixth largest population and has got a huge amount of labour
resources. Khan& Kim (1999) in their research findings argue that a technically trained,
educated and cheap labour force are important factors in attracting foreign direct
investment. There is a shortage of trained and educated labour force in Pakistan as
compared to other developing economies. Pakistan’s adult literacy has been increasing
gradually in recent years. The overall literacy rate stand at 55% in years 2006-07
compared to 45% in year 2001-02, an increase of 10% over a six year period (ESP,
2007-08). However, with a strong base of economically active population, Pakistan has
an edge as it is a low wage economy with an average wage of $75-$100 a month for
unskilled workers, $100-$200 for skilled and $200-$500 for managerial workers
(Akhtar, 2007). Based on the empirical evidence of literature review and cheap labour
costs in Pakistan, a positive relationship exists between the labour cost and inflow of
foreign direct in telecom sector of Pakistan.
4.2.4 Government Economic Policies
Consistent economic policies play an important role to attract foreign direct investment
in the developing countries. Unfortunately, Pakistan’s track record in maintaining
consistent economic policies has been poor since its birth in 1947 (Khan & Kim, 1999).
Khan and Kim (1999) figured out that this change in policies with a change of
government as well as change in policy within the tenure of government has been quite
common in Pakistan. However under the rule of Prime Minister Shaukat Aziz
government of Pakistan provided investor friendly economic policies to attract the
foreign direct investment. The main features of the policy that’s assisted in attracting
foreign direct investment are open, unrestricted, technology-neutral licensing and
Pakistan Telecom Authority is made responsible to regulate the rates (Shahid, Lian &
Liu, 2007).
4.2.5 Foreign Direct Investment Policy in Telecom Sector
Shahid, Lian & Liu (2007) argue that relaxation of limitations on foreign direct
investment in telecommunications sector is very much in line with the liberalization and
competition in the telecommunication market. In order to attract foreign direct
investment in telecom sector, government of Pakistan has taken the following steps
Simplifying registration procedures for investors
Eliminating the requirement of minimum foreign equity in the services sector
after declaration of telecom sector as industry in the year 2004
Lifting the restriction from repatriation of the profits, by allowing foreign
investors to repatriate 100 percent of their profits
Reduction and, in some cases, exemption in duties, taxes and
technical/royalty/franchise fees (Shahid, Lian & Liu, 2007)
Source BOI Pakistan, (2007)
Table 5: Investment Policies by Government of Pakistan
The effectiveness of the Pakistan’s foreign direct investment policy is clearly evident
form the study conducted by WTO. According to WTO, “Pakistan’s foreign direct
investment policy regime is amongst the most liberal in the region. All economic sectors
are now open for foreign direct investment and in almost all sectors 100% foreign
ownership is allowed. No government sanction is required for making investment in
any sector of the economy (except arms and ammunitions; security printing, currency
and mint; high explosives, and radioactive substances). Pakistan provides full
protection to foreign investment under the Foreign Private Investment (promotion &
Protection) Act, 1976, and the Protection of Economic Reforms Act, 1992. Pakistan has
signed bilateral investment Agreement with 40 countries and agreements on avoidance
of double taxation with 51 countries. Foreign investors and technical and managerial
manpower does not require work permits and business work visas are issued liberally”
(Trade Policy Review of Pakistan, 2005).
These investor friendly government policies has helped in attracting foreign direct
investment in telecom sector of Pakistan and hence show a positive relationship
between foreign direct investment policy and inflow of foreign direct investment in
telecom sector of Pakistan.
4.2.6 Tariffs and Taxes in Telecom Sector
According to PTA (2007) telecom sector is a major contributor in generating revenues
for the government in the form of taxes, duties and regulatory charges. However
government of Pakistan is undergoing massive tax reforms aiming to reduce indirect
taxes that are consisted regressive taxes and according to BOI (2007) government of
Pakistan has offered 50% tax relief for non manufacturing sector in Pakistan.
Government of Pakistan has also reduced their tariffs from 100% in 1980 to 21% in
2001 and the tariffs were further reduced by 14% during the year 2005. BMI (2008)
predicted Pakistan can attract a large amount of foreign direct investment in telecom
sector as long as country brings down its tariffs. Pakistani government has set up a zero
import duty on capital goods, plant and machinery equipment not manufactured locally
and zero import duty on raw materials used in the production of exports (see figure).
These investor friendly tariffs and tax rates have attracted foreign companies to invest in
the telecom sector of Pakistan. Hence there exists a positive relationship between the
tariffs and taxes and the inflow of foreign direct investment in telecom sector of
Pakistan.
Source: World Trade Organization
Table 6: Tariffs and Import Product Groups
4.2.7 GDP Growth Rate & Openness of the economy
Pakistan’s economy is experiencing the longest spell of its economic growth in years.
