ANALYSIS OF FACTORS AFFECTING PAKISTAN’S

NATIONAL COMPETITIVE ADVANTAGE IN TRADE WITH

INDIA: EVIDENCE FROM

2005 TO 2015

SAMRA KIRAN

REGISTRATION NO. AWKUM-16002807

DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES

INSTITUTE OF BUSINESS STUDIES & LEADERSHIP

FACULTY OF BUSINESS & ECONOMICS

ABDUL WALI KHAN UNIVERSITY MARDAN

YEAR (2018)

i

Dedication

To my parents

Ms. Samra Kiran

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ACKNOWLEDGMENT

With the name of Allah

The most Gracious and the Most Merciful, all praise to Allah for giving me strength

and confidence for the completion of this thesis.

First and foremost, I offer my profound and sincere gratitude to the Almighty Allah for

bestowing me with strength, wisdom, courage, and intellect to complete this assignment

successfully.

I am very thankful to my Supervisor Prof. Dr. Qadar Bakhsh Baloch, for his advice and

supervision during my research work. His consistent support and guidance gave me the

confidence to achieve my goal.

I am also grateful to Mr. Sohrab Arshad, Mr. Zeeshan Khan, Mr. Mohammad Kamran

and Madam SaimaBano for their cooperation and support in the completion of this

thesis.

I ineffably acknowledge my parents, siblings and especially my husband for their

unconditional love and support in every regard. Without their kindness and guidance,

this thesis would not be possible.

Once again,I convey my gratitude to all those who had a direct or indirect influence on

my work.

Ms. Samra Kiran

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Author’s Declaration

I Ms. Samra Kiran hereby state that my PhD thesis titled “ANALYSIS OF FACTORS

AFFECTING PAKISTAN’S NATIONAL COMPETITIVE ADVANTAGE IN

TRADE WITH INDIA: EVIDENCE FROM 2005 TO 2015” is my own work and

has not been submitted previously by me for taking any degree from Abdul Wali Khan

University, Mardan or anywhere else in the country/world.

At any time if my statement is found to be incorrect even after my Graduate the

university has the right to withdraw my Ph.D. degree.

Ms. Samra Kiran

iv

Plagiarism Undertaking

I solemnly declare that research work presented in the thesis titled “ANALYSIS OF

FACTORS AFFECTING PAKISTAN’S NATIONAL COMPETITIVE

ADVANTAGE IN TRADE WITH INDIA: EVIDENCE FROM 2005 TO 2015” is

solely my research work with no significant contribution from any other person. Small

contribution/help whenever taken has been duly acknowledged and that complete thesis

has been written by me.

I understand the zero-tolerance policy of the HEC and Abdul Wali Khan University,

Mardan towards plagiarism. Therefore, I as an Author of the above-titled thesis declare

that no portion of my thesis has been plagiarized and any material used as a reference

is properly referred/cited.

I undertake that if I am found guilty of any formal plagiarism in the above-titled thesis

even after award of Ph.D. degree, the university reserves the rights to withdraw/revoke

my Ph.D. degree and that HEC and the university has the right to publish my name on

the HEC/University Website on which names of students are placed who submitted

plagiarized thesis.

Student Signature: ______________

Name: Samra Kiran

v

Certificate Of Approval

This is to certify that the research work presented in this thesis, entitled “ANALYSIS

OF FACTORS AFFECTING PAKISTAN’S NATIONAL COMPETITIVE

ADVANTAGE IN TRADE WITH INDIA: EVIDENCE FROM 2005 TO 2015”

was conducted by Ms. Samra Kiran under the supervision of Prof. Dr. Qadar Bakhsh

Baloch.

No part of this thesis has been submitted anywhere else for any other degree. This thesis

is submitted to the Institute of Business Studies & Leadership, Abdul Wali Khan

University, Mardan in partial fulfillment of the requirements for the degree of Doctor

of Philosophy in the field of Marketing Institute of Business Studies & Leadership,

Abdul Wali Khan University, Mardan.

Student Name: Ms. Samra Kiran Signature: __________________

Supervision committee:

1.Major Supervisor:

Prof. Dr. Qadar Bakhsh Baloch Signature: __________________

Director

Institute of Business Studies & Leadership

Abdul Wali Khan University, Mardan

2. External Examiner

Dr. Aamir Nadeem Signature:___________________

Assistant Professor

Department of Management Sciences

City University, Peshawar

3. Co-Supervisor:

Dr. KauserTakreem Signature:___________________

Associate Professor

Institute of Management Studies

University of Peshawar

Director,IBLSignature: __________________

Institute of Business Studies & Leadership

Abdul Wali Khan University, Mardan

Dean, Signature:___________________

Faculty of Business & Economics

Abdul Wali Khan University, Mardan

Director Acad. & ResearchSignature: __________________

Abdul Wali Khan University, Mardan

vi

Abstract

This work had tried to identify sources of competitive advantage for Pakistan in trade

with India. Focusing five industries from both countries for the period 2005 to 2015.

Industries include textile, Sugar and Sugar Confectionaries, Inorganic Chemicals,

edible fruits,and nuts and Agriculture. A detailed literature review, Ratio analysis, and

regression analysis were applied, to identify impediments to trade with India, future

trade prospects, sources of competitive advantage for Pakistan, and assess the effects

of granting of MFN status to India. The analysis identified many impediments to trade

by India, like tariffs, quota, strict quality, non-tariff barriers, Visa policy, hindering

trade between both countries. The intraregional trade share suggests a very costly

future trade between both countries, intra-regional trade share suggested that the

aggregate trade of Pakistan and India is not very significant in the world. The

intraregional trade introversion index suggested that trade between both countries had

an extra-regional bias suggesting trade diversion. The ratio of revealed comparative

advantage suggested that Pakistani textile was not consistently competitive, but

Inorganic chemical, Agriculture, Sugarand sugar confectionaries and Edible fruits and

nuts industries were not competitive during the period under study. Whereas, textile

and sugar and sugar confectionery were sustainable competitive but all the other Indian

industries were not consistently competitive. The regression analysis suggests that

government policy had significantly affected the national competitive advantage of

Pakistan. Whereas for India, government policy and firm strategy and rivalry were

significant. The research concludes that both Pakistan and India are facing the same

problems regarding their factor conditions, demand condition, supporting and related

industries. As compared to Pakistan, India is providing a better business environment

and its relatively easy to conduct business in India. The governments of both countries

are trying to liberalize trade and playing a positive role but the main hindrance is

political and military interference in many issues. Both countries have the potential for

future trade, but for that, they have to abolish their NTBs, tariffs and devise fairly liberal

trade policies against each other.

keywords: International trade, Rational Trade Agreement, SAFTA,

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List of Tables

Table3.1 Pakistan India Trade Share Analysis………………………...….…….…83

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Table 4.1 Variable Proxies Data Source and References………………….….….…93 Table 5.1 Indicators of Regional Trade interdependence.........................................118 Table 5.2 Pakistan Revealed Comparative Advantage inDifferent Industries …...119 Table5.3 Indian Revealed Comparative Advantage in differentIndustries………120 Table 5.4Regional Orientation of Pakistan trade with India…………….….….…121 Table 5.5 Trade Complementarity Index………………………….........................123 Table 5.6 Summary Statistics Pakistan ………………….………………...….......123 Table5.7 Correlation Matrix Pakistan………………….……………………..…..124 Table 5.8 ADF panel unit root test result Pakistan……..……………………….…124 Table 5.9 Hausman Test Result Pakistan overall………………………………....125 Table5.10 Regression Results Pakistan…..……...………….……..………...….….125

Table 5.11 Summary Statistics India.………………………….……………….…...126

Table 5.12 Correlation Matrix India…………………………………………. …….126

Table 5.13 Panel Unit Root test result sugar industry India…………………...……127

Table 5.14 Hausman Test Result India Overal……………………………………...127

Table 5.15 Overall India Regression Results……...…………………….………….127

Table 5.16 Summary Statistics Pakistan - Agriculture …….………...……………..128

Table 5.17 Correlation Matrix Agriculture Industry Pakistan……………………….129

Table5.18 ADF Unit Root Test Result Agriculture Industry Pakistan……………..129

Table 5.19 Regression Results Pakistan Agriculture Industry...................................129

Table 5.20 Summarystatistics Pakistan edible fruits and nuts……………….….…130

Table 5.21 Correlation Matrix Edible Fruits and Nuts Industry Pakistan…..……....131

Table 5.22 ADF Unit Root Test Result- Edible Fruits and Nuts Industry Pakistan...131

Table5.23Regression Results-Edible Fruits and Nuts IndustryPakistan……….…131

Table5.24 Summary Statistics -Pakistan Sugar Industry…..……………….……...132

Table 5.25 Correlation Matrix Sugar Industry Pakistan.……...……………….…....133

Table5.26 ADF Unit Root Test Result Sugar Industry Pakistan..…………….…....133

Table5.27 Regression Results- Sugar Industry Pakistan….……….……....…… ...133

Table5.28 Summary Statistics Pakistan Inorganic Chemicals……………………...134

Table 5.29 Correlation Matrix Edible Inorganic Chemical Industry Pakistan….…..135

Table 5.30 ADF unit root test result inorganic chemical industry-Pakistan….…….135

Table5.31Regression Results Inorganic Chemical Industry-Pakistan……….........135

Table 5. 32 Summary Statistics Pakistan Textile ………………………………......136

Table 5.33 Correlation Matrix Textile Industry Pakistan…………...……………....136

Table 5.34 ADF Unit Root Test Result Textile Industry Pakistan…….....................136

Table 5.35 Regression Results- Textile Industry Pakistan……….……………...….137

Table 5.36 Summary Statistics – Sugar Industry India…………………………......138

Table 5.37 Correlation Matrix Sugar Industry India……………………………,,....139

Table 5.39 Regression Results- Sugar Industry India……………….…………,,...139

Table 5.40 Summary Statistics India Edible Fruits and Nuts………………….…...140

Table 5.41 Correlation matrix edible fruits and nuts industry India………………..141

Table5.42 Unit Root Test Result Edible Fruits And Nuts Industry India……...…..141

Table 5.43 Regression Results- Edible Fruits And Nuts Industry India…..…..........141

Table 5.44 Summary Statistics India Inorganic Chemicals.………………………..142

Table 5.45 Correlation Matrix Inorganic Chemical Industry India……….……..….143

Table 5.46 Unit Root Test Result Inorganic Chemical Industry India………..….....143

Table 5.47 Regression Results -Inorganic Chemical Industry India…….….…...….143

Table 5.48 Summary Statistics India Textile….……………………..………..........144

Table 5.49 Correlation Matrix Textile Industry India……………………………....144

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Table 5.50 Panel Unit Root Test Result Textile Industry India…………...………..145

Table 5.51 Regression Results- Textile Industry India…………..….………..….....145

Table 5.52 Correlation Matrix Agriculture Industry India ........................................146

Table5.53 Unit Root Test Result Agriculture Industry India…………....................146

Table5.54 Regression Results -Agriculture Industry India………….…….....…….147

List of Figures

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Figure 2 1 Porter Diamond Model ………………………………………………….29

Figure 3.1 Conceptual Framework…………………………………………………..90

LIST OF ANNEXURES

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Annexture 1 ................................................................................................................ 202

List of Abbreviations

xii

MFNMost Favorite Nation

SAARC South Asian Association of Regional Cooperation

SAPTA South Asian Preferential Trade Agreement

SAFTA South Asian Free Trade Area

ITO International Trade Organization

WTO World Trade Organization

OECDOrganization for Economic Cooperation and

Development.

RTA Regional Trade Agreement

ERP Enterprise Resource Planning

CRM Customer Relations Management

SCM Supply Chain Management

EU European Union

GSP Generalized System of Preference

FDI Foreign Direct Investment

PTA Pakistan Telecommunication Authority

ARDLAutoregressive Distributed Lag Model

VECMVector Error Correction Model

FC Factor Conditions

DC Demand Conditions

SRI Supporting and Related Industries

FSSR Firm Strategy and Rivalry

GP Government Policy

CA Competitive Advantage

RCA Revealed Comparative Advantage

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CHAPTER # I

INTRODUCTION

1.1.Background

International trade is a practice in which countries expand their markets by selling and purchasing

beyond their borders competitively. International trade developsa global economy in which

demand, supply,and prices are generally affected by global political crises and other global events.

International trade absorbs the country surplus production – the absorption of surplus increases

demand and corresponding production level. Increase in production leads to economies of scale

and hence the reductionin the cost of production, which increases competition in the market. The

resulting efficiency derived from economies of scalemay attract Foreign Direct Investment (FDI),

that guarantees maximum revenue, employment and profitability of the business.As the volume of

trade increases, the integral benefits are divided on more numbers of people, hence prosperity and

wealth creation for society.In order to protect the home industry or control the market, some

countries regulate international business by imposing tariffs andnon-tariffmeasures. Protectionist

policies(old time Mercantilism) arecontradictory to free trade and restrict the volume of foreign

trade.The main purpose of practicing international trade is to decrease cost and maximize revenues.

A country can be positively affected by international trade. The benefits are not only limited to the

producers, but it also contributes in the socialwellbeing, increasing economic development,proper

allocation of funds and more specifically encouraging the businesses to improve the quality,

infrastructure,and technology.

The first organized theory regarding trade was mercantilism suggesting wealth to be

dependent on gold reserves, precious metals and surplus trade.The literature regarding

mercantilism appeared from Great Britain inthe 16th century the major contributor was Thomas

Mun (1571–1641) by his book Treasure by Foreign Trade (1664). The last contributor of this

system was Stuard (1767), who mentioned it in his book an inquiry into Principles of Political

Economy. This system was also extended towardsItaly and France and produced very noteworthy

writers, including Jean Bodin (1530-1596), Colbert (1619-1683) in France and Giovanni

Botero (1544–1617) and Antonio Serra (1580) in Italy. Smith (1776) in his wealth of nations

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organized the idea of mercantilism and its contributions and criticize this system on the basis that

mercantilism view trade as azero-sum game. He proposed the Absolute Advantage Theory,

whichstates that countries should trade with each other by only producing products in which they

are effectivelycreating an absolute balance among different countries.

Ricardo (1817) improved the absolute advantage theory by restating the Comparative

Advantage Theory. The theory suggests that efficiency in resource utilization will help countries

to increase its productivity. The trade should be done by comparing the opportunity cost of a

country, and if it has as a lower opportunity cost in producing certain good it should trade that

product. Heckscher (1919) and Olin (1933) contradicted the Ricardian theory of comparative

advantage and suggested that the countries should export those goods for which it has abundant

resources, rather than efficiency of production. They added government policy to be positively

impacted on factor endowment. They focus on the relative advantage instead of an absolute

advantage. The Heckscher-Ohlin theory was introduced to update the Ricardian model having an

ideological mission of elimination of labor theory of value and to incorporate the neoclassical price

mechanism in international trade theory. The H-O theory suggests that the empirical work for

proving its validity by focusing on its power to forecast the trend of trade patterns is irrelevant.

Secondly, the model is also theoretically weak in its treatment its treatment of capital and labor.

Finally, its view of challenging the Ricardian model by emphasizing its ability to identify trade

patterns of developing and underdeveloped countries, just like the Ricardian model.

The H-O theory suggests that in the case of free trade and factor-price equalization, the capital-

labor ratio of import-competing goods of the United States should be equal to its imports. Leontief

(1951) estimated the consequences of utilization of factors of production of the United States, He

took only two factors labor and capital explicitly into account. When exports were decreased, both

capital and labor were released. When production of import-competing goods is increased, both

labor and capital were more needed.

Linder (1960) introduced the Country Similarity theory, which suggests that trade between

countries take place due to the similarity in customer needs, their preferences, economic

development,and production conditions. Porter (1991) suggested a diamond model in which he

suggested that in order to be globally competitive countries should be competitive domestically.

His model was based on four factors, including factor endowment, demand conditioning, relating

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and supporting industries and two additional factors including government policy and change

events. The New trade theory contributed that with the increase in production specialization is

achieved, which decreases per unit cost and also decreases the learningcurve.Therefore, world

demand can entertain by an increase in large scale. Due to first mover advantage competition

emerged and develop economies of scale, which hiders new entrants. These competitors are further

strengthened by government policies.

The realization of the inherent advantages of free trade led the international community to plan to

create an international trade organization at Bretton woods in 1944. The internal resistance in the

USA against the ratification of International Trade Organization (ITO) succeeded to delay the

establishment of World Trade Organization (WTO) till 1995(Schott, 1996).The underlying

purpose of WTO was to make an ambitious effort to make globalization more inclusive and

help the world's poor, particularly by slashing barriers and subsidies in farming. The initial

agenda comprised both further trade liberalization and new rule-making, underpinned by

commitments to strengthen substantial assistance to developing countries. The sociopolitical

and economic liberalization pushed the phenomenon of globalization and integration to

unprecedented scale and speed.The economic integration involves a hierarchy of levels, starting

from a free trade area, passing through customs union, common market, economic union to

political union. All of these levels gradually increased different dimensions of free trade.

From the foregoing discussion in view, free trade creates jobs, customer focus competitions

and determine the course of flow of goods, services from the lower cost production to demand

destinations. However, if this flow is restricted through agreement (integration) changing from low

to high-cost origins, the volume of trade may decrease thereby creating trade diversion. Therefore,

this conclusion guides that countries before arranging any level of integration must assess the cost-

effectiveness of the intended state in their cost of production and delivery, failing which the

integration may trap the party into trade diversion.Pakistan has facedthe economic problems ever

since its independence. Much work had already done to find the solution for the economic problem

of the country(Baloch, 2009). Trade is an important factor which contributes much to the

development of the country. This will try to find factors affecting national competitive advantage

both Pakistan and India and developa scenario for future trade prospects for both countries.

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1.2 Statement Of Problem

The surplustrade balance is a key indicator of any country’s economic growth and

development. The trend of Pakistan’s balance of payment suggests that the majority of times it

remained in deficit (State bank of Pakistan, 2016),and could not reverse the situationso far.

Economic Integration (depending upon its integration level)is considered to be a positive outcome

of globalization, where trade between the contracting parties is deregularized. However, the

benefits integrated with economic integrationvary from member to member.Due to their varying

nature of themacroeconomic environment,increased trade between Pakistan and Indiais considered

to be offering lots of trade benefits to both countriesby lowering tariff and non-tariff barriers. There

exists mix opinion about the benefits of increased Pak India trade in Pakistan viz a viz India. There

is an increasing argument that Pakistan should reciprocate India by granting MFN Status. as it

granted MFN to Pakistan in 1996. Some of the Schoolsargue that Pakistan is not in a position to

liberalize trade with India as its competitive advantage doesn’t match with India. Therefore, there

is a dire need to know the present level of competitive advantage before taking the decision of

such national significance.

This research aims to determine the National Competitive advantage of Pakistan in a trade with

India with a view to ascertain the ensuing trade prospects for Pakistan in South Asia with special

reference to India. The research intends to investigate the factors that affect Pakistan’s National

Competitive Advantage using Porter’s National competitive Advantage Model. The ultimate

outcomeintended for this research is to determine whether there exists, trade diversion or trade

creation for Pakistan in post SAFTAenvironments.

1.3 Research Questions

The research would seek answers of the following questions:

a. What are the factors which contribute to the competitive advantage of Pakistan trade with

India?

b. What is the impact of SAFTA on Pakistani trade, with regard to its imports and exports

toIndiaand beyond?

c. Does Pakistan hold the National competitive advantage to withstand the effects of granting

MFN status to India or otherwise?

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d. What arethe challenges in Pakistan in extended trade liberalization between Pakistan and

India?

1.4Research Objectives

The main objective persuaded by this work were:

1. To Determine and describe the Pak-India bilateral trade regime and conditions of MFN as in

vogue through a comprehensive review of the current situation.

2. To identify the effectsof SAFTA on trade liberalization between India andPakistanthrough

ratio analysis and their applied status with likely pros and cons integrated intothe bilateral

trade.

3. To identify factors affecting Pakistan National Competitive Advantage intrade with India

during post SAFTA period (2005 to 2015).

4.To identify challenges and opportunities for Pakistan in trade with India and suggest a response

to trade creation.

1.5Significance Of Research

The research study could provide information on Pak-India bilateral trade. For academia, it will

contribute to the limited literature already available and open insights into new areas of research.

As the economic reforms, initiation of the policy of openness to integrate into the global economy

is very important for the sustained economic growth of the country. This work will try to provide

policy guidelines to the policymakers. Countries like companies compete in the international

market. At the firmlevel, the competitiveness can be attained by the combination of strong political

and legal system, with stable institutions and social frameworks, this work will identify factors

which can play important role in the development of competitive advantage. Additionally, the

macro, as well as micro-conditions of the nation, will help to attain and sustain competitiveness in

the global market.As, International competitiveness is critical for the attraction of investment,

tourism and Other services. The current work will analyze variables through which international

competitiveness can be attained for Pakistan and India

The major contribution of this work is that both Pakistan and India are exporting more in

labor-intensive industries which suggest that trade between the two countries will not significantly

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provide benefit. they will be benefited by trading more with developed countries who are more

competitive in capital-intensive industries and are facing problems of labor shortages. As very few

studies were directed towards this issue, so it will help to clarify many important aspects of

international trade, trade liberalization and RTA’s. The research study will also provide

information on Pak-India bilateral trade in SAFTA (free trade agreement between SAARC

countries) environment. As the economic reforms and initiation of the policy of openness,to

integrate into the global economy is very important for the sustained economic growth of the

country. This work will also help investors and businessmen in finding new markets and prospects.

There are a substantial number of theoretical studies that have addressed the issue of regional

Integration and also on the relation and trade potential between Pakistan and India, but this work

has identified potential factors which are contributing or hindering the competitive advantage

selected industries in both countries

1.6The Organization of The Study

The structure of the remaining thesis will be as follows:

Chapter 2 briefly reviews the previous studies, theories related to international trade. The detailed

analysis of Porter national diamond model.The theoretical framework and the specification of the

Porter diamond model applied for the analysis.

Chapter 3 presents an introduction to the economy of India and Pakistan and their trade patterns,

which estimated the effects of RTAs and other trade liberalization efforts in South East

Asia,especially between Pakistan and India.

Chapter 4 willdiscuss the research methodology. This chapter will provide details about the data,

sampling techniques used. Dependent and independent variable development and proxies used to

measure these variables and analytical techniques applied.

Chapter 5 provides results of ratio analysis applied, descriptive statistics, and regression models.

Chapter 6 provides analysis, findings,and discussion based on the results.

Chapter 7 will present the conclusion, recommendations and suggests for future research.

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CHAPTER# 2

LITERATURE REVIEW

To answer the research question about the national competitive advantage, this chapter will discuss

different theories and models regarding the competitiveness of nations and their firms. The next

discussion will be on historical overview of Pak- India bilateral trade and future prospects.

2.1.What is Trade?

Trade means the exchange of goods and service for money or for other goods and services.

According to OEDC (2017) report trade is regarded as a source of growth, development and

employment opportunities. In order to be successful in trade countries need an integrated approach

to make it beneficial for the whole system which thenbenefits its people. This requires the creation

of an environment, with which benefits from trade can be materialized and supportsthe domestic

policies. This encourages innovation, creativity, opportunities,and competition, as a result,

unnecessary trade cost can be invested in its people, digital and physical infrastructure. Secondly,

it tries to help regions which are lagging behind and thirdly, it tries to makethe international system

free and fair, in order to avail the benefits of international economic integration and cooperation

(OECD,2017). Actually, Trade is a very powerful driver in itself, which encourage structural

change, which helps to reallocate resources to the areas and industry, where they can be used most

efficiently. Working Countries and people practice trade for their own interest as open economy’s

progress more than closed economies, additionally working conditions and salaries are better in

firms that trade, rather those that do not (OECD, 2012). The GDP and global trade pace of

economic integration were reversed or slow (OECD, 2016). The increased trade ratio is also

20

positively correlated with productivity over the long run (Newfarmer and Sztajerowska, 2012).

Within regions and countries, that showed progress in productivity are those which are indulged

in trade-related activities (OECD,2017).

2.1.1.Historical Background of Trade

Trade can be found in recorded human history. In the stone ages, evidence was found for obsidian

and flint to be used as a medium of exchange. Much of this trade took place in Guinea 17000 BCE

(Lower, 1970). Trade in the stone ages was believed to be started in South West Asia (Smith,

2009). The archaeological history of the use of obsidian provides evidence on the use of this

material preferred over chert and was increasingly used from the late Mesolithic to Neolithic,

despite its scare reserves in Mediterranean region (Robb,2007), It was traded within 900 kilometers

of the Mediterranean (Thore,1995). The prime source of trade with Antalia was Iran, Levant,and

Egypt (Bohn, 1857). The Melos and Lipari were also the major sources for trade in the

Mediterranean region (Blake & Knapp, 2005). In Afghanistan, the mine of Sari-i-Sang was the

major source of trade of Lapis Lazuli (Colllon, 1990). The material was also widely used the period

of Kassite and Babylonia in 1595 BCE (Bertman,2005).

In the third millennium,Eba was a prominent trading center, having networks with Northern

Mesopotamia and Anatolia (Etheredg, 2011). Since 3000 BCE the material used for jewelry

making was traded with Egypt. The long routes emerged in the 3rd millennium BCE when

Sumerians started trading with Harappan civilization. The Phoenicians were prominent sea traders,

who travel across the Mediterranean Sea and travel as far as Britain in search of sources for tin.

They also established trade colonies called emporia for this purpose (Dikov, 2015). From the early

Greek civilization till the decline of Roman empire, a very valuable and lucrative trade brought

spices to Europe from China and India. Later on, development of saving and secure transportation

system by Roman empire enable trade on these routes without the fear of piracy. As a result, Rome

acquires sole power in the Mediterranean. With the fall of the Roman Empire and the start of dark

ages the trade routes and networks were destroyed but trade continued to flourish in the African

region, India, China,andthe middle east. A minimal trade also happens in the west which includes

Radhanites, who wasa group of Jews, who trade with Muslim at the east and with Christian of

Europe.

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Trade developed in the middle ages with the trade of luxury items. With the development

of the banking system, the transfer of capital and money across national borders and the regulation

of the town market by authorities, a complex and regulated system of trade network was developed

in Europe. Trade networks were also developed by many ports (Sean, 2001). Central Asia was

considered to the economic hub of the world in the middles ages (Beckwit, 2009). From 4th to 8th-

centuryOgdians dominated the silk routes. The Varangians and Viking, during 8th to 11th

century,traveled to and from Scandinavia. Between 13th to 17th century a trade monopoly on

Baltic and northern Europe was maintained by an alliance of different called Hanseatic League.

When Vasco Da Gama Reached Calicut after pioneering the spice trade of Europe in 1498,

sailing around Cape of Good, which was previously dominated by Islamic powers. That was the

start of economic development of Europe. as spice trade brought many impart commodities along

with spices especially gold. In 16th century west indies, in the 17th-century Dutch Republic and

in 18th century Britain dominated the trade activities in the world. The economic recession of

great depression from 1929 to 1930, showed a huge decrease in the trade-related activities. the

lack of free trade was considered to be the main cause of inflation and recession at that time. After

world war ii, the Bretton Wood Agreement was signed which marked the era of trade liberalization

and cooperation among European countries. an international political economy was initiated with

the help of international monetary fund and a bank of reconstruction and development and

promoted international trade later on.

2.1.2.International Trade

The main purpose of practicing international trade is to decrease cost and maximize revenues. A

country can be positively affected by international trade. As a producer can find lower cost factor

of production in achieving economies of scale, which in turn provide benefits to the customer by

providing them lower costs products and services (Appleyardet.al, 2006). The benefits are not

only limited to the producers, but it also contributes to the socialwellbeing, increasing economic

development, proper allocation of funds and more specifically encouraging the businesses to

improve the quality, infrastructure, and technology (Jhingan, 1994 in Mulyanto, 1999). In the

modern era, countries should interact with the world and avoid isolation. This objective will be

achieved through international trade. Goharian (2000) called international trade as an important

growth and development driver. United Nations Conference on Trade and Development (2004)

22

suggested the country should avail existing opportunitiesand possibilities in the international

market, to be competitive in the world.

The important entry into the international market will enhance progress and development.

International trade can rightly be called the engine of economic development and growth

(Goharian,2000). According to the report of theUnited Nations Conference on Trade and

Development (2004) for the reduction of poverty, a nation should maintain its exports annual real

growth rate above 5%. The success of every country is highly dependent on its understanding of

its international competitive environment for exploring international market opportunities.

Hussain (2003) suggested that in last half century world trade volume had increased in twenty

folds and manufactures exports had increased forty-fold. The world output had increased up to

seventy folds. By 2001 the total world trade was almost 24% of world gross domestic product. In

the last three decades,the merchandise and manufactured exports of developing countries a had

grown by an average of 12 % and 70% per annum respectively. The world exports had increased

up to 30% since 1990. This provides an excellent opportunity for developing countries to avail and

participates in the benefits of a buoyant trading environment.If Pakistan had maintained its exports

growth rate equal to the average of developing countries, the country would not face with the

problems of unemployment, poverty and other economic problems. Hussain (2003) identified that

reason for these problems is more reliance on the domestic market.

Entering the global arena will help countries to enhance its economic growth which cannot be

achieved relying only on the domestic market. Increased international trade will help the nation to

achieve economies of scales, benefiting domestic customers in a form of decreased prices. Exports

will generate revenues for the imports of equipment, raw material, components, machinery, etc.

for the industry and for the purchase of petroleum for transports, electricity, railways and other

important economic activities and also repayment to our external creditors. Therefore, relying only

onthe domestic market for poverty reduction and growth is sadly mistaken.

Hussain (2013) suggested that integration into the global market and increase trade liberalization

will lead a nation to accelerate international trade and increase economic activity. This is because

the volume of the traded goods sector increase as compared to rest of the economy and shifting

the resources from protected import sector to the export-oriented sectors. This reallocation of

resources will help gain competitive advantage and welfare gains to the society. This exposure to

23

the world competition will provide country more access to technology and information for the

development of new capabilities and skills as export-oriented economies enjoy better capabilities

as compared to closed economies.

2.1.3. HistoricalEvaluation of InternationalTradeTheories.

In 1492 Columbus discovered America, The World; in Amerigo Vespucci, an Italian explorer

Amerigo Vespucci discovered the east coast of South America between 1499 and 1504. Magellan

in 1519 with the permission of his Spanish king discovered a new route to India. All these

discoveries were the outcome of scientific advancement in astronomy and transportation industry.

Businessmen and other trade were interested to expand their business in western and eastern

countries to earn a profit(Dong-Sung &Cho, 2000). The International business phenomenon

hadbecome popular in the age of exploration and discovery during the 15th century.

2.1.3.1. Mercantilism

The first organized economic system is Mercantilism dated back in the 16th century and was

dominant in major European countries till 18th-centuryeconomic theory and a political struggle.

There is generally no accurate definition of this system, as it was a collection of policies and

principle of economic regulation upon which a country can achieve welfare and be prosperous

(Rempel 1998). According to Ekelund and Hébert (1996) in 1684 Philipp von Hörnigk (1640-

1712) suggested a very clear mercantile policy by suggesting nine important rules. According to

these rules the country should make every effort to achieve maximum efficiency from its

agricultural fields, all the raw materials and minerals, which cannot be used in their first-hand state

should be refined and should be developed within the country, the population should be large

enough to be easily supported by the country resources. Gold and silver reserves of the countries

should be hoarded and should not be taken out of the country under any circumstances.

The inhabitants of the country should use preferably their home manufactured products, imports

should not be done in exchange for gold and silver but in an exchange with their domestic products.

It should be tried that imports should be done in unfinished form. Imports should be done only in

case there is not sufficient quantity of products not available within the country. Britain France

and Germany developed a very strong economy based on this system. Asthe first principle of this

system was to increase exports and store precious metals in order to achieve power and increase

24

wealth. It advocates that countries should be strong and they can use military power for the

protection of their local markets and their supply sources. Therefore,Mercantilism holds that a

nation can be prosperous if it had an abundance of capital and a positive balance of

trade.Mercantilism practiced by different countries in the world are discussed below:

2.1.3.1.1British Mercantilism

In the 1650’s, Britain pursued a policy of mercantilism for international trade., which states that

in order to gain economic strength, a country must import less than it exports. In order to achieve

this goal, they passed different laws to benefit from this system. From 1651 and 1673, the British

Parliament passed NavigationActs in order to ensure proper implementation of mercantilist trade

balance.

The acts include clauses, like that, Only English colonial or English ships had permission to carry

cargo between imperial ports, Trade of Goods such as tobacco, rice, and furs can only be done

between foreign nations except through England.The British Parliament has to pay “bounties” for

raw material produced by Americans while charging tariffs from other nations producing the same

goods. There would be no competition for British large-scale manufacturers from American.

Between 15th and 18th-century huge amount of revenues were required in order to bare expenses

of the army and city governments. At that time this concept flourished as governments identified

that precious metals were in universal demand and they can be exchanged with other commodities

as well. So, they identify wealth with money, giving birth to the theory of bullionism which can

only be achieved under certain conditions. Firstly, Agricultural base should be developed and

strengthened, so imports can be minimized and farmers should prosper as they help to provide a

solid base for taxation, sea routes should be specialized and secure, in order to facilitate imports

as well as exports and all kindsof internal taxes should be imposed (Rempel 1998).

The policy of mercantilism encourages increased production, in order to increase exports for

maintaining a positive balance of trade. Thomas Mun (157 1 - 164 I), who was the director of East

India company, explained thatmercantilist policy in detail, he advised trade to be the only source

of increasing. He suggested different tactics such as increased imports of precious metals to

England through its colonies, also increase imports of cheap raw material and increased exports of

finished goods and protectionist policies for other country’s imports, take measures for population

and maintain competitive and low wages.

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Mercantilist policies were intended to national prosperity through maximization of exports. This

idea was closely linked to the bullionism, which advocates a nation’s success due to the amount

of gold and other precious metals. This idea had a very great impact on economic policy. Which

ensures fewer imports and a huge amount of exports to maintain a large amount of foreign

exchange to maintain and increase the reservoirs of gold. These ideas were adopted by different

countries e.g. The Navigation Acts, by Britain strictly restrict the ability of other countries to trade

with Britain and its colonies.

2.1.3.1.2. French Mercantilism

After the Napoleonic wars, the French government tried to restrict the import of foods and other

exports by their opponents to restrict their supply of gold. The mercantilist theorist identified tax

policy to be an important tool for achieving mercantilist goals. This policy was misused by

government and they imposed taxes on even births, burials, marriages bachelor and even windows.

This policy also encouraged smuggling, damage many important industries. Another problem

created by granting a monopoly to critical industries. Therefore,the policy created a negative

impact on the industrial structure and became less helpful. Laffemas (1598) a French thinker,

criticize the view of not using expensive silk, as he was of the view that purchase of precious silk

earned a livelihood for poor and hoarding of money results in starving them to death. In 1952

William Grampp published his paper in which he suggested that mercantilist policies should not

be mingled with mercantilist thought as according to his views, true mercantilists are an advocate

of foreign trade. Nicholas Barbon (1690) a pioneer of fire insurance policy was of the view that

money should not be hoarded but invested.

Actually, mercantilism replaced the feudal imperialism of Western Europe, but it was not

popular till Smith (1776) in his book, wealth of nations organized the idea of mercantilism and its

contributions. That was the beginning of modern capitalism. As there was a decline of feudalism.,

Smith (1776) presented Absolute Advantagetheory which is explained below.

2.1.3.2 Absolute Advantage Theory

Smith (1776) in his wealth of nations organized the idea of mercantilism and its contributions and

criticize this system on the basis that mercantilism view trade as azero-sum game. He proposed

the Absolute Advantage Theory, whichstates that countries should trade with each other by only

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producing products in which they are effectivelycreating an absolute balance among different

countries. He suggested an economic system which is deeply rooted in the human nature and social

system and suggested that the wealth of a nation can never be judged by reservoirs of metal itposses

but, its capacity and the abilityto create and extend world markets through trade. According to him,

the actual strength of the nation is the speed and efficiency of its production of goods and services.

He developed the idea of free trade and individualism, presented the concept ofinvisible hands.The

concept of invisible hand suggests that the mechanism of the market is automatic and it regulates

itself, but this ability is threatened by lobbying groups, tax preferences, and monopolies. Further,

he mentioned that every individual is well aware of the needs of the other, if he is allowed to

achieve the welfare, in the long run, he will contribute to the welfare of the nation. The government

can only facilitate and protect his freedom.

Smith (1776) extracted the idea of individualism and naturallaw from the division of labor, which

was then extended to the international division of labor accompanied by specialization. He

suggested due to the division of labor the countries will specialize in producing particular types of

goods which will then be exchanged and will further promote the world's progress.But, he

identified that in the real-world governments try to create barriers to trade, which should

discourage and free trade should be promoted.

Smith's ideas of reduced protectionist policy by the government were reduced in England. Smith

proposed that competition is very important for the society, as it promotes efficiency, better reward

system, which further promotesthe welfare of the nation. Therefore, interference of the

governments should be minimum. However, Smith’s does not restrict governments from

undertaking necessary projects which are critical for private enterprise. He also favored the

NavigationActs, which were at that time necessity for marine services and national defense.

Smith’s ideas and thoughts have a significant place in the history of trade. He not only promoted

international trade but also gave the idea of social responsibility and economic freedom.