Economic growth accelerates to 7.0 percent in 2006-07 at the back of robust growth in
agriculture, manufacturing and services sector (BMI, 2008). According to BMI (2008),
Pakistan’s economy has been rated as one of the fastest growing economies in
comparison with other East Asian economies like Malaysia, Indonesia, Thailand and
Philippines which grew at the rates between 5% and 5.5%. BMI (2008) expects Pakistan
to maintain a 6-8% growth rate in the coming 5 years. Government policy of
deregulation, privatization & liberalization is paying rich dividends. There is an
unprecedented inflow in FDI. Pakistan has attracted a FDI of 2.2 billion US$ in year
2006 compared to 308.8 million US$ in year 2000. Compared with other emerging
economies in Asia, this puts Pakistan as one of the fast growing economies in the region
along with China, India and Vietnam (BMI, 2008). This stable economic growth makes
Pakistan an open economy for the foreign investors. Therefore there exists a positive
relationship between GDP and foreign direct investment inflow in telecom sector of
Pakistan.
Source: Datamonitor (2007)
Figure 3: Real GDP Growth of Pakistan
4.2.8 Infrastructure
Availability and cost of the infrastructure facilities such as water, power and
telecommunication services play an important role in attracting the foreign direct
investment (Khan & Kim, 1999). According to the research conducted by Khan and
Kim (1999), infrastructure facilities in Pakistan are poor as compared to the other
developing countries that have attracted large amount of foreign direct investment. But
in recent years, Pakistan has seen a rapid improvement in its infrastructure facilities
mainly because of the development projects undertaken by the government of Pakistan
(Farhat, 2008). Government of Pakistan has given special consideration to improve the
infrastructure of the country in order to attract foreign investors. One of the key projects
undertaken by the government of Pakistan is the development of Gwader port which
was opened in March 2008. One of the main challenges that Pakistan is facing is the
shortage of electricity because of the increase in demand of electricity. Tarbela Dam and
Mangla Dam account for nearly 50% of the electricity generated in Pakistan (Farhat,
2008). However, construction of new dams is in process and is expected to complete by
year 2012 (Farhat, 2008).
4.2.9 Regulatory Authority
Presence of an independent regulator is an important factor in order to create a
competitive environment and to liberalize the telecommunication sector (Shahid, Lian
& Liu, 2007). In order to create an environment conducive for foreign direct investment
in Pakistan, Pakistan telecommunications authority was established in 1996 under the
Pakistan Telecommunications (Re-Organizing) Act. PTA was formally under the
jurisdiction of Ministry of Information and Technology but in 2001 it gained the status
of an independent regulatory agency for the telecom industry in response to Pakistan’s
WTO commitments (BMI, 2008). The main functions and responsibilities of PTA are as
follows;
To regulate the operation and maintenance of telecom sector in Pakistan
To protect the interest of the consumers
To ensure non discrimination in telecommunication licensing
To improve and accelerate the infrastructure of telecommunication services to
all parts of Pakistan
To facilitate new entrants to survive in the presence of an incumbent operator
To support the modernization of the telecommunication sector through
privatization, de-regulation and liberalization
To maintain an effective and well defined regulatory environment in accordance
with the international laws
To protect Pakistan’s national and security interests
To create a rationalized and investor friendly tariff structure for the telecom
sector (BMI, 2008)
PTA since its inception has been able to maintain an investor friendly environment and
ensured a free and fair bidding process for new licenses. BMI (2008) in their repost
indicated that the independence of regulator in Pakistan is nearly 80% (see Appendix).
The effectiveness of regulator authority in Pakistan is also clearly evident from the
remarks of Telenor Pakistan’s CEO Tore Johnsen;
“We appreciate the presence of a stable regulatory environment with a clear licensing
framework…the Ministry of Information technology and the Pakistan Telecom
Authority has been successful in providing a level playing field and has fostered a
culture of industry consultation” (BMI, 2008). Presence of an independent and stable
regulatory authority has helped in attracting a large amount of foreign direct investment
in Pakistan. Hence, there exists a strong relationship between regulatory authority and
inflow of foreign direct investment in Pakistan.
4.2.10 Privatization
Government of Pakistan’s policy of privatization has attracted large amount of foreign
direct investment in recent years. Privatization in Pakistan was started in 1991 by Prime
Minister Nawaz Sharif and has shown an impressive growth in recent years (Husain,
2006). Some of the salient features of Pakistan’s privatization policy are;
Foreign Direct Investment is allowed in all sectors
Equal treatment of local and foreign investors
100% foreign equity allowed
Attractive tax and incentive packages
Reduction in the corporate tax rate from 39% in 2005 to 35% in 2007 for private
companies (PTA, 2007)
These policies resulted in privatization of a number of companies in recent years (ESP,
2007). Privatization of state owned PTCL in year 2006 resulted in a large inflow of
foreign direct investment in telecom sector of Pakistan.
4.2.11 Telecom Related Suppliers in Pakistan
A lot foreign telecom companies such as Nokia, Ericsson, Motorola and Siemens have
setup their business activities in Pakistan and are offering valuable services to the new
entrants to establish their networks across Pakistan. In addition to the foreign firms a
number of local firms are also providing similar services to the new entrants in the
telecom sector.
4.3 Foreign Direct Investment Risks in Pakistan
Pakistan in spite of providing investor friendly economic policies and a business
environment supportive of inward investment in telecom sector pose significant threats
to foreign investors (BMI, 2008). According to BMI (2008), Pakistan secures 11 th
position in their regional Business Environment Rankings largely due to the on going
political instability in the country. Pakistan has got the highest country risk of 10.6 (see
Appendix B) as compared to the other the regional countries (BMI, 2008).