2.1.3.3.Comparative Advantage Theory

After the publication of Adam Smith book, many economists enriched this theory by their valuable

contributions. The most notable among them was David Ricardo. David Ricardo (1817) improved

the absolute advantage theory by restating the Comparative Advantage Theory. The theory

suggests that efficiency in resource utilization will help countries to increase its productivity. The

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trade should be done by comparing the opportunity cost if a country has a lower opportunity cost

in producing certain goods it should export those goods. Smith (1776) suggeststhat if a nation

had an absolute advantage in both goods than they might have no benefits from international trade.

But Ricardo suggests superior country produce those goods in which it had a more absolute

advantage and import those goods in which it had a greater absolute disadvantage. The theory of

comparative advantage has some serious implication because it suggests that if the country does

not have an absolute advantage in any good it still can participate in international trade and

contribute to national and international welfare. Ricardo contended a country can export good and

gain profit even though it cannot produce a single productata lower cost. In the real world, it cannot

be true as according to Adam Smith a country should specialize in the production of those goods

which it can produce atthe lowest cost.

The principle of comparative advantage specifies the advantages of specialization and division of

labor between countries and individuals. It is also a very important model of international trade,

which explains the reason for the existence of trade and the mechanism through which it can

increase the welfare of the country. The Ricardian model is very useful, butstill, it has some

deficiencies. There are two major shortcomings in this model. Firstly, it predictsa high level of

specialization, but in the realworld, it is not possible that a country only produces one product, but

they produce many goods in which import-competing goods are also included.

The reason behind this that when the factor of production moves from one industry to another, the

opportunity cost of the individualunit other industry increases, this concept is called diminishing

returns to scale. The reason forthe increased cost is due to variation in the quality and quantity of

the suitability of each factor in that particular industry. Under these situations in the country can

only specialize up to a certain point, appoint at which gains from specialization equals its cost.

Therefore, a country cannot specialize in every industry it had. The second problem is that this

theory does not explain the reason for the differencein production of different countries. This

problem is solved with the introduction of the factor endowment theory.

The core determinant of trade in the Ricardian model is labor cost, lower labor cost in the

production of a specific commodity will be a commodity. The theory was tested in 1952 by

MacDougall by using data from the US and Great Britain from 1937 of 25 productivity industries.

In order to compare exports with labor productivity. The results were not consistent with the

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simple Ricardian modelbut were supporting the Ricardian general argument, which suggests that

the difference in labor productivity is the major determinant of comparative advantage.

2.1.3.4.The Factor EndowmentsTheory

The Ricardian model suggests adifference in labor productivity in different countries, but they did

not give areason for this difference. In the twenty century, the Heckscher-Ohlin(HO)theory of

comparative advantage was developed by Swedish economists – Heckscher (1919) and Ohlin

(1933) as an alternative to the Ricardian model and provide justification and explained that the

labor productivity difference between countriesis dueto the differences in factor endowmentof

these countries.According to this model goods require different factors for their production, the

country had a comparativeadvantage in the production and latterly exports of those goods in which

they are well endowed, as the factor abundance will able them to produce goods in a cost-

effectivemanner. The HO model identified two major factors of production, capital, and labor,

whereas, in the Ricardianmodel, labor was the only factor of production. The HO model also

assumes that countries have the same type of technology, but they apply different production

methods in which different combination labor and capital are utilized. This is because of price

differences of a different factor of production. The production and trade pattern is therefore

dependent on the factor endowment. This model is expanded by three theorems which are the

factor price equalization, Stolper-Samuelson, and the Rybczynski theorem.

2.1.3.4.1.The Factor Price Equalization Theorem

This theorem states that due to free trade between countries, the difference in the factor endowment

will be equalized. In the case of free trade,the production of comparative advantage goods

increases, which increase the demand for the abundance factor increase, this increase the price of

that factor. Moreover, the prices of comparative disadvantage factor decrease due to its decrease

demand and less utilization in the production. This will increase rents, and decrease labor wages

in countries where labor is abundant, the opposite happens in capital-intensive countries. Before

free trade wage rates were high and rental rates were lowest in the capital-intensive country, but

after the freetrade, the prices of both factors move to the equalization. However, in order to get

factor prices to equalization certain conditions must be fulfilled. These include the elimination of

trade barriers and transportation cost and uniform technology. The major implication of this

theorem is that it is valid in case the prices of different factors are in different countries. Investment

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abroad is not needed in case of factor price equalization. But in reality, many hurdles are there

which hinder complete price equalization of factors. (Hymer,1960/1976). Despite

certainlimitations, this theorem is very useful in explaining the effects of free trade on overcoming

income gaps of different countries. The useful conclusion of the theorem is that after the formation

of trade bloc the low-income country will benefit more as compared to a high-income country.

The developing and underdeveloped countries can increase their income level by relaxing

international trade barriers.

2.1.3.4.2. The Stolper-Samuelson Theorem

The theorem predicts linkage of international trade to the distribution of income in the country.

This theorem states that free trade increase income or the price of an abundant factor and decrease

the income of scarce factor, so the abundant factor will gain and scarce factor will lose in the

international trade. Scarce factor, because internationaltrade has to compete with its foreign rival.

Despitethe immovability of labor, its value is added to the prices of the product. So, in the case of

international trade one –factor model everyone is in a win-win situation. But in the case of the two-

factormodel, one factor will gain and others will lose. It is important to understand that in the case

of free trade the scarce resource loses, but the country will overall gain. In order to attain the true

benefit of free trade, the government should apply an effective tax policy. To avoid the

accumulation of money in a few hands.

2.1.3.4.3. The Rybczynski Theorem

This theorem states that keeping the prices constant increase in a factor will increase the output of

goods in the greater proportion which uses that factor and decreases the production of goods that

uses the other factor. If a country’s stock of capital increases and labor remains unchanged. This

result in an increase in capital-intensive goods and a decrease in labor-intensive goods. The major

implication of this theorem is that a country can influence and change its factor endowment with

the help of changing its investment patterns

According to absolute advantage theory and comparative advantage theory factor of

production are fixed, which is said to be the theories of classical the economics. The HO theory,

which is said to be a neo-classical theory, as is based upon the Ricardian theory of comparative

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advantage. The model is very simple and appealing and makes sense and self-evident. However,

this model was challenged by empirical test by Leontief in the caseof the US market.

2.1.3.5. Leontief Paradox

Leontief (1953)empirically tested the HO model, and in 1973 gained a NobelPrize for his

work.The expected results for the Leontief work was that as the US is a capital-intensivecountry,

therefore, it should export more capital-intensive goods and import labor-intensive goods. But,

results were opposite of his expectation. The US was exporting more labor-intensive goods than

capital-intensiveIn order to reconcile the results of Leontief with HO Model, many economistshave

tried their best. The first attempt was made by Leontief himself and explained that as labor

productivity of US labor is three times better than the rest of the world, therefore the produce goods

three times more than the other countries of the world.But actually, he overstated the labor

productivity of US labor.

As according to Kreinen(1965),US labor is superior to the rest of the world but it is not 300%

better. He suggested that this superiority may be around 20-25%, which is not significant enough

to change the paradox. His finding was opposite of HO theory and was named as the Leontief

Paradox. Vanek (1968) tries to challenge the paradox and added that as the US is scarce in natural

resources and abounded in capital and labor. So, importing natural resources from abroad means

importing capital in a form of natural resources. Many studies have tried to recalculate US content

of factor by excluding the natural resource, but the results were not significant enough to challenge

the paradox.

Another issue with Leontief paradox was that, due to non-availability of foreign data he used factor

content of imports competing for goods of US, Instead of actual import data. As in the case of

textile sector, Leontief calculated factor content of textile products which are competing with

imports, instead of taking factor content of the textile industry abroad. In reality, it is possible that

the textile industry would be capital intensive in the US market but labor intensive in Mexico. In

reality, many economists believe that factor reversal is not significant. Many other explanations

were tried to reverse the paradox and prove the validity of the HOmodel. many other theories were

developed afterward,These theories include ProductLife CycleTheory, country similarity theory,

andNew trade theory.

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2.1.3.6. Country Similar Theory

Linder (1961) introduced the Country Similarity theory,which was different from other theories as

it explained the demand side of thetrade. This theory suggests that increased trade between

countries occurs when they have similar characteristics and demand patterns. This theory is based

on two assumptions. According to the first assumption, the country only produces and export

those goods which have a significant domestic market. Firstly, they produce goods to serve home

market, but in order to be cost-effective, they increase their production for achieving economies

of scale. Therefore, they produce more than domestic market demand.

The second assumption is that countries exports to those foreign countries which have a

similar level of income and tastes. They try to produce products for their domestic market and

export part of that production to countries with similar demand pattern. The first assumption is

similar to the first stage of the product lifecycle theory of international trade. This view is obsolete

as in the modern world countries try to satisfy the global demand rather than a domestic one. For

example, the major exporter of artificial Christmas tree is China, which is a non-Christian country.

Moreover, thesecond assumption was also not valid as two countries which have similar incomes

and demand patterns, then why one country produces a specific product. Actually, the origin of

the product is not clearly explained in the Linder model. In order to understand the difference, we

have to know the factor endowments and technological facilities of different countries which are

clearly explained in the HO model. These are some limitations of the Linder theory, but still, it is

providing a valuable explanation of different trade patterns in different countries. According to the

model, much of the trade happens betweenhigh-income countries and most of this trade

composition of similar products.

There are basically two dissimilarities between Linder theory and HO theory. HO theory suggests

that countries trade due to dissimilarities between factor endowment these differences create

greater differences in factor prices. Whereas, Linder suggests that countries trade because of

similarities in tastes and income level. Secondly, the HO theory regards exports and imports to be

different products. Whereas, in Linder theory exports and imports of countries are similar products.

These differences are the due difference in the perspective difference between these theories.

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As Linder model explains the demand side and HO model explains the production side.

The Lindertheory provides two important variables – economy of scale and domestic demand. For

the explanation of international trade patterns. The variable economies of scale are explained in

intra-industry trade theory and domestic demand are detailed explained in the Porter (1990)

diamond model.

2.1.3.7. Product Cycle Theory

Vernon (1960) presented this theory and suggested that goods which are produced in a country go

through a life cycle which is comprised of introduction, growth, maturity, and decline. The

comparative advantage of producing goods is shifted from one country to another from time to

time. The assumption of this model is that a country innovates due to some stimulus, which is

coming in a form of a threat or opportunity in the market. The home market will be placed which

provides that stimulus and also serves as a preferable place for the production of that product

In the introduction phase, a country tries to innovate and produce products depending upon the

availability of capital and labor which will be used in the production. The production will be

domestically produced. So that team of skilled workers to be brought at the same location. In the

introduction phase, the demand for the product is based on factors other than price. The innovative

firm can chargehigh prices for a new product. As the market grows for the product, the producers

will try to find low-cost production location worldwide. As the market matures for the product the

price would become the only weapon for competition, and the entire production would transfer to

other countries.

Vernon (1979) in his later work suggested that with a passage of time the power the PLC model is

changing and this change is due to two reasons. Firstly, due to the improvement in transportation

and geographical reach, many producers are subsidiary business units, which are producing

products for that particular country. Secondly, changes in the domestic markets of the developed

industrialized countries, reducing many differences that previously existed between them.

Companies are not limiting their production in the domestic market now a day, companies which

have their international network and introduce new products in developmentas well as developing

countries. They grab their profit through time lapse between the introduction of a new product and

its first production in the foreign country location, which is rapidly decreasing. As the income of

developed countries is increasing which has decreased the income gap between different countries

33

have minimized, weakening the assumptions of this model. Entrepreneurs of large businesses face

different conditions in their domestic markets. As Japanese and European incomes reach the US,

these differences were minimized.

The hypotheses of product lifecycle had a predictive power in the first twenty to thirty years after

the Second World War, in the case of US it had provided a valid explanation for trade patterns and

its compositions. It also helped in anticipating the US firm’s likely patterns of foreign direct

investment. However, Vernon explained that many conditions of that period do not present now.

The reason might be the development of worldwide networks of subsidiaries of leading

multinational companies. Additional, the U.S. market is no longer a unique market among other

international markets. The model is useful in explaining for multinational companies, which are

willing to move from domestic production site to any foreign location but not yet acquired the

capacity. The model is also helpful in providing l guidelines for many less-developing countries,

for the absorption of innovation of developed countries in their economy.

2.1.3.8.Economies of Scale

The basic assumption of the HO model was a constant return to scales, which suggests the

incorporation of double inputs will double the output. In reality, in many industries doubling of

input results in an output which are more than double. The phenomenon is known as economies

of scale. This concept encourages firms to specialize in the manufacturing of a limited range of

products to get the full benefit of economies of scale.

Lancaster (1979) and Krugman (1979) developeda trade model for differentiated product

independently. If we take the example of the US and Japan, producing two kinds of cars. (The US

produceslarge and Japan produces small cars), and there is a demandfor these cars in both

countries, in the caseof economies of scale it would beneficial for each country to specialize in

manufacturing of only one type of car instead of both types. In the case of are practicing freetrade,

International trade and economies of scale had made possible for both countries produce products

more efficiently without compromising the variety of products. Two types of trade occur between

countries- intra-industry and inter-industry trade. Comparative advantage is reflected in Inter-

industry, as a customer can buy both types of cars.

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Countries similar in many aspects have very few comparative differences are not engagedin

inter-industry trade. In this case,the HO model suggests no trade between them. But in the case of

economies of scale, both countries will benefit from specialization in a specific product. This

concludes that countries possessing dissimilar factor endowment are intensively involved in the

inter-industry trade. But countries having similar factor endowments are largely engaged in

interindustry.

The economy of scale theory explains the patterns of trade of manufactured goods of

developed countries, as in the case of the US, the products of US are exported to other countries

and same types of product areimported from foreign country. This prediction is similar to country

similarity theory. However, the production or supply side is focused by Intra industry trade model,

while the country similarity model explains the demand side

The two implication of this model is that due to broad aggregation measures are overstated intra-

industry and most of this trade disappear if products are further disaggregated. Another implication

of this model is that it does not specify the particular product to be produced by the specific

country, due to which Intra industry trade patterns remain unpredictable. In reality, trade patterns

are not so unpredictable as we can see in country similarity it is based on similar demands of the

customers of different countries or patterns can be based on the amount of factor endowment

among different countries.

The theories above are categorized as traditional theories,but, they are still very useful in

explaining many phenomena of this modern age. They are very helpful in understanding different

trade and industrial policies pursued by different nations. The theory of comparative advantage

will help and guide countries to properly develop their trade and industrial policies. Even the policy

of mercantilism is helpful for countries to strengthen their exchange rate. However, no traditional

theory can give a comprehensive explanation which can explain the phenomenon of international

trade in the modern era. No traditional theory is satisfactory in explaining traditional trade because

the modern world is much more complex than before. The main aim of building a theoretical model

is to identify variables to understand the particular phenomenon and understand the world. The

theory of comparative advantage only identifies one variable i.e. factor endowment and ignores

many another important variable like demand factors. The traditional theories were valid when

they were introduced, but are now not compatible with the modern world. In order to identify

35

important variables, several factors have to be considered simultaneously to calculate

competitiveness formula trade patterns. There is a general acceptance that these theories fail to

explain intra-industry trade, they only explain sufficiently only inter-industry trade. (Grubel &

Lloyd 1975). For the explanation of intra-industry trade, economists had put forth many new

theories which relax the certain assumption of constant economies of scale and perfect

competition. These new set theories had opened the new debate in which government policy can

play a very critical role inthe increasing international competitiveness of the country. Porter

(1990a, 1998b), hadalso questioned the traditionaltrade abilityenhance location advantages of a

nation and proposed a ‘new theory’ which clearly identified location advantages and thus the

competitive advantage of nations. The introduction of a national competitive advantage model

introduced by Porter (1990) can be helpful in explaining many important variables of competitive

advantage.

2.1.3.9.The Competitive Advantage of Nations

Porter (1990) presented his theory of competitive advantage of nations. This theory contributed

tothe understanding of competitive advantage in production and international trade. The theory

focuses on single industries which build up to the whole economy. The important implication of

this theory is that at international level firms, not nations compete, therefore we can understand

the key role the nations can playin helping theirfirms to achieve and sustain its competitive

advantage.

Therefore, home country can help its industries to be internationally competitive in a particular

industry. Interdependence of this nature will help to understand the factors involved in gaining

competitive advantage in a particular industry. According to Porter (1990), the prosperity of a

nation is not inherited but created. It is created by a pool of natural resources, skillful labor, interest

rates, and stable currency. A competitiveness of a nation is dependent upon its industrial capacity

to upgrade and innovate. The success of a country is dependent upon the competition and pressure

it faces in the domestic market, which is composed of aggressive domestic suppliers, strong rivals

and demanding local customers. The modern world had changed the concept of competition, as in

this era competition is not on the basis of physical factors. Competition is now based on the speed

of creativity, generation of knowledge and innovation. This has increased the importance of a

nation. This model states that competitive advantage can be created through the localized process.

36

In this case,the national language, culture, values, traditions, customs, institutions, histories may

contribute to the success of a nation. The difference in the pattern of competitiveness is extremely

different in each country. No country will be competitive in each and every industry. Countries

can gain a competitive advantage in a specific industry, which is supported by the favorable,

challenging and dynamic environment in that country

The traditional model suggests that important determinants of competitiveness are labor cost,

exchange rates, economies of scale and interest rates. Firms nowadays are opting for the

strategicalliance at national and international level. Managers are seeking support from the

government for particular industries. Additionally, various policies at the government level are

used to manage and manipulate exchange rates, in the intention to increase national

competitiveness. Both these techniques are categorized as flawed by Michael Porter. These

techniques have a short-term benefit but in reality, missed the true source of competitive

advantage. Therefore, a perspective was needed to ascertain the true source of competitive

advantage or particular industries. A new tool or measure was needed at that time to identify an

approach to competitiveness by making a detailed analysis of firms and industries which are

internationally successful, disregarding the old traditional theories of international trade.

2.1.3.9.1.How Companies Succeed in International Markets

The internationally successful companies around the world are devising strategies which are

extremely different from each other in all aspects. But all these successful companies, while

employing their strategy with the same underlying logic and emphasis. They had perceived a

newbasis for competition or different means of competing in old ways. They incorporate

innovation in designing the product, production facilities or new ways of marketing or employee

training, and developing new technologies for the achievement of a competitive edge.

Innovation is a continuous process in which small and continuous small advances and insights

rather a huge breakthrough are achieved. The ideas are not totally new but were not previously

pursued before. It includes continuous investment in many physical assets, development of

goodwill, knowledge, and skills. Innovation might include finding a new market or segment for

an old product which was not targeted before. This innovation can gain a competitive advantage

to the firm if the competitor is not much responsive. Japanese companies of home appliance and

car manufacturing are the ideal example of this kind of innovation. They are involved in low-cost,

37

compact, small and lower capacity models. Which was previously ignored by others. The

international competitive advantage which is gained by innovation can help forecast potential

foreign and domestic demand. Swedish companies have recognized consumer concerns for

product safety and developed different products recognizing these market opportunities.

The innovation, which is the outcome of circumstances which peculiarly to the domestic market

retards the competitive advantage which can further gain international success. Information plays

a vital role in the process of development of improvement and innovation the information that is

limited to the company or not clear to them can be helpful for success and later on gaining

competitive advantage. Innovation can be achieved through investment in research and

development, looking to an unexpected place, the policy of openness to new ideas and adopting

new ways of doing things.

2.1.3.9.2. The Diamond of National Advantage

There are certain countries in which companies are consistently engaged in innovation and

improvement and able to gain and sustain competitive advantage in different industries. They are

also able to overcome barriers to reach different markets. The reason for their success lies in four

important attributes of that country. These attributes individually and as a constitute diamond of

national competitive advantage. This actually a playing field which is developed by that country

for its industries. These attributes are:

Factor Conditions include the condition of a factor of production, including human, physical,

informational, infrastructure and capital necessary for the competition in a particular industry.

Demand Conditions include the composition of home demand and number and sophisticated

customer in the home country. For particular goods and services.

Related and Supporting Industries are the existence or absence of supplier’s industries and other

internationally competitive supporting and relates industries for a particular product or service.

Firm Strategy, Structure, and Rivalry are the business environment of the nation in which

companies develop their strategies and also the nature of domestic rivalry in the countries.

The role of governmentthe policies and procedures perused by the government to boost the

competitiveness of the country.

38

The role of chanceis the sudden incidents or events which might have affected the competitiveness

of the country.

Figure 2 1 Porter Diamond Model

Source: Porter (1980)

Figure 2.1 shows the relationship of all the determinant of the Porter national diamond

model which helpsto generate a national environment in which firms are created and learn to

compete. Each factor of the diamond individually and as system affects important aspects of

achieving success in the international market. The necessary skills, resources availablefor the

particular industry for achieving competitive advantage, the needed information which helps to

avail opportunities by deploying their skills and resources, the intentions and goals of the corporate

managers, owners, and employees in the companies and the pressure for creativity and innovation.

When a domestic environment permits and supports companies for rapid accumulation of

specialized resources and skilled workers for greater efforts and commitment they gain

competitive advantage.Additionally, when a national environment provides and facilitates to

39

provide ongoing information and helps to develop new insight into the productionprocess and

customer needs, they gain a competitive advantage. Finally, when the companies are pressurized

by the national environment to invest and innovate, they win competitive edge and able to sustain

that position for the longer period of time.

2.1.3.9.2.1.Factor Conditions

The standard theory of economics states that the flow of trade is determined by the factor of

production possessed by a country. The country uses its well-endowed resources to produce and

exportgoods. This doctrine was presented by Adam Smith and David Ricardo, which were the

prominent classical economists. Porter explains the different types of factors present in the

economy, which are explained in detail below.

2.1.3.9.2.1.1. Specialized Verses Inherited Factors

According to Porter (1990), the important and critical industries which form the backbone of the

economy of any country does not inherit but creates resources needed such as sophisticated

technology or skilled labor. The amount factors endowment a nation possesses at a particular point

in time is less important than the speed and quality of factors they create, upgrade and deploy them

into its industries. The factors which are very important and required heavy and continuous

investment are specialized one. The basic factor, including labor and natural resources, do not help

a country to achieve a competitive edge in knowledge-based industries. Companies can achieve

them through their global strategy or a breakthrough technology. In contrast to the traditional view

of merely having an educated and skilled workforce does not guarantee a competitive advantage

in the modern era. To achieve and sustain competitive advantage, an industry needs factors which

are highly upgraded by specialized research through its educational institute, availability of capital

to be invested in new ventures and moreover a highly integrated and decentralized corporate

culture. These are the factors which are not easily imitated by foreign rivals, as this requires

continuous investment to create and sustain.

Nations can succeed in those industries in which they create factors. A nationcan create a

Competitive advantage in presence institutions which are world class that creates and works

continuously upgrade their specialized factors. The major example is Denmark’sleadership

insulin and diabetes treatment which is the outcome of its two hospitals who continuously

40

concentrated on studying and treating diabetes. Holland’s leadership in flower export is also the

outcome of its research and development in the cultivation, packaging,andshipping.

2.1.3.9.2.1.2. Selective Disadvantage

Another factor which is identified by Porter is the selective disadvantage.When a country is

naturally not well endowed with some basic factors. They will try to overcome that deficiency by

finding and upgrading its existing factors, to convert them into a competitive advantage. It is

obvious that when a country has natural resources in abundance they will not use them carelessly,

but if they have a deficient resource they will try to use them more efficiently.

Japan is the ideal example of converting their resource disadvantage into a competitive advantage

by innovation, technological up gradation and creativity. The strategy of just in time inventory is

an ideal example of overcoming space and warehousing capacity deficiency. The concept of

vertical vegetation and garden is another example. Another example is of Italian steel

manufacturer situating in Brescia faced with high energy and capital cost with non-availability of

raw material. They also face problem non-efficient transportation facilities and non-proximity of

the port. This resulted in the creation of technology comprising of mini-mills which require not

much capital investment and energy efficient, utilizing scrap metal and encouraging producers to

be in close vicinity with sources of raw material and its customers.

Disadvantages which can be converted to competitive advantage under certain conditions. Firstly,

the government must properlytime signals to the companies to innovate and equip themselves

before their foreign rivals. Secondly, their condition that helps to convert a disadvantage into an

advantage is having a favorable environment for innovation, having proper access to skilled

people, favorable domestic demand conditions which send the appropriate signals. Additionally,

they must have challenging competitors, which create pressure. Another precondition required in

this scenario is a commitment of the company goals for the industry. As without this commitment

and industry rivalry, the companies will not employ their efforts to overcome a disadvantage.

US consumer electronics manufacturers faced high labor cost due to which they chose to

shift production processes from the US to Taiwan or any other country where they can find cheap

labor, instead of upgrading their factor disadvantage to competitive advantage. On the other hand,

Japan facing the same problem eliminated labor with automation of its manufacturing facilities

41

which decrease the need for labor. This helped Japanese manufacturers to produce goods at

relatively low cost with reliable quality. Soon, Japan took over the market, even they established

assembly plants in the US from where US manufacturers fled. Alemu (2010) Applied porter

diamond model for of Ethiopian Textile and identified that country is naturally endowed with large

populations, cheap labor supply, positive weather condition for cotton production, large water

potential (nine river basins). But they are lack of skilled and highlyproductive labor, lack of capital

resources, poor infrastructure,and deficient marketing and business information.

Rodrigues and Khan. (2015) found that India and Sri Lanka aremore potentials in factor conditions

as compared to the countries of SAFTA. India had asupportive infrastructure, having a good

quality of roads, air transportation,and telecommunication. Both have improved the efficiency of

their labor force through training and education. The Government of both countries had also played

a major role in this regard, by allocating a large amount for this purpose. But Despite being

competitive in the region Indian clothing industry is far behind world standards. The world-

classclothing industry uses automatic design, automatic material arrangement, automatic sewing,

3D ironing,and automatic packing. The majority of the world class units has moved towards the

knowledge era and are applying Enterprise Resource Planning (ERP), Customer Relations

Management (CRM) and Supply Chain Management (SCM). This possible with the use of

software technology such as a CAD, CAM,and UPS. USA IS USING 50 % of CAD /CAM

applications in its clothing industry. The EU is using 70 % and 80% in Japan. Which is almost

negligible in SAFTA. in order to be competitive in this industry this region seriously needs a

strategic change from ‘cost orientation’ to ‘value orientation’ Rodrigues and Khan. (2015).

2.1.3.9.2.2. Demand Conditions

There is a misconception that international competition would decrease the importance of home

demand. In practice, it is not true, as challenging and demanding customers, helps in achieving

international success. Home demand had a very strong effect on the speed of innovation, creativity,

quality, and quantity of products being produced by the companies. Home demand helpsdomestic

companies to forecast emerging buyer’s future needs to for timely repose to these trends and gain

a competitive advantage before foreign rivals. Demand conditions include population size,the

sophistication of home demand. Related and supporting industries includes suppliers, supporting

42

and training institutes which contribute to providing cost-effective inputs, help in the upgrading

process, on the other hand, stimulate other firms in the value chain to innovate. Firm strategy,

structure, and rivalry includestrategies, goalsof managementwhich are a key factor for success,

But the intense rivalry in the home market pressurizes other firms to upgrade competitiveness.

Porter (1990) suggests that large and high growth domestic market compels producers to be

efficient and innovative, which help them to gain a competitive advantage. Additionally, small

and low growth domestic market tries to find opportunities beyond their borders. There are both

qualitative and quantitative market aspects of home demand. The domestic demand size ascertains

the minimum amount of economic activity of local customer, which provides an estimation of

stable demand. The expectation of customersregarding the quality and service is an important

driver ofcompetitiveness a country or firm.

According to Porter(1990), Demand conditions help the country achieve a competitive advantage.

The concept was first introduced by Linder (1961) which helped in explaining intra-industry trade,

he explained that countries which have similar income patterns can have similar spending and

demand Patterns. However, Porter (1990) emphasizes more on-demand differences rather than

similarities for the explanation of competitiveness and suggests that the demand conditions can

help industries of the nation to achieve a competitive advantage in three ways.

Firstly, the industry can gain a competitive advantage in that segment, which is larger and more

visible in the home country as compared to the other countries. Secondly, buyers to sophisticated

demand pressurize firms in the industry to innovate for meeting high standards. Thirdly, domestic

industries achieve competitive advantage in the global market, if home demand helps the company

to anticipate future demand patterns of the other countries. It’s important to understand that not

only size of demand matters, but the pressure of innovation is a driving force for gaining

competitive advantage. As compared to the factor condition, demand conditions force companies

to interpret, respond and perceive their buyer’s needs. In some cases, the stringent type of needs

arises due to special circumstances of the country e.g.Japanese firms have to satisfy their customer

living in very compact, humid and small homes with smart and energy efficient products. This

pressure of local demand has forced Japanese companies to innovate, developing smart products-

small, thin, light and short, which is also more acceptable globally.

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According to Porter(1990), domestic demand condition plays an important role in achieving

competitive advantage.The domestic demand shapes how firms in the country interpret, perceive

and respond to buyers needs and demands hypotheses assume that due to cultural nearness

domestic firms can perceive and anticipate more quickly the changes in the customer preference.

The domestic demand is less affected by changes in exchange rates or any other external market

factor due to changes in trade policy of destination countries.

2.1.3.9.2.3.Related and Supporting Industries

The third determinant of national competitive advantage is related and supporting industries.

Internationally competitive supporting industries help many downstream industries to create a

competitive advantage at an international level. Firstly, they provide cost-effective inputs in a very

efficient and effective manner. Additionally, this close bonding will create room for innovation

and up gradation. The proximity of suppliers and other supporting industries help in shortening

lines of communication and transportation, which result in swift information flow and exchange

of ideas for continuous improvement and innovation. This also givesthe opportunity to the home-

based industries to incorporate their new R&D ideas in their home market. These industries help

local producers to embrace new skills, providing a source of entrants increasing competition in the

market. The success of the Swiss pharmaceutical sector is due to their previous experience in the

dye industry. The success of the Japanese electronics industry is due to their success acoustic

instrument and consumer electronics. Porter (1980) emphasizes that companies should not confine

their suppliers to the domesticindustry because internationally competitive suppliers can bring with

them new technologies and ideas. The domestic industry is greatly supported by globally

competitive related industries. These industries include marketing, technology development

efficient distribution channels, manufacturing and marketing (Porter, 1990:100).

Clusters composed of many medium and small local firms provide a veryfirm corporation and

institutional support for economic up gradation (Marchallian, 1920). The local firms are more

likely acquiring supplies and other inputs from the local market, which will prevent leakage of

capital from the economy (Barkley, 2001; Markusen, 1996). Li andZhou (2010) used data to

measure the competitive advantage of China in 179 countries, the results suggested that integrity

of and assessment of market trend creates competitive advantage through market diversification,

44

cost reduction and differentiation . Yamin et al. (1999) worked on data from Australian firms and

favors at Porter’s general strategies.

Rodrigues and Khan.( 2015) used data on textile and clothing sector form SAFTA countries and

suggested that in order to improve the competitiveness of this region depends largely on

infrastructural development including a steady flow of electricity, paved roads, ports,highways and

administration forms and standardization of customer data. In order to improve export shipping

documentation should be processed quickly to minimize transaction cost in terms of money and

time. India is suffering 37% cost disadvantage due to poor shipping containers from

Mumbai/Chennai to the east coast of the USA, relative to similar container shipments from

Shanghai. This cost disadvantage arises from inefficiencies and delays at Indian ports. This can be

improved by introducing proper government policies which help in technological up gradation in

the clothing and textile sector. The policies of Bangladesh, India, and Pakistan should be focused

on reducing tariffs on imports of equipment, machinery and also provide cash and credit support

to modernize this sector. Alemu (2010) identified that establishment of ETGAMA, USAID

AGOA + VEGA project had a positive impact on the Ethiopian textile industry. But the industry

has very few suppliers of raw material other than cotton and apparel accessories (ETGAMA, 2009;

ITC, 2009). They have very poor integration of raw material and industrial production. Firms are

poorly vertically integrated and lack of research have avery bad impact on the industry.

Oh and Rhee (2010) suggested that Koreans car manufactured had achieved competitive advantage

by adopting the strategy of cost leadership. Feng et al. (2010) used data from Chinafrom 2008 to

2009 and suggested that continuous participation of customer and suppliers in the operational

process helps organizations to achieve competitive advantages in the industry. Bobillo et al. (2010)

used data of 1500 manufacturing companies from in France, UK, Spain, Germany and Denmark

and suggested that organizational factors (e.g. capital markets, financial liaison, and skilled

workforce) –differentiation strategies approach- can be very supportive in the attainment of

competitive advantages. Rugraff (2012) used data of car industry of Czechs republic and suggested

vertical integration through forward and backward agreement and mergers to be major source of

competitive

2.1.3.9.2.4.Firm Strategy and Rivalry

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Country context and circumstances play a major role as to how firms are created, organized,

and managed; additionally, it also determines the nature of the rivalry. In Italy, we can find

internationallysuccessful competitors which are privately owned, small or medium-sized firm

which is operated like extended families. But in Germany we can find firms which follow strict

organizational hierarchy and management practices, having a technical expert at the corporate

level. There is no universal managementsystem, it changes with the cultural, social and market

conditions.

In a particular industry,Competitiveness is the outcome of organizationalmodels, Favorable

managementpractices and sources of competitive advantage of the country. Italian companies are

internationally competitive in footwear, lightning, woolen fabrics, furniture etc., industries which

are more customized, creative, dynamic need more niche and marketing and breathtaking

flexibility that fits both the dynamics of the industry and the character of the Italian management

system. But in the case of a German management system, they are more successful in engineering

or technical-oriented industries, complicated machinery and chemical industries where product

demand is very complicated, meet careful procedures and development process, after-sale service,

and a highly disciplined managerial structure. German companies are not very prominent in

consumer goods and service in which new models,technologies, and image marketing are critical

for competitionPorter(1990). Nations also differ in the goals that firms and individuals try to

achieve. The Goals of the firm reflect different characteristics of domestic capital markets and

managerial compensation practices. For example, in Switzerland and Germany, banks comprise a

significant part of the nation's shareholders, andthe majority of sharesis rarely traded as they are

held for long-term appreciation

Attaining international success can make an industry, prestigious, reinforcing its

advantage. The presence of strong local rivals is a final, and powerful, stimulus to the creation and

persistence of competitive advantage.

2.1.3.9.2.5. Government Policy

The government can affect all the other determinants of the diamond model significantly

(Tasevska, 2006). Government policies and other regulations formulated at all levels of the

46

government can adversely affect or benefit the competency of industry and a nation (Barragan,

2005). Thegovernment policy can create or damage the competitive advantageof a nation (Nilsson

&Peterson, 2002). Tuna (2006) identified that the role of government policy can be ascertained by

recognizing how it affects different variable in the diamond model. Theirteam, which constitute

this variable, including subsidies, education policy, taxes, financial incentives, quality standards,

capital market regulations, public procurement and antitrust laws (Mehrizi&Pakneiat, 2008.).

When antitrust laws are formulated and implemented, they will prevent unfair competition and

these regulations and change demand conditions. Education policies can influence factor

condition, as an investment in education, improve skills of human resource, which will in turn help

to upgrade and improve infrastructure, physical resources, and upgrade knowledge resources.

Acquisitions by the governments can improve and upgrade related and supporting industries (Tuna

2006). Friendly governmentpolicies create an environment which helps to encourage new

businesses and stimulate and enhance the entrepreneurial skills of people. The governmental policy

of mergers and joint ventures will help to transfer technology (Barragan, 2005). It is also very

important for governments to ascertain thepros and cons associated with particular types of

policies, as the implementation of policies without proper consideration of its adverse impact will

damage national competitive advantage. Countries which develop protectionist policies for the

development of indigenous industries will discourage them from improving quality

standards.Therefore, they are not prepared for the challenges of the global market(Barragan,

2005).

Government policies and intervention at local, national and international level can influence each

of the above four determinants of competitiveness. Chance events are occurrences that are outside

of the control of a firm. They are important because they create discontinuities in which some gain

competitive positions and some lose. Lew and Sinkovics (2013) used primary data to investigate

governance mechanisms in international technology alliances (ITAs), performance outcomes and

firm-level innovation capabilities, in the hi-tech mobile market. There are strategic alliances

between software and hardwarecompanies globally. Therefore, the study tries to analyze resource-

based and inter-firm governance view and its relationship with governance behavior mechanism,

business performance,and innovation capability. The results suggested that international level

47

strategic union helps firms to innovate, develop new products, win market share and gain

competitive advantage.

2.1.3.9.2.6. The Role of Chance

Chance events, which are non-predictable and are outside the control of the firm., play an important

role in a form of creating discontinuities that affect the competitive position of the firm. These

events, political decisions by other governments, wars, climate change, inventions, natural

disasters, the rise in prices of inputs and others, have a very strong impact on different industries

of the nation.

2.1.3.9.2.7. National Competitive Advantage

Porter (1990), defined competitive advantage to be maintained at three levels- nation,

industry,and firm level. Competitive advantage at the national level is reflected by sustained

growth in the standard of living of the citizen of that country, and it can be attained by continuous

creativity in production. Industry competitive advantage is reflected by the industry’s profitability,

inbound and outbound foreign direct investment and trade balance, and the firm-level competitive

advantage is measured by its market share, exports,and profitability (JMOP 2003). Balkyte and

Tvaronavičiene (2010) divided the competitiveness to be maintained at six levels- firms level,

sector level, regional level, national level, regional bloc level,and international level.

According to the diamond model, the prosperity of a country is not inheritedbut created through

industrial innovation and up-gradation. The companies can compete at a global level and gain

competitive advantage at an internationallevel if they face challenges and pressures in the domestic

market. The role of the nation has grown with the shift of competition bases more and more on

assimilation and creation of knowledge.Harrison, Hoskisson, and Ireland(2001). suggested that

latest literature has paid closer attention to the resource based aspect of the firm in the business

context, as this suggests that the competitive advantage of the firm is associated with the quality

and quantity of resources it possesses. These resources are interlinked with each other. If one area

is weak, it will influence other areas as well. Therefore, it is important for the organization to use

its strong resources to overcome the deficiency of its weak resources through the system of

resource creation. Nater and Cini (2009) used data from economically troubled country Osijek-

Baranja. They applied the Porter diamond model to identify opportunities for the development of

48

the home industry and identify potential threats in the long-term development of the industry in

the country.

Rodrigues and Khan (2015) applied the diamondmodel to the clothing industries of SAFTA

and suggest that this industry had provided the potential for growth and employment in the region.

They also contributed that due to many Free trade agreements in the region and government

policies and expenditure on training, providing infrastructure and cluster had a very significant

and positive impact on this said industry.Mboya and Kazungu (2015) used data from textile and

apparel industry of Tanzania to explore determinants of competitive advantage, by applyingthe

Porter diamond model. They used non probability sampling technique and collected data from

three regions, including Dar es Salaam, Arusha,and Mwanza from 204 respondents, applying

Factor Analysis, Principal Component Analysis and Structural Equation Modeling, the results

supportthe Porter diamond model as a determinant of firm competitive advantage and identified

relating and supporting industries and demand conditions critical factors for apparel and textile

industries In Tanzania.

Bashiri et al. (2013) used data from Iran by applyingthePorter diamond modelin the agricultural

sector and suggested that to be aligned with international standard countries must align themselves

with the global economy, for which they have to learn ways to compete in the global marketplace

for higher productivity and quality. International trade provides revenues, which facilitate

investment and development of new technologies which increases productivity. Oz (2002) used

the diamond model of Porter to identify Turkey’s sources of international competitiveness. The

main emphasis was to improve and understand these sources and study Turkish competitive. The

study also aims to shed some light on the competitive structure of the Turkish major industries.

The results suggested that except for domestic rivalry and government policy, Turkish industries

support porter diamond model.

Grant(1991) appreciated theory of competitive advantage and suggested that despite

having some limitation of measurability and concept determination it will help to bridge the gap

between international economics issues and strategic management by enriching both disciplines.

The analysis presented by porter had enriched the theory of competitive advantage by including

the impact of environmental issues on the competitive performance of a nation in global markets

had broadened the scope of the theory of competitive advantage by providing international and

49

dynamic aspects of competition to encompass both the international dimension and the dynamic

context of competition. The National competitive advantage is the country’s evaluation ability to

involve and participate competitively in global markets. Some countries can achieve more

advantage over the other due to many reasons. For achieving and boosting economic growth they

have to identify their strength and weaknesses and try to enhance their strengths and overcome

their weaknesses. Different frameworks were designed by Micheal Porter helping nations to assess

themselves (McMahon, 2017).

National competitive advantage can come from a variety of sources. These don’t just include

natural resources, but also human, physical, capital knowledge, talent, entrepreneurial skills and a

favorable environment for the business. Nations may enrich these resources through proper

policies and strategies in order to attain a competitive edge in the world. For example, establishing

universities to increase research and development in a different field for increased innovation and

creativity. They can also overcome their resource disadvantage by innovating new ways of doing

things. An innovation capability is a powerful tool for the success of the nation in a global

marketplace. Innovation can be encouraged by the government by introducing patent laws which

encourage innovations. The government can also finance potential new projects to encourage

innovation. Another key component of the national competitive advantage is supporting industries

the presence of major suppliers, distributors, marketing agencies will contribute positively to

achieving success. These industries develop a network will facilitate the value chain of the

production processes.

2.1.3.9.3.The Dynamics of National Advantage

The determinants of the diamondmodel, reinforce each other, which creates a system in which the

cause and effect of single determinants become blurred. The home demand stimulates high growth

rates and generates sophisticated buyers. Ifthese competitive and sophisticated customers, then

decided to enter the supplier's industry the domestic competition intensified. The domestic rivalry

helping firms to gain from the other determinants of the diamond model Porter (1990). He

connects domestic rivalry the geographical concentration of industries.The majority of industries

analyzed by Porter (1990) were situated in small regions within individual cities of the countries

and few of them was situated in adjacent areas of different countries.This suggests that proximity

and geographical concentration of industries increase information flow, clarify the competitive

50

behavior, also attract necessary resources and factors. Porter (1990) also added that this

geographical concentration develops into clusters of supporting and related industrieswhich

accelerate information flow and spreading rivalry.

Factor’s creation and a tendency to move resources away from isolated industries into cluster

ones.This reinforcement and dynamic nature of diamond determinants and the added influence of

geographical concentration and clustering generate a situation where competitive advantage

depends upon the entire diamond system. Porter states that it is not necessary that all determinants

should succeed in international competition.The disadvantage in one determinant that can be

overcome by having an unusual advantage in another one. In the more sophisticated industries, the

competitive advantage rarely comes from only one determinant.

2.1.3.9.4. The Competitive Development of National Economies

Porter (1990)analyzedthe evaluation and patterns of the success of eight nations in his book.He

extends his framework to identify the up gradation of firms in the country by linking it to the

international competition. He identified four stages of the economic development for a nation-

factor-driven, investment-driven, innovation-driven and wealth-driven. Nations belonging any

stage of development at any point in time corresponds to predominant patterns of the firm’s

competitive advantage. Although these stages do not explain everything about the country’s

development stages, it can only highlight industries attributes of the nation which are most closely

related to economic prosperity.

In the caseof the factor-driven stage, the International competitive advantage comes from basic

factors like a natural resource, semi-skilled labor, climate, and condition. The domestic

competition is largely based on prices in sectors where technology is not required or available

widely. The local demand for export products is modest and the economy is very sensitive to

exchange rate and economic cycles. The range of industries is widened with the passage of time,

creating domestic-oriented industries through import substitution. Industries in this stage lack

international competitiveness.

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In the investment-drivenstage,the economyis characterized by the ability and willingness of

the public and sectors for aggressive investment. Firms construct modern facilities and import

technology from abroad, they have the potentialto absorb and upgrade foreign technology

according to their particular needs.These firms, governments, and citizens are also willing to invest

in education, infrastructure,and other mechanics in order to create advanced factors. Firm’s

strategy,structure, and rivalry is another source of competitive advantage for domestic firms. There

is an increasing demand for export goods, but demand sophistication is still very low and

supportingand related industries are very underdeveloped. Countries at this stage of development

can devisethe role of government in the form of temporary protection measures and capital aids.

The innovation-driven stage is a situation in which all the determinants of the diamond framework

are at work. The nation is very competitive in a wide range of industries, having deeper clusters

and even the establishment of an entirely new range of industries. Due to demanding and

knowledgeable customers and skilled human resource and infrastructure Sophisticated service

industriesdeveloped. Firms create innovative goods, production, and technological methods in

order to compete in more differentiated segments.International strategies,develop firms, design

their own international distribution and marketing networks, establishing their brands. This also

accelerates foreign direct investment which increases investment in many factors. Industries in this

state are less affected by exchange rate and price shocks in the world market. The economy of the

country is less dependent on fewer sectors. The role of the government is indirect, which

emphasizes more on up gradation of advanced factors, improvement in home demand and in the

domestic rivalry.

The fourth stage is a wealth drivenstage in which firms start to lose its competitive advantage in

many industries due to intense international competition. There is a decrease in the rivalry as

businesses are trying to preserve their position. There is less motivation for investment and

desperate need for the role of government for the protection of the status quo. Slower production

will lead to increase in wages, mergers and acquisitions will try to preserve stability, businesses

are less willing to take the risk., especially in starting a new venture or transforming an existing

one.The international competitive advantage of many industries starts to diminish causing a

declustering, where the loss of position of one industry affects all the others in its cluster. The

range of competition of the industries where the nation can compete will limit only those industries

52

which are related to personal wealth, industries where there is no technological change occurs,

basic factor or where national brands are still strong.

Porter(1990)used analysis of ten countries and categorized them according to their development

stage, he categorized Singapore in the factor-driven stage, while Korea to be moved to the

investment-driven stage. In 1960 Denmark, in1970 Japan, in 1980 Italy and Sweden soon after

the second world was moved to the innovation-driven stage. Switzerland, USA, and Germany had

moved to the innovation-driven stage before the second world war,while the UK is viewed to be

at this stage for decades (Porter, 1990: 570-572).

2.1.3.9.5. Applications of the Diamond Framework

Porter (1990) applied the diamond model in his book “The Competitive Advantage of Nations”.

He devoted three chapter to the detailed analysis of eight out of ten nations which were included

in his original work. His application cannot regard as testing of theory, as these are the nations

providing the empirical analysissince its inception. A short summary of his work will help

understand how he had applied this framework. Porter (1990) Particularemphasis was placed

particularlyon the European countries, especially Sweden and Switzerland,Italy, which had an

industrial structure of clusters and Germany, that is a major supplier and market for many

industries in the world. The other four countries-USA, Korea, Japan,andthe UK were briefly

examined. Porter had also applied his model on a number of other countries the most prominent

are New Zealand and Canada.

The first nation whichPorter declared as post world war –II winner was Switzerland, which was

very competitive in a wide range of service and manufacturing industries. Natural resources havea

very little contribution to the success of this nation.The only advance resource available was its

pleasant landscape and hydropower. Political neutrality and location advantage are as important

as skilled and educated human resource. Easily available credit and low-interest rate along with

world-class infrastructure and transportation system were basic factors which had played a major

role in the success of Switzerland economy. These basic factors were upgraded with the help of its

education system, extensivein-house training of the employees, the highlydeveloped

apprenticeship system, as well as the extensive in-house training of employees. The research work

53

at universities, especially in physics and chemistry will aid related industries, while close ties with

international research centers guarantee the assimilation of foreign technologies.

The Demand conditions of the Swiss market had played a major role in its success. The climate

and geographical conditions have resulted in a sophisticated demand for railway equipment, heat

controlling industries. The presence of multi-cultures, including French, Italian, German and has

resulted in the generationof many important competitive industries. Firms from related and

supporting industries have also initiated the creation of competitive industries. Additionally,the

interchanges among industries are open and frequent. The most successfulSwiss industries

followed the strategy to concentrate onsmall high -quality and highly differentiated segments. The

major exception was a pharmaceutical industry in which they already had a potential to compete

internationally. These firms perform very well in industries where they have close contacts with

the buyers. The domestic rivalry is the main characteristic of many Swissfirms, although many

competitions had been reduced due to carteland mergers. The Swiss government had played its

role by intervening in a modest way and impact positively, but the main advantage came from

Switzerland's neutrality in the two world wars. Demand conditions, skilled human resource,

clustering and devisingan appropriate strategy are the reasons for most successful Swiss industries.

According to Porter the trend towards innovation and reduction in rivalry are some worrying trends

and also, aggressive market seeking and risk-taking will take market share from out of favor in

many Swiss industries.

The second country studied by Porter(1990) was Sweden, which was also a post-war winner. The

country hada cluster, but avery narrower competitive industrial base. Especially transportation,

metals, materials,and forest products. The country is naturally endowed with large forest, large

iron ore deposit, and hydroelectric power. Which is very important for many Swedish industries.

Latterly, this factor played a significant role in the development of this country. The major role

played by higher standard educational institutes, the majority of excellent technical and research

universities and institutes and the early licensing of foreign technologies all these factors constitute

a competitive advantage for Swedish industries. Due to the high wages of skilled labor

manufacturing industries have led to reconstruction and automation, the long distances to

sophistication and efficient logistic and extreme winters have caused an emphasis on energy

conservation. The demandforthe reliable and efficient transportation system, due to the long

54

distance of Sweden, high level of automation and extreme climate which put pressure on mining

and power-related industries and positively affected the competitive advantage of Sweden. The

resource-related of industries of Sweden has very sophisticated industrial buyers, especially when

they are facing certain factor disadvantages. This disadvantage is evident because of the presence

of a large state sector whichsometimes havean unsophisticated buyer and low demand due to the

high tax rate,especially on luxury items.Large Clusters of industries are also present in Sweden.

The culture of cooperation and collaboration resulted inthe development of horizontal and vertical

integration in industries.

The corporate structure of open communication and trustworthinessis also very supportive in

competing for technologically intensive industries that require extensive international networks.

Strategies designed for international competition and strong capital market are also very beneficial.

Intense rivalry is present in some industries Porter (1990: 350-351). This disadvantage of less

rivalry is compensated by Swedish open economy and its presence in foreign markets. The positive

role of government is played by enforcement of strict environmental safety laws, but it is only

concentrating on large firms. The chance events have also impacted many industries. The

problematic areas of Sweden are its less rivalry, too much dependence on some industries on only

basic factors, lack of individual motivation and loss of position of Swedish firms in many

industries are worrying signs.

The third country studied by Porter was Italy is very a successful country. It has limited natural

resources and an image of chaotic government. Italy has a highly clustered f exporting industries,

The country enjoys high market household products, textiles and apparel, personal products, food

and beverages, and metal goods and associated machinery. Many highly

CompetitiveItalianindustries also geographically concentrated, situated in with smaller cities or

regions having a home base for as much a hundred of firms in different industries. Their factor

conditions are not very favorable, socially created and inherited factors are not present. Having

very few Natural resources are few, wages, are close to major Western European nations and high-

interest rates. There is a high standard Education system, both at the highschool and university

with close links with industry, which has created a major advantage. Demand conditions are the

major source of competitive advantage of Italian firms sophisticated buyers of many products such

as furniture, clothing, and presence of consumer goods buyers for machinery and inputs.

55

The major role has been played by Internationalizationwith Italian taste and style, which was

created by a worldwide exposition of Italian designs and millions of tourists visiting Italy every

year. Italian industries have deep clusters and strong vertical relationship with its related

industries, with cooperation among distribution channels. In many geographic areas, family links

are also common. The characteristic of competitive Italian firms is a high level of specialization

and constant remodeling of products, mediumthe and small size firms with simple organizational

structure and high autonomy from employees and sometimes high rivalry at personal or family

level Industries. The Italian example proves that the role of government is not central for

competitive advantage. As many disadvantagesare created by national governments for Italian

firms. Since the local government was more supportive with limited interference and proper

investment. The major chance event for Italian firms was post world war II Boom which enables

its firms to invest in modem production technologies, without anycommitments to older

generations of process technology.

The demand conditions, domestic rivalry, extensive clustering,and Geographic concentration, had

broadened and created the competitive advantage for many Italian industries. A more effective

national government,Better functioning capital markets, and properly managed and organized

large firms might have contributed to a widening in the range of industries where Italy competes

successfully.

The fourth country studied by Porter (1990: 356), is Germany which had in 1985, 345 competitive

industries, which includes both industrial and consumer industrialproducts, having very strong

positions in production machinery. The main natural resources wereiron and coal reserves, mostly

contributed to the initial formation of some competitive industries Their role is now much smaller,

a major role is played by skilled, motivated, educated workers, technical and scientific base and

highly upgradedinfrastructure, very high standard universities, colleges, and apprenticeship

System with research institutes had led to the continuous up gradation of human resource and the

knowledge base. The early saturation and large size of the market have been the majority of

German industries. In the case of demand condition, they have an extremely demanding,

sophisticated and quality conscious industrial andend-usercustomer. The collaboration between

suppliers and buyers is extensively high on technical issues clustering is also high, the emphasis

on precise engineering and hierarchical structure has led to international success in different high-

56

performance segments. The technical orientation of the German firms has resulted in the

competitiveness of many industries which require a complex production process. The rivalry is

also strong in many international competitive industries on the basis of performance and

technology. The German government had less protective but plays a substantial role in factor

creation.

The two World Wars were the source of destruction of 34 important Germanfirms but at the same

time a challenge to overcome them and recreate a strong industrial base. These German industries

have an unusualadvantage in chemistry, mechanical engineering and physics related industries

(Porter, 1990: 379). The human capital and technological knowledge have contributed to its

competitive advantage which led to the creation of wide and deep clusters. Additionally, the two

world wars had a pose a constant challenge for German industries to upgrade major threat to these

industries are the absence of position of jew industries. A Recent phenomenon, such as the

apparent consolidation in some of the strong traditional industrieshaving subdued domestic rivals,

which is threatening their competitive advantage, and also their concerns over the ‘ability to make

fundamental breakthroughs in new scientific fields’ (Porter, 1990: 380) allhave seriously raised

questionsabout the German’s industries future.

The fifth nation mentioned by Porter(1990: 384-421) was Japan, which is the first of the Asian

country studied. Japan had a rapid success in many of its industries resulting in major economic

power. The country has very scarce natural resources (except for available hydropowerand natural

ports), industries have taken advantage of its skilled, educated and disciplined workforce, superior

labor-management relationships and constructive government. These advantages were then

supplemented by low-costcapital, by a large pool of engineers, a diversified related and supporting

industries for large firms which promoted clustering. Demand condition has played a major role

in its success as, the buyers more emphasis on product quality and automation. There is Fierce and

emotional domestic rivalry which contributed more tothe competitive advantage of Japanese

industries.

Korea is another Asian country analyzed by Porter (1990: 453-479). The competitive advantage

is primarily depended on the domestic rivalry, investment-oriented company, managerial goals,

and human resources. Demand conditions are a major weakness of Korean industries except for

the defense, construction,andshipbuilding. The last country analyzed by Porter (1990) was a

57

United Kingdom (UK) the country had an advantage in all the factors ofthe diamondmodel. But

there is a decline in the rivalry, sophisticated demand,a smaller number of related and supporting

industries and low commitments from investors and employees. The same observations are made

by Porter (1990: 507-535) about the United States industries. American industries which declined

during the last two decades had the same problem. The home market size, natural resources, many

competitive industries make around the base for upgrading competitive advantage. There are many

competitive industries across the US with clusters, skilled employees, intense rivalry, sophisticated

home demand,and strong domestic suppliers.

Oz (1997: 75-94) used Porter’s methodology for the analysis of Turkey, which is very competitive

in food/ beverages, housing and household, textile and apparel and materials/metal clusters.

Turkey’s had aweak position in the machinery industry, but strong positions in final

products.Hestudied five industries in which flat steel, clothes, construction, and glass, were

competitive whereas, the automobile industry was uncompetitive. He thoroughly investigates these

industries by applying cases study approach to identify sources of competitive advantage and

disadvantage. The results found the competitive advantage (or disadvantage in the automobile

case) to closely linked to the determinants of the Porter national diamond model. There were

certain issued raised related to the basic factors like government intervention and domestic rivalry

as two of the industries –leather and clothing grew little advantage from these basic factors., there

was no domestic rivalry in flat steel and glass industries in three cases the role of government was

more direct what Porter envisages.

A lot of work can be found based on porter diamond model. But there are many researchers which

criticize this model on a different basis. The following paragraph will discuss views and

justifications of many researchers on this model.

2.1.3.9.6. Criticism of Diamond Model

Criticism of the ‘Diamond Theory’ as an interactive system comes (Krugman 1991; Dunning 1992,

1993; Cartwright 1993; Rugman & Verbeke 1993; Bellak& Weiss 1993; Rugman &D’Cruz 1993).

58

They criticized that domestic demand conditionsdo not consider the attributes of thelargest trading

partner in the domestic market (Krugman 1990) this is not acceptable in many small nations

(Bellak& Weiss 1993; Cartwright 1993).It also ignores the role played by multinational

corporations in the competitive success of many nations (Dunning 1992, 1993). Krugman (1994)

introduced an extension of the diamond model which includes attributes of largest trading partner

at home Country’s double diamond model suggeststhat competitiveness dependent on both

domestic and foreign diamonds, therefore management of the domestic companies should

understand and exploit both diamonds, in order to be globally competitive (Rugman &D’Cruz

1993). The double diamond and multiple diamond models are simply the extensions of the single

diamond model (Dunning 1992, 1993; Bellak& Weiss 1993; the extensionis helpful in explaining

the international competitive advantage of less and small industrialized countries, theadditional

impact of international factors on the national diamond. Krugman identifies three dangers

associated with competitiveness.

Firstly, it results in wastage of money to enhance Competitiveness. Secondly, it promotes trade

warfares and development of lead protectionist policies which could result in the development of

worse government policy. Certain points of responses by many other argue that trade is not a zero-

sum game, but competition among firms is a zero-sum game. Prestowitz (1994) argued that in the

case of trade between Costa Rica and the United States Krugman is correct, but it is not correct in

case of trade between Europe and the United States. Krugman also argues that an economicfortune

of the nationis determinednot only by its success in international markets but by also productivity

at domestic level. Thurow(1994) responded that to be successful at domestic level productivity,

the firm must be competitive in the international market. The obsession with competitiveness is

very dangerous and advises connecting onto productivity (Krugman, 1994). Cohen (1994)

responds and identified that focusing exclusively on productivity has many dangers. Krugman

(1994) then suggested that in the absence ofa clear definition of competitiveness, it should not be

used for policy guidance. He further added that this debate is highly practical and intellectual, but

a little confusing. Krugman (1994) also argued that majority of economist and policymakersas

they consider trade as a zero-sum game. However, Krugman (1994) criticized for not providing a

clear difference between comparative advantage and competitive advantage as a basis for a

nation’s competitiveness. There are mainly two issues in this debate. First, the absence of a clear

definition of competitiveness. Secondly, the balance of trade balance may not be a very good

59

measure of competitiveness. Therefore,a new, comprehensive model that can selectively deal with

these two issues should be proposed,

The management school of thought criticizesPorter central idea of the diamond model which

suggests that nations like firms compete with each other. Porter’s (1990) suggest that the latest and

traditional theories of international trade and inadequate to explain modern trade patterns, this view

has received much criticism from the economic school of thought.

Balcorova(2013) used the Porter diamond model and nine-factor model and suggested that the

nine-factormodel is more appropriate for less developed countries as compared to the simple Porter

diamond model. He applied both models to three countries, Hungary, Slovakia,and the Czech

Republic and added that choice of variables for both models can influence the results of the model.

Waverman (1995), criticize the diamond model on a general basis, by trying to explain every

expect of international trade but end up with a vague view of competition. It is not able to

differentiate among hypotheses, theorems, facts,and conjecturesand thus unable to prove causality.

Grant (1991) was of the view that the Porter work is a primary contribution in explaining the

patterns of investment and trade in the modern economy, better than prevailing international trade

theories. These views are in contrast to the views of Waverman (1995), Davies and Ellis (2000)

who criticize this model on the grounds that Porter’s analysis is not satisfactory as it is not based

on core theory and lacks ex-ante predictive power, and it is a typical partial equilibrium analysis

ends up leading to a misinterpretation of the new and traditional trade theories. Additionally, the

relationships betweenproductivity, trade, exports, competitiveness,and national welfarewere,

misunderstood and are not properly interpreted.

Lastly, the new and traditional trade theories help to explain trade, but not those factors which

will determine the international competitiveness of the firms in the country, which is clearly

explained in the Porter work. The latest work of Porter (2004) also focuses the micro approach of

Diamond Framework; he calls it ‘the microeconomic foundations of prosperity’. Porter (2004)

also shifted his focus to productivity associated with the location which helps firms improve

theircompetitiveness. Thus, if the location had an advantage for production, it will help nations to

increase their productivity, which will lead to the welfare of that nation. This does conclude that

nation, then becomes internationally competitive, even if the producers located there are

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internationally competitive. The reason is that productivity of nothing to do with international

competitiveness. Of the nation (Krugman 1998). Porter’s original work provides management with

a general framework which can be used to identify and analyze sources of competitive advantage

that firms can use to evaluate area related benefits of different countries. The frameworkthus

provides a connection between the firm and country sources of competitive advantage, which has

nothing to do with the international competitive advantage of countries. Therefore, the present

study will use the Porter nation diamond model for its analysis.

2.1.10.The Trade Liberalization Era

The Second World War ended up with a huge amount of destruction and distress. This marks the

start of a new era in which it was recognized that the increase in international trade would greatly

contribute to the development of weak economies of the world, This framework of increased

cooperation rapidly increased international trade. This economic cooperation takes place in the

different level. The first and least cooperation is a free trade area, where member countries abolish

maximum trade barriers. A Custom union as the second level doesn’t eliminate all trade barriersbut

adopt a common trade policy with non-member countries. In the third level factors of production

are free to move between member countries. In the fourth level known as economic union member

countries in the union adopt the single currency. The fifth level is a more advanced form of union

in which a single government will be formed by the union. The acceleration trade integration the

outcome of establishment of GATT in 1944.GATT was a multilateral trade agreement between

23 countries, agreed to abolish protectionist policies and increase trade integration through

cooperation among member countries.It was in effective till 1995, after which it was replaced by

the WTO.

In order to achieve the advantages of trade integration South Asian Association for Regional

Cooperation (SAARC) was formed among the eight nations of South Asian 1985 these countries-

India, Pakistan, Nepal, Srilanka, Bangladesh, Maldives, Bhutan, and Afghanistan. This agreement

was to be operational till 2006 and achieve full integration till 2013. After the signing of these

agreements' member countries are struggling to increase regional cooperation by reducing tariffs

and quotas and othernon-tariff barriers Gul and Yasin(2011). Indo- Pak bilateral trade had largely

been dominated by political mindset. Although certain initiatives from both sides were trying to

increase ‘People to People contact’, two-way diplomacy or SAFTA; but still tensions remained

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between both countries which resulted in untapped virtual opportunities. Pakistan can gain much

while increasing trade with India, which is almost one-sixth of the world market. It is beneficial

for India too perceives as it gains them trade routes from Asia to Europe, moreover, access to

natural resources of Pakistan. Cheema and Khan (2016) suggest that the Ricardian theory of

comparative advantage explains that Pakistan and India can trade with each other to their mutual

benefit even if one is more efficient in producing everything and the other county is not very

efficient and can compete by paying lower wages. Pakistan is more efficient in producing cement,

ceramic and textile due to labor expertise. As Pakistan is medium sized developing country as

compared to its neighbors especially India.So, economic cooperation and trade arebeneficial if

Pakistan selectsappropriate sector at the appropriate time and export its surplus production.

Taneja, Mehra, Mukherjee, Bimal, and Dayal (2014) used two different approaches- the trade

possibility and revealed comparative advantage approach to measure the trade potential between

Pakistan and India. The objective was to identify certain measure for normalizing trade relations

between these two neighboring countries.

Bhatti and Taga (2014) suggested that SAFTA was signed by both Pakistan and India to reduce

tariff barriers, increase regional trade to enhance regions socioeconomic development., but still

certain measure is required to improve the effectiveness of this agreement. Omar, Saleem, Jabeen,

and Hanan (2014) Performed a thorough analysis of 37 articles published in two years (2011 to

2013) in Dawn news regarding trade ties between Pakistan and India and suggested that increase

trade ties are visible but, are on the bilateral and parallel basis. The trade between India and

Pakistan did not normalize despite signing SAFTA another policy measure. Memon, Rehman and

Rabi (2014) used revealed comparative advantage method to study the effect of trade liberalization

on Pakistan’s industrial sector by using data from Pakistan, India, and China from 2003 to 2013.

The study suggested Pakistan trade pattern be diverted from China to India, which is more

beneficial. In addition, they also suggested that 18 industries should be protected from Indian

market imports to Pakistan as they have the potential of threatening Pakistan competitive

advantage in that industry. In order to identify the factors which will contribute to Pakistan’s

national comparative advantage in trade with India, Porter competitive advantage theory will be

used in the current work.

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CHAPTER #3

THE AGENDA OF PAKISTAN AND INDIA

This chapter presents the profile of Pakistan and India. The first section has discussed the economy

of Pakistan and India. The second section will analyzein detail the trade pattern between Pakistan

and Indian and the major hurdles of trade between these two countries.

3.1 The Economy of Pakistan

Pakistan came into existence on 14 August 1947. The country has very significant development

potential. It is located at the crossroads of China, Middle East, and South Asia. It is thus at the

fulcrum of a regional market, having large population untapped potential for trade and diverse

resources. At the time of independence, Pakistan was an agricultural based country. In the first

five decades, its average economic growth was abovethe world economy in the same period

(Ahid&Wali 2017). Pakistan purchasing power parity (PPP) in 1980 was $71.81 billion. It grew

upto $793.85 billion in 2013. Pakistan wasranked 42nd in terms of GDP and 24 in terms of

PPP. With a population of over 190 million (the world's 6th-largest) with 6% of the total

population is below the povertyline, its nominal GDP per capita is $1,428 in 2016. Pakistan was

ranked 25th in 2017. Growth in GDP was 4.5 % in 2015 and 6.7% in 2016 and 5.2% in 2017 with

the expectation of 5.5% growth in 2018, with the agriculturesector contributing 25%. services 54

%, and industrial sector 20% in the total GDP (Wikipedia, 2017).

The main issue which is threatening its economic stability and growth is decades of war against

terrorism and political instability which had seriously damaged its infrastructure and other

managerial issues. Pakistan economy is semi-industrialized, which is growing along the Indus

63

River (Henneberry, 2000).A seminar on Pakistan competitiveness by Zia (2006) suggested a weak

Competitive position of Pakistani firms with stagnant growth. As compared to newly emerging

economies. The exports are mainly composed of low technology products. But, despite weak

competitive position the economy is showing signs of recovery, which might be the result of

economic reforms, concessionalfinancing, debt restructuring, structural reforms, designing of

policies with resulted in increased GDP (Zia,2006).Currently, the country is in the process of trade

liberalization and privatization of many public organizations for the attraction of FDI and also for

decreasing the problem of the budget deficit (Pakistan Country Report, 2010).

3.1.1. Major Exports

Primary export commodities include chemicals, leather, textiles, sportsgoods, medical

instruments,and carpets/rugs. (Workman,2017). Other item exported by Pakistan are Cotton,

Cereals, Ores, slag, ash, Salt, Sulphur, stone, cement, Rawhides excluding fur skin, Plastics, Food

waste, animal fodder, Copper, Fish, Gums, resins, Other textiles, worn clothing, Knit or crochet,

Clothing (not knit or crochet), Leather, animal gut articles, Medical, technical equipment, Textile

floor coverings, Furniture, lighting, signs, Plastics, Fruits, nuts, Footwear, Toys, games, Toys,

games, Manmade staple fibers, Salt, Sulphur, stone, cement, Vegetables, Alcoholic beverages,

Sugar, Base metal tools, cutlery, Coffee, tea and spices, organic and inorganic chemicals and

oilseed (Pakistan Defense Forum, 2015).

3.1.2. Factor Conditions

Factor conditions are the backbone of any economy. They play avital role in the development

and acceleration in the economic development of any country. These factors are a combination of

basic and advanced factors. As Pakistan is a factor driven economy,Therefore, the factor condition

plays a very important role in the development of national competitive advantage in Trade. The

detailed analysis of different factors of Pakistan is as follows:

3.1.2.1. Human Resource

Human capital and its development play an integral part in the development of competitive

advantage. In this regard, professional experts have strategic importance (Debrah and Ofori,

2006).For the development of the knowledge-based economy,it’s very essential to develop human

resource of the country which reduces skill mismatch in the labor market and createsa competitive

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advantage for the nation by enhancing economic and social development for the improvement of

the wellbeing of its citizens (Khan, 2005). The Agriculture industry has employed 43% of the total

workforce, whereas, wholesale and retail sector, 9.2 %, manufacturing sector, 13.3 %, and

transportation and communication sector contribute 7.3% of the total workforce (Pakistan

economic survey 2013).Afridi (2016) suggests a positive relationshipbetween human capital and

economic growth using data from 1972 to 2013 from Pakistan they applied ARDL and VECM

models. The study suggested that it’s very important for Pakistan to invest in education and health

sector from its budgets for long-term benefits for the economy.

Pakistan has a population of over 220 million. But it is utilizing almost or less than 20% of its

workforce on the professional, managerial and technical positions, a Major portion of its workforce

is engaged in the industrial and agricultural workforce at the frontline(Afza& Nazir,

2007).Pakistan is situated in South East Asia and the majority of thisworkforce is comprised of the

labor force, themajority of countries in this region have a labor-intensive economy. As compared

to other economies of South Asia, Pakistan is in a better position, as it is using its workforce at

technical, administrative and professional positions. However, improvement is still needed in

many areas. The current education system has to be modified and upgraded, the industry and

academia should bridge the gap and work together for the development of therequired skills and

technical expertise needed. New institutes for training and development should be established.

Pakistan is ranked 147out 188 in human development index in 2016 (Human Development Report,

2016).

The education sector is dominated by poor infrastructure, ghost teaching staff in many village

schools, poor teaching staff and very inadequate learning outcomes (Arshad, 2016). In the health

sector, government spending was 1% of GDP in 2013, which makes it the lowest spender in the

health sector in the world. The outcomes of the health sector have improved but showed very low

improvement in nutritional outcomes. Which is not improved since two decades, and even

worsened. According to the survey on NationalNutrition,the 44% of child stunning rates remained

static since 1965, with 15% acutemalnutrition in under 5 yearsof age. The official statistic

suggested reduced poverty rates. Reductions in poverty have been strong in both urban and rural

areas, and the fall in rural poverty from 40 to 16 percentage points between 2002 and 2011 is

particularly striking. This decline in poverty is confirmed when examining the poverty headcount

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according to the international poverty line of $1.25 per capita. According to this metric, poverty

in Pakistan declined from 36 % in 2002 to 11 % in 2011. Pakistan now has the second lowest

headcount poverty rate in the South Asia region, after Sri Lanka (4 %). A large mass of the

population moved from just below to just above the official poverty line, which is why small

improvements in households’ real consumption. Despite increased growth in many sectors,

Pakistan is faced with the problems of very low human development and very low labor force

participation and economic growth. It ranked 146 out of total 187 countries in 2014. Which is

lower than most of the SouthAsian countries. Access to education is very low with primary

completion very low. Government spending on education is 2.1 % of the total GDP in 2013

(Wikipedia, 2017).

3.1.2.2. Physical Resources

The major resource of Pakistan’s is its arable land and water.Pakistan has a larger irrigation system

with 25% of arable land under cultivation. It irrigates almost three times more acres than, Russia

with a favorable climate, agriculture contributes 23 % in the GDP and employs 44% of the total

workforce of the country (World Bank, 2008). The country is endowed with a largenumber of

mineral resources and a very promising area for exploration of mineral reserves. The country is

gifted with almost 6,00,000 km² of the outcrops area demonstrates a geological potential

ofdifferent varieties metallic and non-metallic mineral reserves(Wikipedia, 2017).

3.1.2.3 Knowledge Resources

There is a dire need to increase research and development culture in Pakistan to increase exports

(Manan, 2013). There are a large number of research institutions set up at federal and provincial

level by the government, but the main problem is inconsistent financial support from the

government, lack of linkage between academia and industry and lack of funding for market-based

surveys. The science and technology board of management has made significant efforts for the

development of national science policy (Butt, 2015).

3.1.2.4. Capital Resources

The banking sector of Pakistan remained very strong during the financial crises of 2008-9,

attracting a huge amount of FDI (Wikipedia,2017). The consumer financing greatly flourished in

the country during the last few years due to the privatization of banks. There is an inadequate

66

finance to many sectors. The FDI is the major external source of finance, which can help modernize

the industries and it helps to integrate the economy in world markets. Pakistan had taken reasonable

steps to increase the amount of FDI. It is categorizedas one of the top ten destinations of Asia

(SBP, 2017).

3.1.2.5. Infrastructure Resources

The Pakistan telecommunication industry has shown remarkablegrowth due to regularization

measures. In 2008 mobile subscribers reached 140 million in 2014, which was the world’s highest

mobile tele densities (Wayback machine,2010). There are above 6 million landlines having 100%

fiber-optic network. Which provide coverage to the remotest areas of the country(Wikipedia,

2017). There are almost 3.1 million fixed line users, additionally 2.4 million wireless users. The

liberalization measures had attracted almost $90 million FDI During 2007-8 (Wikipedia, 2017).

This sector attracted $1.62 billion FDI whichalmost 30% of the FDI received by the country. The

Current growth of state-of-the-art infrastructures in the telecoms sector is due to the efforts of

PTA’s vision and implementation of the updated policy. Internet and mobile phones were adopted

with laissez-faire policy. There is a rapid increase in internet users with an increased number of

people speaking in English; the Pakistani society has shown a remarkable revolution in

communication. In terms of growth in broadband internet, Pakistan is ranked 4th in the world

(Wikipedia, 2017). In 2009 the country had 20 million internet users with the capability of

absorbing 50 million in the next 5 years (Wikipedia, 2017). Every government department has

their own website. The used of search engines and messaging devices is accelerating very

rapidly.This sector had provided almost 80000 directly and 500000 jobs indirectly (Wikipedia,

2017).

3.1.3. Supporting and Related Industries

An efficient and modernized communication and transportation system is a key for the success of

a country. Public and private investment in this sector greatly reduces transportation cost and also

generates employment. Pakistan has reasonably developed its transportation infrastructure. The

country bears a load of almost 239 billion passenger kilometers domestic transport and 153 billion

kilometers per year. The demand for domestic transportation services, higher than the growth in

GDP. The road transport system plays a vital role in the overall transport system. The network of

about 3.65% of the total road network in the country. It carries loads of about 80% of the total road

67

traffic. Over the last few decades, the freight and passenger traffic has significantly grown even

more than the national economy. But there is negligence in the other modes of transportation; the

government is now trying to improve them as well. The port traffic is increasing at the pace of

*8% per annum. There are three major ports efficiently working including Karachi, PortQasim,and

Gwadar port. There are also 14 dry ports working to cater to foreign trade. Pakistan Railways (PR)

provides service for inland transportation, which cheaper than land routes. It consists of the main

North-South corridor, which connects the Karachi port and the primary production and different

population centers within Pakistan. There are 36 operational airports in the country which handle

both domestic and international cargo (Pakistan Economic Survey, 2007-8).