Following are the main risks associated with the foreign investor’s decision to invest in
Pakistan.
4.3.1 Political Risk
4.3.1.1 Political Risk Type-2
Political stability is one of the important factors in attracting foreign direct investment
in developing countries because it creates confidence for foreign investors (MIGA,
1994). Pakistan is ranked 7th in political risks study carried out by Eurasia Group and
has faced political instability because of weak institutional role since its independence
in year 1947. Lack of institutional and judicial role and involvement of army has led to
the demise of four elected governments during the period 1988-1999. Changes in the
governments have also affected the inflow of foreign direct investment in Pakistan
during the year 1988 to 1999. Apart from the political instability other factors such as
the decision of Pakistan government in year 1998 to test the nuclear weapons also
hindered the foreign direct investment in the country. However, Pakistan has seen a
period of political stability under the dictatorship of President Musharraf and for the
first time in the history of Pakistan an elected government led by Prime Minister
Shaukat Aziz has been able to complete its tenure of 5 years. These five years of
political stability saw a large inflow of foreign direct investment in Pakistan especially
in the telecom sector. But removal of Chief Justice of Pakistan on 3 rd November 2007
and assassination of former Prime Minister Benazir on 27th December 2007 has led to
country wide protests and violence. Pakistan Peoples Party won the parliamentary
election on 18th February and vowed to bring the peace and stability in the country.
However, the new government is facing tough challenges on the issues of restoration of
judges and impeachment of President Musharraf. On 7th August 2008 government
coalition announced to impeach the President of Pakistan and vowed to reinstate the
deposed Chief Justice of Pakistan (BMI, 2008). This situation will create further
political unrest and will have a negative impact on the inflow of foreign direct
investment in the country.
Apart from political instability, Pakistan continues to fight against internal extremism
and sectarian violence within the country. Armed forces are carrying out operations
against militants in nearly every province of Pakistan. This has led to an increase in
suicide attacks and cross border terrorism in recent months. According to Eurasia
(2007), Pakistan’s security situation will further deteriorate in Tribal areas and North
West Frontier Province, posing serious implications for the country.
The above factors clearly indicate that Political Risk Type-2 is clearly high in Pakistan
and can discourage the inflow of foreign direct investment in the country.
4.3.1.2 Political Risk Type-1
Political risk type-1 involves change in the government policies with a change in
government. According to (Khan & Kim, 1999), Pakistan has a poor record in
maintaining consistent economic policies. But this situation has improved quiet
considerably in recent years. Under the dictatorship of President Musharraf, Pakistani
government has been able to maintain consistent investor friendly economic policies
and attracted a large amount of foreign direct investment in the country. However, with
inflation rising to a record high 11 percent government is facing a tough task to
maintain the consistency in economic policies. Hence, Political Risk Type-1 is
considerably high in Pakistan.
4.3.2 Currency Risk
Pakistani currency has depreciated a lot in recent months on the back of deteriorating
fundamentals, rising oil prices, sagging foreign exchange reserves and political
instability (BMI, 2008). Pakistani Rupee has depreciated by more than 13% percent
again the US Dollar since the start of year and it is expected that it will depreciate
further in coming months (BMI, 2008). This rapid decline in Pakistani Rupee could
further deteriorate the economic situation of the country and affect the inflow of foreign
investment.
Source: BMI (2008)Figure 4: Depreciation of Pakistan Rupee
Chapter 5. Analysis
This chapter will analyze the findings of the research data in connection with the
theoretical framework provided in chapter 3 and chapter 4.
5.1 SWOT Analysis of Pakistan Telecom Sector
SWOT analysis is used to analyze the state of Pakistan Telecom Sector.
5.1.1 Strengths
5.1.1.1 Investor Friendly Government Policies
Government of Pakistan’s policy of privatization and deregulation is a key strength for
Pakistan telecom sector in attracting the foreign investors. Privatization of state owned
PTCL to UAE based Etisalat group has been a significant milestone in this regard.
Apart from privatization and deregulation policies government of Pakistan has provided
various incentives to foreign companies to invest in the telecom sector of Pakistan.
Incentives such as simplifying registration procedure for telecom investors, eliminating
the requirement of minimum foreign equity in telecom sector and allowing the foreign
investors to repatriate 100 percent of their profits has helped the inflow of foreign direct
investment in telecom sector. Government of Pakistan has also reduced the tariffs by 14
percent in 2005. BMI (2008) in their annual report indicated that government of
Pakistan’s steps in bringing the tariffs down will encourage the inflow of foreign direct
investment in telecom sector of Pakistan. According to WTO, “Pakistan’s foreign direct
investment policy regime is amongst the most liberal in the region. All economic sectors
are now open for foreign direct investment and in almost all sectors 100% foreign
ownership is allowed. No government sanction is required for making investment in
any sector of the economy (except arms and ammunitions; security printing, currency
and mint; high explosives, and radioactive substances). Pakistan provides full
protection to foreign investment under the Foreign Private Investment (Promotion &
Protection) Act, 1976, and the Protection of Economic Reforms Act, 1992. Pakistan has
signed bilateral investment Agreement with 40 countries and agreements on avoidance
of double taxation with 51 countries. Foreign investors and technical and managerial
manpower does not require work permits and business work visas are issued liberally”
(Trade Policy Review of Pakistan, 2005).
The above analysis clearly indicates that investor friendly government policies act as a
potential strength for the Pakistan telecom sector.
5.1.1.2 Regulatory Authority
The rapid growth in every domain of the telecom sector and emergence of new telecom
companies has raised a number of regulatory issues in Pakistan telecom (PTA, 2007).
The role of PTA as an independent regulatory authority is an important strength for
Pakistan telecom sector in this regard. PTA is an independent regulatory authority who
is responsible for overall operations of telecom sector in Pakistan. PTA since its
inception has been able to maintain an environment conducive for foreign investment.
PTA is responsible for the issuing the licenses to foreign companies through free and
fair bidding process. PTA has played an important role in helping the new telecom
companies to set up their network across the county and provided a level playing field
to all the operators in Pakistan telecom market. It has also improved the infrastructure of
telecom services across the country. These measures taken by PTA have made Pakistan
telecom more modern, efficient and attractive for foreign investors. Hence an
independent and fully functional PTA augurs well for the inflow of foreign direct
investment Pakistan telecom industry.
5.1.1.3 Labour Cost
One of the main strength for the Pakistan telecom sector is the availability of cheap and
well educated labour. Pakistan has an edge in the telecom market since it is a low wage
economy with an average wage of $75-$100 a month for unskilled workers, $100-$200
for skilled and $200-$500 for managerial workers (Akhtar, 2007). The cheap labour
costs act locational advantage for Pakistan and provides an added incentive for the
foreign investors to invest in telecom sector of Pakistan.
5.1.2 Weaknesses
5.1.2.1 Inflation
Inflation in Pakistan has risen considerably in the last few years on the back of high fuel
and food prices. High inflation can act as a weakness for the telecom sector since it will
have an impact on the purchasing power of the public.
5.1.2.2 Infrastructure
Infrastructure facilities in Pakistan are poor as compared to other developing nations
who have attracted foreign direct investment (Khan & Kim, 1999). One of the main
challenges for the Pakistan telecom sector is the shortage of electric supply. Pakistan in
recent years has failed to construct new dams and power generating facilities. In order
to cater the demand in electricity government of Pakistan has opened up new projects to
build new dams by 2012 (Mohsin, 2007). Poor infrastructure facilities can have a huge
impact on the decision of foreign companies to operate in Pakistan.
5.1.3 Opportunities
5.1.3.1 Market Size
Pakistan with a population of nearly 161 million people offers vast potential for the
foreign investors to invest in the telecom sector. Mobile density in Pakistan is still under
50 percent and there are approximately 77 million mobile subscribers in Pakistan (BMI,
2008). Pakistan has seen rapid rise in the use of mobile services in recent years with an
addition of 28.5 million subscribers per month. BMI (2008) forecasts an annual growth
of 15 percent each year till 2012, when there will be around 135 million subscribers and
a market penetration of around 78%. Government of Pakistan’s decision to open the
regions of Azad Jammu & Kashmir and Northern Areas to private sector also provide
telecom companies to expand their networks in those regions and gain market share.
Azad Jammu & Kashmir boasts a population of nearly 4.5 million and provide an
opportunity to the telecom companies to gain the market share.
This analysis clearly indicates that Pakistan telecom market offers huge potential for
foreign investors to invest.
5.1.3.2 Implementation of 3G Network
Introduction of 3G technology in Pakistan also offers market potential for foreign
investors to invest in the Pakistan telecom sector. The current technology in use is GSM
and PTA will run an auction for three 3G licenses by the end of this year (BMI, 2008).
BMI (2008) expects a rapid increase in 3G mobile subscribers in Pakistan in next few
years and predicts that the 3G market will account 11.9% of the entire mobile market by
year 2012.
5.1.3.3 Competition
There are currently five mobile companies operating in Pakistan on GSM network. The
competition among these companies is fierce and each company is trying to gain the
market share. This tough competition can be treated as threat as well but this provides
an opportunity to foreign companies to provide an incentive to the customers by
keeping the price low and also by providing the value added services.
5.1.4 Threats
5.1.4.1 Political Risk Type-II
One of the key threats to Pakistan telecom market is the political risk type-II which
deals with the political stability in the country. Pakistan since its inception has faced
political instability because of weak institutional role. Apart from political instability,
Pakistan continues to fight against internal extremism and sectarian violence within the
country. Armed forces are carrying out operations against militants in nearly every
province of Pakistan. This has led to an increase in suicide attacks and cross border
terrorism in recent months. According to Eurasia (2007), Pakistan’s security situation
will further deteriorate in Tribal areas and North West Frontier Province, posing serious
implications for the country.