3.1.4. Firm Strategy and Rivalry

According to the world bank,Pakistan had made asignificant progress in doing business

index in medium and small size business. It is included in the top ten improvers of the world. The

country has also announced a roadmap for the next three years for further improvement in the

global ranking of doing business. The country has also implemented reforms in the last three years

for registering property, trading across the border and getting credit (Wikipedia,2017).

The introduction of digitalization process land transferring and other land has improved

and became more reliable. Introduction of cross-border electronic custom platforms both in

Karachi and Lahore had decreased time for fulfilling border regulation. The government of

Pakistan has also improved accessto credit information and provided a legal guarantee to borrower

right for the inspection of their data. This has also increased the country ranking in getting credit.

Despite these efforts, the domestic businessmen still face many problems in different areas

including enforcing the contracts and also getting electricity. It also takes almost 3 years to clear a

dispute in Pakistan as compared to world average of 637 days. The companies in Karachi and

Lahore faces power outages on a daily basis (Pasha & Saleem, 2013).

3.1.5. Government Policy

Amjad.et.al (2012) performed a firm-level survey using data from Pakistan and suggested that the

key impediment to Pakistan export competitiveness are, skilled labor shortages, energy crises, poor

infrastructure,and market imperfection. Which needs a clear and practical government policy to

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be devised to solve these problems, and help to expand the export market of the country. The

growth strategy of Pakistan followed a pattern of sector-picking for the sake of import substitution

and later for export promotion. This kind of policy results in negligence of other sectors and

distortion of incentives in the public and private sectors. There is an urgent requirement of

deregulation of subsidies and tax incentives fortrue innovation and entrepreneurship (Hussain

&Ahmed,2011).

Hussain (2017) identified that the decline in the international price of oil and gas were not passed

to exporters of the country, who are not able to take advantage of cost-saving and innovate new

product to be introduced in the market. Exporters are continuously stressed by the government to

increase their exports, but they are continuously faced with the problem to load-shedding.

Additionally,their inconsistency and lack of coordination between various government policies.

Import tariffs are purely driven by or protection of domestic,import-substituting industries or

revenue mobilization. It is not beingrealized that a restrictive import regime with the tariff,nontariff

and regulatory barriers, and customs clearance procedures which are very cumbersome and

withautocratic powers enjoyed by low-level customs officials which are amenable to corruption,

would restrict entry of Pakistan into the global market. Large-scale manufacturer enjoys higher tax

incentives which restrict medium-sized firms to attain economies of scale.

In order to analyze the economy of Pakistan this work has selected five industries. A brief overview

of five selected Pakistan industries is as follows:

3.2.Pakistan Agriculture Industry

Pakistan is an agricultural economy. The majority of its population is involved in the

agricultural activities directly or indirectly. Important crops of agriculture industry are sugar cane,

wheat, cotton,and rice. Which together comprise almost 75% of the total output value of the crops.

The largest food crop is wheat. In 2005, the country had produced 21,591,400 metric tons of wheat,

which is more than all of Africa (20,304,585 metric tons) and nearly as much as all of South

America (24,557,784 metric tons), the country is expected to harvest 47 to 64 million tons of wheat

in the 2015 (FAO, 2015). Pakistan has gradually decreased the use of dangerous pesticidesand is

a net exporter of food products except for the years in which the harvest wasaffected by droughts

(Wikipedia, 2017).

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3.2.1.Major Exports and Imports

The major exports of this industry are, cotton, fish, fruits, vegetables, rice etc. the major imports

are wheat, pulses, vegetable oil,and other consumer products. Pakistan has categorized

aslargest camel market, second-largest ghee and apricot market and third-largest milk, cotton and

onion market in Asia (FAOSTAT, 2006; Pakistan Statistical Bureau,2016).

3.2.2. Government Policy

The Pakistani government is introducing agricultural assistance policies for the improvement of

this industry. The government had introduced increased support prices for a variety of agricultural

commodities and easy credit facilities for the farmer for the purchase of good quality seed,

fertilizers,and tractors. The real growth in this industry was 5.7% on average from 1993 to 1997

but had declined to about 4%(Bakshi&Trivedi, 2011).

3.2.3. Challenges Faced by the Industry

Alam and Khan (2010) suggested that due to the global recession, poor security situation,

inflation,andan increase in production cost are major problems of this industry. The problem of

soil erosion, water wastage, use of old and conventional methods of farming, a division of land

from generation to generation resulting to small farms, water logging and salinity, low yield, lack

of communication networks (Enfopedia, 2010), had seriously damaged this sector. The

Monopoly of foreign companies and non-comprehensive government policies are added to the

difficulties of this sector (Amjad, 2010).

3.3. Textile Industry of Pakistan

Pakistan Textile industry is the largestin the manufacturing industry (Wayback Machine,2015:

Memon, 2015).It is the 8th largest exporter of textile products in Asia and contributes 8.5% to the

GDP of the country (Factsheet Pakistan, 2015). Almost 45 % of the total workforce is employed

by this sector, but unfortunately, the productivity is also very low due utilization of old technology

and methods. The country is a 4th largest cotton producer, having the third largest spinning capacity

after China and India in Asia. It has 5% of the global spinning capacity (Tahir,2013). Currently,

Pakistan has 124 large spinning units, 1221 ginning units, 442 spinning units and 425 small units

(Tribune, 2013). The country is the third largest cotton consumer in the world. The industry is a

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backbone of Pakistan economy. The industry is facing a very tough competition internationally

due to production cost, which is even higher than its neighboring countries-Bangladesh, China and

India. The major sectors of the textile industry include Spinning, Weaving, Processing, Printing,

Garment manufacturing and Filament yarn manufacturing (Tahir, 2013). This Sector has

maintaineda 54% share of the total exports of the country (Memon, 2015). Industry clusters are in

Lahore, Karachi,and Faisalabad are the major hubs for this industry, but the clusteris also found in

Gujranwala, Gujarat, Multan, Kasur,andJhang.

3.3.1. Exports

Textile industry earns large amounts of foreign exchange. The major exports of this sector are

cottonyarn, cotton fabrics, bed wears and ready-made garments. It is the largest bed-linen supplier

to the European Union (EU). In January 2014, Pakistan was given approval for the Generalized

System of Preference (GSP), by EU (Memon, 2015).

3.3.2.Government Policy

The deregulation and privatization have placed the private sector in very domination position for

shaping the market. The government is not playing to tackle the market imperfections.

Additionally, subsidy previously provided to the industry has also eliminated (Tahir, 2013).

3.3.3. Challenges Face by the Industry.

The industry is badly hit by power cuts, which had forced many to close their operations. The

Majority had shifted their production to Bangladesh. The industry is also affected by the global

recession, increased the cost of production, which badly affected the growth rate of the industry.

Thereis alsolack of research and development, used of modernized technology, electricity

shortages, tight monetary policy, removal of subsidy and increased inflation badly impacted the

textile industry of Pakistan (Tahir,2013). The industry is highly dependent on agricultural produce,

due to which in case of a natural disaster like flood and hurricane the raw materials became scared.

There is alsolack of technical education related to this industry. The industry also faces the problem

of lack of investment and fluctuation in the raw material prices. Another challenged recently

Emerged by the imposition of strict environmental standards as part of the worldwide response of

businesses and government for ecological friendly composition and production (Memon, 2015).

Other problems include shortages of utilities, variation of yarn prices, the poor security situation

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in the country, inflation, deficient reach activities, use of old techniques and machinery, high-risk

averse industrialist, very low R&D labor and industries shifted to other countries, quality issues

and anti-dumping duties imposed by other countries (Shah, Walayat& Kabeer, 2012)

3.4. Pakistan Edible Fruits and Nuts Industry.

Pakistan is producing a large amount of export quality dry fruits, including Almond, pine nuts,

dates, figs, walnuts, pistachio, walnuts, peanuts, dates, raisins,and dry apricots. But the actual

exports are far less than its potential due to un-standardized grading, packaging, lack of addition

and other policy constraints. The country had started mechanization of grading packaging, but the

industry had shortages of storage facilities, which results in the loss of fruit production during

harvesting, transportation,and storage (Ali, 2012).

Fresh fruit exports had shown a positive trend during the period 2006 to 2015. The production of

mangoes and citrus fruit had significantly increased from 2006 till 2010 after that it showed a

decreased trend. But joint efforts of private, public sector had prevented this industry from a

decline. The exports of citrus fruit had continuously increased, but mangos exports decline did not

impact on the export earnings (Aazim, 2016). There is a great potential for Pakistani dry fruits as

most of it is organic. But due to itsnon-compliance to the international standards, it is not successful

to increase its exports (Ali, 2012).

3.4.1. Challenges Faced by the Industry

Poor transportation facilities, unskilled labor using outdating techniques for production and

post-harvesting, poor financial capacity and ignorance of producers, products are not produced

according to market demand and the main problem is apoor-quality certification which never let

producers improve the quality of their products (Ali, 2012.). The other crucial issues of this sector

are soil erosion and low levels of water (Abass,2013). Hughes (2014) identifies food, water,and

energy security and falling agricultural production major challenges of this industry.

3.4.2. Government Policy

The government is trying to encourage the privatesector for the development of production

centersin northern areas and also developed solar proceeding units and initiated different projects

of dry fruit processing in D.I.Khan, Turbat,and Khairpur. Additionally, they had also sent delegates

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of exporters to participate in international food exhibitions and fairs (Ali, 2012).But practically no

concrete steps were taken., it was evident fromthat, out of many horticulture projects initiated by

Pakistan Horticulture Development and Export Company (PHDEC) not a single was associated

with this sector. In KPK where major production of dry fruit is done, an army led efforts had

contributed a lot in increasing its production (Aazim, (2016).

3.5. Pakistan Sugar Industry

The Sugar industry is the second largest agro-based industry of Pakistan. The industry is playing

a very significant role in creating economic activity in the country for farmers and sugar

manufacturers contributing its rolein the economic development of the country. Pakistan is the

sixth largest producer of sugarcane in term of acres, in term of production of refined sugar it stands

12th in the world. Sugarcane is grown on approximately 1 million hectares, which provide raw

material to 84 sugar mills.The byproducts of sugar, molasses is also used in fuel grade ethanol,

paper production,andchipboard manufacturing. Another byproduct, bagasse is utilized in

chipboard and paper manufacturing (JCR-VIS, 2013).

3.5.1. By-Products of the Sugar Industry

The byproducts of this industry are bagasse, molasses,and press. Bagasse which isused for the

production of paper or fiber boards which are used for light furniture making. Molasses, which is

used for the making of ethanol, a high-grade fuel press is used for the making of fertilizer

manufacturing (JCR-VIS, 2013).

3.5.2.Challenges Faced by the Industry

The industry is facing a situation which is very similar to the textile industry, which stems from

the government unchecked growth. The projects are sanctioned on the basis of political grounds

without the consideration of market size and availability of raw material. The newly established

units are facing this problem more adversely, because of their low crushing capacity and more

financial losses (Wayback Machine, 2015). The average yield per hectare of sugar is very low as

compared to the world and even below India, which had similar soil and weather condition. There

is also a large gap between the yield obtained from the ordinary farmer field and yield from

experimental stations. Sugar mills are also producing below their capacity. The main reason

behind these problems is that most of the sugar mills are owned by political personalities, many of

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which were financed by DFIs which results into working capital crisis, resulting into close down

of many mills (Whizz Mag,2009). Other problems include late planting, early and late harvesting,

outdated methods of planting and agricultural practice, very low soil fertility, poor management,

low Variety of output, non-availability of credit. Khushk, Memon,and Saeed (2011) suggestthat

the growers blame that the crises in the sugar industry are created artificially to provide benefit to

the mill owners to maintain sugar cane prices less than support prices, for the generation of

abnormal profits. Additionally,they also identified that increased transportation cost had

contributed to the problems of growers.

3.5.3. Government Policy

The procurement prices for sugar are set by provincial governments with the consultation of

representatives of farmers and sugar industry, which was based on guideline provided by ministries

of agriculture and National Food Security and Research. In order to boost sugar exports, the

government of Pakistan had announced export subsidies of $100 per metric ton and imposed

25%tariff on imports. The problem is that the sugar area under cultivation has not increased over

the last few years, despite the increase in its procurement prices (Rehman, 2015).

3.6. The Chemical Industry of Pakistan

In 1950’sgovernment established Pakistan industrial development council (PIDC) for the

industrialization of the country. As a result, many large chemical estates were established,

including Maple leaf cement, Pak American Fertilizers, Pak Dyes and Antibiotics (Penicillin), at

Iskanderabad (DaudKhel), district Mianwali. This area played a major role in the development of

the cement industry in Pakistan. Later on in another estate was established near Kala Shah Kaku,

Lahore. In Karachi, many chemical factories started to emerge due to flexible credit policy by the

government. But in 1970 privatization policy badly hit the growth of this industry and never pickup

after that resulting into increase in the imports of chemicals from abroad (Paracha, 2012).

3.6.1. Challenges faced by the Industry

The industry is exposed to international competition due to negligence by the government,

import substitution policies, high tariffs, intellectual property rights and, trade defense laws and

patents, etc. ((Paracha, 2012). Adress (2015) stressed the importance of increasing the potential

of this industry as almost 17% of the total imports comprise of chemical products. Pakistan has

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made substantial development in basic chemicals like Caustic Soda, Soda Ash, Bleaching powder,

Sulphuric Acid (H2SO4) and Chlorine and has constructed sufficient production capacity of these

chemicals to meet the needs of the local industry, while leftover is being exported. The main

challenge faced by the industry is its independence on imports, which results in high production

cost. Secondly, poor infrastructure and technology, financial resources, sufficient research and

development,and trade policy deficiencies result in weakening of this industry(Adress, 2015).

3.6.2. Government Policy

The country has a very good organized system for imports and exports of chemical material. The main

problem is that the imports are more than exports. The government should try to devise policies for the

improvement of exports in this sector (Zeenat, 2011).

3.3.Overview of the Indian Economy

According to international monetary fund (IMF) and central statistics organization India is the

world’s fastest growing economy. India is the world'sthird-largest economy as measured by PPP

and seventh largest by nominal GDP. It is classified as a newly industrialized country, categorized

as the major economy of G-20. The average growth rate is 7% in the last two decades. In 2014,

India became the fastest growing economy, which can surpassChina (ESOPB,2015). India has the

largest young population and low dependency ratio and healthy savings due to increased

investment rates and increased integration into the global economy (CIA,2017) the potential

economy of India suggest that it will be the third largest economy till mid-century.(IMF,2015).

India is a major exporter of IT-related products, software-related products,and BPO services with

about $167.0 billion worth of service exports in 2013-14. IT is a fast-growing sector of the Indian

economy (The Hindu, 2014).

The IT sector is regarded largest employer of the private sector in India (Livemint,2015). It is also

the third largest hub of startups in the world (money control, 2014). The countrystands second in

the world farm production. The agriculture industry is the largest employer but contributes only

17 % to its GDP in 2013-14(Press Trust of India,2015). Whereas, the industry contributes about

26% of GDP in 2013-14 (The Economic Times, 2014). The major prominent industry is

itsautomobile industry, which produces almost 21.28 million vehicles in 2013-14 (Share of the

different sector in Indiaeconomy,2015). The retail market, ofIndia, comprisesof $600 billion in

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2015 and including the fastest growing E-Commerce markets of the world. There are two stock

exchanges in India-the National Stock Exchange of Indiaand Bombay Stock Exchange. Having a

market capitalization of $1.68 trillion and $1.71 respectively in ranking 12th and 11th in the

world(Bhupta, 2015).

3.3.1.Factor Conditions

Factor conditions refer to available factors which contribute to the competitive advantage of

nations. The detailed analysis of factor conditions of India is given below:

3.3.1.1.Human Resource

Population growth shows that Indialabor will reach up to 160-170 million till 2020. India has very

rigid labor laws, which has hindered the growth of the labor market (Planning Commission of

India, 2007). India is included in three large economies of PPP. The population median age is 25,

putting it in a very favorable demographic position (HSBC, 2012).

3.3.3.2. Physical Resources

India is naturally gifted with a large land area which includes regions having heavy rainfall

to barren deserts, coastline,and large forest area. Due to climatic variation and difference in

altitude, different types of forest are present. Almost 21 % of the total area covered with forest.

Forests are the main source of drugs, paper, firewood, spices, gums and herbs and many more.

They significantly contribute to the national GDP (Planning

Commission,Government ofIndia,2013). The country receives an average rainfall of 1,208mm

annually. The total precipitation of 4000 billion cubic meters annually. The utilizable water

includes groundwater consist of 1123billion cubic meters (Wikipedia, 2016). The cultivated area

is 546,820 square kilometers of the total land (Wikipedia, 2016). The Indian inland water

resources include lakes, rivers, wells, canals and also large marine sources which consist of west

and east coast of theIndian ocean and also bays and gulfs, providing employment to over 6 million

people in fishery industry(Wikipedia, 2016). The agricultural growth has increased due to use of

high yielding seeds, improved quality fertilizers and proper irrigation system, which has increased

the crop productivity, crop pattern and strengthen the backward and forward linkage of industry

and agriculture (Arunabha,2004). However, some categorized it as an unsustainable effort, which

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resultsin the development of capitalistic farming, increasing income disparities and ignoring

institutional reforms (Taskforce, 2006).

3.3.3.3. Infrastructure Resource

In the internet users, India isexpected to reach 850 million till 2025 (BCG, 2017). The use of the

internet is increasing in men as well and women and it is spread through rural areas. The major

challengesfaced by internet service is the very low average of broadband bandwidth as compared

to developed countries. Additionally, internet penetration rate is also very low, almost 75% of

broadband are in major 30 cities of the country (Telecom Regulatory Authority of India, 2007).

3.3.3.4. Capital Resources

The Indian banking sector is highly regularized with 75% of the total banking, asset in publicly

owned banks, as compared to foreign and private banks' asset holding 6.5% to18.2 %. The gross

domestic saving of the country is usually in physical assets and gold. The liberalization efforts of

the country had reduced interference of the government increasing competitiveness and

profitability, additionally, thegovernment had open its door for private and foreign companies

(Datt.et.al. 2009). Since liberalization, the government has approved significant banking reforms.

While some of these relate to nationalize banks – such as reforms encouraging mergers, reducing

government interference and increasing profitability and competitiveness – other reforms have

opened the banking and insurance sectors to private and foreign companies. (D'Silva, 2007).

3.3.3.5. Knowledge Resources

The R&D environment in India provides a very significant opportunity for MNCs research,the

ecosystem in India around the globe due to its intellectual capital available in the country. The

competent engineers and researchers working at competitive cost are available. Many MNCs had

shifted their research centers to India. These centers are very helpful in meeting the demand

(IBEF,2017).

3.3.2. Supporting and Related Industries

The transportation sector contributes almost 5% of the GDP of India. The country has 5,472,144

kilometers networking 2015. This was ranked second in the world. The quantitative density of

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Indian roads is higher than inmany developed countries. The roads of the country are a mix of

paved, modernized, unpaved and slightly improved highways (Wikipedia,2017). The problem

with Indian inland road is traffic congestion, the country is trying to improve its infrastructure and

building 4 to 6 lane highways to connect major manufacturing, cultural and commercial center.

The inland road bears 60% of freight and 85 % of passenger traffic (Wikipedia 2016). The Indian

railways are ranked fourth in the world, having a 114,500-kilometer track length and 7,172

stations. It carried a 23NSN average OF 23 million Passengers a day. The country has a coastline

of 75000 kilometers, having 13 ports and 60 major ports. There are 125 airports from which 66

are licensed for handling logistics and passengers (. McKinsey and Company, 2007). The Indian

mobile subscription had drastically increased with the addition of 3 million every month

(Gopal&Srinivasan, 2006). The country has the fastest growing market with ease of getting

connected in even rural and remote areas (EY,2016).

3.3.3.Demand Conditions

The increasing middle class of the Indian economy had made it the largest buying economy

(HBFC,2012). Agarwal (2013) suggested that the large size and increasing disposable incomes of

Indiahave made a profitable market. The consumer is highly informed and demanding which made

market customer oriented, but despite having a higher disposable income they have less time for

evaluation and selection of their desiredproducts, due to increased working hours. The political,

social and technological environment had transformed the behavior of Indian consumer. The

behavior of Indian consumer has changed in recent years, they are now spending more on different

items. The widespread increase of the use of the internet and social media and urbanization had

contributed a lot in this changing purchasing patterns (Dey,2017).

3.3.4. Firm Strategy and Rivalry

Poddar(2004) used panel data and identified that the trade liberalization policy of the

Indiangovernment had led to increasing the competition, creating a healthy environment for the

businesses.Foreign investors are very keen to invest in India, despite having developed economy

the country is providing excellent services to investors. The transformation of the Indian economy

from socialism to the capitalisticeconomy has made economy open for the producers to innovate

goods and services (Marketing and Strategy Article, 2014).

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3.3.5. Government Policy

Since independence, the economic policy of India was dominated by Indian colonial experiences.

The domestic policy was dominated by protectionism, having a strong emphasis on

industrialization, import-substitution and economic interventionism (IMF, 2015)]. The policies

related to foreign investment and trade were quite liberal (Gurcharan,2002). After the end of the

British occupation,India was dominated by social democratic policies and Fabian socialism,

protectionism and import substitution. Their economy was extensively regularized, having a

largemonopoly, protectionist policies, pervasive corruption and slow growth

(Gagan,1992). Since, 1991 after the Indian economicliberalization initiative, the countryshifted

towards market-based economy (OECD, 2011), and till 2008 it was ranked as the world’sfastest

growing economy. But the growth was significantly slowed down to 7% in 2008 -09, which was

slightly recovered to 7.4 % in 2009-10. The fiscal deficit rose from 5.9% to a 6.5% 2009-10.

(Sachs,2007) accountdeficit rose up to 4.1 % of GDP, in the second quarter of 2011. In 2012-13

the unemployment rate was, according to the Government of India's LaborBureau, were 4.7%

nationwide, by UPS method (Kumar,2013) and 3% by NSSO method. The inflation rate ranges

from 8.9% to 12% in 2012-13 (Habib,2004). Poddar (2004) used panel data and identified that

India wasfacing a serious balance of payment in 1990, due to which series of trade liberalization

reforms were introduced, this resulted in a boom in exports of goods and services. In2001, the

country used nontariff barriers and technical standardrules for the regularization of trade,even in

2005 they introduced a new patent law for the protection of intellectual property rights

(HSBC,2012).

The brief overview of the selected industries from India are as follows:

3.5.Textile Industry in India

After agriculture, the textile is the largest industryin India, which had a generated large amount of

employment for the skilled and unskilled labor force. It had employed almost 35 million people in

India. The export of this industry was almost 11.04%in 2010 (Ministryof Textile India, 2017).

There was almost 2,500 textile weaving firms and 4,135 textile finishing firms in 2010 all of India

(Wikipedia, 2017). According to AT Kearney’s ‘Retail Apparel Index’, India was declared as

fourth mostpromising retailapparel market in 2009.In Jude production, India is first in capturing

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almost 63% of the global market. It also stands second in world textile, silk,and cotton production.

They allow 91% FDI in the textile sector via the automatic route. Many foreign textile companies

had invested, and many are working in India(Business Standards,2014)

2.5.1. Production

India stood second in the production of fiber in the world. The major produced fiber is cotton. The

many other fibers produced by India,is silk, jute, wool, and man-made fibers. But almost 60% of

the IndianTextile Industry is based on cotton. The major determinant of the huge growth of the

textile industry is due to huge domestic demand and revival of the market in 2009. The prices of

cotton were increased 50%from 2009 to 2010. The reason for increased prices was flooded in

Pakistan and China. The cotton textile industry was previously concentrated in Maharashtra and

Gujarat, which was cotton production belt. The industry was facilitated by the proximityof raw

materials and labor availability, transport, moist climate,and many such factors contributed to its

localization. Spinning was centralized in Maharashtra, Gujarat and Tamil Nadu, as compared to

weaving which is highly decentralized. Till 30 September 2013, there were almost 1962 cotton

textile mills in India, 80% of which are in the private sector and 20% is in the cooperative and

public sector. There are also many small factories with four to ten looms working in India

(Wikipedia, 2017).

2.5.2. Major Exports

India exports yarn to Russia, United States, Japan, United Kingdom, France, Singapore, Sri

Lanka,and Nepal and other countries. The installed capacity of spindles in India is the world largest

after China. Despite India’s largest share of cotton yarn in the world market, its garment export

comprises only 4 % of the world market. The reason might be its local incompetency in the

spinning and weaving mills of yarn processing. Despite having large companies, but the majority

of production is fragmented in small units, which are only capable of entertaining the local market.

Other reasons are outdated machinery, power supply shortages,low labor output and the threat of

competition with synthetic fiber sector (IBEF,2008).

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3.5.3. Challenges Face by the Industry

Oneof the major challenges faced by the textile industry in India is stiff competition from synthetic

fiber industry and also from other countries like Thailand, Brazil, Philippines, Bangladesh,and

Egypt.

3.5.4. Government Policy.

In order to improve the working of India textile industry,the Indiangovernment in 2000 had passed

the National Textile Policy. The ministry of textile is working to improve the coordination of

human-madefiber like cotton, silk, Jude, wool industry, promotion of exports, decentralization of

power loom industry, use of information technology etc (IBEF,2008).

3.6. Indian Inorganic Chemicals Industry

The inorganic chemical industry produced products of intermediate products, which are used as

inputs in many industries and production processes. This industry is comprisedof two Sections,

which are alkaline and basic inorganic chemicals.Chemicals included in inorganic chemical are-

carbon black, Aluminum Fluoride, potassium chloride, Calcium Carbide. Alkali chemicals

include-liquid chlorine, caustic soda and Soda Ash (IBEF,2008)

3.6.1. Market Size

The market size was about approximately 5.8 million tons in 2006-07. In which basic chemical

contributed 0.6 million tones and alkaline contributes 5.26 million tonnes. In alkaline chemical,

the largest segment is soda ash, which comprisesabout 40% of output. Caustic soda contributes

36% and 24 % is contributed by liquid chlorine. In the case of basic chemical, carbon is the largest

segment, comprising a share of 71% of total output. 16 % is contributed by calcium carbide and

1% by titanium dioxide and other significant segments ( Bysani, 2010).

3.6.2.Market &Opportunities Inorganic Chemicals

The domestic production of the inorganic chemical industry is increasing in India, imports and

exports of these chemicals had also increased there had been imports of 256,000 tons in 2001-02

to 842,000 tones in2005-06, at an increased 34.7%. There was also a similar trend in exports during

that period, which was about 24.2 % in 2006-07(IBEF,2008).There has been increased demand for

these chemicals in the world, which had increased the exports of titaniumdioxide carbon black and

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aluminum fluoride. This had pushed the industry to a saturation point in many key segments which

suggests that in order to increase exports of these chemicals capacity has to be increased.

3.7. Agriculture Industry In India

Agriculture industry had played a vital role in India’s economy. It is priciple livlihood of over

58% of the rural population. Agriculture, along with forestry and fisheries, is one of the largest

contributors of the India's GDP. As per the 2nd advised estimates of Central Statistics Office

(CSO), the share of agriculture and allied sectors (including agriculture, livestock, forestry,and

fishery) is expected to be 17.3 % of the Gross Value Added (GVA) during 2016-17 at 2011-12

prices (IBEF,2017). India has an agrarianculture supported by the regionalclimate whichhad

significantly contributed tothe world food needs (IBEF, 2017).

3.7.1. Major Products

The major products of this region are spices, mangos, curries,and snacks, which are known for

their excellent quality. India shares 10% of the global food and agriculture market. India ranks first

in pulses and milk production and second in vegetable production.

3.7.2.Export

From April-August 2016, the agricultural and other processed food exports amounted to US$ 6.4

billion, for animal products and cereal it was almost 41.16 % of the total exports, for livestock

products it was 25.98 %, 6.94% of processed foods,8.32%of fresh fruits and vegetables, 6.52%

was for processed fruits and vegetables and 1.09% for floriculture and seeds. The Indian

agricultural and processed food products are exported to more than 100 countries including EU,

US, Middle East, Southeast Asia, SAARC countries.

3.7.3. Government Policy

In order to meet the growing food and for industrial base needs of India the government had

introduced a number of technical measures such as providing high yield seeds, irrigation facilities,

land reforms in which their elimination of intermediaries, tenant and landlord regulation for the

security of tenants. Credit facilities were introduced for farmers. Procurement or support prices

and subsidies were announced for fair returns to farmers. The Food security system was maintained

to tackle any shortages of food. Certain measures were also introduced for people living below the

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poverty level. Lastly, the government also introduced employment development plans for rural

areas (Chand, 2016).

3.8. The Sugar Industry of India

Indian sugar industry is a fourth major producer of the world. It stands second largest Agro-based

industry of India. It not only serves its world’s largest domestic marketbut also provides

employment to almost 50 million farmers and their families. The industry has accelerated growth

in the rural areas of India by providing employment and with the socio-economic change (Pandey,

2007).

3.8.1. Exports

Since 2005 Indian sugar industry contributes 17 % of the world’s sugar production. Exports of

sugar were also grown in the year 1998 to 2003, but due to decrease sugar production the exports

of sugar gradually declined and in 2005 the country has to import sugar for its domestic

consumption (Pandey, 2007). India is not competitive in the production of raw or white sugar

the country has the capability for sugar production, but not at competitive levels (Mahajan,2017).

The country needs support from the government for its recovery.

3.8.2. Government Policy

It is a government-controlled industry through the commodity act of 1955 (Pandey,2007). In

1998 the government-initiated liberalization policies in an effort to globalize trade of this industry,

which created significant improvement and led to the growth of sugar mills. The government de-

licensed the industry announced Statutory Minimum Price (SMP) and fix State Advised Price

(SAP). All these measures played important role in the production of sugar. Despite continuous

liberalization efforts, there are still regulations on the entire value chain sugarcane procurement,

sugarcane price, land demarcation, sugar production and sale of sugar by mills to international and

domestic customers (Mahajan, 2017).

3.8.3.Challenges Face by the Industry

The major challengesfaced by this industry is lack of alignment between sugarcane prices and

sugarcane production, which leads to arrears in payment to producers. The=is leads needs

government support packages which are also not very stabilized. Another problem is the low yield

83

of sugar cane. Even the large-scale companies are struggling to maintain their profitability due to

fixed mandate prices of sugar cane (Mahajan,2017). Pandey (2007) identified that the industry is

facing an infrastructural problem, low utilization capacity and shutting down of many sugar mills

due to low profitability. The major problem is the utilization of sugar prices as a political tool.

3.9. Edible Fruits and Nuts Industry of India

India is enjoyinga comparative advantage in the production of coconut, Areca nut,and cashew. It

is ranked second in the production of lime and a significant producer of banana and mango. It is

ranked 8th in the production of walnut and comprises of 1.05% of world walnut production (Mir

&Kottaiveeran, 2016). Newsletter (2016) stated that India dry fruit industry will reach 30000

crores till 2020, due to awareness of the health benefits associated with the use of dry fruits,

increased disposable income, consistent quality, proper labeling,and packaging. In 2016 it was

round about 15000 crores. The household consumption of dry fruits is also increasing the demand

(Netscribes,2013).

3.9.1.Major Products

Cashew is the major product consumed in India, including Almonds, pistachio, walnuts

raisin, fig, dates,and apricot. The dried fruit is majorly consumed within the domestic

food processing industry, making of sweet Kaju Barfi and also other dry fruits are used for

garnishing of bakery products, cereals, confectionary products and desserts (Netscribes,2013).

3.9.2. Challenges Faced by the Industry

The India dry fruit industry is facing many problems. The dry fruits from Jammu and Kashmir,

which is the largest producing area of dry fruit is going waste due to unorganized markets. High

freight, income taxes,and storage charges. The industry is also facing financing problems as

financing institutions are not providing loans to dealers and growers. India is ranked second in the

production of horticulture products, but due to lack of storage facilities,poor-quality packaging,

poor infrastructure, lack of transportation facilities, power supply,andinorganized markets, the

industry is not able to flourish and increase its exports (Mir &Kottaiveeran,2016 ).

84

3.9.3.Government Policy

Due to low profile government policies, the industry is unable to cope with the challenges. The

imposition of General Sales Tax (GST) is also playing a negative role in the exports of this

industry.

After the overview of different industries of Pakistan and India, the following section will

discuss the patterns of trade between both countries and opportunities and impediments to

increasing trade between them.

3.10. Overview of The Pak-India Trade Relations

At the time of independence, India was Pakistan's major trading partner accounting for 70 % of its

total trade. In comparison, India accounted for less than 5 % ofPakistan's trade. However, the

bilateral trade picked up in 2009-10. Pakistan's positive list for trade with India was further

increased to 1938 items and the total trade recovered from USD 1.8 billion in 2008-09 to USD 2.7

billion by 2010-11. The bilateral trade balance at present is heavily in favor of India. Since, 1975

when the Trading Corporation of Pakistan, a state-owned company, was allowed to import 40

commodities, Pakistan has gradually increased the number of commodities permitted to be

imported from India. It was only in 1982 that private corporations in Pakistan were allowed to

import from India. Pakistan started trading with India based on the positive list approach which

included the approved imports from India. Trade started picking up corresponding to the number

of commodities in the positive list, which reached 571 items by 1989 (Khan, 2013). The decline

in global trade following the subprime crises impacted Indo-Pak trade as well.Pakistan's share in

India's total exports increased from 0.33% in 2001-2002 to 0.99% by 2010-11 and imports from

Pakistan as a percentage of total imports of India, marginally declined from 0.13% in 2001-02 to

0.09 % by 2010-11.The formal trade between India and Pakistan increased from $144 million in

2001-02 to $2.7 billion 2010-11.

Acharya and Marwaha (2012) stated that Pakistan and India are the two largest and

populous economies of the South East Asian, but the bilateral trade remains negligible and both

are not in the category of each other’s top trading partner. At present investment flows from

Pakistan are not allowed into India. Also, no Indian investment has been done in Pakistan, despite

85

having a large potential for cross-border investments. India and Pakistan have common

multinational companies operating in their countries. These can act as meaningful conduits for

trade and investment. Pakistan,Indiarelations continue to be tense despite efforts from both sides

for their normalization (Nazir, 2005). In an age of globalization and information technology,

which is adorned with an age of MNCs, there is a need for cooperation at both ends at

theinternational and regional level,therefore, bilateral relations are very important (Ahmed, 2004).

Choudary (1975) suggests that countries haveanalyzed the foreign policy problems of their citizens

and also different factors which have affected the foreign policy of both countries.It is also tragic

that both countries are neighbors, but they consider themselves their enemies. Additionally, both

countries are charged with elements such as nationalism, prejudice' bigotry' and religious hostility

since independence

The trade relations were suspended by the end of 1949 and at the beginning of the 1950s, but after

one year in 1951 the Pakistan currency worth was accepted by India and trade agreements were

restored (Bhutto 1972). Due to the war of 1965, trade relations between both countries were

suspended,but, again in 1966-67 trade relations were restored, after signing of the Tashkent pact

by the leaders of both countries. Although the scope of bilateral trade was limited at that time,

these trade relations were again suspended due to the war of 1971 but normalized in 1972 after

Shimla Pact. In 1975 a trade agreement was signed between both countries, also railway corridors

were established. In 1988 after nuclear testing by both countries the trade relations harmony was

disturbed. The trade relations were again suspended in2002, when India accused Pakistan of an

attack on its parliament in December 2001. After the withdrawal of Indian troops in 2002 these

relations were again restored (Mitra &Pahariya, 2008). In 2011 improved relations were witnessed

due to dialogue between India and Pakistan leaders. The reason for improving relations might be

increased globalization, which promoted regional economic integrationand co-operation in the

region. The increased bilateral trade was initiated by the business communities of both nations

(Askari, 2012).

Both nations are trying to take steps in the form of bilateral Composite Dialogue toimprove

economic and political relations. For this reason, both countries have signed SAFTA (South Asia

Free Trade Agreement) which was tobe operational in 2006 and fully till the year 2015 (Baroncelli,

86

2007). In 2012 both countries decided to cooperate in custom and recognition of standards,

Pakistan also announced to open trade in 6800 fields, previously banned. Visa policies were also

relaxed from both sides the same year.A mutual agreement was also made for business travelers

for the improvementof economic partnership (Siddique, 2013). Tabish and Khan (2011)

appreciated that these efforts will help in confidence building between these two countries andwill

open avenues for free trade and also decreasecross-border tensions. The study bySaleem,Jabeen,

Omer,and Hanan (2014) suggested that for normalization of trade ties betweenPakistan and India

there is a need for confidence-buildingmeasures for enhancing trade volumes. These measures

may include strategies for combating terrorism, fruitful negotiation on Kashmir dispute and an

uninterrupted dialogue for solving water disputes and civil society may contact between two states.

Khan (2013) surveyed different chamber of commerce of different cities of Pakistan and suggested

that they were positive about trade with India and recognize it as a major opportunity. Many of the

members havetraded with India without any hurdle at the individual level for several years. They

are skeptical of the free trade with India due to entrepreneurial weakness. They identified that for

the successful implementation of SAFTA as a strategic bloc, trade relation between India Pakistan

is very critical. The private sector of Karachi was also of the view that regional trade will be

successful if ties between India and Pakistan improve. Khan (2013) estimated that in case of

normal trade relation, the trade between two countries could eventually increase almost 20 times

to its current levels, which is $2.5 billion will be increased to $50 billion if normal trade relation

is restored in the next five years it will cross to $6 billion to $10 billion.