Political instability could turn to economic uncertainty, which could affect the inflow of
foreign direct investment (BMI, 2008)
5.1.4.2 Currency Risk
Pakistani Rupee has been subject to sharp volatility in recent months on the back of
deteriorating fundamentals such as soaring oil prices, sagging foreign exchange reserves
and political turbulence (BMI, 2008). Pakistani Rupee has depreciated by more than 13
percent versus the US Dollar since the start of 2008 and it is expected to depreciate
further in next months. A weak currency will affect the profit potential of the firm and
discourage the investors to invest in Pakistan telecom sector.
5.2 Pakistan Telecom Sector and Porter’s Five Forces
Porter’s five forces model is used to analyze the industry environment. Porter’s five
forces model is helpful in determining the best suitable entry strategy for the foreign
companies.
5.2.1 Threats of New Entrants
Threat of new entrants in Pakistan telecom market is significantly high because of the
investor friendly government policies and an environment conducive for foreign direct
investment. Also, PTA is soon going to issue three licenses for 3G network to foreign
companies.
5.2.2 Bargaining Power of Customer
Bargaining power of customers is high in telecom sector of Pakistan. Currently there are
six mobile companies operating and each of them is offering different packages at
different prices with added value added services. Also, the price of switching from one
provider to another is fairly low. Hence, the buyer power in Pakistan telecom sector is
considerably high.
5.2.3 Bargaining Power of Supplier
Bargaining power of telecom related suppliers is low in Pakistan. A lot foreign telecom
companies such as Nokia, Ericsson, Motorola and Siemens have setup their business
activities in Pakistan and are offering valuable services to the new entrants to establish
their networks across Pakistan. In addition to the foreign firms a number of local firms
are also providing similar services to the new entrants in the telecom sector.
5.2.4 Threat of Substitutes
The only substitute to mobile services is the fixed line. PTCL is responsible to handle
the fixed line business in Pakistan and is facing an uphill task to add to its fixed line
subscriber because of the growing popularity of the mobile services. Hence, the threat
of substitutes is fairly low in Pakistan telecom market.
5.2.5 Level of Existing Rivalry
Currently there are six telecom companies operating on GSM network in Pakistan. The
rivalry among these companies is fierce and each company is facing tough battle to gain
market share. However, there is still a lot of market potential available to these firms,
since the mobile density in Pakistan is well under 50 percent.
5.3 Entry ModeThis section will try to analyze the entry strategy to enter in telecom sector of Pakistan.
The research shows that choice of entry mode is affected by external (Host Country)
and internal factors. Since, the research is being done on Pakistan telecom sector so the
research will assume the internal factors in order to identify suitable the entry strategy
for foreign direct investment in telecom sector of Pakistan. The analysis will be based
on the findings of Franklin (1998).
5.3.1 External Factors
The research clearly suggests that there is a high sales potential in Pakistan telecom
market. BMI (2008) indicated that there was an increase of 28.5 million net additions to
Pakistan’s wireless market, an average of 2.4 million per month and despite shadows
over the sustainability of growth in Pakistan’s mobile market, BMI (2008) forecasts an
annual growth rate of 15% each year until 2012, when there will be around 135 million
subscribers.
The competition in Pakistan telecom market is of oligopolistic type, as there are six
telecom companies competing to gain the market share. Mobilink is leading mobile
operator in Pakistan with a market share of 40% and 30 million subscribers (BMI,
2008).
Production costs in Pakistan telecom sector is assumed to be significantly low because
of the availability of cheap labour. Also, government of Pakistan has given 50 percent
tax relief to non-manufacturing sector in Pakistan (BOI, 2007).
Government of Pakistan have liberal and investor friendly policies for foreign direct
investment. Government has provided various incentives to foreign investors to invest
in the telecom sector of Pakistan.
Pakistan economy is dynamic and is experiencing the longest spell of its economic
growth in years. Economic growth accelerates to 7.0 percent in 2006-07 at the back of
robust growth in agriculture, manufacturing and services sector (BMI, 2008).
According to BMI (2008), Pakistan’s economy has been rated as one of the fastest
growing economies in comparison with other East Asian economies.
Political risk is significantly high in Pakistan because of the on going political crisis and
terrorism in the country.
Pakistani Rupee has been subject to sharp volatility in recent months on the back of
deteriorating fundamentals such as soaring oil prices, sagging foreign exchange reserves
and political turbulence (BMI, 2008). Pakistani Rupee has depreciated by more than 13
percent versus the US Dollar since the start of 2008.
5.3.2 Internal & Home Country Factors
The researcher assumes that the ‘Alpha Telecom’ is the company which is going to
invest in Pakistan telecom sector and following are the assumed internal and home
country factors related to ‘Alpha Telecom’ that will determine the choice of entry mode
to invest in Pakistan telecom sector.
Standard product
High Product Adaptation
Substantial Resources
High Commitment
Small Market
Oligopolistic Competition
High Production Cost
5.3.3 Choice of Entry Mode
Choice of entry mode to enter Pakistan telecom market is derived by putting the internal
and external factors in the table 1 mentioned in chapter 2.
Table 7: Choice of Entry Mode
It is clearly evident from the table the best suitable entry mode to invest in Pakistan
telecom sector is through equity investment or production. This means that the ‘Alpha
Telecom’ can either entry through acquisition or can do joint venture with other
company in Pakistan
Chapter 6. Conclusion & Recommendations
The previous chapter provided an in-depth analysis of the Pakistan telecom sector by
conducting the SWOT analysis and Porter’s fiver forces model. This chapter will
discuss the summary of the project. Also, the limitations of this research will be
discussed along with the some suggestions and recommendations for future research in
this area.