Table 3 1 Pakistan India Trade Share Analysis

Period Pakistan Exports

to India

% Share in

Pakistan Total

Exports

Pakistan Imports

from India

% Share in

Pakistan total

imports

Total Imports

Trade Balance

with India

1994-95 41.60 0.51 63.99 0.62 -22.39

1995-96 40.74 0.47 94.50 0.80 -53.76

1996-97 36.13 0.43 204.66 1.72 -168.53

1997-98 88.97 1.30 153.41 1.52 64.4

1998-99 174.72 2.25 145.60 1.54 29.12

1999-2000 53.65 .63 127.35 1.24 -73.70

2000-01 55.40 .60 235.09 2.19 179.69

87

2001-02 49.20 0.54 186.50 1.80 137.30

2002-03 70.70 .63 166.50 1.36 95.80

2003-04 93.70 .76 382.40 2.45 288.70

2004-05 288.20 2.00 548.20 2.66 260

2005-6 32.67 1.92 111.4 3.88 -78.73

2006-7 29.16 1.64 126.6 3.99 -97.44

2007-8 35.46 1.74 169.1 3.42 -133.64

2008-9 23.53 1.34 108.0 4.15 -84.47

2009-10 27.49 1.28 155.9 3.69 -128.41

2010-11 27.28 1.07 160.7 3.59 -133.42

2011-12 34.79 1.41 157.2 4.28 -122.41

2012-13 40.27 1.6 187.4 4.43 -147.13

2013-14 39.22 1.58 210.4 3.8 -171.18

2014-15 31.28 1.413 166.9 3.5 -135.62

Source Pakistan economic survey

Table #3.1 shows the trade share of Pakistan and India. The table suggests that trade balance was

highly in favor of India.

3.10. Major Issues in Pak- India Trade

Pakistan and India are two important nations in Southeast Asia. Despite export potential

on both sides of the border, there is insignificant trade between both countries. There are many

impediments to trade, which had to be removed for the development of the total region.The major

impediments are identified below.

3.10.1. Ill-legal trade

Acharya and Marwaha (2012) stated that the illegal trade, including third country trade between

India and Pakistan, is estimated at USD 10 billion. The ill legal tradehas flourished as Pakistan

only allows imports from India based on a positive list of 1938 items. Trade through third countries

or circular trade is mainly conducted through agents operating in free ports like Dubai or Singapore

and the Central Asian Republic (CAR) countries. The size of circular trade underlines the potential

of improving bilateral trade between the two countries. The formal trade between India and

Pakistan increased from USD 144 million in 2001 to USD 2.7 billion in 2010.

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Taneja et al. (2011) stronglyrecommendthe normalization of trade relation between Pakistan and

India to increase formal trade between these countries. Acharya and Marwaha (2012) stated that a

large number of productsare traded between Pakistan andIndia through informal channels,

including smuggling or througha third country. This ill-legaltradehappens in goods which are not

in the positive list of Pakistan and cannot be imported legally (Pharmaceuticals, cosmetics,

jewelry) or have a very high import tariff in Pakistan (e.g. Beetle leaves, tractor tires). The ill legal

tradeis estimated to be $500 million, which is almostfive times the size of the formal trade

(Acharya and Marwaha,2012). Nakhoda (2016) suggested that the ill legal tradebetween Pakistan

and India mainly comprise of machinery parts, jewelry and textiles the main reason of ill legal

tradeiscross-border trade restrictions and maintenance of sensitive list maintained by both

countries. The main items of import from India are cloth, tires, pharmaceutical and textile

machinery, cosmetics, livestock,and medicines, accounting roughly 80% of the total import value.

While Pakistan's informal exports mainly consist of textiles, in which 88 % was routed through

third countries. The main implications of ill legal tradearea loss of tax revenues and the high

process of products due to increased transportation cost major informal route include via Dubai,

Singapore,and Afghanistan.

3.10.2. Pakistan Granting MFN Status to India

Khan (2013) suggested that for granting MFN status, traders and manufacture have divergent

views. The manufacturers are circumspect and cautious about the trade liberalization within India

whereas, traders are confident and hopeful of improving trade relations with India Engelken (2013)

suggest that the key to Pakistan’s success and escaping from economic trap and downfall is to

increase trade with India. He worked for many years on different issues of South Asian, as deputy

chief of the U.S. Embassy in Islamabad during 2010-11 and also as acting counsel general in

Peshawar in 2012 and was convinced that the only way left for Pakistan and India to escape from

old enmities is normal and peaceful trade relations. He suggested that if we want to expand trade

in this region, the region is to remain peaceful. Taneja et al. (2011) stated that in the case of normal

trade between Pakistan and India, the trade potential will be increased in both countries. They

added that in order to grasp this opportunity both countries have to work together in many areas

for tapping this trade potential. Both governments are only taking incremental steps for the

movement of goods across borders.

89

In July 2011, the foreign minister of Pakistan announced that the government of Pakistan is taking

positive for granting Most Favored Nation (MFN) status to India. In November 2012, Pakistan

announced, that it will grant MFN status to India, in principle. For this, the first step would be to

replace, the positive list with the negative list Indian imports. After preparation and finalization of

the negativelist, the next step would be to grant MFN status to India. But still, Pakistan had not

granted MFN status to India. To increase awareness and cooperation among business community

of both countries, there is a dire need for exhibitions, trade fairs,and business seminars. etc. the

interaction between the chamber of commerce of both countries had institutionalized as India-

Pakistan Chamber of Commerce.

In order to improve trade relations a comprehensive international, transportation policy is needed

for land, sea,andrailroads for the swift movement of goods between Pakistan and India and their

connectivity with other parts of the world. Certain steps have to be taken for smoothening of these

trade relations. India should relax. Its non-tariff barriers, also both countries should put their efforts

to overcome hurdles and help business to enter each other’s markets fearlessly with their country

labels displayed. The interest and overwhelming response of both countries customer were seen

when exhibition and fairs held inPakistan and India.

Saleem. et al., (2014) suggest that due to changes in world scenario no country can survive in

isolation and every country is bound to improve trade relations with each other. Currently,

Pakistan hada great threat of terrorism, which is badly affecting its economy. The conventional

capabilities of Pakistan are not sufficient to address this issue. There is a desperate need for

improving trade relations with our neighboring countries especially with India; which is a very

fast-growing economy in the region. Pakistan needs hisplatform to boost its economic

growth.Therefore,a visionary approach requires, development of an appropriate strategy which

will be based on cost-effective analysis for the nation. So, granting MFN status to India,

development of the free trade market,and mutual confidence and peaceful dialoguesare very

important steps which require to continue trading on an equity basis. It also requires an active

participation of political leaders, a neutral thinking on both sides and realistic goal of economic

stability by ignoring existing stereotypes and prejudices about each other.

90

3.10.3.Non-Tariff Barriers(NTBs)

Non-Tariff Barriers include all those measures, other than tariffs, which restrict trade and protect

domestic industry.Taneja. et al. (2011). Pakistan has allowed almost 1,9003 Indian products and

is regularly imported, but Pakistan exports are restricted to very few items due to NTBs imposed

by India. The Indian tariff rates also remained high for exports intensive good in Pakistan such as

leather, mineral onyx,and textile. In 2009 the exports of Pakistan to India were only 30% of total

imports from India, in 2010 it fell to 24 % and to 20% in 2011. Acharya and Marwaha (2012)

also identified that Pakistan is facing non-tariff barriers from India, including standard

certification, customs inspections, sampling requirement, visa issues,and other certification, etc.

Pakistan had sought clarification on non-tariff barriers which its trading groups face in India. These

are related to visas, requirement sampling or customs inspection, the requirement of technical or

standard certification (e.g.cement, textiles, leather), labeling and marking rules (e.g. processed

foods), packaging rules specification, multiple certifications (e.g. surgical instruments) and

investment-related issues. These issues are being pursued by both sides. Recently the two have

signed agreements on “Acceptance of Certification of Internationally Accredited Laboratories”

and “Redressing of Grievances” to remove non-tariff barriers. An analysis by UNCTAD and world

bank suggest that is compared to Pakistan, India had imposed higher technical barriers for imports,

including textiles and agricultural goods (Adil,2016).

3.10.4.Land Route Restrictions.

Pakistan agreed to remove its resent restriction on the number of commodities traded by land route

through Wagah, once the construction of new infrastructure is completed.At the April 2011

meeting, the Commerce Secretaries of both countries decided to set up the Customs Liaison Border

Committee (CLBC) to formalize the customs liaison arrangements. At the end of the first meeting

of CLBC in June2011, it was decided to set up a telephone hotline at the Attari International

Railwaystation for improved communication. The hotline became operational after the CLBC

meeting in December. It was also decided that the trade routes be open on Sundays to clear the

heavy backlog of trucks which are standing on both sides of the border. Pakistan and India have

finalized an agreement to increase trade through the land border. In addition to the opening of the

second gate at the integrated check post, the following steps are being taken to improve trade,

increasing trading hours to take advantage of the improved infrastructure. Facilitating movement

91

of large vehicles and containerized cargoes. Data sharing (examination report sharing in real time)

in Customs Co-operation Agreement to avoid arbitrary stoppages of goods at each other's ports

(Taneja et al, 2011)

3.10.5.Visa Restrictions

Taneja et al. (2011) state that a liberal visa system should be adopted by both countries. For this

an updated automated system, such as the Smart system, should be adopted for the screening of

visa application, also tracking the physical movement of people. This will minimize the

unnecessary harassment of genuine and potential trader.The restrictive visa policy had limited the

access, of many traders willing to trade with India (Khalid, 2012).Easing of Visa restrictions (only 3

cities, police reporting, same city entry and exit, Multiplevisas for Business Men, Tourist Visa)

3.10.6. Political Tensions

The political relation between Pakistan and India remain a major hurdle in trade normalization.

The violent partition of British India in 1947, the Kashmir issue and various military conflicts their

relationship had been plagued by suspicion and hostility. Masood (2014) identified that situation

on the line of control is closely linked to the stabilization of trade relations. Nakhoda (2016) also

identified that the main interference in the success of SAARC is the cross-border tension between

Pakistan and India.

3.10.7. Restriction on FDI’s

Taneja et al. (2011) suggested that in order to get the benefit of Pak- India trade, restriction on

capital movement should be minimized. This will open new doors for investment, businesses from

Pakistan and India, which were previously fearful and reluctant in these kinds of investments. The

investment in India is also risky due to the Hindu extremist policy adopted by the Indian

government.

3.10.8.inefficient Telecommunication Channels

Taneja et al. (2011) Telecommunication channels also need to be opened foster people-to-people

contact, reducing business costs. The current communication system between Pakistan and India

does not allow travelers to use their mobile phones in the other country. The purchase of local

SIM is not easy as it required a lot of documentation; as a result, travelers and businessmen have

92

to use certain informal mechanisms to attain local SIM cards via relatives and friends. The issue

of improved telecommunications between the two countries also was raised in the in different

rounds of talks and is expected to be part of the trade normalization process.

3.10.9. Payment and Dispute Resolution System

Taneja et al. (2011)suggested that India and Pakistan Should constantly engage with each other to

understand regulatory regime both countries. As new entrepreneurs are engaged into trade

relations, it is very crucial to have forums that bridge gap between buyers and sellers.

Guaranteedpayments are very essential for creating new and lasting business partnerships, for

which banking channels need to be upgraded and improved. An innovative dispute resolution

system should also be put in place. Dubai has acted as a facilitator fortrade and guaranteed

payments between India and Pakistan since several years. A third countrythat is trusted by both

countries had served an effective dispute resolution mechanism. Moreover, it is very important to

create new and innovated business communities to create multi-level channels of communication

that can reduce misconceptions, bridge information gaps and generate a significant change in the

business environment of both countries. All these holistic measures could facilitate in realizing the

untapped trade potential between both countries.

3.10.10.Information Gap

Khalid (2012) suggested that a huge information gap exists between both sides on products

which can be imported by both India and Pakistan. There are very few items, which have trade

potential with Pakistan and are at the positive list of Pakistan. Additionally, there are many

products which India imports from other parts of the world and not from Pakistan. Businessmen

willing to invest could enter into joint ventures without physically located in each other’s territory

as the first step to entry until legal systems are set up to safeguard investments and investor

confidence improves.

3.11. Benefits Of India - Pakistan Trade

The Pak- India trade is very insignificant in India's international trade. However, the

amount of ill legal tradeand the third world trade volume suggestsa tremendous potential for

bilateral trade between Pakistan and India. Restrictions on official trade between these countries

compel both them to import certain products from far off sources, which they can easily import

93

from each other. Asthe increase in bilateral trade would ensure low transportation cost, cheaper

raw materials and insurance cost which will enhance the quality of goods and their availability at

competitive prices for both countries. While consumers would gain in terms of lower prices, higher

purchasing power and greater choice of trade goods; manufacturers will have access to the wider

markets in the neighborhood. The Government would have revenue gains by bringing ill legal

tradeinto the formal channel. Ultimately, this would result in a win-win situation for everyone.

Trade in Electricity between both the Countries will also help in reducing problems associated

with electricity load shedding.

Based upon all the discussed issues mentioned above. The work has tried to apply Porter national

diamond model for both countries based upon the conceptual framework mentioned below.

3 .12. Conceptual Framework

Based on the above discussion the following conceptual frameworkwas designed

H1

H3

Human resources

Physical

resourcesknowledge

resources

Capital resources

infrastructure

Skilled labor

technology

Supporting industries

Related industries

Irrigation system

Home demand

composition

Demand size and

pattern

Internationalization

ofdomestic demand

Intense competition

Quality and

quantity of

products

Industry status

RTAs

Tariffs

Accountability and transparency

Factor conditions

Government Policy

Demand

conditions

Supporting and related

industries

Firm strategy,

structure and rivalry

National

Competitive

Advantage

in Trade

94

Figure 2.2 Conceptual Framework

3.12. Hypotheses

Basedupon the discussion above and the conceptual model following hypotheses was generated

H1= Factor endowment has a significant relationship with National competitive advantage in trade.

H2= demand conditions have a significant relationship with National competitive advantage in

trade.

H3= Supporting and related industries havea significant relationship with National competitive

advantage in trade.

H4= Firm strategy, structure,and rivalry has a significant relationship with National competitive

advantage in trade

H5= Government policy has a significant relationship with National competitive advantage in

trade.

95

CHAPTER# 4

METHODOLOGY

This chapter will present the methodology and sources of the data. Proxies and other methods for

the calculation of variables. Exports are the important driver of the economy, which helps to boost

the level of economic growth, the balance of payment and employment. After independence

Pakistan had facedsince its independence in 1947. At that time, the economy was based on

agriculture. The economy had shown a positive growth since independence and developed as a

semi-industrialized country, which was greatly based on agriculture, food products,and textiles.

But it is not able to bridge a gap between itself and developed countries. As export is one of the

components of aggregate demand, an increase in exports will increase economic growth. The

export growth also accelerates service sector and benefit the local economy. There are many

factors which will determine the level of exports conducted by the country are its -

Competitiveness, value addition of exports, exchange rate, sustained productivity and economic

growth. The balance of trade compares the value of a country's export of goods and services against

its imports. When the export of the country is greater than its imports the country tends to have a

positive or surplus balance of trade. The surplus balance of trade is beneficial for the economy,

but unfortunately, Pakistan is facing the deficit balance of trade since very long. A serious effort

is required to overcome this situation. In this regard series of steps has taken by the government to

liberalized trade

This work had tried to analyze prospects of trade liberalization of Pakistan with India. The study

had analyzed different industries of Pakistan and India with an intention to identify sources of

competitive advantage of Pakistan and India by applying Porter National diamond model. The

ultimate purpose was to ascertain that after so many trade liberalization efforts and implementation

of SAFTA there exist trade creation or trade diversion in Pakistan. Additionally, is it in the favor

of Pakistan to grant MFN status to India and identify challenges associated with trade liberalization

The current study had used secondary data. The panel and time series data was collected for the

period 2005 to 2015. Based upon the number of trade patterns, data for 5 Pakistani and Indian

sectors was selected textile, Sugar and Sugar Confectionaries, Inorganic Chemicals, edible fruits

and nuts, food and agriculture. In assessing the competitiveness of Indian and Pakistani different

96

industries in both countries, export performance was used and for that used Revealed Comparative

Advantage (RCA). Which was also used by Mukhtar and Javed(2009) Rattanavijit,

Somboonwiwat and Khompatraporn. (2012). The trade data which was used in the study was

collected from a different source which is clearly identified in Table# 4.1. the proxies used for a

different variable have also mentioned the Table4.1. Different variables were identified, but the

problem was the standardization of value as a different variable is expressed in different

measurement scales. For standardization of variables, z-score was calculated and a means were

calculated for the computation of the variable.

4.1. Casual Research

The casual research basically intends to answer certain questions which are related to a problem

and tries to find out the reasons to solve that problem. It also helps to identify the nature and extent

of cause and effect relationship and helps to measure and assessthe impact of certain changes on

various processes and norms. This type of study focusses on examining the situation for an

explanation of the relationship and certain patterns between variables. This type of research is

usually conducted in the social sciences. The empirical research is mostly done on preexisting or

secondary data.The current study is also based on secondary data of Pakistan and India.

Table 4.1 Variable Proxies Data Source and references

Variables Components Proxies Sources References

Factor

conditions (FC)

Human Resources (HR)

Labor force

Participation rate

World bank Wijinads, et.al (2005)

Tuerck et al. (2007b,

2008)

Education Index HDR Report Wang, Chaing,and Yin

(2004)

GDP Per Capita World bank Wijinads, et.al (2005)

Physical Resources (PH) Agricultural land World bank Wijinads, et.al (2005)

Gawad, lkhteeb,

Intezar (2014)

97

Knowledge Resources (KR)

R&D

expenditure (%

of GDP)

World Bank Wijinads, et.al (2005

Balcarova (2013)

Capital Resources (CR)

Getting credit World bank Wijinads, et.al (2005)

FDI Inflows

(billion USD)

World

Development

Index

Wijinads, et.al (2005)

Infrastructure (IF) Internet Users per

1000 individuals

World

Development

Index

Wijinads, et.al (2005)

Demand

conditions

(DC)

Home demand composition

(HD)

Total population

(million people)

World bank Wijinads, et.al (2005)

Vu and Pham (2016

Demand Size and Pattern

(DSP)

GDP (billion

USD)

Pakistan Bureau

of statistics

Vu and Pham (2016)

Internationalization of

Domestic Demand (IDD)

Total export

value industry

(billion USD)

Pakistan Bureau

of statistics

Vu and Pham (2016)

Home Demand Composition

(HDC)

GDP per capita

(USD)

World bank Wijinads, et.al (2005)

Vu and Pham (2016)

Related and

Supporting

Industries

(RSI)

Domestic Supporting

Industries (DSH)

Mobile

subscription

World bank

Related industries(RI) Rail lines (total

route-km) and

Roads, paved (%

of total road

World bank Wijinads, et.al (2005)

Balcarova (2013)

Firm structure,

rivalry,and

strategy

(FSRS)

Domestic Rivalry (DR) The intensity of

local competition

Prices of

products

Wijinads, et.al (2005)

Business Context (BC) World bank DTF

points

World bank Vu and Pham (2016)

International Rivalry (IR) Market share of

the country in the

global market

World bank Vu and Pham (2016)

Government

Policy (GP)

Regional Trade Agreement

(RTA)

Dummy variable World bank Herath,

Liang,Yongbing (2014)

Tariffs (TF) Average Tariff

Rate

World Bank David (2007).

98

4.2. Variables and their Proxies

The current work had applied Porter national diamond model for the analysis of trade pattern

between India and Pakistan. Porter presented this model to explain variables in the economy,

which will help an economy to be competitive internationally. In his view in order to be

internationally competitive as a nation had been domestically competitive. The model is based on

many other theories previously presented by many authors details of the variable and proxies been

used are described below. The current study had used secondary data. The panel and time series

data were collected for the period 2005 to 2015. Based upon the number of trade patterns, data for

5 Pakistani and Indian sectors was selected textile, Sugar and Sugar Confectionaries, Inorganic

Chemicals, edible fruits and nuts, food and agriculture. In assessing the competitiveness of

Indiaand Pakistan different industries in both the countries, export performance was used and for

that used Revealed Comparative Advantage (RCA). Which was also used by Mukhtar and Javed.

(2009) and Rattanavijit, et. al.(2012). The trade data which was used in the study was collected

from a different source which is clearly identified in Table# 4.1. The proxies used for a different

variable are also mentioned the Table# 4.1.The different variables were identified, but the problem

was the standardization of value as different variables are expressed in different measurement

scales. For standardization of the variable z-score was calculated and a means were calculated for

the computation of the variable.

The independentvariables used in the model were as follows:

4.2.1. Factor Conditions

Factor conditions are endowed factors in the economy, which helps an economy to develop a

competitive advantage. These factors are a combination of many other subfactors, including

human, physical, knowledge, infrastructural and capital and resources. The brief overview of

different the factors included the model are as follows.

National

Competitive

Advantage In

Trade

(NCA)

Exports Revealed

comparative

advantage

Pakistan

statistical bureau

Mukhtar. and Javed

(2009)

Rattanavijit et al (2012)

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4.2.1.1. Human Resources

Labor or human resource is one part of a component of the diamondmodel (Byoungho, 2004)

worked in the apparel industry of newly industrialized countries of South East Asia and contributed

that skilled labor, which is creative, energetic and hardworking is an integral determinant of

competitive advantage of the firm. Porter(1990) suggested that is not labor but the efforts of its

motivation, and upgradation to overcome factor disadvantage is important for achieving a

competitive advantage.

The success of any nation depends upon the number of competent people which have higher

competency. As these people serve as a valuable asset and most important factor of production to

create economic goods and services. As these competent people take charge of all the other

economic activities, i.e., transaction, production,and consumption, to create value for the firm as

well as nationally. Human resource can actively work as a labor force to create value, by the

interaction of other resources, According to Romer (1990) with the investment in human capital,

the knowledge and skills are transferred to create valuable economic goods and services. Frank

and Bemanke (2007) explain human resource to be a combination of intelligence, education,

training, experience, energy, work, trustworthiness,and habits, which impact the value of the

employee and its productivity. Human resourceis divided into three component-quantity, skills

cost. These three components are explained below

4.2.1.1.1.Quantity of Labor

The quantity of labor is an absolute term as different countries have different amount and sizes of

labor, which is significantly linked to the population of that country. As Pakistan and India Labor

participation might help in indicating the effective exploitation of this valuable resource. The

increased level of labor participation ratio indicates less unemployment and labor scarcity in the

region. The assumption there will be higher wages which leads to potential competitive

disadvantage. Tuerck et al. (2007) also suggested that regions having a higher labor participation

ratio perform better. The education level and quality of the labor force is very crucial for driving

economic efficiency in the country (Eberts et al., 2006; Lucas, 1988). This educated workforce is

very helpful in providing flexibility and creativity in production, especially in the knowledge

economy (Florida, 2002; Glaeser, 2005; Glaeser and Saiz(2003). The quantity of labor was

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measured by labor force participation. This proxy was used by Wang, et. al(2004), Wijinads, et.al

(2005).

4.2.1.1.2. Skills

The skills and quantity of human resource are a significant factor in achieving competitive

advantage. There isa limitation in data availability for this variable, but many different measures

are available in the world bank database for including literacy or participation in primary

education. In order to measure skills of labor this work had used education index of Human

Development Report (HDR), which is a comprehensive measure, including population with

secondary education, literacy rate, trained teachers or education expenditures or gross enrollment

ratio (UNDP, 2014), a significantly high index ratio indicates increased human resource skills

contributing to its competitive advantage.

4.2.1.1.3.Costs

In order to measure the labor cost GDP per capita can be used. In major cost associated with of

labor is their wages, which can be reflected in GDP per capita. A high level of GDP/capita indicates

a competitive disadvantage.

4.2.1.2.Physical Resources

The physical resource includes natural resources, including land, water,and climate. Porter (1990)

suggests that the quality, abundance,and accessibility of these resources helps countries achieve

competitive advantage. Endowed resources can be divided into mineral, agricultural, forestry,

fishery and environmental resources. Mineral resources are depleting, other energy resources such

as coal, oil and natural gas can be distinguished from non-energy resources such as iron ore,

gold,and silver. Agriculture, forests and fish stocks are renewable and environmental factors are

composed of land, weather, water,andanother natural advantage. All these resources can form

inputs into economic activities, and they may add to a nation’s international competitiveness.

The availability of agricultural land is an appropriate indicator for potential production, as the

quality of land, should be included in the analysis but due to the limitation of data availability the

area of agricultural land was used as a proxy for increasing production. A large amount

agricultural area suggests the potential contribution of this factor in a country’s competitive

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advantage. This measure was also used by Ratinger (2001), Wijinads, et.al (2005) and Gawad,

Ikhteeb,andIntezar (2014)

4.2.1.3.Knowledge Resources

Massa and Testa (2009) found through surveys that management of knowledge resource

effectively hasa positive impact on the competitive advantage of the nation. This will help firms

in the country to use effective strategies of differentiation, cost leadership,and centralization. Liao

and Hu (2007) emphasize the importance of proper knowledge transfer in the economy and also

its proper implementation as in case of uncertain external environment it negatively impacts

nations competitive advantage.

Whitehill (1997) was of the view that knowledge-based strategies, which are difficult to be

replicated by competitors as they are intangible, and help achieve competitive advantage for the

firm. Whiteley and Hessan (1996) also contributed that application of customer-oriented approach

also help firms to achieve competitive advantage through centralization strategies and

differentiation. Adams and Lamont (2003) recommended in their study that knowledge

management, organizational resources, innovation and differentiation of products, and

organizational learning are the outcome of effective utilization of knowledge resources.Swink and

Chuang (2004) also found a positive impact on a knowledge resource on competitive advantage.

Song (2007) states that increase innovation and deployment of new products in the country will

increase the competitive advantage of the firms in the country. Knowledge recourses include the

amount and quantity of technical, scientific and market knowledge on services and goods. In order

to measure this variable, the amount of research and development expenditure will be used.

Increase the level of expenditure suggestsknowledge inputs. The proxy used for the measurement

of knowledge resources of the country was R&D expenditure at %age of GDP. This measure was

also used by Wijinads et al (2005), and Balcarova (2013).

4.2.1.4.Capital Resources

The amount of availability and cost of capital is also a significant factor in contributing competitive

advantage as it has a significant impact on productivity. In order to measure this variable two

indicators can be used – getting credit and FDI inflows.

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4.2.1.4.1 Getting Credit

In case of getting credit, the world bank used it in its doing business report, which measures the

lenders and borrowers’ legal rights, security of transaction and credit information sharing. This

indicates measures the facilitation of lending in the country through laws of collateral, bankruptcy,

coverage and the accessibility and scope of credit information(World Bank, 2014, p125). This

indicator ranks countries, lowest rank suggestsa high contribution of this variable in countries

competitive advantage.

4.2.1.4.2. Foreign Direct Investment (FDI)

The financial resources coming from outside the country can play a major role to developa

competitive advantage as they increasethe capital resources. If the country is successful enough to

attract a large amount of FDI they will definitely increase their capital resources. If FDIs are

consistent and not speculative than they can contribute significantly tothe country’s competitive

advantage. The amount of FDI is also independent of the size of the economy, therefore FDI is

measured by FDI as %age of GDP. This Measure Was Used ByWijinadse t al (2005), Wang. et.al

(2004) Nan and Lei (2013) and Rantinger (2001).

4.2.1.5. Infrastructure

The Infrastructures is comprised of the transportation system, mail system, communication and

also institutions which affect the standard and quality of life ((Porter, 1990) p.75). The internet

access is the major component of communication infrastructure as it helps not only in connecting

people but also helps in mobile banking, retrieving information and documentation. In order to

measure this variable, this work used internet user per 1000 people. This measure was used by

Wijinads, et.al (2005)

4.2.2. Demand Conditions

Alemu (2010) suggests that the Ethiopian textile industry has is benefited by increased domestic

demand, large population and potential domestic market. The industry has very low-level demand

sophistication, due to low purchasing power due to very low GDP per capita of the country.

Rodrigues and Khan (2015) suggested that GDP per capita growth rates during the last few years

were, approximately, 5 % in India, this showthat demand conditions depend more on international

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demand than internal (domestic) demand in the case of these countries. However, countries like

India have a large population (World Fact Book 2014), therefore with economic development and

a change in the consumptionstructure, the domestic demand for clothing will increase. Similarly,

with a rise in the middle class in Bangladesh, Pakistan,and Nepal, domestic demand will increase.

Currently, however, the domestic clothing consumption is not mature and, in the t, lacks elite

consumption group. There is ahigh demand forthe clothing industry in SAFTAregion, particularly

in Bangladesh, India, Pakistan rank 4th and 6tth and 9th respectively, in the top 10 clothing

exporters (WTO, 2014).

4.2.2.1. Size of Home Demand

This suggests that due to the proximity of buyers and cultural nearness the buyers help firms to

develop products that satisfy the demands of local customers (Porter, 1990) p 89). According to

Porter (1990),a largenumber of buyers will help in encouraging new entrepreneurs and motivate

investment and generate market information. If a country has a large number of buyers it will help

in achieving a competitive advantage.The proxy used for this measure was the total population of

the country. This measure was also used byWijinadset al (2005), and Vu and Pham (2016).

4.2.2.2. Internationalization of Domestic Demand (IDD)

In case the domestic buyers are mobile or a multinational company it creates an advantage for the

domestic firms as their domestic customers are also foreign customers. Porter (1990) also

suggested that if the domestic demand is internationalized foreign sales will help in creating an

advantage for the nation. The proxy used for this item was the total exports of the industry.

4.2.3.Related and Supporting Industries

The third major determinant of the diamond model is Related and supporting industries. The

existence of suppliers and other related industries in the country which are internationally

competitive (Porter, 1990). These include Clusters composed of many medium and small local

firms providing a very firm,corporation and institutional support for economic up gradation

(Marchallian, 1920). The local firms are more likely acquiring supplies and other inputs from the

local market, which will prevent leakage of capital from the economy (Barkley, 2001; Markusen,

1996). Li and Zhou (2010) studied the effective factor on attaining competitive advantages in 179

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foreign countries in China with the presumption that these companies have accepted market

tendency and integrity of management. They found that market trend and management integrity

create competitive advantage through attenuating costs, differentiation, and diversity in the market.

Yamin et al. (1999) showed in their study on Australian manufacturing industries follow Porter’s

general strategies (cost leadership, differentiation, and centralization strategy) were effective on

competitive advantages and performance of the company.

Rodrigues and Khan.(2015) used data on textile and clothing industry form SAFTA countries and

suggested that the improvement of the competitiveness of this region requires serious steps for the

development of infrastructure, including a steady flow of electricity, paved roads, ports,highways

and administration forms and standardization of customer data. In order to improve export

shipping documentation should be processed quickly to minimize transaction cost in terms of

money and time. India is suffering 37% cost disadvantage due to poor shipping containers from

Mumbai/Chennai to the east coast of the USA, relative to similar container shipments from

Shanghai. This cost disadvantage arises from inefficiencies and delays at Indian ports.

This can be improved by introducing proper government policies which help in technological up

gradation in the clothing and textile industry. The policies of Bangladesh, India, and Pakistan

should be focused on reducing tariffs on imports of equipment, machinery and also provide cash

and credit support to modernize this industry.

Alemu (2010) identified that establishment of ETGAMA, USAID AGOA + VEGA project had a

positive impact on the Ethiopian textile industry. But the industry has very few suppliers of raw

material other than cotton and apparel accessories (ETGAMA, 2009; ITC, 2009). They have very

poor integration of raw material and industrial production. Firms are poorly vertically integrated

and lack of research has avery bad impact on the industry.

Oh and Rhee (2010) argued that the Korean car industry has achieved competitive advantages in

the world industry by combining the capabilities of suppliers and merging (cost leadership

strategy). Feng et al. (2010) conducted a study in China between 2008 and 2009 and concluded

that customer and suppliers’ participation throughout the process of attaining competitive

advantages (cost leadership strategy) improves competitive advantages of the industry.

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Bobillo et al. (2010) studied 1500 manufacturing firms in Germany, France, the UK, Spain, and

Denmark and maintained that organizational factors (e.g. Capital markets, financial liaison, and

skilled workforce) –differentiation strategies, approaches- have a positive effect on attaining

competitive advantages.

Rugraff (2012) worked in Czechs car industry and suggested that two main factors of creating

competitive advantages in the industry aretoothe forward-looking and backward-looking merger

or the suppliers in the industry(participation in and sharing the resources of customers and

suppliers).This variable is composed of two items, including – supporting and related

industries.Communication and transportation both serve as related and supporting industries. They

are vital in the global market for enhancing competitiveness (Hult (2012); Kenji (2013); Morgan

2014)). In order to measure the transportationnetwork. Length of railway lines was used. This

measure was also used by Vu and Pharma (2014)

In order to measure communication system mobile cellular subscription per year was used.

This measure was also used by Rodrigues and Khan. (2015).

4.2.4.Firm Strategy Rivalry and Structure

The fourth determinant of the diamond model is a firm strategy, rivalry,and structure, it actually

measures the context in which business is ‘created, organized and also the nature of rivalry at home

market (Porter, 1990:107).The nation will gain success in the industries in which the management

practices and modes of the companies are highly favored by national businesses and serve as a

source of competitive advantage. Schumpeter (1942) emphasis on the importance of having inter-

firm competition in the industry, he categorized it as a function of industry structure, which not

only includes firm size butalso barriers to entry. In case of a smaller number of skilled human

resource, there will be a competition for market share as well as for these scarce human resources

as well. Schumpeter (1942) also introduced a term creative destruction, which means the closing

of firms which are less innovative and productive and the opening of new firms which are more

innovative and productive. Therefore, intercompany competition increases productivity and

innovation.

Henderson et al. (1995) stated that for a newly established firm’s urbanization of economies,

whereas for mature industries localized economies are very important. The reason might be needed

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for general avail services available in the urbanization addition flow of ideas between industries

also add to its benefits. On the other hand, mature industries require more communication networks

and a service agglomeration which is built with time for satisfying the needs of particular

industries.

Olson et al. (1998) suggests that marketing efforts, including introduction of line of products,

pricing strategies, customer relationship and available resources and production facilities and

strategic design including centralization or decentralization of business and mergers and

acquisition strategies of an organization can plays a vital role in development of competitive

advantages.

Alemu (2010) identified a strong vertically integrated textile industry in Ethiopia. The country

has Nine ginneries with an average annual ginning capacity 42.000 tons. But he identified that

this industry is faced with the very poor strategy of firms, underdeveloped production facility and

very limited capacity to produce large volume.

Rodrigues and Khan.(2015) suggested that in the case of SAFTA countries this variable had been

neglected. There are almost no clusters related to the clothingindustry. Additionally, the exports

of clothing sector had taken an L-shape which has major clusters of dying, knitting manufacturing,

and printing. Also,a different firm which produces accessories and washing mills. There are poor

management and organization system, andthe majority of world leading brands uses SMEs and

privately-owned firms for their production outsourcing. To take advantage of the low-cost labor

of the region. These SMEs still used old style household management which emphasized the

achievement of targets rather than long-term objectives of skills and quality improvement. In order

to measure these variable threedifferent proxies were used, which are discussed below:

4.2.4.1 Domestic Rivalry

Rivalry in the domestic market encourages firms to upgrade their operations and upgrade their

competitive advantage by selling abroad to increase their profits. It also,influences firms to

innovate, create and upgrade their operations to achieve competitive advantage. Domestic

competition results first in higher efficiency and lower prices. As this indicator was measured by

an index intensity of local competition. The range of this index is from 1-7 in which 1 shows

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limited competition in most industries and 7 shows very intense competition in most industries

(www.weforum.org/docs).

4.2.4.2. Business Context

This variable was measured by World bank DTF points. This index helps in assessing the

performance of the country and its improvement overtime. This shows the distance of each country

to its frontier, representing superior performance on different indicators across all the countries.

This index is helpful in identifying a gap between the performance of a country with the best

performing economy (The World Bank, 2016). This measure was also used by Vu and Pham

(2016)

4.2.4.3. International Rivalry

The International share of the industry is very important. International rivalry shows the

competitiveness of the industry in the international market in order to measure this variable

Market share of the country in the global market this measure was also used byVu and Pham

(2016).

4.2.5.Government Policy

The government can affect all the other determinants of the diamond model significantly

(Tasevska, 2006). Government policies and other regulations formulated at all levels of the

government can adversely affect or benefit the competency of industry and a nation (Barragan,

2005). Thegovernment policy can create or damage the competitive advantageof a nation(Nilsson

&Peterson, 2002). Tuna (2006) identified that the role of government policy can be ascertained by

recognizing how it affects different variables in the diamond model. The components, which

constitute this variable, include subsidies, education policy, taxes, financial incentives, quality

standards, capital market regulations, public procurement and antitrust laws (Mehrizi&Pakneiat,

2008).

This variable was measured by three items -Regional Trade Agreement (RTA), tariffs and

transparency, accountability and corruption in public index. The details are given below.

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4.2.5.1.Regional Trade Agreement

The regional trade agreements are a very prominent feature of international trade. WTO

encouraged to notify whenever they sign a new agreement. There are many economic and non-

economic benefits associated with this agreement. They will secure foreign market entry they

improve the bargaining strength of members protect infant industry and drive trade to the desired

areas (Economy and Finance, 2014).It was measured as a dummy variable. This measure was

also used by Herath, Liang,andYongbing (2014).

4.2.5.2. Transparency, Accountability, and Corruption in the Public

This variable was measured by CPIA transparency, accountability, and corruption in the

public sector rating. The ratio ranges from 1-6, in which 1 represent lowest and 6 represent highest

levels.

4.2.5.3.Tariffs

Tariffs are the taxes upon imports from any other country. These tariffs play a significant role in

increasing or decreasing trade from any country. This item was measured by the average tariff rate.

The same measure was used by David (2000).

4.2.6. National Competitive Advantage

Garelli (2003) suggests that national competitiveness is achieved through firm competitiveness.

Nations should provide an environment for the firms, so they outperform and excel their

capabilities and achieve competitive advantage in their business. Firms are now trying to cooperate

rather than compete due to advancement in technology, increased domestic and international

competition in the market and changing demand patterns, because of trade liberalization and

globalization. (Ortmann, 2001; Trienekens, 2011).

The World Competitiveness Yearbook (WCC, 2013), stated that competitiveness is the field of

study that tries to analyze countries enhance the ability of its firms to the facts and policies that

helps to create an environment for its firms, so they can create value, and on long-run increase the

standard of living of the its people.

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Porter (1990), defined competitive advantage to be maintained at three levels- nation, industry,and

firm level. Competitive advantage at the national level is reflected by sustained growth in the

standard of living of the citizen of that country, and it can be attained by continuous creativity in

production. Industry competitive advantage is reflected by the industry’s profitability, inbound and

outbound foreign direct investment and trade balance and the firm-level competitive advantage is

measured by its market share, exports,and profitability (JMOP 2003).

Balkyte and Tvaronavičiene (2010) divided the competitiveness to be maintained at six levels-

firms’ level, sector level, regional level, national level, bloc level,and international level.

Kulikov (2000) identifies two types of competitiveness- real and nominal Competitiveness. Real

competitiveness is reflected by market’s fairness, openness and continuous innovation and

improvement in the quality of goods and services offered by the county of origin and

additionally,the standard of living of the citizen of the country. Therefore, the real competitiveness

can be achieved by free and fair markets that can meet domestic and international markets.

Whereas, nominal competitiveness can be achieved by introducing government policies, providing

a supportive macroeconomic environment through state subsidies, cash grants and tax exemptions

to domestic producers. Therefore, the real competitiveness can only be achieved, if the country

provides a creative and innovative environment to its domestic firms to meet international quality

and design for both domestic and international customers.

According to the diamond model, the prosperity of a country is not inherited but created through

industrial innovation and up gradation. The companies can compete at a global level and gain

competitive advantage at an internationallevel if they face challenges and pressures in the domestic

market. The role of the nation has grown with the shift of competition bases more and more on

assimilation and creation of knowledge.

Harrison. et al(2001) suggested that latest literature has paid closer attention to the resource based

aspect of the firm in the business context, as this suggests that the competitive advantage of the

firm is associated with the quality and quantity of resources itposses. These resources are

interlinked with each other. If one area is weak, it will influence other areas as well. Therefore, it

is important for the organization to use its strong resources to overcome the deficiency of its weak

resources through the system of resource creation. Nater and Cini (2009) used data from

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economically troubled country Osijek-Baranja. They applied the Porter diamond model to identify

opportunities for the development of the home industry and identify potential threats in the long-

term development of the industry in the country.

Astarlioglu (2012) used Porter’s Generic Strategies and diamond model for analysis and suggests

that generic strategies help firms achieve success at the national and international level. On the

other hand,the diamond model will help them understand that why some firms are successful while

others are not. Aghdaie, Seidi,andRiasi (2012) worked on data from Iran’s Saffron industry by

applying the diamond model to identify the potential barriers to Iran’s saffron export to

international markets. They used practical and empirical analysis and used descriptive analysis,

including, cognition and survey methods for data collection techniques. The results suggested that

important barriers in saffron export are demand conditions, related and supporting industries, firm

strategy, structure, and rivalry, government, and chance. Factor condition was not an important

barrier to Iran’s saffron export.

Bakan and Dogan (2012) used data from the city of Kahramanmaraş to apply Porter diamond

model by using both primary and secondary data in order to understand the situation of different

industries, to improve the competitivenessof these industries. Bashiri, Baziyar,

Balakshahi,andMojib (2013) Used data from Iran to assess the prospects of olive exports by

applying Porter diamond model to compete internationally. He suggests increased exports

revenues for the investment in the latesttechnologies which will increase productivity to increase

exports.

Taga(2014) suggested that SAFTA was signed by both Pakistan and India to reduce tariff barriers,

increase regional trade to enhance regions socioeconomic development., but still certain measures

are required to improve the effectiveness of this agreement. Rodrigues and Khan (2015) appliedthe

diamondmodel to the clothing industries of SAFTA and suggest that this industry had provided

the potential for growth and employment in the region. They also contributed that due to many

Free trade agreements in the region and government policies and expenditure on training,

providing infrastructure and cluster had a very significant and positive impact on this said industry.

Mboya and Kazungu (2015) used data from textile and apparel industryof Tanzania to explore

determinants of competitive advantage, by applyingthe Porter Diamond Model. They usednon-

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probability sampling technique and collected data from three regions including Dar es Salaam,

Arusha,and Mwanza from 204 respondents, applying Factor Analysis, Principal Component

Analysis,and Structural Equation Modeling.The results support the Porter Diamond Model as a

determinant of firm competitive advantage and identified relating and supporting industries and

demand conditions critical factors for apparel and textile industries In Tanzania.

Bashiri et al (2013) used data from Iran by applying the Porter diamond model inthe agricultural

sector and suggested that to be aligned with international standard countries must align themselves

with the global economy, for which they have to learn ways to compete in the globalmarketplace

for higher productivity and quality. International trade provides revenues, which facilitate

investment and development of new technologies which increases productivity.

Oz (2002) used the diamond model of Porter to identify Turkey’s sources of international

competitiveness. The main emphasis was to improve and understand these sources and study

Turkish competitive. The study also aims to shed some light on the competitive structure of the

Turkish major industries. The results suggested that, except for domestic rivalry and government

policy, the Turkish industry supportsPorter Diamond Model.

Robertm. (1991) appreciated theory of competitive advantage and suggested that despite having

some limitation of measurability and concept determination it will help to bridge the gap between

international economics issues and strategic management by enriching both disciplines. The

analysis presented by porter had enriched the theory of competitive advantage by including

theimpact of environmental issues on the competitive performance of a nation in global market

had broadened the scope of the theory of competitive advantage by providing international and

dynamic aspects of competition to encompass both the international dimension and the dynamic

context of competition. The National competitive advantage is the country’s evaluation ability to

involve and participate competitively in global markets. Some countries can achieve more

advantage over the other due to many reasons. For achieving and boosting economic growth they

have to identify their strengths and weaknesses and try to enhance their strength and overcome

their weaknesses. Different frameworks were designed by Micheal Porter helping nations to assess

themselves (McMahon, 2017). National competitive advantage can come from a variety of

sources. These don’t just include natural resources, but also human, physical, capital, knowledge,

talent, entrepreneurial skills and a favorable environment for the business. Nations may enrich

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these resources through proper policies and strategies in order to attain a competitive edge in the

world. For example, establishing universities to increase research and development in a different

field for increased innovation and creativity. They can also overcome their resource disadvantage

by innovating new ways of doing things. An innovation capability is a powerful tool for the

success of the nation in a global marketplace. Innovation can be encouraged by the government by

introducing patent laws which encourage innovations. The government can also finance potential

new projects to encourage innovation. Another key component of the national competitive

advantage is supported industries the presence of major suppliers, distributors, marketing agencies

will contribute positively to achieving success. These industries develop a network will facilitate

the value chain of the production processes. Demand conditions in the local market will also help

nations. A tougher condition in the home market will help companies to develop a competitive

base for international competition. Through this rivalry, creativity and innovation make it pace and

the industry become dynamic. The internal pressure from domestic market makes the industrial

diamondof four key variables that can be assessed, compared and contrasted for determining

national competitive advantage. This variable was measured by Revealed Competitive Advantage.

This measure was used by Bonzanier (2015), Blgirat(1999), Van royenetal (2001) Taneja at

al.(2013) and Hallat(2005).

4.3. Sources of Data

The work was based on secondary data, various data sources were used in the work. The list of

data sources is given below:

• World Integrated Trade Statistics (WITS)

• UNCOMTRADE.

• Bureau of Statistics Pakistan.

• State Bank of Pakistan.

• Pakistan Economic Survey.

• SAARC Statistical Yearbooks of the sample period.

• SAARC trade database

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• Books, journals and articles.

• Trade map

4.4. Data

4.4.1.Population

The population of this work was industries of Pakistan and India. The work had tried to find the

source of competitive advantage in both countries, applying national diamond model presented by

Porter (1990). The panel data was used to analyze the overallexport competitiveness of Pakistan

and India. Time series data was used for the analysis of individual industries of each country.

4.4.2.Sample

The sample consists of five industries from Pakistan and five industries from Pakistan. The

industries include Agriculture, Textile, Sugar and Sugar confectionaries,Edible fruits and nuts and

inorganic chemical industry.In order to select sample 5 Pakistan industries where selected based

on their trade potential by matching import potential for India.

4.4.3.Sample Size

The sample consists of five industries from Pakistan and five industries from India for the

period 2005-2015.

4.4.4.Sampling Techniques

The sampling techniques used for the analysis were purposive sampling. In order to analyze

industries of Pakistan and India.The main purpose was to identify export potential Pakistani

industries and match them with import potential Indian industries.

4.4.5.Data Analysis

The data were collected from the sources mentioned above. After the collection of the data,

the thorough check was done for identifying error entries, outliers etc.The z- values were calculated

for standardization. After those descriptive statistics were calculated for checking the normality of

the data. The correlation matrix was also calculated between the independent variables for the

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detection of the multicollinearity problem. In orderto select between fixed effect or random effect

model,the Hausman test was calculated. In order to check before applying the model data should

be tested for Stationary andautocorrelation. For stationary unit root test and for testing of

autocorrelation Durban Watson test was used. Individual variables were tested for stationary. For

panel data panel unit root test was applied and for time series data Augmented Dickey-Fuller test

was applied. In case a variable is non-stationary the first difference was taken.The value of

Durban, Watson test should be around 2 or less than 2.

4.4.6. Research Approaches

Two types of analytical approaches will be applied.

The First approach will be based on calculating ratios for an assessment of the state of trade flows

and trade patterns between Pakistan and India in selected industries. In the calculation of ratios

first three ratios were calculated for Pakistan and India overall trade patterns to identify the trade

intensity, trade share,andintra or extra-regional trade bias. The other three ratios used were

revealed comparative advantage, regional orientation and Complementarity index, they were

calculated for trade patterns ofindividual industries. This will help in the assessment of individual

industry performance in the global market.

The second approach applied was the calculation of multiple regression models. Panel data were

used for assessment of India and Pakistan national competitive advantage. The fixed effect model

was used for the analysis. In the case of individual industry analysis, time series data was used for

which, a simple linear regression model was applied.In assessing the competitiveness of India and

Pakistan, the trade patterns of different industries from both countries were used and Revealed

Comparative Advantage (RCA) was applied.The trade data which was used in the study was

collected from a different source which is clearly identified in Table 4.1.The proxies used for a

different variable are also mentioned in the Table4.1. The different variable was identified, but the

problem was the standardization of value as different variables were expressed in different

measurement scales. For standardization of the variable z-score was calculated and a means were

calculated for the computation of the variable.

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4.9.1. Ratio Analysis of Trade Indicators

The ratio analysis is the first step toward trade policy analysis, they help an analyst to have an idea

about the general pattern of trade. The following Ratios will be calculated:

4.9.1.1 Indicators of Regional Trade Interdependence

These include the following of ratios:

1. Intraregional Trade Share

2. Intraregional Trade Intensity

3. Regional trade introversion index

4. Revealed comparative advantage.

5. Regional Orientation index

6. Complementarity index

4.10 Model Specification

4.10.1 The Multiple Regression Analysis

This work had used a fixed effect model for India and Pakistan overall panel data,

Housman’s testwas applied to select between fixed and random effect model for the analysis and

fixed effect model was preferred. For a fixed effect model, the values of Bayesian criterion (SBC)

Akaike information criterion (AIC), Schwarz and Hannan-Quinn criterion (HQC) were also lower.

By including fixed effect, the average differences across variables were controlled in any

observable or unobservable predictors. The Fixed Effect Model greatly reduced the threat of

omitted variable bias. The following fixed effect model was applied to the panel data:

NCAit = α0 + α1 (FC)it + α2 (DC)it + α3 (FSRS)it + α4 (RSI)it + α5(GP)it + u

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4.10.2. Multiple Regression Model

The Linear regression model is used for individual sector analysis is a statistical technique used

for estimating the relationships among dependent and independent variables. This work will use

the linear regression model, but Following model will be used:

NCA = α0 + α1 (FC) + α2 (DC) + α3 (FSRS) + α4 (RSI) + α5(GP) + u

Where:

FC = HR + PH +KR + CR + IF

DC = HDC +DSP+ IDD+HDC

RSI= SH+RI

FSRS = DSI +RI +IR +BC

GP =RTA + SD + TC

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CHAPTER #5

RESULTS

This section will apply the methodology identified in the previous section. The results will be

analyzed and discussed thoroughly.

5.1. Ratio Analysis

The ratio analysis was used to access the current trade patterns of India Pakistan. The ratio

calculated includes an indicator of regional trade interdependence. These ratios are helpful in

measuring the current situation of trade pattern and trade interdependence between different

partners or regional groups. For each indicator, a higher value indicates the lowest trade cost in the

proposed region and vice versa.

5.1.1.Intra Regional Trade Share

The first ratio used was Intraregional trade share. This ratio identifies the ratio of the trade between

countries to theratio ofthe total trade of countries. This ratio is helpful in identifying the relative

trade importance of trade between countries compared to trade with other countries of the

world.The ratio was calculated as under:

Interregional trade share= Tii/Ti

Where Tii = exports from India to Pakistan plus imports from Pakistan to India

Ti= total exports fromIndia Pakistan to imports from India to the world.

Source: Anderson and Norheim (1993)

5.1.2.Intra Regional Trade Intensity

The second ratio appliedwas interregional trade intensity which was used to measure the

intraregional share of the trade of Pakistan and India with the world trade share. This ratio helps

to measure the trade intensity within the region, whether it is greater or smaller than expected on

the basis of the importance of the region for world trade. If the index is greater than the one it

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shows that trade flows are greater than expected and shows the importance of the region in the

world trade. The calculation method is given below:

Intra-regional trade intensity index = (Tii/Ti) / Ti/Tw)

In the above formula:

Tii = exports from India to Pakistan plus imports from Pakistan to India

Ti= total exports from India Pakistan to imports from India to the world.

Tw= world total exports plus world total imports.

Source: Anderson and Norheim (1993)

5.1.3. Trade Introversion Index

This ratiowas introduced by Lapadre (2006) to measure relative intensity trading within the region

compared with outside the region. The range of this ratio is between -1 to +1. In this index,

intraregional trade intensity (HIi) and extra-regional trade intensity (HEi) are functions of the

region ‘s share of outsider ‘s total trade and not of world trade as in the previous trade intensity

index. The significance of this index is that it increases or falls if the intraregional trade intensity

increases or falls. The zero indexesshowthat trade in the region is neutral. More than zero suggest

an intraregional bias and less than zero suggest extra-regionalbiases. The formula for the ratio is

given below:

Regional Trade Introversion Index i = [HIi – HEi] / [HIi + HEi]

HIi = (T ii / Ti)/ (TOi / TO) and HEi = [1 –( T ii / Ti)]/ [1 – (TOi / TO)]

Tii = exports of region i to region i plus imports of region i from region i

Ti = total exports of region i to the world plus total imports of region i from the world

TOi = exports of region i to outsiders plus imports of region i from outsiders

TO = total exports of outsiders plus total imports of outsiders

Source: Anderson and Norheim (1993)

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Table 5 1 Indicators of Regional Trade Interdependence

Years Intra-Regional Trade Share Intra-regional

Trade intensity

Intra-regional

Trade introversion index

2005 0.002 0.19 -0.53

2006 0.004 0.30 -0.36

2007 0.004 0.30 -0.37

2008 0.003 0.21 -0.51

2009 0.003 0.17 -0.57

2010 0.004 0.19 -0.54

2011 0.002 0.10 -0.72

2012 0.002 0.10 -0.72

2013 0.002 0.12 -0.66

2014 0.003 0.13 -0.64

2015 0.003 0.14 -0.62

Source:Prepared by the Researcher

In order to calculate the ratio for the analysis of Pakistanand Indiatrade, Import and export trade

patterns of both the countries were collected from the World Integrated Trade Solution website.

Table 5.1 shows the result of the three ratios;the first ratio of intra-regional trade shows a very low

value for intra-regional trade that future trade will be costly between Pakistan and India. The

second ratio of intra-regional trade intensity was less than one for all the years analyzed and

suggest that collective trade of Pakistan and India is not very significant in the world. The ratio of

Intraregional trade introversion index gives negative values for all the years which suggests an

extra-regional bias.

5.1.4. Revealed Comparative Advantage

This index is used to measure the comparative advantage or disadvantage of a country in certain

good or commodities as evident from their trade flows. Greater than one index shows that a country

has a comparative advantage in that particular commodity. Less than one shows that the country

has a comparative disadvantage in a particular industry or commodity. The index is based on the

Ricardian concept of comparative advantage. The Balassa index was used to measure the

competitive advantage, which was introduced by Balassa and Noland (1965).

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Table 5.2 Pakistan Revealed Comparative Advantage In Different Industries

(2005-2015)

Table 5.2 presented the resultsof revealed comparative ratio of different industries of Pakistan the

results suggest that the textile and clothing industry of Pakistan performed very well in 2005 with

the Revealed comparative advantage of more than 12 but the performance was declining after that,

but the industry remained competitive withthe Revealed comparative advantage of more than one,

but in the year 2009, 2013 and 2014 it lost its competitiveness but regain it in 2015. In inorganic

chemical industry, the result showed Pakistan is not at all competitive in this industry withthe

Revealed comparative advantage of less than one in all the years under study. In the agriculture

and food industry, theRCA results show that the country is not competitive in all the years. The

same results were found in Sugar and edible fruits and nuts industries.

Table 5 3 Indian Revealed Comparative Advantage In Different Industries

(2005-2015)

Years Textile and

clothing

Inorganic

chemicals

Agriculture Sugar and sugar

confectionaries

Edible fruits and

nuts

2005 12.19 0.01 0.88 0.39 0.21

006 1.80 0.00 0.10 0.32 0.21

2007 1.53 0.01 0.09 0.19 0.19

2008 1.35 0.00 0.09 0.64 0.18

2009 0.11 0.02 0.12 0.22 0.21

2010 1.16 0.01 0.10 0.13 0.22

2011 1.17 0.01 0.11 0.07 0.21

2012 1.28 0.01 0.14 0.30 0.24

2013 0.94 0.01 0.09 0.68 0.24

2014 0.97 0.01 0.09 0.55 0.24

2015 1.13 0.01 0.07 0.55 0.24

Source: Prepared by the Researcher

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Years Textile Inorganic

Chemicals

Agriculture Sugar and Sugar

Confectionaries

Edible Fruits and

Nuts

2005 3.23 1.08 0.74 0.31 1.82

2006 3.16 1.00 1.06 2.28 1.59

2007 3.00 0.72 1.26 3.35 1.35

2008 2.87 0.85 1.20 4.17 1.40

2009 0.25 0.68 0.82 0.19 1.07

2010 2.73 1.37 1.26 1.58 0.98

2011 2.89 0.60 1.08 2.31 0.99

2012 3.24 0.85 1.32 2.63 0.97

2013 2.77 0.65 1.40 1.28 0.94

2014 2.73 0.70 1.19 1.66 0.92

2015 3.25 0.70 1.16 2.18 0.88

Source: Prepared by the Researcher

Table5.3 shows the results of the revealed comparative advantage of different industries of India.

The results suggest that India remained competitive in the textile industry and is able to sustain

that position consistently. In inorganic chemical industry the result showed that in 2005 and 2006

the country gainedthe comparative advantage, but, lost this advantage in 2007, 2008 and 2009, but

regain its competitive advantage in 2010 but was not able to sustain that position for the rest of the

year. The agriculture industry in India has gained competitive advantage except for the year 2005

and 2009. In the sugar industry in 2005 they country performance was not very good, but it gainsa

competitive advantage in all the other years except for 2009. The edible fruits and nuts industry

were very competitive from 2005 till 2009 but lost its competitiveness afterward.

5.1.4. Regional Orientation

The ratio of regional orientation suggests that whether the exports of certain goods are more

oriented toward a certain region as compared to other regions. This ratio is composed of two

shares. Firstly, the numerator comprisesof the share of Pakistan’s exports of the product to India,

in Pakistan’s total exports. The denominator is the share of Pakistan’s exports of the product to

other countries in the country’s total exports to other countries. If the value is more than 1, it

indicates the regional bias of the country of exports of a particular product, and if it is less than 1

than the country has no regional biases.

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This ratio along with revealed comparative advantage helps to identify trade diversion or trade

creation after signing of a particular free trade agreement. The country’s Revealed comparative

advantage value less than 1and regional trade orientation is more than 1 than the Free Trade

Agreement will cause trade diversion.In order to calculate this ratio following formula was used:

Regional Orientation Index = (Xcgr /Xcr) /= (Xcgr-r /Xcr-r)

where,

Xcgr = exports of industry g by Pakistan to India

Xcr = total exports of Pakistan to India

Xcg-r = exports of the industry by Pakistan tocountries other than India outside the region.

Xc-r = total exports by industry to countries outside region r.

Source: Anderson and Norheim (1993)

Table 5 4 Regional Orientation of Pakistan Trade with India

Years Textile and

clothing

Inorganic

chemicals

Agriculture Sugar & Sugar

confectionaries

Edible Fruits and

Nuts

2005 0.37 2.17 0.15 0.03 1.07

2006 0.58 2.57 0.19 0.00 1.13

2007 0.71 2.58 0.39 0.00 1.29

2008 0.58 3.70 0.83 0.00 1.20

2009 0.75 4.93 0.50 0.00 1.49

2010 0.70 13.7 0.63 0.00. 1.05

2011 0.59 8.73 0.50 0.00 1.17

2012 1.05 8.81 2.61 0.04 1.19

2013 0.65 6.18 1.66 0.20 1.07

2014 0.75 6.47 2.04 0.00 0.93

2015 0.76 8.02 2.46 0.00 1.19

Source: Prepared by the Researcher

Table 5.4 suggests the regional orientation of Pakistan and India in trade the textile and clothing industries

shows a value less than 1 for all the years except for 2012. In inorganic chemical, the value is more than 1

for all the year. The agriculture industries showa value less than 1 from 2005 to2011, after that, it shows

that value more than 1, for sugar and sugar confectionaries the value is more than 1 in 2009 and 2010., for

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the remaining years it showed avalue less than 1. In Ediblefruits and nuts Industries,the value was greater

than 1 for all years except for 2014.

5.1.5.Trade Complementarity Index

This index helps to measure the degree to which export pattern of one country is similar to the

import pattern of the other country. The value ranges from 0 to 1, which shows no overlapping

and 1 suggest a perfect match of trade pattern. A high index suggests favorable prospects for the

future arrangement. The formula for measuring this index was as follows:

1 − [∑ abs(

MrgMr⁄ )−

Xcg

Xc

2∂

]

Mrg = imports of good g by region r

Mr = total imports of the region

Xcg = exports of good g by country c

Xc = total exports by country c

Source: Anderson and Norheim (1993)

Table 5 5 Trade Complementarity Index

Years Textile and

clothing

Inorganic

chemicals

Agriculture Sugar & sugar

confectionaries

Edible Fruits

and nuts

2005 0.06 0.99 0.93 0.81 0.90

2006 0.09 0.99 0.94 0.83 0.90

2007 0.19 0.99 0.95 0.89 0.91

2008 0.23 0.99 0.94 0.63 0.91

2009 0.92 0.98 0.91 0.83 0.86

2010 0.15 0.98 0.92 0.90 0.84

2011 0.02 0.98 0.90 0.93 0.83

2012 0.003 0.98 0.89 0.76 0.82

2013 0.16 0.98 0.91 0.41 0.79

2014 0.18 0.98 0.91 0.53 0.81

2015 0.09 0.99 0.94 0.55 0.81

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Source: Prepared by the researcher

Table 5.5 shows the results of the trade complementarily index. The trade complementarity index

washigh for all the industries except for the textile and clothing industry.

5.2 Regression Analysis

The regression analysis is a technique used to identify the variation independent variable caused

by individual or more than one independent variables. Before calculating regression, the

normality of the data was checked the descriptive statistics for each model was calculated.

Forchecking the problem of multi-collinearity Pearson correlation test was applied. ADF test was

applied to check stationarity of each variable.

Table 5 6 Summary Statistics Pakistan

Variables Mean Median Min Max SD skew Kurt

FC 6.3e019 -0.026 -0.0784 0.193 0.077 0.270 1.022

DC 7.2e-008 0.0378 -0.0378 0.274 0.183 -0.051 -1.361

SRI -9.0e-009 0.0090 -0.186 0.106 0.081 -0.903 0.202

FSSR 0.0042 -0.002 -0.396 0.263 0.114 -0.901 2.000

GP -0.0002 0.0060 -0.104 0.060 0.048 -0.595 -0.433

Source: Prepared by the researcher

Table 5.6 shows the summary statistics of Pakistan. In order to check the normality of the data the

value of kurtosis was analyzed and suggests that all the variable shows less than 2 value. This

suggests that the data is normally distributed.

Table 5 7 Correlation Matrix Pakistan

FC DC SR FSSR GP

FC 1.00 0.65 -0.31 0.14 -0.47

DC 1.00 0.021 0.34 0.19

SR 1.00 0.30 0.51

FSSR 1.00 0.22

GP 1.00

Source: Prepared by a researcher

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Table 5.7 showsthe correlation matrix of explanatory variables oftheoverall Pakistan model. The

result suggests that the problem of multicollinearity is not present in the data.

Table 5 8 ADF Panel Unit Root Test Result Pakistan

Variable Estimated –value Test statistic P-value

CA -1.03 -3.32 0.04

FC -1.41 -4.11 0.01

DC -1.72 -3.34 0.01

SRI -0.03 -0.28 0.55

FSSR -0.96 -4.94 0.00

GP -0.60 -2.00 0.04

Source: Prepared by a researcher

Table 5.8 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is nonstationary, the first difference was taken.

Table 5.9 Hausman Test Result -Pakistan

Null hypothesis : GLS estimates are consistent

Chi-square 0.095

p-value 0.00953

Source:Prepared by the researcher

Table 5.9 shows the results of the Hausman test (Gujarati, 2003). The analysis of the test suggests

that the fixed effect model should be used.

Table 5 10 Regression Results- Pakistan

126

VARIABLE Coefficient Std. Error t-ratio p-value

FC −0.01 0.074 −0.12 0.89

DC 1.14 2.19 0.51 0.60

SR 0.23 0.83 0.28 0.77

FSSR −0.64 1.13 −0.57 0.56

GP 2.44 0.74 3.27 0.002

Adjusted R-squared 0.28

F statistic 5.23

P-value (F) 0.00

Durbin-Watson 1.79

Source: Prepared by the Researcher

Table 5.10 presents regressionresults Pakistan. The adjusted R square was28.14 %, which suggests

that almost 28.14 % changes in the selected data were due to above motioned explanatory

variables. The coefficient for factor conditions variable is −0.01 and shows a negative relationship

between factor condition and competitive advantage. The coefficient of demand conditions is1.14

which shows that there is a positive relationship between demand conditions and competitive

advantage. The coefficient for supporting and related industries is 0.23 and shows a positive

relationship with the competitive advantage of the country. The coefficient for firm strategy and

rivalry is −0.64 and shows a negative relationship with the competitive advantage of the country.

The coefficient for government policy variable is 2.44 and shows a positive relationship with the

advantage of the country. The overall model is statistically significant with F value of 5.23 and

P-value 0.00. The T-statistics show that only government policy is statistically significant at 5%

significance level. The DW statistics suggest the data is free from Auto Correlation.

Table 5.11 Summary Statistics -India

Variables Mean Median Min Max S.D Skew kurt

FC 9.09e007 0.030 0.680 0.486 0.351 0.339 0.850

DC -3.63e-007 0.090 1.546 1.305 0.907 -0.211 -1.425

SRI -8.8e-018 0.101 1.146 1.360 0.919 0.100 1.551

FSSR -1.9e-018 0.079 -1.079 1.024 0.472 -0.462 0.039

GP 4.3e-018 -0.021 -0.949 1.341 0.618 0.5676 0.149

Source: Prepared by the Researcher

127

Table5.11 shows the summary statistics of India. In order to check the normality of the data the

value of kurtosis was analyzed and suggests that all the variable shows less than 2 value. This

suggests that the data is normally distributed.

Table 5.12 Correlation Matrix - India

FC DC SR FSSR GP

FC 1.0000 0.347 0.068 -0.135 -0.522

DC 1.000 0.280 0.470 -0.472

SR 1.000 0.178 -0.472

FSSR 1.000 -0.410

GP 1.000

Source: Prepared by the Researcher

Table 5.12 shows the correlation matrix of explanatory variables of overallIndia. The result

suggests that the problem of multicollinearity is not present in the data.

Table 5 13 Panel Unit Root Test Result - India

VARIABLE ESTIMATED –VALUE TEST STATICIC P-VALUE

CA -1.035 -3.311 0.042

FC -0.993 -2.801 0.092

DC -0.224 -1.413 0.532

SRI 0.0116 0.1341 0.950

FSSR -0.969 -5.179 0.003

GP -0.6011 -1.893 0.321

Source: Prepared by the Researcher

Table 5.13 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is not stationary, the first difference was taken.

Table 5.14 Hausman Test Result - India

Null Hypothesis GLS estimates are consistent

128

Chi-square 0.053

p-value 0.019

Source: Prepared by the Researcher

Table 5.14 shows the results of the Hausman test (Gujarati, 2003). The analysis of the test suggests

that the fixed effect model should be used.

Table 5 15 Regression Results- India

Variable Coefficient Std. Error t-ratio p-value

FC 0.131 0.445 0.294 0.769

DC 0.808 0.510 1.584 0.120

SR −0.83 0.495 −1.67 0.100

FSSR 0.925 0.344 2.68 0.010

GP 0.823 0.286 2.87 0.006

Adjusted R-squared 0.34

F –statistics 6.66

P-value(F) 0.00

Durbin-Watson 1.87

Source:Prepared by the Researcher

Table 5.15 presentsthe regression results for India. The adjusted R square was 34.40% which

suggests that almost 34.40 % changes in the selected data were due to the five above mentioned

explanatory variables. The coefficient for factor conditions variablewas 0.131and shows a positive

relationship witha competitiveadvantage. The coefficient of demand conditions was 0.808 which

shows that there is a positive relationship between demand conditions and national competitive

advantage. The coefficient for supporting and related industries was−0.83 and shows a negative

relationship withthe national competitive advantage of the country. The coefficient for firm

strategy and rivalry was 0.925 and shows a positive relationship with national competitive

advantage. The coefficient for governmentpolicy variable is 0.823 and shows a positive

relationship with national competitive advantage. The overall model was statistically significant

withan F value of 6.66 and P-value 0.00. The T-statistics showsthat only firm strategy and

rivalry andgovernment policy variables were statistically significant at 5% significance level. The

DW statistics suggest the data is free from Auto Correlation.

Table 5 16 Summary Statistics Pakistan - Agriculture

129

Variables Mean Median Min Max S.D Skew Kurt

FC -9.9e-007 0.03 -0.68 0.48 0.36 -0.33 -0.85

DC -9.0e-007 0.23 -1.51 1.07 0.94 -0.27 -1.45

SRI -8.8e-018 0.10 -1.14 1.36 0.95 0.100 -1.55

FSSR -1.3e-017 0.04 -1.07 1.02 0.59 -0.39 -0.09

GP 4.13e18 -0.02 -0.94 1.34 0.64 0.568 -0.15

Source:Prepared by the Researcher

Table 5.16 shows the summary statistics of Pakistan agriculture industry. In order to check the

normality of the data the value of kurtosis was analyzed and suggests that all the variable shows

less than 2 value. This suggests that the data is normally distributed.

Table 5 17 Correlation Matrix Agriculture Industry Pakistan

FC DC SR FSSR GP

FC 1.OO 0.66 -0.31 0.48 -0.47

DC 1.00 0.038 0.91 0.13

SR 1.000 -0.11 0.51

FSSR 1.00 0.30

GP 1.00

Source:Prepared by the Researcher

Table 5.17 shows the correlation matrix of explanatory variables of Pakistani agriculture

industry. The result suggests that the problem of multicollinearity is not present in the data.

Table 5.18 ADF Unit Root Test Result Agriculture Industry Pakistan

Variable Coefficient T-value P-VALUE

CA -0.95 -3.53 0.03

FC 0.25 0.72 0.98

DC -0.11 -0.74 0.78

SRI -0.67 -1.99 0.28

FSSR -0.22 -4.11 0.01

GP -0.42 -1.02 0.69

Source:PreparedBy Researcher

130

Table 5.18 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is not stationary, the first difference was taken.

Table 5.19 Regression Results Pakistan Agriculture Industry

Variable Coefficient Standard Error Test Statistic P-Value

FC 9.42 4.39 2.14 0.04

SR −9.66 3.52 −2.74 0.05

GP 27.09 6.74 4.01 0.01

FSSR −4.61 3.96 −1.16 0.30

DC 4.71 3.99 1.18 0.30

Adjusted R-squared 0.84

F (6, 4) 4.78

P-value(F) 0.010

D.W −1.94

Source: Prepared by the Researcher

Table 5.19 presents the regression results for Pakistan agriculture industry. The adjusted R square

85 %, which suggests that almost 85% changes inthe agriculture industry were due to these five

explanatory variables. The coefficient for factor conditions variable is 9.42 and shows a positive

relationship between factor condition and national competitive advantage. The coefficient of

demand conditions was 4.71 which shows that there is a positive relationship between demand

conditions andNational competitive advantage. The coefficient for supporting and related

industries was -9.66 and shows a negative relationship with the nationalcompetitive advantage of

the country. The coefficient for firm strategy and rivalry was −4.61 and shows a negative

relationship withnational competitive advantage. The coefficient for governmentpolicy variable

was27.09and shows a positive relationship with the advantage of the country. The overall model

was statistically significant with F value of 4.78 and P-value 0.01.The T-statistics show that firm

strategy and rivalry, government policy and supporting and related industries are significant. The

DW test suggests that the data is free from autocorrelation.

Table 5 20 Summary Statistics Pakistan Edible Fruits and Nuts

Variables Mean median Min Max SD skew Kurt

FC -6.3e-019 -0.02 -0.07 0.19 0.08 0.27 1.02

DC 3.1e-018 -0.03 -0.30 0.27 0.19 -0.00 -1.27

SRI -9.0e-009 0.009 -0.18 0.10 0.08 -0.903 0.20

FSSR 1.8e-008 0.014 -0.1 0.12 0.07 -1.16 1.79

GP -0.02 0.006 -0.104 0.06 0.05 -0.59 -0.43

Source: Prepared by the Researcher

131

Table 5.20 shows the summary statistics of Pakistan edible fruits and nuts industry. In order to

check the normality of the data the value of kurtosis was analyzed and suggests that all the variable

shows less than 2 value. This suggests that the data is normally distributed.

Table 5 21Correlation Matrix Edible Fruits and Nuts Industry-Pakistan

FC DC SR FSSR GP

FC 1.OO 0.69 -0.31 0.23 -0.47

DC 1.00 -0.00 0.37 0.14

SR 1.00 0.78 0.51

FSSR 1.00 0.25

GP 1.00

Source: Prepared by the Researcher

Table 5.21 shows the correlation matrix of explanatory variables of edible fruits

and nuts industry Pakistan. The result suggests that the problem of

multicollinearity is not present in the data.

Table 5 22 ADF Unit Root Test Result- Edible Fruits and Nuts Industry

Pakistan

VARIABLE ESTIMATED –VALUE TEST STATICIC P-VALUE

C -0.29 -1.01 0.70

FC 0.25 0.72 0.98

DC -0.04 -1.02 0.69

SRI -0.67 -1.99 0.28

FSSR -0.58 -1.82 0.34

GP -0.42 -1.02 0.69

Source: Prepared by the Researcher

Table 5.22 shows the results of theADF test for each variable. This test was run individually for

each Variable. In case the variable isnot stationary, the first difference was taken.

Table 5 23 Regression Results- Edible Fruits and Nuts Industry Pakistan

Variable Coefficient Std. Error T-value p-value

FC −0.48 1.59 −0.30 0.77

DC 0.36 1.05 0.34 0.74

SR 1.87 2.29 0.81 0.44

FSSR −0.55 2.28 −0.24 0.81

GP −1.94 2.29 −0.84 0.43

132

Adjusted R-squared 0.25

F(5, 5) 0.38

P-value(F) 0.84

Durbin-Watson 1.92

Source: Prepared by the Researcher

Table 5.23 presents the regression results for edible fruits and nuts industry Pakistan. The adjusted

R squarevalue was 25.50%, which suggests that almost 25.50 % changes in the dependent variable

are due tothese five explanatory variables. The coefficient for factor conditions variable was

−0.48and shows a negative relationship between factor condition and national competitive

advantage. The coefficient of demand conditions was 0.36 which shows that there is a positive

relationship between demand conditions and national competitive advantage. The coefficient for

supporting and related industries was1.87 andshows a positive relationship with

nationalcompetitive advantage. The coefficient for firm strategy and rivalry was −0.55 and shows

a negative relationship withthe nationalcompetitive advantage of the country. The coefficient for

government policy variable was −1.94 and shows a positive relationship with national advantage.