6.1 Summary of the Research
The objective of this research is to identify the determinants and risks associated with
foreign direct investment in Pakistan telecom sector and to identify the suitable mode of
entry to invest in Pakistan telecom sector.
The research identifies that Pakistan telecom market is one of the fastest growing in the
South Asian region. There is a lot of potential available in the Pakistan telecom market
since the mobile density in Pakistan is well under 50 percent. Government of Pakistan’s
policy of liberalization, privatization and investment protection are some of the key
strengths of Pakistan telecom market. Opening of the Northern areas and issuing of the
3G licenses will provide an opportunity to the foreign companies to expand their
network across the country. Presence of an independent and fully functional regulatory
authority and availability of cheap labour provides added incentive for foreign investors
in the telecom sector of Pakistan.
However, Political instability in the country is the biggest threat to attract the foreign
investors. High inflation and deprecation of the Pakistani Rupee could also have a
negative impact on the inflow of foreign investment in the market.
The research suggests that the best entry mode to invest in Pakistan telecom sector is
either through acquisition or joint venture. Since, it will provide the foreign company a
rapid access to the market and will help them in gaining the significant market share.
Note: In a major development President Pervaiz Musharraf stepped down as President
of Pakistan on 18th August. This major development has seen a slight appreciation of
Pakistan Rupee and also has a positive impact on the Karachi stock exchange. But
politically Pakistan is not stable yet.
6.2 Limitations
The major limitation in conducting this research was to get the primary data through
telephonic interviews and emails. The researcher tried to contact Pakistan Telecom
Authority and Warid Telecom but due to lack of corporation from the management of
Pakistan Telecom Authority and Warid Telecom, a considerable amount of time was
lost. The lack of primary data completely changed the structure of the research. Also,
there is insufficient data available on development of infrastructure facilities in
Pakistan.
6.3 Future Recommendation
This research can be used for future researches from the prospect of assessing the entry
strategy in Pakistan telecom sector. Researchers can take this study as a base and take it
further to enhance the scope of this study to optimum level by assessing the entry
strategy and post entry strategies for investing in Pakistan telecom sector. This research
can also act as a guideline for researches in other sectors of Pakistan.
Appendix A
FDI in Pakistan Telecom Sector
Student UB Number
07000441
TITLE OF DEGREE: Master of Arts
MODULE TITLE: Research Methods (MAN 4148M)
MODULE LECTURER: Dr Shona Bettany
STATEMENT OF AUTHORITY
We have read the University Regulations relating to plagiarism and certify that the above piece of coursework is all our own work and do not contain any unacknowledged work from any other sources.
Signature………………………………………………………………………………
………………………………………………………………………………………… April 25, 2008
Date: ………………………………………
Word Count: 2059 1
1In accordance with the UoB’s regulations excluding tables, footnotes and the appendix
Contents
Introduction......................................................................................................................3Defining the Parameters................................................................................................31) Purpose of the Study/ Concept Map....................................................................42) Literature review......................................................................................................43) Research Gap.........................................................................................................54) Research Gap Contribution...................................................................................65) Research Questions...............................................................................................66) Research Methodology..........................................................................................7
I. Philosophy............................................................................................................7II. Approach..............................................................................................................7III. Strategy................................................................................................................7IV. Data Analysis Approach.....................................................................................8
7) Sampling...................................................................................................................88) Data Collection........................................................................................................9
a) Primary Sources of Data....................................................................................9b) Secondary Sources of Data..............................................................................9
9) Limitations of Research.......................................................................................1010) Proposed Chapter Plan....................................................................................1111) Project Plan........................................................................................................1212) References.........................................................................................................13
Introduction
Pakistan’s economy has grown considerably in recent years because of the investor
friendly economic policies brought by the Government of Pakistan. Government’s
policy of deregulation, privatization & liberalization is paying rich dividends and has
attracted a large amount of foreign direct investment in the past few years. Low tariffs,
high consumer demand, intense competition and a government and regulator ready to
welcome inward investment have created a powerful impetus for growth in Pakistan’s
telecom sector. According to Business Monitor International, BMI, (2008), investment
levels continue to impress, as Pakistan’s mobile operators now fight it out for market
share amid network enhancement projects. In the last few years, many telecom
companies from Europe and Middle East have invested heavily in the telecom sector.
According to Business Monitor International, BMI, (2008), a total of US$2.7bn was
invested in infrastructure by Pakistan’s mobile operators in the fiscal year ending June
2007. China Mobile has recently invested in Pakistan’s telecom sector.
The research proposal covers the purpose, concept map, literature review, research
gap, research questions, and research methodology. In the light of these, it also
purposes the chapter plan but the important factor is that this chapter plan is subject
to change depending on the analysis of the primary and secondary data.
Defining the Parameters
Bell (2005) gave the concept of ‘defining the parameters’ for the research. Based on
his concept, the necessary parameters are described below:
1. Language of Publication: English
2. Subject Area: International Business Environment, International Business
Strategy
3. Business Sector: Telecom Industry
4. Geographical Area: Pakistan
5. Literature Type: Books, Journals, Company Reports, Government Policies,
World Bank Reports, International Monetary Fund Reports, Business Monitor
Online.
1) Purpose of the Study/ Concept Map
Pakistan is a developing country with the world’s sixth largest population. Pakistan’s
economy is experiencing the longest spell of its economic growth in years. Economic
growth accelerated to 7.0 percent in 2006-07 at the back of robust growth in
agriculture, manufacturing and services. Pakistan’s real GDP has grown at an average
rate of 7.0 percent in the last 5 years. There is an unprecedented inflow in foreign
direct investment in Pakistan. Pakistan has attracted a FDI of 4.1 billion US$ in year
2007 compared to 308.8 million US$ in year 2000. Foreign direct investment in
telecom sector accounted nearly 33 percent of the total foreign direct investment. The
study will try to explore the factors that have facilitated the large amount of foreign
direct investment in telecom sector in Pakistan. The theory of internationalization
insists on moving to different countries for low cost and high quality production,
Pakistan has begun to be sought as a better market. So, the research will investigate
those variables which have attracted the foreign investors to invest in telecom sector
in Pakistan. It will examine the incentives given by the government to the foreign
investors to invest in telecom sector. It will also provide the detailed overview of the
industry environment using the SWOT analysis. An overview of the political and risk
assessment factors will also be discussed in detail to identify the trends that have been
present in the past and may contribute to the present as well as future investment
trends in telecom sector. In conclusion, the current research will try to figure out the
strategies of the multinational firms who have invested in telecom sector in Pakistan.
2) Literature review
In recent years, South Asian countries have been the focus of foreign direct
investment. According to Business Monitor Online (2008), South Asian region is home
to high levels of telecoms growth; but in Pakistan infrastructure and subscriber growth
patterns seem unrivalled with the telecoms sector experiencing unusually high growth.
Love and Hidalgo (2000) argue that empirical studies show the domestic market size
and cost factor relate to the location of foreign direct investment. According to them,
market size measures are GDP, GDP/capita and growth in GDP of country. Pakistan’s
real GDP has grown at an average rate of 7.0 percent in the last 5 years. Asiedu (2002)
spotlighted that policy reforms brought about by the governments are the
determinants of FDI in developing countries. This can be proved by the fact that
Pakistan's government has been instrumental in the deregulation of Pakistan's
telecoms market, which in turn has led to competition, improved investment and
growth. Aqeel and Nishat, (2004) identified determinants of growth by considering
tariff rate, exchange rate, tax rate, credit to private sector and index of general share
price variables. Low tariffs, high consumer demand, intense competition and a
government and regulator ready to welcome inward investment have created a
powerful impetus for Pakistan’s telecom market. Investor friendly policies of Pakistani
Government have encouraged inward investment from the likes of Telenor and Warid
Telecom (Business Monitor, 2008). Although economic growth is likely to remain
robust in the short term, but Pakistan’ growing political instability and security issues
could hamper the foreign direct investment. According to ODI (1997), political
instability, in terms of crime level, riots, labor disputes and corruption, is an important
factor limiting substantial foreign investment into developing countries. On the other
hand there are other factors, for example, structural weakness of economy, shortage
of skilled labour and deficient technological capability. These factors can depress the
potential profitability of investment. Pakistan’s economy has improved most of these
factors in recent years but the political instability remains the biggest threat to attract
the foreign investment.
3) Research Gap
Foreign direct investment in telecom industry in Pakistan is still into its initial stages.
Lots of variables have contributed in making Pakistan a better market for foreign direct
investment especially in telecom sector. However, the journal research on this issue
has been under researched. Jahanzeb (2007) assesses the FDI in Pakistan over the last
5 years in SME sector. A lot of statistical data on foreign direct investment in Pakistan
is available from the government websites. World Investment Reports by UNCTAD
(2007) also gives an overview on the amount of foreign direct investment in Pakistan.
However, there is insufficient research on determinants of the foreign direct
investment in telecom sector in Pakistan. Some research has been done to identify the
impediments of foreign direct investment in Pakistan (Khan, A.H, & Kim H 1999) as
they mentioned economic instability, taxation etc. Economic indicators explain change
in the economic situation of Pakistan since it is moving through a recovery phase. The
existing research has not accounted for the new socio-political, socio-cultural and
socio-economic environment of Pakistan. Moreover, there is in sufficient data available
on the variables such as political instability and security risks which have been changed
dramatically in recent years and their impact in foreign direct investment.
4) Research Gap Contribution
In the light of above mentioned research objectives and literature review, it can be
argued that the areas identified in the research objectives have not been explored or
discussed in great depth. It is hoped that the objectives set in this report will try to
answer all these unanswered questions and will also try to contribute towards already
published research.
5) Research Questions
The research will try to answer the following questions:
4. What are the determinants and motives of foreign direct investment in
Pakistan telecom sector?
5. An overview of the industry environment using SWOT analysis
6. What are the entry strategies and challenges for the firms to invest in telecom
sector in Pakistan?
7. What variables have changed and their impact on the foreign direct investment
in telecom sector in Pakistan?