The overall model was statistically significant with F value of 0.38and P-value 0.84. The T-

statistics show that only, firm strategy and rivalry variable is statistically insignificant at 5%

significance level. The DW statistics suggest the data is free from Auto Correlation.

Table 5 24 Summary Statistics -Pakistan Sugar and sugar confectionaries

Industry

Variables Mean median Min Max SD Skew Kurt

FC -6.3e-19 -0.02 -0.07 0.19 0.08 1.27 1.02

DC 1.8e-007 -0.03 -0.29 0.24 0.19 -0.02 -1.43

SRI -9.0e-09 0.00 -0.18 0.10 0.08 -0.90 0.20

FSSR 0.0215 0.031 -0.22 0.26 0.13 -0.01 -0.10

GP -0.000 0.006 -0.10 0.06 0.05 -0.59 -0.43

Source: Prepared by the Researcher

Table 5.24 shows the summary statistics of Pakistan sugar and sugar confectionaries industry. In

order to check the normality of the data the value of kurtosis was analyzed and suggests that all

the variable shows less than 2 value. This suggests that the data is normally distributed.

133

Table 5 25 Correlation Matrix Sugar Industry Pakistan

FC DC SR FSSR GP

FC 1.OO 0.68 -0.31 -0.05 -0.47

DC 1.00 0.01 0.01 0.18

SR 1.00 0.50 0.51

FSSR 1.00 0.21

GP 1.00

Source: Prepared by the Researcher

Table 5.25 shows the correlation matrix of explanatory variables of the sugarand sugar

confectionaries industry of Pakistan model. The result suggests that the problem of

multicollinearity is not present in the data.

Table 5 26 ADF Unit Root Test Result Sugar Industry Pakistan

Variable Estimated –value Test statistic P-value

CA -0.55 -1.78 0.36

FC 0.25 0.72 0.98

DC -0.11 -1.01 0.70

SRI -0.67 -1.99 0.28

FSSR -0.69 -2.16 0.22

GP -0.42 -1.02 0.69

Source: Prepared by Researcher

Table 5.26 shows the results ofthe ADF test for each variable. This test was run individualy for

each Variable. In case the variable is notstationary, the first difference was taken.

Table 5 27 Sugar Sector Pakistan-Regression Results

Variable Coefficient Std. Error T-ratio P-value

FC 3.91077 6.00101 0.6517 0.5434

DC_1 0.623263 5.64619 0.1104 0.9164

SR 4.75694 6.45376 0.7371 0.4942

FSSR_1 −0.372647 2.72561 −0.1367 0.8966

GP 6.93072 13.6185 0.5089 0.6325

R-square 0.356062 Adjusted R-squared 0.354152

F(5, 5) 0.552944 P-value(F) 0.734359

Durbin-Watson 1.951973

134

Source: Prepared by Researcher

Table 5.27 presents the regression results of Pakistani Sugar and sugar confectionaies industry.

The adjusted R square 35.42% which suggests that almost 35.41 % changes in the selected data

are due to these five explanatory variables. The coefficient for factor conditions variable is 3.91

and shows a negative relationship between factor condition and competitive advantage. The

coefficient of demand conditions is 0.62 which shows that there is a positive relationship between

demand conditions and a competitive advantage. The coefficient for supporting and related

industries is 4.75 and shows a positive relationship with the competitive advantage of the country.

The coefficient for firm strategy and rivalry is -0.37 and shows a negative relationship with the

competitive advantage of the country. The coefficient for government policy variable is 6.93 and

shows a positive relationship with the competitive advantage of the country. The overall model

is statistically significant with F value of 0.552 and P-value 0.73. The T-statistics show that all

the variables are statistically insignificant at the 5% significance level. The DW statistics suggest

the data is free from Auto Correlation from Auto Correlation.

Table 5 28 Summary Statistics Pakistan Inorganic Chemicals

Variable Mean Median Min Max S.D skew Kurt

FC -6.308e-19 -0.03 -0.08 0.19 0.08 1.27 1.02

DC 3.154e-018 -0.03 -0.31 0.27 0.19 -0.01 -1.28

SRI -9.090e-09 0.01 -0.18 0.10 0.08 -0.90 0.20

FSSR 1.818e-008 0.015 -0.19 0.12 0.08 -1.17 1.79

GP -0.0002 0.006 -0.10 0.06 0.05 -0.59 -0.43

Source: Prepared by the Researcher

Table 5.28 shows the summary statistics of Pakistaniinorganic chemical industry. In order to

check the normality of the data the value of kurtosis was analyzed and suggests that all the variable

shows less than 2 value. This suggests that the data is normally distributed.

Table 5 29 Correlation Matrix - Inorganic Chemical Industry Pakistan. FC DC SR FSSR GP

FC 1.O0 0.54 -0.31 -0.16 -0.47

DC 1.00 0.04 0.22 0.30

135

SR 1.00 0.89 0.52

FSSR 1.00 0.49

GP 1.00

Source: Prepared by the Researcher

Table 5.29 shows the correlation matrix of explanatory variables of the inorganic

chemical Pakistan model. The result suggests that the problem of the multicollinearity

is not present in the data.

Table 5 30 ADF Unit Root Test Result Inorganic Chemical Industry

Pakistan VARIABLE ESTIMATED –VALUE TEST STATICIC P-VALUE

CA -0.61 -1.92 0.31

FC 0.25 0.72 0.98

DC -0.13 -2.44 0.15

SRI -0.67 -1.99 0.28

FSSR -0.93 -2.63 0.12

GP -0.42 -1.02 0.69

Source: Prepared by the Researcher

Table 5.30 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is notstationary, the first difference was taken.

Table 5 31 Regression Results Inorganic Chemical Industry Pakistan

Variable Coefficient Std. Error t-ratio p-value

FC −0.99 0.83 −1.19 0.29

DC 0.96 0.27 3.45 0.02

SR 0.15 0.89 0.17 0.87

FSSR 0.79 0.71 1.10 0.33

GP 1.53 0.96 1.59 0.18

Adjusted R-squared 0.79

F(5, 4) 7.74

P-value(F) 0.03

Durbin-Watson 1.82

Source: Prepared by the Researcher

Table 5.31 presents the results of regression results for the inorganic chemical industry of Pakistan.

The adjusted R square 78.92 %,which suggests that almost 78.92 % changes in the selected data

are due to these five explanatory variables. The coefficient for factor conditions variable is 0.99

and shows a positive relationship between factor condition and competitive advantage. The

136

coefficient of demand conditions is 0.96 which shows that there is a positive relationship between

demand conditions and competitive advantage. The coefficient for supporting and related

industries is 0.15 and shows a positive relationship with the competitive advantage of the country.

The coefficient for firm strategy and rivalry is 0.79and shows a positive relationship with the

competitive advantage of the country. The coefficient for government policy variable is 1.53 and

shows a positive relationship with the advantage of the country. The overall model is statistically

significant with F value of 7.74and with P-value 0.03. The T-statistics show that only demand

conditions are variable is statistically significant at 5% significance level. The DW statistics

suggest the data is free from Auto Correlation.

Table 5 32 Summary Statistics Pakistan Textile

Variable Mean median Min Max S.D Skew Kurt

FC -6.3e-019 -0.02 -0.07 0.19 0.08 1.27 1.02

DC 1.8e-007 -0.04 -0.29 0.24 0.19 -0.02 -1.43

SRI -9.0e-009 0.001 -0.18 0.10 0.08 -0.90 0.20

FSSR 3.6e-008 -0.01 -0.02 0.12 0.04 2.76 5.82

GP -0.00 0.01 -0.10 0.06 0.05 -0.59 -0.43

Source: Prepared by the Researcher

Table 5.32 shows the summary statistics of Pakistan edible fruits and nuts industry. In order to

check the normality of the data the value of kurtosis was analyzed and suggests that all the variable

shows less than 2 value. This suggests that the data is normally distributed.

Table 5 33 Correlation Matrix Textile Industry Pakistan

FC DC SR FSSR GP

FC 1.OO 0.68 -0.31 -0.26 -0.47

DC 1.00 0.01 -0.53 0.18

SR 1.00 0.32 0.51

FSSR 1.00 -0.30

GP 1.00

137

Source: Prepared by the Researcher

Table 5.33 shows the correlation matrix of explanatory variables of the textile industry of

Pakistan model. The result suggests that the problem of the multicollinearity is not present in the

data.

Table 5.34 ADF Unit Root Test Result Textile industry Pakistan

Variable Estimated –value Test statistic P-value

CA -0.93 -24.49 0.00

FC 0.25 0.72 0.98

DC -0.10 -1.01 0.70

SRI -0.67 -1.99 0.28

FSSR -0.93 -24.49 0.00

GP -0.42 -1.02 0.69

Source: Prepared by Researcher

Table 5.34 shows the results of theADF test for each variable. This test was run individually for

each Variable. In case the variable is not stationary, the first difference was taken.

Table 5.35 Regression Results- Textile Industry Pakistan

Variable Coefficient Std. Error T-ratio P-value

FC −0.57 0.33 −1.72 0.14

DC −0.01 0.60 −0.01 0.99

SR −0.34 0.30 −1.12 0.31

FSSR 0.52 0.89 0.58 0.58

GP −0.06 0.54 −0.11 0.91

R-squared 0.42

Adjusted R-squared 0.28

F(5, 5) 0.74

P- value 0.62

Durbin Watson 1.038158

Source: Prepared by the Researcher

Table 5.35 presents the results of regression results for the textile industry of Pakistan. The

adjusted R square 28.30%, which suggests that almost 28.30 % changes in the selected data are

due to these five explanatory variables. The coefficient for factor conditions variable is -0.57 and

shows a negative relationship between factor condition and competitive advantage. The

coefficient of demand conditions is −0.01 which shows that there is a positive relationship between

demand conditions and competitive advantage. The coefficient for supporting and related

138

industries is−0.34 and shows a negative relationship with the competitive advantage of the country.

The coefficient for firm strategy and rivalry is 0.52 and shows a positive relationship with the

competitive advantage of the country. The coefficient for government policy variable is - 0.06

and shows a positive relationship with the advantage of the country. The overall model is

statistically insignificant with an F value of 0.74 and P-value 0.62. The T-statistics show that all

the variables in the model are statistically insignificant at 5% significant level. The DW statistics

suggest the data is free from Auto Correlation.

Table 5.36 Summary Statistics – Sugar and sugar confectionaries Industry

India Variables Mean Median Min Max S.D skew Kurt

FC -9.09 0.03 -0.68 0.48 0.36 -0.34 -0.85

DC -0.001 0.09 -1.46 1.30 0.98 -0.08 -1.43

SRI -8.e-018 0.10 -1.14 1.36 0.95 0.10 -1.55

FSSR -1.e-017 0.08 -0.88 0.73 0.46 -0.51 -0.29

GP 4.3e-01 -0.02 -0.95 1.34 0.64 0.57 -0.14

Source: Prepared by the Researcher

Table 5.36 shows the summary statistics ofSugar and sugar confectionaries Industry India. In

order to check the normality of the data the value of kurtosis was analyzed and suggests that all

the variable shows less than 2 value. This suggests that the data is normally distributed.

Table 5 37 Correlation Matrix Sugar and sugar confectionaries Industry

India

FC DC SR FSSR GP

FC 1.OO 0.35 0.37 -0.07 -0.52

DC 1.00 0.09 0.58 -0.35

SR 1.00 0.45 -0.56

FSSR 1.00 -0.09

GP 1.00

Source; prepared by the researcher

Table 5.37shows the correlation matrix of the independent variable. All the values are below

0.6, therefore, the problem of multicollinearity

139

Table 5 38 Unit Root Test Result Sugar and sugar confectionaries industry

India

Variable Estimated –value Test Statistic P-value

CA -1.04 -3.31 0.04

FC -0.99 -2.80 0.09

DC -0.2 -1.41 0.53

SRI 0.01 0.13 0.95

FSSR -0.97 -5.17 0.00

GP -0.60 -1.89 0.32

Source; Prepared by the Researcher

Table 5.38 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is not stationary, the first difference was taken.

Table 5 39 Regression Results- Sugarand sugar confectionaries India

Variable Coefficient Std. Error T-ratio P-value

FC 0.94 0.62 1.51 0.21

DC −0.48 0.81 −0.60 0.59

SR −0.08 0.23 −0.34 0.75

FSSR −0.69 0.44 −1.58 0.21

GP 1.58 0.37 4.28 0.02

Adjusted R-squared 0.79

F(5, 6) 6.85

P-value(F) 0.01

Durbin-Watson 1.98

Source Prepared by Researcher

Table 5.39 presents the results of regression results of Indian Sugar and sugar confectionaries

industry. The adjusted R square 79.58%,which suggests that almost 79.58% changes in the

selected data are due to these five explanatory variables. The coefficient for factor conditions

variable is 0.94 and shows a positive relationship between factor condition and competitive

advantage. The coefficient of demand conditions is −0.48 which shows that there is a negative

relationship between demand conditions and competitive advantage. The coefficient for

supporting and related industries is −0.08 and shows a negative relationship with the national

competitive advantage of the country. The coefficient for firm strategy and rivalry is -0.69 and

shows a negative relationship with the national competitive advantage of the country. The

coefficient for government policy variable is 1.58 and shows a positive relationship with the

140

advantage of the country. The overall model is statistically significant with F value of 6. 85and

P-value 0.01 The T-statistics show that demand conditions and firm strategy and rivalry variable

are statistically significant at 5% significant level. The DW statistics suggest the data is free from

Auto Correlation.

Table 5 40 Summary Statistics India Edible Fruits and Nuts

Variables Mean Median Min Max S.D Skew Kurt

FC -9.0e-007 0.03 -0.68 0.48 0.36 -0.34 -0.85

DC -9.0e-007 -0.012 -1.40 1.23 0.97 -0.08 -1.46

SRI -8.8e-018 0.10 -1.14 1.36 0.95 0.10 -1.55

FSSR 6.3e-018 0.08 -0.64 0.79 0.45 0.051 -0.90

GP 4.1e-018 -0.021 -0.95 1.34 0.64 0.57 -0.15

Source: Prepared by the Researcher

Table 5.40 shows the summary statistics of India edible fruits and nuts industry. In order to check

the normality of the data the value of kurtosis was analyzed and suggests that all the variable shows

less than 2 value. This suggests that the data is normally distributed.

Table 5 41 Correlation Matrix - Edible Fruits and Nuts Industry India FC DC SR FSSR GP

FC 1.OO 0.37 -0.01 -0.50 0.06

DC 1.00 0.048 -0.51 0.25

SR 1.00 -0.39 0.10

FSSR 1.00 -0.47

GP 1.00

Source: Prepared by the Researcher

Table 5.41 shows the correlation matrix of explanatory variables of edible fruits

and nuts industry India model. The result suggests that the problem of the

multicollinearity is not present in the data.

Table 5 42 Unit Root Test Result Edible Fruits and Nuts Industry

India Variable Estimated –value Test Statistic P-value

CA -0.28 -2.71 0.10

141

FC -0.99 -2.80 0.09

DC -0.05 -0.76 0.78

SRI 0.012 0.13 0.95

FSSR -1.32 -3.51 0.03

GP -0.60 -1.89 0.32

Source: Prepared by the Researcher

Table 5.42 shows the results of the ADF test for each variable. This test was run

individually for each Variable. In case the variable is nor stationary, the first

different was taken.

Table 5 43 Regression Results- Edible Fruits and Nuts Industry

India Variable Coefficient Std. Error t-ratio p-value

FC 0.85 0.35 2.43 0.06

DC −2.50 1.30 −1.92 0.11

SR 1.70 1.25 1.37 0.23

FSSR 0.07 0.25 0.32 0.77

GP 0.57 0.32 1.81 0.13

Adjusted R-squared 0.43

F(5, 5) 1.77

P-value(F) 0.27

Durbin-Watson 1.63

Source: Prepared by the Researcher

Table 5.43 presents the results of regression resultsinIndia, Ediblefruit and nuts industry. The

adjusted R square 43.37 %, which suggests that almost 43.37 % % changes in the selected data are

due to these five explanatory variables. The coefficient for factor conditions variable is 0.85 and

shows a positive relationship between factor condition and competitive advantage. The coefficient

of demand conditions is −2.50which shows that there is a negative relationship between demand

conditions and competitive advantage. The coefficient for supporting and related industries is

1.70 and shows a positive relationship with the national competitive advantage of the country.

The coefficient for firm strategy and rivalry is 0.07 and shows a negative relationship with the

national competitive advantage of the country. The coefficient for government policy variable is

0.57 and shows a positive relationship with the advantage of the country. The overall model is

statistically insignificant withF value of 1.77 and P-value 0.273. The T-statistics show that not

a single variable is statistically significant at the 5% significance level. The DW statistics suggest

the data is free from Autocorrelation.

142

Table 5 44 Summary Statistics -India Inorganic Chemicals

Variable Mean Median Min Max S.D Skew Kurt

FC -9.09e-007 0.030 -0.68 0.48 0.36 -0.34 -0.85

DC 0.0000 0.44 -1.40 0.94 0.90 -0.34 -1.54

SRI -8.83e-018 0.10 -1.14 1.36 0.95 0.10 -1.55

FSSR 6.93e-018 0.048 -0.93 0.83 0.51 -0.25 -0.58

GP 4.10e-018 -0.021 -0.95 1.34 0.64 0.56 -0.15

Source: Prepared by the Researcher

Table 5.44 shows the summary statistics ofIndian Inorganic Chemicals. In order to check the

normality of the data the value of kurtosis was analyzed and suggests that all the variable shows

less than 2 value. This suggests that the data is normally distributed.

Table 5 45 Correlation Matrix Inorganic Chemical Industry India

FC DC SR FSSR GP

FC 1.00 0.24 -0.33 -0.50 0.07

DC 1.00 0.37 -0.53 0.41

SR 1.00 -0.63 0.45

FSSR 1.00 -0.47

GP 1.00

Source: Prepared by the Researcher

Table 5.45 shows the correlation matrix of explanatory variables of the inorganic

chemical industry of India. The result suggests that the problem of multicollinearity

is not present in the data

Table 5 46 Unit Root Test Result Inorganic Chemical Industry

India

Variable Estimated –value Test statistic P-value

CA -1.29 -4.02 0.014

FC -0.99 -2.80 0.092

143

DC -0.23 -1.32 0.57

SRI 0.011 0.13 0.95

FSSR -1.03 -3.14 0.05

GP -0.60 -1.89 0.32

Source: Prepared by the Researcher

Table 5.46 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is not stationary, the first difference was taken.

Table 5 47 Regression Results -Inorganic Chemical Industry India Variable Coefficient Std. Error T-ratio P-value

FC 0.06 0.48 0.14 0.89

DC −0.59 0.22 −2.71 0.05

SR 0.40 0.34 1.17 0.30

FSSR −0.36 0.81 −0.44 0.67

GP 0.06 0.25 0.25 0.80

Adjusted Square 0.084

f-statistics 4.343545

p-value 0.0089865

Durban Watson 2.146090

Source: Prepared by the Researcher

Table 5.47 presents the regression results for the inorganic chemical industryof India. The adjusted

R square 8.040% which suggests that almost 8.4 % changes in the selected data are due to these

five explanatory variables. The coefficient for factor conditions variable is 0.06 and shows a

positive relationship between factor condition and competitive advantage. The coefficient of

demand conditions is−0.59 which shows that there is a negative relationship between demand

conditions and competitive advantage. The coefficient for supporting and related industries is

0.40 and shows a positive relationship with the national competitive advantage of the country.

The coefficient for firm strategy and rivalry is −0.36 and shows a negative relationship with the

national competitive advantage of the country. The coefficient for government policy variable

is0.06 and shows a positive relationship with the advantage of the country. The overall model is

statistically significant with F value of 4.343545 and P-value 0.00898 The T-statistics show

that all the variables are statistically insignificant at 5% significant level. The DW statistics

suggest the data is free from Auto Correlation.

Table 5 48 Summary Statistics India Textile

Variables Mean Median Min Max S.d Skew Kurt

FC -9.9e-7 0.03 -0.68 0.48 0.36 -0.33 -0.85

DC -9.099 0.09 -1.46 1.30 0.98 -0.08 -1.43

SRI -8.8e-18 0.10 -1.14 1.36 0.95 0.10 -1.55

144

FSSR -1.4193 0.08 -0.88 0.72 0.46 -0.51 -0.29

GP 4.1e-18 -0.02 -0.94 1.34 0.64 0.56 -0.14

Source: Prepared by the Researcher

Table 5.48 shows the summary statistics of the Indian textile industry. In order to check the

normality of the data the value of kurtosis was analyzed and suggests that all the variable shows

less than 2 value. This suggests that the data is normally distributed.

Table 5 49 Correlation Matrix Textile Industry India

FC DC SR FSSR GP

FC 1.OO 0.37 0.36 -0.19 -0.52

DC 1.00 0.69 0.71 -0.53

SR 1.00 0.70 -0.56

FSSR 1.00 -0.34

GP 1.00

Source: Prepared by the Researcher

Table 5.49 shows the correlation matrix of explanatory variables of the Indian

textile industry. The result suggests that the problem of multicollinearity is not

present in the data.

Table 5 50 Unit Root Test Result Textile Industry India

Variable Estimated –value Test staticic P-value

CA -0.98 -2.78 0.095

FC -0.99 -2.80 0.092

DC -0.05 -0.75 0.788

SRI 0.011 0.134 0.950

FSSR -0.62 -2.21 0.213

GP -0.60 -1.89 0.321

Source: Prepared by the Researcher

Table 5.50 shows the results of the ADF test for each variable. This test was run

individually for each Variable. In case the variable is nor stationary, the first different

was taken.

Table 5 51 Regression Results- Textile Industry India

Variable Coefficient Std. Error T-ratio P-value

FC −5.30 1.564 −3.38 0.01

DC −1.49 3.597 −0.41 0.69

145

SR 3.76 3.57 1.053 0.34

FSSR −4.38 1.50 −2.90 0.03

GP −0.22 0.72 −0.31 0.76

Adjusted-R square 077

F -Value(5,5) 3.37

p-value (F) 0.103

Durbin-Watson 2

Source: Prepared by Researcher

Table5.51 presents the regression results for the textile industry of India. The adjusted R square

77.16%, which suggests that almost 77.16 % changes in the selected data are due to these five

explanatory variables. The coefficient for factor conditions variable is -5.30 and shows a negative

relationship between factor condition and competitive advantage. The coefficient of demand

conditions is −1.49 which shows that there is a negative relationship between demand conditions

and competitive advantage. The coefficient for supporting and related industries is 3.76 and shows

a positive relationship with thecompetitive advantage of the country. The coefficient for firm

strategy and rivalry is −4.38 and shows a negative relationship with the competitive advantage of

the country. The coefficient for government policy variable is −0.22 and shows a positive

relationship with the advantage of the country. The overall model is statistically significant with

F value of 3.37 and P-value 0.103 The T-statistics show that all the variables are statistically

significant at 5% significance level. The DW statistics suggest the data is free from Auto

Correlation.

Table 5 52Corrélation Matrix Agriculture Industry-India

FC DC SR FSSR GP

FC 1.OO 0.26 -0.16 -0.50 0.06

DC 1.00 0.57 -0.47 0.31

SR 1.00 -0.53 0.26

FSSR 1.00 -0.47

GP 1.00

Source: Prepared by the Researcher

Table 5.51 shows the correlation matrix of explanatory variables of

IndianAgriculture industry. The result suggests that the problem of

multicollinearity is not present in the data.

Table 5 53 Panel unit Root Test Result Agriculture Industry India

146

Variable Estimated –value Test Statistic P-value

CA -0.95 -3.53 0.03

FC -0.99 -2.80 0.09

DC 0.14 -1.45 0.51

SRI 0.01 0.13 0.95

FSSR -0.80 -2.94 0.07

GP -0.60 -1.89 0.32

Source: Prepared by the Researcher

Table 5.53 shows the results of the ADF test for each variable. This test was run individually for

each Variable. In case the variable is not stationary, the first difference was taken.

Table 5 54 Regression results for Agriculture industry- India.

Variable Coefficient Std. Error T-ratio P-value

FC 9.97 5.70 1.75 0.14

DC_1 5.36 3.93 1.36 0.23

SR −11.63 4.07 −2.85 0.03

FSSR_1 −7.441 5.20 −1.42 0.21

GP 27.88 8.19 3.40 0.01

Adjusted R-squared 0.75

F(5, 5) the 3.26

P-value(F) 0.11

Durbin-Watson 1.86

Source: Prepared by the Researcher

Table5.54 presents the regression results for agriculture industry India. The adjusted R square

75.90 %,which suggests that almost 75.90 % changes in the selected data are due to these five

explanatory variables. The coefficient for factor conditions variable is 9.97 and shows a positive

relationship between factor condition and competitive advantage. The coefficient of demand

conditions is5.36 whichshow that there is a positive relationship between demand conditions and

competitive advantage. The coefficient for supporting and related industries is −11.63 and shows

a negative relationship with the competitive advantage of the country. The coefficient for firm

strategy and rivalry is −7.441 and shows a negative relationship with the competitive advantage of

the country. The coefficient for governmentpolicy variable is 27.88 and shows a positive

relationship with the advantage of the country. The overall model is statistically significant with

F value of 3.26 and P-value 0.11 The T-statistics show that only government policy variable is

147

statistically significant at 5% significance level. The DW statistics suggest the data is free from

Auto Correlation.

CHAPTER # 6

ANALYSIS AND DISCUSSION

This chapter will provide an analysis of the results presented in the previous chapter. The

research was conducted with the intention to find the sources of competitive advantage for Pakistan

and India. Both neighboring countries are sharing a common border, culture, climatic condition,

common language, values, rituals and demand patterns, but still, there are many hurdles in the free

trade between both countries. This chapter will provide a detailed analysis and discuss

opportunities, hurdles and any other problems faced by the selected industries of both countries.

6.1. Ratio Analysis

The ratio analysis is the first step toward trade policy analysis, they help an analyst to have

an idea about the general pattern of trade.

The first ratio applied was the Interregional trade ratio, which shows a very low value for

intra-regional trade between Pakistan and India for all the industries, suggesting a costly future

trade between two countries. The second ratio applied was the intra-regional trade intensity

suggests that the results are less than one in all the years analyzed and suggest that collective trade

of Pakistan and India is not very significant in the world. The ratio of Intraregional trade

introversion index gives negative values for all the years which suggest and extra-regional bias.

The third index used was Revealed Comparative Advantage to measure the comparative

advantage or disadvantage of a country in certain good or the commodities measuring of its trade

flows. The results of the ratio when applied to Pakistani industries suggest that the textile Pakistan

performed very well in 2005 with RCA of more than 12 but the performance was declining after

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that, but the industry remained competitive with RCA of more than one, in the year 2009, 2013

and 2014 it lost its competitiveness but regain it in 2015. In inorganic chemical industry, the result

showed Pakistan is not at all competitive in this industry with RCA of less than one in all the years

under study. In the agriculture and food industry, the RCA results show that the country is not

competitive in all the years. The same results were found in sugar and edible fruits and nuts

industries. Mehmood (2004) also applied RCA indices to Pakistani nonagriculturalproducts from

1990 to 2000 and found that except for 1999-2000, 20 out of top 25 product line were from textile

and clothing industry In 1999 and 2000 18 and 19 respectively were from textile and clothing.

The revealed comparative advantage was relatively stable during the entire period under study,

this was due to its consistency in natural climate and human resource available in the country. The

analysis reveals the failure of Pakistan to upgrade its technology in the value chain and had not

moved from low-value-added products to technology-intensivehigh-value products.

In the case of India, this ratio suggests that India is very competitive in the textile industry and

is able to sustain that position consistently. In inorganic chemical industry, the result showed that

in 2005 and 2006 the country had a comparative advantage, but lost this advantage in 2007, 2008

and 2009, but regain its competitive advantage in 2010 but was not able to sustain that position for

the rest of the years. The agriculture industry in India has gained competitive advantage except for

the year 2005 and 2009. In the sugar industry in 2005 the country’s performance was not very

good, but it gains a competitive advantage in all the other years except for 2009. The edible fruits

and nuts industry were very competitive for 2005 till 2009 but lost its competitiveness afterward.

The comparative analysis of revealed comparative advantage (Annexure # 1) suggests that India

is more competitive in different industries, as compared to Pakistan.

6.2. Regression Analysis

Before applying regression augmented Dickey-Fuller unit root test was applied to test the

stationarity of the data, otherwise the findings of the study would be inconsistent and biased

(Breusch and Pagan,1980; Pesaran, 2004).

6.2.1. Regression Analysis –Pakistan

The results of the fixed effect model show that overall model is significant, which suggests

that the overall model is significant,therefore, Pakistan’s national comparative advantage can be

explained by the independent variables tested and identified in the model. This favors the national

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diamond model presented by Porter (1990). The regression results for Pakistan suggested a

significant impact of factor conditions, demand condition, supporting and related industries and

government policy on the national competitive advantage. This shows that Pakistani exports are

positively affected by the abundant natural resources available in the country which supports the

results of Zia (2006) who also suggestthat Pakistan is factor driven country and there are signs of

growth in the economy. This also supports the results of Raja (2015) that Pakistan is endowed with

fertile soil, climate, hardworking human resource working in the areas of information technology,

finance and engineering, who is providing a strong base for exports. The variable of factor

conditions suggestsan insignificant negativerelationship withthe national competitive advantage

of Pakistan. This contradicts the resultsof Abbas and Waheed (2015), who suggested a positive

relationship between the irrigated land area and exchange rate against US dollars with the export

competitiveness of Pakistan. It also contradicts the results of Afridi (2016). Who found a positive

relationship between different factor conditions, including human capital on the economic growth

of Pakistan and suggested an investment in education and health sector to achieve long-term

benefits. As the p-value is greater than 0.05 therefore, the hypothesis of a significant relationship

between factor conditions and the national competitive advantage is rejected. The reason might

be unskilled labor situation with an increase in the flight of both skilled and unskilled human

capital to developed countries suggested by (Husain, 2001). As compared to India and China the

development of human capital is very weak, with very low productivity. There is also a very slow

growth in private investment with poor infrastructure which are major impediments to the growth

of the economy (Chaudry, 2007). As suggested by Afza and Nazir (2007) that despite having a

large population majority, Pakistan has utilized only 20% of its population on professional,

managerial and technical positions, a Major portion of its workforce is engaged in the industrial

and agricultural workforce at the Frontline. Financial resources for the business sector are also

rudimentary and very restricted as compared to countries following export growth led policies.

FDI can be identified as a potential external source of finance and continuous inflow of its help in

value addition of much industry, transfer of technology and improvement of labor skills but

Pakistan is also lagging behind to attract the potential amount of FDI. Additionally, Pakistan is

not efficiently in research and development as compared to East Asian countries, for the

achievement of sustainable growth (Mahmood & Ahmed, 2017).

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The results of demand conditions suggest positive and insignificant with national

competitive advantage. This suggests that demand conditions are not playing a significant role in

the national competitive advantage of Pakistan. This contradicts the results of Abbas and Waheed

(2015) suggested who suggested a negative relationship between domestic consumption demand

with the export competitiveness. The reason might be the low technology production trap

identified by Zia (2013), the preference of buyers to purchase to export items, lack of purchasing

power of the majority population due to high poverty levels. Therefore the hypothesis of a

significant relationship between demand conditions and the national competitive advantage is

rejected

The variable of supporting and related industries suggests a positive but insignificant relationship

with national competitive advantage national competitive advantage. The reason might be the

critical challenges faced by the transport and logistics sector include non-declaration of transport

and logistics as an industry by the government, lack of proper investment in transport infrastructure

by the government, no government licensing authority for freight cargo transporters, no official

law enacted for transport sector in Pakistan, outdated legal framework for carriage of goods by

roads, lack of rail services and logistics to transport containers from ports, damage of roads and

other infrastructure due to floods, run down roads and transport network, restrictions on provision

of bonded transport, high cost for less than container load, non-operation of Pakistan Railways on

commercial basis, lack of road safety devices, resulting in road accidents (Masood ,2011).

Therefore, the hypothesis of a significant relationship between related and supporting industries

and the national competitive advantage is rejected

Firm strategy and rivalry showa negative and insignificant relationship with the national

competitive advantage of Pakistan. Therefore, the hypothesis of a significant relationship between

firm strategy and rivalry and the national competitive advantage is rejected. The reason might

increasethe cost of doing business in Pakistan identified by the Department of International Trade

(2015). Mahmood and Ahmed (2017) also identified the increased cost of setting and running a

business in Pakistan, which might be the result of high inflation and poor security situations.

National Tariff Commission (NTC),(2015) also identified the high cost of doing business and the

veryunfriendly socioeconomic environment in Pakistan.

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The variable of government policy shows a positive and significant relationship with

national competitive advantage showing government positive role in increasing the national

competitive advantage of the country. The reason might be the liberalization policies introduced

in the country. It is also supported by Pakistan country report (2010), whi9ch suggest that the

country is trying to adopt trade liberalization policies, privatization of many public owned

organizations and attracted FDI which might have impacted the positive impact on the national

competitive advantage. According to Mahmood & Ahmed (2017), increased tariffs had restricted

the imports of certain items which boosted some domestic and increases exports of the country,

but in the long run, they will seriously damage the competitive advantage of the country so applied

tariffs should be decreased. Amjad.et. al (2012) performeda firm-level survey using data from

Pakistan and suggested that the key impediment to Pakistan export competitiveness are, skilled

labor shortages, energy crises, poor infrastructure,and market imperfection. A clear and practical

government policy should be devised to solve these problems which help to expand the Pakistan

export market. Another issue identified by Husain and Ahmed (2017) was sector picking for export

promotion which boosts exports of the certain sector but seriously damages others. Therefore,

uniform policies should be devised for the balanced growth of the economy. The benefits of

decreased Soil prices should be passed to manufacturers for cost saving (Hussain, 2017). Another

issue of customs clearance and shipping documentation should also be revised for better

performance. Therefore, the hypothesis of a significantrelationship between government policy

andthe national competitive advantage is accepted is rejected.

6.2.2. Regression Analysis- India

The results of fixed effect model show that the overall model is significant for India

therefore in national comparative advantage is determined by the independent variables

identified in the model which follows the national diamond model presented by Porter (1990).

The empirical results suggest a positive but insignificant relationship between factor conditions

and national competitive advantage of India. This follows the results of planning commission of

India, suggesting that despite having abundance labor force, the rigid labor laws had restricted

the growth and seriously hindered the labor market growth. Therefore, the hypothesis of a

significant relationship between factor conditions and the national competitive advantage is

rejected.

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The result shows a positive but insignificant relationship between demand conditions and a

national competitive advantage. The hypothesis of a significantrelationship of demand condition

and the national competitive advantage is rejected. This follows the result of Agarwal (2013)

suggested that the large size and increasing disposable incomes of Indian population has made a

profitable market., addition highly demanding and informed customer can play a vital role in

improving the competitive advantage of the Indian market but due to increased working hours

customers have less evaluation and selection of their desired products, this contradicts the result

of Dey (2017) who suggest That the political, social and technological environment had

transformed the behavior of Indian consumer. As they now spending more on different items. The

widespread increase of the use of the internet and social media and urbanization had contributed a

lot in this changing purchasing patterns.

In the case of Supporting and related industry, results suggest a negative and insignificant

relationship between supporting and related industries and national competitive advantage.

Therefore, the hypothesis of an insignificant relationship between this variable is rejected. The

reason might be the problem of traffic congestions, which greatly contributed to the problem of

the Indian economy. Additionally, the Indian mobile subscription had drastically increased with

the addition of 3 million every month (Gopal &Srinivasan, 2006). But still, they are not able to

contribute to the exports of the country.

Firm strategy and rivalry showa positive and significant relationship with the national competitive

advantage of India. Therefore, the hypothesis of a significant relationship between firm rivalry and

strategy and the national competitive advantage is accepted. This is due to favorable business

conditions and ease of doing business in India which showed improvement in world bank ranking

(George, 2015).

The variable of government policy shows a positive and significant relationship with

national competitive advantage showing that Government policy is playing a positive role in

increasing the national competitive advantage of the country. Therefore, the hypothesis of a

significantrelationship between government policy and the national competitive advantage is

accepted. The reason might be the liberalization policies adopted by the Indian government

(Gurcharan,2002). Poddar (2004) also identified that in order to overcome the balance of payment

problem Indian government had introduced a series of trade liberalization reforms and positively

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impacted exports. India continued to follow the policy of Since, 1991, continued to follow the

policy of economic liberalization and shifted towards market-based economy (OECD, 2011).

6.2.3. Regression Analysis -Pakistan Agriculture Industry

The result of the regression model expressed that the overall model is significant for

Pakistani agriculture industry. It confirms that all variables identified in the model collectively

have a significant impact on the national competitive advantage of trade Pakistan agriculture

industry.

The empirical results suggest a negative and significant relationship between factor

conditions and national competitive advantage. The results are significant; therefore, we will

accept the hypothesis of a significant relationship between factor conditions and national

competitive advantage. This shows that factor conditions are negatively impacting competitive

advantage, the reason might health issues andnoncollaboration of research institutions and crop

growers identified by Afridi (2016). Requiring heavy investment and serious policy consideration

in these areas overcoming numerous growing constraints which are affecting yield and quality of

crops to achieve long-term benefits in Pakistan economic development. Additionally,

Insufficiency of research due to the lack of financial assistance by the government and; the spread

of crop diseases might be negatively affectingthe competitiveness of this industry.