8. How the pr-entry strategies implicate the existing and future strategies of the
firms investing in telecom sector?
6) Research Methodology
The research onion described by Mark Saunders, Philip Lewis and Adrian Thornhill
(2006) is used to analyze the philosophy, approach and strategy of research.
I. Philosophy
The major philosophy used in this research will be ‘Realism’. According to Saunders,
Lewis & Thornhill (2007), realism is a branch of epistemology which is similar to
positivism in that it assumes a scientific approach to the development of knowledge.
This assumption underpins the collection of data and the understanding of that data.
Bhaskar (1989) argues that we can identify what we don’t see through the practical and
theoretical processes of the social sciences. The objective of the research is to assess the
industry environment and entry strategies, so ontology is not the right choice for this
particular research as according to Saunders, Lewis & Thornhill (2007), it is concerned
with the nature of reality.
II. Approach
The research will be employing inductive as well as deductive approach. Since, one of
the main objectives of the research is to figure out the variables which are responsible
for foreign direct investment in telecom sector of Pakistan, therefore inductive approach
will be used extensively. Only where there is a requirement of analyzing the quantitative
data, deductive approach will be used.
III. Strategy
In order to critically evaluate the industry environment and entry strategies, grounded
theory presented by Glaser & Strauss (1967) will be used as research strategy.
According to Goulding (2002), grounded theory strategy can be used to explore a wide
range of business and management issues.
IV. Data Analysis Approach
The research will be mainly comprised of qualitative data and will be inductive in
nature; hence analytical induction approach will be used to make the critical remarks.
Other theories do not cope with the philosophy, approach and strategy of the research
and cannot be used for that reason. Spreadsheets will be used for the analysis of the
quantitative data.
Figure 1: The Research ‘Onion’: Model Presented by Mark Saunders, Philip Lewis and Adrian
Thornhill (2006)
7) Sampling
Sample population will consist of telecom firms and Pakistan Telecom Authority which
is responsible for the policies and overall operations of telecom sector of Pakistan. Key
telecom companies i.e. Mobilink, Warid Telecom, U-fone and Telenor which have
invested heavily in recent years will be under the main focus. Because of the special
nature of this research, the data collection points are small. Henry (1990) advised
against using probability sampling technique for sample population of less than 50.
Because of the short time span and financial constraints the research will employ
homogenous sampling technique. Saunders, Lewis & Thornhill (2007) argue that
homogenous sampling technique focuses on one sub group in which all the sample
members are similar. This will help us to cover the topic in detail.
8) Data Collection
The research will employ both qualitative and quantitative data techniques to draw
conclusions. However, main emphasis will be given to collect and analyze the
qualitative data. The plan of the research will be mainly to use primary data collected
from both primary and secondary sources.
a) Primary Sources of Data
Primary data will be of utmost importance, since it will give us a true picture of what’s
happening in the real world. Primary research will be used to analyze the telecom
industry of Pakistan. It will also answer to some extent, the important question of what
sort of entry strategies firms are using to invest in telecom sector in Pakistan.
Following methods will be employed for collecting the primary data.
Interviews
Company reports
Industry reports published by government departments
b) Secondary Sources of Data
Secondary data will be of utmost importance in this research. Information will be
acquired from reliable sources. Priority will be given to government sources such as
Pakistan Telecom Authority in order to provide accurate information. Online website
such as Business Monitor Online will be used comprehensively because they contain
most up-to-date information. Journals and articles will be used extensively as well
because explanation of data from these sources will be more accurate. This research
will also include statistical analysis where information will be easily accessible from
company reports, IMF Reports, World Bank Reports and government websites.
9) Limitations of Research
There can be a lot of limitations and restrictions in carrying out the desired research.
There are limitations associated with questionnaires, if companies are not willing to
share information. The questionnaire in research project is to support findings which
will be drawn from secondary data. It’s not a primary research but a supportive tool for
research. The availability of primary data through interviews is not a surety as well.
There are financial and time constraints for the collection of primary data. Inductive
approach needs to be used in combination with deductive approach and both have
different roots to evolve. Therefore, there is no certainty of getting the desired results by
employing both the techniques. The qualitative data analysis also poses a threat because
it may involve human judgment errors. Data analysis techniques will also be employed
and data can astray the researcher if it is not valid or insufficient.
10) Proposed Chapter Plan
1. Introduction
1.1. Research Overview
1.2. Country Analysis
1.2.1. Political Factors
1.2.2. Economical Factors
1.2.3. Technological Factors
1.2.4. Legal Factors
2. Pakistan Telecom Sector Overview FDI in Telecom Sector
2.1. Industry Analysis
2.1.1. Strength
2.1.2. Weaknesses
2.1.3. Opportunities
2.1.4. Threats
3. Determinants of FDI in Pakistan Telecom Sector
3.1. Entry Conditions and Strategies
3.1.1. Examples of Warid Telecom & Telenor
3.2. Post Entry Scenario
3.2.1. Challenges
3.2.2. Future Strategies
4. Conclusion
Appendices & Bibliography
11) Project Plan
12) Reference for Purposal
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Appendix B
Source: BMI (2008)
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