The result found a positive and insignificant relationship between demand conditions and

a national competitive advantage. Therefore, the hypothesis of the significant relationship of

demand condition with the national competitive advantage was rejected. This supports the results

of Zia (2013) who identified thatin Pakistan low technology production trap and buyerspreference

to purchase, exported goods, and lack of purchasing power of majority population due to high

poverty levels. It also supports the results of Abbas and Waheed (2015) who found a highly

competitive advantage for Pakistanis agriculture industry from 2003 to 2014 but with sluggish

growth.

A significant and negative relationship was found between supporting and related industry

and national competitive advantage. Therefore, the hypothesis of a significant relationship between

firm strategy and rivalry was accepted.

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Firm strategy and rivalry show negative and insignificant relationship with national competitive

advantage. Therefore, the hypothesis of a significant relationship between firm strategy and rivalry

is rejected. The reason might increasethe cost of doing business in Pakistan identified by the

Department of International Trade (2015). Mahmood and Ahmed (2017) also identified the

increased cost of setting and running a business in Pakistan, which might be the result of high

inflation and poor security situations. NTC, (2015) also identified the high cost of doing business

and the veryunfriendly socioeconomic environment in Pakistan.

The variable of government policy shows a positive and significant relationship with

national competitive advantage showing government positive role in increasing the national

competitive advantage of the country. Therefore, the null hypothesis of a significant relationship

was accepted.

6.2.4. Regression Analysis- Edible Fruits And Nuts Industry Pakistan

The result of the regression model expressed that the overall model is insignificant for

Pakistani edible fruits and nuts industry. The shows that the independent variable identified in the

model are not determining the competitive advantage of this industry. In the case of Factor

condition the empirical results suggest a negative and an insignificant relationship between factor

conditions and national competitive advantage, therefore the hypothesis of a significant

relationship between factor condition and the national competitive advantage is rejected. This

contradicts the results of Afraid (2016) who found suggested a positive relationship between

different factor conditions including human capital on the economic growth of Pakistan. This

results also follow the results of World Bank, (2009) which suggest that this industry has weak

factor condition like unskilled labor and advance factors and low research and development.

The results suggest a positive and insignificant relationship between demand conditions

and a national competitive advantage. Therefore, the hypothesis of a significant relationship

between demand conditions and the national competitive advantage is rejected. The main reason

might be is that, despite rising demand for horticultural products, the growers only increasing the

quantity of the production, not the quality of production (World Bank, 2006). Another reason

might be the low technology production trap identified by Zia (2013). The lack of purchasing

power of the majority population due to high poverty levels. Another issue might be lack of

demand-oriented production accompanied by a poor-quality certification (Ali, 2012.). potential

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international demand is also not catered, because of noncompliance with the international

standards (Ali, 2012).

There is a positive and insignificant relationship between supporting and related industry

and national competitive advantage, therefore the hypothesis of a significant relationship between

supporting and related industry is rejected. The reasons might be unstandardized grading,

packaging, lack of addition and other policy constraints. The country had started mechanization of

grading packaging, but the industry had shortages of storage facilities, which results in the loss of

fruit production during harvesting, transportation,and storage (Ali, 2012).

Firm strategy and rivalry show negative and insignificant relationship with national

competitive advantage. Therefore, the hypothesis of a significant relationship between firm

strategy and rivalry and the national competitive advantage is rejected. The reason might

increasethe cost of doing business in Pakistan identified by the Department of International Trade

(2015). Mahmood and Ahmed (2017) also identified the increasedcost of setting and running a

business in Pakistan, which might be the result of high inflation and poor security situations. NTC,

(2015) also identified the high cost of doing business and the veryunfriendly socioeconomic

environment in Pakistan.

The variable of government policy shows a negative and insignificant relationship with

national competitive advantage. Therefore, the hypothesis of a significant relationship between

government policy and the national competitive advantage is rejected. The reason might be

inconsistence policies and lack of execution of plans. The government is following a restrictive

policy which is seriously harming the industry (World Bank, 2006). The Delegates attend seminars

and exhibitions abroad but are not contributing to the development of the industry as identified by

Aazim (2016). As Pakistan is an agricultural country and the government should design proper

policies and ensure their implementation for the deployment of this industry.

6.2.5. Regression Analysis-Sugar and Sugar Confectionaries Industry

Pakistan

The regression results show that the overall model is insignificant. This suggests that national

comparative advantage of Pakistan sugar and sugar confectionery industry is not determined by

the independent variable identified in the model. The empirical results suggest that there is a

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positive but insignificant relationship between factor conditions and national competitive

advantage, therefore the hypothesis of a significantrelationship between factor conditions and the

national competitive advantage is rejected. This result is inconsistent with the results of Afridi

(2016) who suggested a positive relationship between different factor conditions and national

competitive advantage.The reasons might be critical problems faced by the sugar industry, delayed

payment by the millers to growers, the unscientific and obsolete technology used by farmers and

delayed crushing due to delayed payment to farmers (ICMAP, 2015). The average yield per

hectare of sugar is also very low as compared to the world and even below India which had similar

soil and weather condition. There is also, a large gap between the yield obtained from the ordinary

farmer field and yield from experimental stations. Sugar mills are also producing below their

capacity. The main reason behind these problems wasthat most of the sugar mills are owned by

political personalities, many of which were financed by DFIs which results into working capital

crisis, which results in to close down of many mills (Whizz Mag, 2009). Other problems include

late planting, early and late harvesting, outdated methods of planting and agricultural practice, very

low soil fertility, poor management, low Variety of outputs, non-availability of credit.

The results showed a positive and insignificant relationship between demand conditions and

a national competitive advantage. Therefore, the hypothesis of a significant relationship between

demand conditions and the national competitive advantage is rejected. The reason might be the

low technology production trap identified by Zia (2013). The buyers prefer to purchase, export

goods. The lack of purchasing power of the majority population due to high poverty levels. The

results suggest a negative and insignificant relationship between supporting and related industry

and national competitive advantage, therefore the hypothesis of a significant relationship between

supporting industries and the national competitive advantage is rejected. The main cause might

be the increased transportation cost identified by Khushk et. al (2011). The inefficient

transportation and costly transportation whichhad increased the cost of sugar for growers (Saeed,

2013: 1CMA, 2015). The variable of government policy shows a positive and insignificant

relationship with national competitive advantage. therefore the hypothesis of a significant

relationship between government policy and the national competitive advantage is rejected. The

reason might be unchecked growth by the government. The used of nepotism in sanctioning of

projects. All this has contributed to the problems of newly established units (Wayback Machine,

2015). The other reason might be the stringent policies of the government which has decreased

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exports of sugar as the state has allowed only paper contract against the letter of credit and also

advance payments, which discouraged the exporters to export more in the global market (Saeed,

2013). Another problem is price fixation delays by the government (ICMAP, 2015).

6.2.6. Regression Analysis- Inorganic Chemical Industry Pakistan

The results showed that the overall model is significant this suggest that national competitive

advantage of Pakistan inorganic chemical industry is determined by the independent variables

identified in the Porter national diamond model. The empirical results suggest a negative and

insignificant relationship between factor conditions and national competitive advantage of

Pakistan. Therefore, the hypothesis of a significant relationship between factor conditions and the

national competitive advantage is rejected This contradicts the results of Afridi (2016) who

suggested a positive relationship between different factor conditions, including human capital on

the economic growth of Pakistan. The results suggest a positive relationship between a positive

relationship between demand conditions and national competitive advantage, but the results are

insignificant. Therefore, the hypothesis of a significant relationship between demand conditions

and the national competitive advantage is rejected. The reason might be the low technology

production trap identified by Zia (2013). The results show a positive and significant relationship

between supporting and related industry and national competitive advantage. Therefore, the

hypothesis of a significant relationship between supporting and related industries and the national

competitive advantage is accepted. The result shows the negative and insignificant relationship

between Firm strategy and rivalry with the national competitive advantage of Pakistan. Therefore,

the hypothesis ofa significant relationship between these two variables is rejected. The reason

might increasethe cost of doing business in Pakistan identified by the Department of International

Trade (2015). Mahmood and Ahmed (2017) also identified the increased cost of setting and

running a business in Pakistan, which might be the result of high inflation and poor security

situations. NTC, (2015) also identified the high cost of doing business and the veryunfriendly

socioeconomic environment in Pakistan.

The variable of government policy shows a positive and insignificant relationship with

national competitive advantage. Therefore, the hypothesis of a significant relationship between

government policy and the national competitive advantage is rejected. this follows the result of

Hussain &Ahmed (2011) who recommended an urgent requirement of deregulation of subsidies

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and tax incentives fortrue innovation and entrepreneurship. Amjad.et.al (2012) also recommends

that clear and practical government policy should be devised to solve the problems of export

problems of Pakistan.

6.2.7. Regression Analysis- Textile Industry Pakistan

The results show that the overall model is insignificant in case of Pakistani textile industry.

Therefore, the national comparative advantage of this industry is not determined by the

independent variables identified in the model. The empirical results suggest a negative and

insignificant relationship between factor conditions and national competitive advantage of

Pakistan. Therefore, the hypothesis of a significant relationship between the two variable is

rejected. This contradicts the results of Afridi (2016) who suggested a positive relationship

between different factor Conditions, including human capital on the economic growth of Pakistan.

The reason might be a lack of skilled labor. As the world is rapidly changing new technologies are

introduced, but this industry is not absorbing and not adopting new methods, procedures due to

which there is high turnover and also lack motivation which had adversely affected the whole

industry. There alsoa lack of technical education related to the industry. The industry also faces

the problem of lack of investment and fluctuation in the raw material prices, lack investment in

R&D (Tahir, 2013). As highlighted by World Bank (2016), unlike its other South Asian neighbors,

lack of female participation in Pakistan’s textile industry is one of the major obstacles which are

keeping its growth below potential. There is a negative and insignificant relationship between

demand conditions and anational competitive advantage. Therefore, the hypothesis of a significant

relationship between the two variable is rejected. The reason might be the low technology

production trap identified by Zia (2013). Abass and Waheed(2015) also suggested that the export

competitiveness of raw cotton had increased, whereas, the textile industry faced a competitive

disadvantage. Another challenged recently Emerged which badly damaged the industry by the

imposition of strict environmental standards as part of the worldwide response of businesses and

government for ecological friendly composition and production (Memon, 2015: Shah et.al,2014).

There is a negative and significant relationship between supporting and related industry and

national competitive advantage. therefore, the hypothesis of a significant relationship between

supporting and related industry and the national competitive advantage is accepted. This shows

that this variable is negatively impacting the industry. The reasons might be gas and electricity

shortages, closure and shift of Majority of looms to Bangladesh, then the global recession

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increased the cost of production which badly affected the growth rate of the industry, lack of

research and development, and very limited use of modernized technology (Tahir, 2013). The

variable Firm strategy and rivalry showa negative and insignificant relationship with the national

competitive advantage of Pakistan. Therefore the hypothesis of a significant relationship between

firm strategy and rivalry and the national competitive advantage is rejected. The major reasons

might be energy crises, tax policies and corruption, which is complicating the

businessenvironmentin the country. Other reasons includethe increased cost of doing business in

Pakistan identified by the Department of International Trade (2015). Mahmood and Ahmed (2017)

also identified the increased cost of setting and running a business in Pakistan, which might be the

result of high inflation and poor security situations. NTC, (2015) also identified the high cost of

doing business and the veryunfriendly socioeconomic environment in Pakistan.

The variable of government policy shows a positive and insignificant relationship with

national competitive advantage. Therefore, the hypothesis of a significant relationship between

government policy and the national competitive advantage is rejected. The reasons might be the

negative role played by the government, who reduced subsidies, delay in declaration of prices and

unchecked growth (Tahir, 2013). The deregulation and privatization had placed the private sector

in the very dominating position in shaping the market. The government isalso not tackling the

market imperfections. Additionally, subsidy previously provided to the industry has also

eliminated (Wayback Machine, 2015). Also suggested that unfriendly policies, unchecked growth,

political influences, low per hectare yield as compared to global productionstandard and low

crushing capacity have negatively impacted the performance of this industry.

6.2.8. Regression Analysis-Edible Fruits and Nuts Industry India

The results show that the overall model is insignificant,therefore, the national competitive

advantage of edible fruits and nuts industry is not determined by the independent variables

identified in the model. The empirical results suggest a positive and significant relationship

between factor conditions and national competitive advantage of edible fruit and nuts sector of

India. Therefore, the significant hypothesis of the relationship between factor conditions and the

national competitive advantage is accepted. This suggests that factor condition is playing a

significant role in improving the competitive advantage of this industry, despite many problems,

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including financial difficulties, substandard storage capacity, poor quality packaging and poor

infrastructure identified by Mir and Kottaiveeran (2016).

The empirical results suggest a negative and insignificant relationship between demand

conditions and a national competitive advantage. Therefore, the hypothesis of a significant

relationship between demand conditions and the national competitive advantage is rejected. The

reason might be insufficient production, poor quality packaging and deficient storage facilities for

these dry fruits, which resulted in the deterioration many dry fruits during transportation (Mir

&Kottaiveeran, 2016).There is a positive and insignificant relationship between supporting and

related industry and national competitive advantage. Therefore, the hypothesis of a significant

relationship between thetwo variable is rejected. This show that supporting and related industry

variable is not contributing to the national competitive advantage in this industry. The reason might

be the inefficient transportation system.

There is a negative and insignificant relationship between demand conditions and a

national competitive advantage. Therefore, the hypothesis of a significant relationship between

demand conditions and the national competitive advantage is rejected. This shows that demand

conditions are not playing a significant role in improving the national competition of this

industry.Firm strategy and rivalry showa positive and insignificant relationship with the national

competitive advantage of Pakistan. Therefore, the hypothesis of a significant relationship between

firm strategy and rivalry and the national competitive advantage is rejected. The variable of

government policy shows a positive and insignificant relationship with national competitive

advantage. Therefore, thenull hypothesis of a significant relationship between government policy

and the national competitive advantage is rejected.

6.2.9.Regression Analysis-Inorganic Chemical Industry India

The results show that the overall model is insignificant, therefore, the national comparative

advantage of the inorganic chemical industry is not determined by the independent variables

identified in the Porter diamond model. The empirical results suggest that there is a positive and

insignificant relationship between factor conditions and national competitive advantage of the

inorganic chemical industry of India. Therefore the hypothesis of a significant relationship

between the two variable is rejected. The reason identified by Lohokare (2011) that despitehaving

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a great pool of skilled and qualified Indian chemist., the industry is not progressing due to a

continuing trend of increased wage structure in the industry and high financing cost.

There is a negative and insignificant relationship between demand conditions and a national

competitive advantage. Therefore, the hypothesis of a significant relationship between demand

conditions and the national competitive advantage is rejected. The reason might be increased

economic recession world over which resulted in the decline of demand for its products. The Indian

chemical industries have entered the world market and its presence is also felt in market

penetration terms. The world demand for Indian chemicals is also high, but domestic consumption

is very low (Lohokare, 2011). There is a positive and insignificant relationship between supporting

and related industry and national competitive advantage. Therefore, the hypothesis of a significant

relationship between the two variable is rejected. The reason might be the inefficient

transportation system. Firm strategy and rivalry showa negative and insignificant relationship with

national competitive advantage. Therefore, the hypothesis of a significant relationship between the

two variable is rejected. The variable of government policy shows a positive and insignificant

relationship with national competitive advantage. Therefore,the hypothesis of a significant

relationship between these two variables is rejected.

6.2.10.Regression Analysis -Textile Industry India

The results show that the overall model is significant, therefore the national comparative

advantage ofthe Indiantextile industry is determined by the independent variables identified in the

national diamond model presented by Porter (1990). The empirical results suggest a negative

relationship between factor conditions and national competitive advantage of the textile industry

of India. Rodriguez and Khan (2015) worked on clothing industries of SAFTA Countries and

suggested that the Indian clothing industry is performing better than all the other SAFTAcountries

in case of factor conditions. India is the largest yarn producer in the world, having large resources

of fibers like silk, polyester, viscose, it accounts for almost 25 % of world cotton yarn.

Additionally, they have skilled human capital, both in technical and management fields. The

design and artistic skills are also in abundance. But the main problem is that its labor cost is

comparatively higher than other competing countries like Pakistan, Bangladesh. This industry also

has disadvantages in labor productivity, technology,and modernization and it is far behind its

competitors, including Taiwan, China,and South Korea (Katharina, 2008). In the case of gents’

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shirts, its productivity is 9.1 pieces per day per machine which very low as compared to Hong

Kong and China which is 20.9 and 14.respectively. The lower Productivity is because of the use

of obsolete technology (Rangarajan, 2005).

Demand condition shows a negative relationship with national competitive advantage, but the

results were insignificant. The reason might be the low technology production trap identified by

Zia (2013). The buyers prefer to purchase foreign goods. The lack of purchasing power of the

majority population due to high poverty levels. The country is increasing its production at a much

larger pace, but still, the industry is facing larger completion from regional competitors due to the

abolition of restriction by SAFTA agreement (Kathuria, 2008). Therefore the null hypothesis of

an insignificant relationship between demand conditions and the national competitive advantage

is rejected.

The results showa positive relationship between supporting and related industry and national

competitive advantage, but the p-value suggests an insignificant relationship. Therefore the

significant hypothesis between these two variables is rejected. The main problem of this industry

isthatthe best quality of raw material at a reasonable price is not available from the domestic

market, which is largely affected its competitiveness (USITC, 2004). Handlooms and power loom

for fabric manufacturing are also poor in quality with low technology (Kathuria, 2008). Rodrigues

and Khan (2015) also suggested that the industry is facing problems regarding poor quality

containers, and shipping documentation difficulties, steady availability of utilities, paved roads

and highways. Therefore, the null hypothesis of insignificant relationship with supporting

industries with national competitive advantage is accepted. Firm strategy and rivalry showa

negative and insignificant relationship with national competitive advantage. Therefore, the null

hypothesis of the insignificant relationship of firm strategy and rivalry with nation competitive

advantage is accepted. The results show a negative and significant relationship with national

completive advantage showing government positive role in increasing the national competitive

advantage of the country. The reason might be the liberalization policies adopted by the Indian

government.

6.2.11. Regression Analysis - Agriculture Industry India

In the case of the Indian agriculture industry. The results show that the overall model is

insignificant, therefore the national comparative advantage of Indian agriculture industry is not

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determined by the independent variables identified in the model national diamond model identified

by Porter (1990). This result confirms the results of Parappurathu and Mathur (2008) suggested an

eroding competitive advantage of major agriculture products of India.

In the case of individual variables, the empirical results suggest a negative and significant

relationship betweenfactor conditions and national competitive advantage of India. Therefore, the

hypothesis of a significant relationship of factor condition with national; competitive advantage is

accepted. This supports the results of (Indian food report, 2016), who identified that the Indian

agriculture industry is adding less value to its product despite having a large amount of raw

material and space. Kharuband Sharma, (2017)also identified that main problem of factor

condition in Indiais non Availability of financial service, poor Quality of overall infrastructure,

lack of financial assistance and a large number of Contractual labor.

There is a positive relationship between demand conditions and national competitive

advantage, but the results are significant therefore the hypothesis of a significant relationship

between this two variable is accepted. This confirms the results of Kharub& Sharma (2017), who

identified that the main potential of the Indian economy is its large market size, large and diverse

segments of the buyer.

There is a positive relationship between supporting and related industry and national

competitive advantage but the p-values suggest an insignificant relationship. Therefore the

significant hypothesis of the relationship between this two variable is accepted. This confirms the

results of (Indian food report, 2016), who identified that the main problem in this industry is its

non-deployment of skills and lack of technology to achieve competitive on the global scale

Firm strategy and rivalry show a negative and insignificant relationship with the national

competitive advantage of India. Therefore, the hypothesis of a significant relationship between

firm strategy and rivalry is rejected. The reason might be limited technology absorption and formal

training programs identified by Kharuband Sharma (2017). The results show variable of

government policy shows a positive and significant relationship with national competitive

advantage showing government positive role in increasing the national competitive advantage of

the country. Therefore the significant hypothesis of the relationship between government policy

and the national competitive advantage is accepted. The reason might be,the liberalization efforts

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by the government additionally, the Indian government are also trying to help the private sector

with this industry by providing incentives (Indian food report, 2016).

6.2.12.Regression Analysis-Sugar And Sugar Confectionaries Industry India

The results show that the overall model is significant. This shows that the independent

variable identified in national diamond mode by porter (1990) are contributing into determining

national competitive advantage of the Indian sugar industry. The empirical results suggest a

negative and significant relationship between factor conditions and national competitive advantage

of the Indian sugar industry. Therefore, the hypothesis of a significantrelationship between factor

condition and the national competitive advantage is accepted.

The results show a negative and insignificant relationship between demand conditions and

a national competitive advantage. Therefore, the hypothesis of a significant relationship of demand

condition and the national competitive advantage is rejected. The variable supporting and related

industries show a positive and insignificant relationship between supporting industries and national

competitive advantage. The reason might be the inefficient transportation system. Therefore, the

significant relationship between these two variables is rejected. Firm strategy and rivalry showa

negative and significant relationship with the national competitive advantage of India. Therefore,

the hypothesis of a significant relationship between these two variables is accepted.

The variable of government policy showed a negative and insignificant relationship with

national competitive advantage. Therefore the hypothesis of a significantrelationship between

these two variables is rejected. The reason might unchecked growth by the government. The used

of nepotism in sanctioning of projects. All this has contributed to the problems of newly established

units (Wayback Machine, 2015).

6.3.Comparison India and Pakistan

6.3.1.Comparison – Pakistan& India

The results of the fixed effect model for Pakistan and India are significant, which suggest

that the porter diamond model is significant in contributing national competitive advantage of both

countries. So, both countries should work on the improvement of these factors for the achievement

of a better position in the global market. As both countries share the same culture, social,

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geographical conditions and very long common border so they should cooperate and improve ties

with each for attaining the benefits of economic integration. The empirical results suggest

anegative and insignificant relationship between factor conditions and national competitive

advantage for Pakistan, but a positive and insignificant relationship forIndia. This suggested a

very alarming situation for both countries as they are not properly utilizing their factor condition.

Both countries should seriously work on the improvement of their unskilled labor, research and

development, agricultural land, internet facilities and capital resources for the business sector. As

both countries have a low productive human resource, unspecialized factor conditions, lack of

research and development low penetration of internet facilities.

Demand condition shows an insignificant relationship between demand conditions and

national competitive advantage for both countries. Both countries have a very large population,

but the majority of the population is below the poverty line and unable to fulfill their basic needs.

They are not in a position to demand high quality and sophisticated products. This is a very serious

issue, so, both countries should try to improve the poverty condition within the country. Another

issue is very high international standards of product quality. Which requires serious efforts for the

improvement of the quality of goods and services to enhance global demand.

The Supporting and related industries variable shows the insignificant relationship between

supporting and related industry and national competitive advantage for both Pakistan and India.

The major problem in both countries is poor transportation system. The traffic congestion is the

problem in both countries. Railways are in a very bad condition in Pakistan and need serious effort

for its improvement, but in India improvement is made, but it needs much more efforts for its

improvement for its active role in improving the competitiveness of the country. The mobile

subscription in both counties is increasing rapidly, therefore it does not need any serious steps, but

his rapid increase in mobile subscription had created many problems e.g. terrorism etc. therefore,

this aspect needs careful issuance of mobile subscription. Firm strategy and rivalry showa negative

and insignificant relationship with the national competitive advantage of Pakistan. But, in the case

of India, it showed a positive and significant relationship. This shows that as compared to Pakistan,

India is providing a betterenvironmentfor doing business. The intensity of completion and the

favorable environment is attracting foreign investors. Pakistan should seriously Work on this

variable as India is in better a position than Pakistan, as identified by Department of International

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Trade (2015) and Mahmood and Ahmed (2017), doing business is verycostly in Pakistan. The

variable of government policy shows a positive and significant relationship with national

competitive advantage in Pakistan and India, which suggest that both countries are trying to

increase their exports by introducing trade liberalization policies. India as compared to Pakistan

had followed very protectionist policies till 1990, but after that gradually introduced trade

liberalization policies. Pakistan also had tried to introduce trade openness policies from time to

time. Both countries had entered into many Regional trade agreements and applied measures to

introduce sound business operations at the governmental level.

6.3.2. Comparison-AgricultureIndustry

The results showthat the overall model is significant for agriculture industry of Pakistan and

India. The reason might be that both countries are agriculturally based, supported by favorable

climatic condition, abundant labor force, land resources,and abundant water resources. The

empirical results suggest a negative and significant relationship between factor condition and

national competitive advantage in case of Pakistani agriculture industry in case of India it shows

an insignificant relationship. The results suggest serious problems in both countries. Both countries

have a large pool of labor force, but the majority is unskilled, large agricultural land, but

unspecialized farming methods, lack of research and development, very less value addition, scare

supply of finance and very poor infrastructural resources. The results show an insignificant

relationship between demand condition and national competitive advantage in both countries. This

suggests that despite having a large population, creating a huge market for domestic firms, India

have a huge middle class but, still demand conditions are not playing its role in creating

international and domestic competitive advantage.

The variable of supporting and related industry shows a negative and significant

relationship with national competitive advantage in case of Pakistan, but an insignificant

relationship in case of India. This shows that Pakistan’s supporting and related industries are

contributing negatively in the national competitive advantage of this industry due to

underdeveloped transportation system, as government is not taking keen interest in the

development of these industries, as a result this variable is not contributing into the competitive

advantage of the country, But is damaging its reputation. India is also confronted with the problem

of traffic congestion, making problems for the industry. Firm strategy and rivalry show an

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insignificant relationship with national competitive advantage for Pakistan and India the reason

might be the uncompetitive environment, energy crises and other difficulties which are creating a

very poor atmosphere for doing business. The variable of government policy shows a positive and

significant relationship with national completive advantage in both countries, showing

government positive role in increasing the national competitive advantage of India and Pakistan

this suggests the government of both countries have realized the importance of this industry and

identified liberalization policies of boostingthe agricultureindustry, India has introduced many

measures for increasing the cooperation between private and public sector by providing many

incentives ( Indian food report, 2016). The Indian government has also introduced certain land

reforms, high-quality seeds, technical capabilities, irrigation facility and the introduction of

procurement prices and subsidy Chand (2016).

6.3.3. Comparison- Edible Fruits and Nuts Industry

The results show that the overall model is insignificant for both Pakistan and India Therefore, the

national competitive advantage of edible fruits and nuts industries of Pakistan and Indiais not

determined by the independent variables identified in the model. The reason may be the poor

transportation facilities, unskilled labor, outdating techniques for production and post-harvesting,

poor financial capacity and ignorance of producers and poor quality certification in Pakistan (Ali,

2012.). In the case of India, the problems are unorganized markets. High freight, income taxes and

storage charges, credit availability constraints, lack of storage facilities and poor quality packaging

(Mir &Kottaiveeran, 2016).The empirical results suggest an insignificant relationship between

factor conditions and national competitive advantage of the edible fruits and nuts industry in

Pakistan. The main reasons are skilled labor using outdating techniques for production and post-

harvesting, poor financial capacity and ignorance of producers, products are not produced

according to market demand and poor-quality certification (Ali, 2012.). there is a need for taking

serious steps for the development of human resourcesin thisPakistani industry. Afraid (2016) also

suggested an increased investment in education and health sector achieve long-term benefits. In

the case of India, factor condition shows a positive and significant relationship with national

competitive advantage. This suggests that despite having too many constraints India has improved

its factor condition. In the case of Pakistan, demand condition shows an insignificant relationship

with national competitive. In the case of India, the empirical results suggest a negative and

insignificant relationship. In case of Pakistan insignificant relationship might be low-quality

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production (World Bank, 2006), low technology trap (Zia, 2013), Another issue might be less

demand-oriented production accompanied by a poor quality certification (Ali, 2012.) and

itsnoncompliance to the international standards (Ali, 2012). In the case of India, the problems are

insufficient production, poor quality packaging and deficient storage facilities for these dry fruits,

which resulted in the deterioration many dry fruits during transportation (Mir &

Kottaiveeran,2016). There is a positive and insignificant relationship between supporting and

related industry and national competitive advantage for Pakistan and India. In case of Pakistan, the

reason might be poor quality transportation facilities, unstandardized grading, packaging, lack of

addition, policy constraints, shortages of storage facilities, which results in the loss of fruits

production during harvesting (Ali, 2012). India is facing similar problems of traffic congestions

and lack of storage facilities (Mir & Kottaiveeran,2016). There is an insignificant relationship

between demand conditions and national competitive advantage in case of Pakistan but in the case

of India, it showed anegative and insignificant relationship. In the case of Pakistan, the reason is

inefficiencies such as lack of strategy, competitive positioning, lack of shared vision, and low

sector cooperation. But in the case of India, the insignificance relationshipsare the uncompetitive

environment and other issues related to doing business. The variable of government policy shows

a negative and insignificant relationship with national completive advantage in case of both

Pakistan and India. In the case of Pakistan,an insignificant relationship might be inconsistence

policies and lack of execution of plans. The government is following a restrictive policy which is

seriously harming the industry (World Bank, 2006) Delegates attend seminars and exhibitions

abroad but are not contributing to the development of the industry as identified by Aazim (2016).

But in the case of India, the insignificant relationship may be due to low profile government

policies which have made industry unable to cope with the challenges. The imposition of General

Sales Tax (GST) is also playing a negative role in the exports of this industry. India has a high

demand for dry fruits as, these fruits are used in the preparation of many sweet dishes, specially

Cashew which is the major product consumed in India. Many other products like Almonds,

pistachio, walnut raisin, fig, dates,and apricot are frequently consumed domestically (Netscribes,

2013).

4.3.4 Comparison-Sugar Industry And Sugar Confectionaries

The results show that the overall model is insignificant for Pakistan but significant in case of

India. In the case of Pakistan, the insignificant relationship might be due to unchecked growth by

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the government, political interference (Wayback Machine, 2015), very low yield per hectare as

compared to world averages even below India. There is also a large gap between the yield obtained

from the ordinary farmer and yield from experimental stations. Sugar mills are also producing

below their capacity, due to their ownership by political personalities (Whizz Mag, 2009). Many

other problems include Late planting, early and late harvesting, outdated methods of planting and

agricultural practice, very low soil fertility, poor management, low Variety of outputs,

nonavailability of credit, increased transportation cost (Khushk, Memon and Saeed, 2011). India

is also facing similar challenges which include a lack of alignment between sugarcane prices and

sugarcane production, which leads to arrears in payment to producers. Like Pakistan low yield is

also a problem for India even the large-scale companies are struggling to maintain their

profitability due to fixed mandate prices of sugar cane (Mahajan, 2017). Pandey(2007) identified

that the industry is facing an infrastructural problem, low utilization capacity and shutting down

of many sugar mills due to low profitability. The major problem is the utilization of sugar prices

as a political tool. Despite these problems, India is able to sustain its position in the global market.

The reason might be concrete steps by the government for solving the problems of this industry.

The empirical results suggest a positive and insignificant relationship between factor conditions

and national competitive advantage of Pakistan. But in the case of India, it showed a negative and

significant relationship. In the case of Pakistan an insignificant relationship might be due to below

capacity production, ownership by political personalities (Whizz Mag,2009) late planting, early

and late harvesting, outdated methods of planting and agricultural practice, very low soil fertility,

poor management, low Variety of output, non availability of credit, increased transportation cost

(Khushk.et.al, 2011), delayed payment by the millers to growers, unscientific and obsolete

technology used by farmers and delayed crushing by the farmer due to late recovery. (ICMAP,

2015 ). In the case of India, the reasons for negative relationship includes a lack of alignment

between sugarcane prices and sugarcane production, which leads to arrears in payment to

producers. Like Pakistan low yield is also a problem for India even the large-scale companies are

struggling to maintain their profitability due to fixed mandate prices of sugar cane (Mahajan,

2017). Pandey and Agarwal (2007) identified that the industry is facing an infrastructural problem,

low utilization capacity and shutting down of many sugar mills due to low profitability. There is

an insignificant relationship between demand conditions and national competitive advantage in

Pakistan and India. In the case of Pakistan,the reason might be the low technology production trap

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identified by Zia (2013). In the case of India, an insignificant relationship is due to the productionof

uncompetitive raw or white sugar (Mahajan, 2017). Thesupporting and related industry variable

was insignificant for both Pakistan and India. In the case of Pakistan, the insignificant relationship

might be increased transportation cost (Khushk et.al, 2011;Saeed, 2013: 1CMA, 2015). The same

reason was identified by Pandey (2007) identified that the industry is facing an infrastructural

problem, low utilization capacity and shutting down of many sugar mills due to low profitability.

The major problem is the utilization of sugar prices as a political tool. Firm strategy and rivalry

showa negative and insignificant relationship with national competitive advantage for both

Pakistan and India. The variable of government policy shows an insignificant relationship with

national completive advantage for Pakistan and India. In case of Pakistan, the insignificant

relationship might be due to stringent policies of the government which have decreased exports of

sugar as the state has allowed only paper contract against the letter of credit and also advance

payments which discouraged the exports to export more in the global market. (Saeed, 2013).

Another problem is price fixation delays by the government (ICMAP, 2015). In the case of India,

the reasons might be unchecked growth bythe government, the use of nepotism in the sanctioning

of projects. All this has contributed to the problems of newly established units (Wayback Machine,

2015).

6.3.5. Comparison- Inorganic Chemical industry

The results show that the overall model is significant for Pakistan andIndia. The empirical

results suggest an insignificant relationship between factor conditions and national competitive

advantage of the Pakistan and IndiaIn case of Pakistan the insignificant relationship might be due

to poor infrastructure, technology, financial resources and insufficient research and development

(Adress, 2015). In the case of India,an insignificant relationship might be due to the trend of

increased wage structure and very high financing cost. Demand condition shows an insignificant

relationship with national competitive advantage for both countries. In the caseof Pakistan,an

insignificant relationship might be a low technology production trap identified by Zia (2013). The

Indian chemical industry is highly impacted by increased economic recession world over which

resulted in the decline of demand for its products; another reason is very low domestic

consumption (Lohokare, 2011). Supporting and related industries show an

insignificantrelationship with national competitive advantage for both India and Pakistan. The

reason might be the inefficient transportation system. Firm strategy and rivalry insignificant

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relationship with the national competitive advantage of Pakistan and India. The variable of

government policy shows a positive and insignificant relationship with national competitive

advantage for Pakistan and India.

6.3.6. Comparison- The Textile Industry

The overall model is insignificant in case of Pakistani textile industry, but the model is

significant in of case of India. The main reason behind the insignificance might be high inflation,

high cost of financing, high electricity tariffs, increase interest, global recession, tight monetary

policy, removal of subsidy and lack of modernization of equipment in Pakistan(Ahmed &

Tariq,2009), exposition of industry is exposed to international competition due to negligence by

the government, import substitution policies, high tariffs, intellectual property rights and, trade

defense laws and patents, etc.(Paracha, 2012) another reason is the trade policy deficiency by the

government, lack of R&D, energy crises, high prices of raw material, poor law and order situation,

and absolute and low level technology (Shah.et.al., 2012), unfriendly policies, unchecked growth,

political influences, low per hector yield as compared to global production standard and low

crushing capacity (Wayback Machine, 2015). The significance of the model in the case of India

might be due to friendly policies by the government for the improvement of the textile industry in

2000 by passing the National Textile Policy. The ministry of textile is working to improve the

coordination of human-made fiber like cotton, silk, Jude, wool industry, promotion of exports,

decentralization of power loom industry and use of information technology, etc. The empirical

results suggested a negative and insignificant relationship between factor conditions and national

competitive advantage of the textile industry of Pakistan. But in the case of India, it showed a

negative insignificant relationship. The insignificant relationship in case of Pakistan may be

increased cost of financing, high electricity tariffs, increase interest, global recession, tight

monetary policy and lack of modernization of equipment (Ahmed & Tariq,2009), another reason

is the trade policy deficiency by the government, lack of R&D, energy crises, high prices of raw

material, poor law and order situation, and absolute and low level technology (Shah.et.al., 2012),

political influences, low per hectare yield as compared to global production standard and low

crushing capacity (Wayback Machine, 2015). Another reason might be lack of skilled labor, as the

world is rapidly changing, new technologies are introduced, but this industry is not absorbing, and

are not applying new methods and procedures, due to which there are high turnover and lack of

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motivation in the labor market, which had adversely affected the whole industry. The lack of

technical education related to the industry,lack of investment and fluctuation in the raw material

prices other reason (Tahir, 2013). As highlighted by World Bank (2016), unlike other South Asian

neighbors, lack of female participation in Pakistan’s textile industry is one of the major obstacles

which are keeping its growth below potential. In the case of India, the insignificant relationship

might be due to high labor cost as compared to other competing countries like Pakistan,

Bangladesh. This industry also has disadvantages in labor productivity, technology,and

modernization and it is far behind its competitors, including Taiwan, China,and South Korea

(Katharina, 2008). In the case of gents’ shirts, its productivity is 9.1 pieces per day per machine

which was very low as compared to Hong Kong and China which is 20.9 and 14 respectively. The

lower Productivity was due to the use of obsolete technology (Rangarajan, 2005).

There is an insignificant relationship between demand conditions and national competitive

advantage for Pakistan and India. In the case of Pakistan, the insignificant relationship might due

to low technology production trap identified by Zia (2013). The reasons behind insignificant

relationship in the case of India is that the majority of production is fragmented in small units,

which are only capable of entertaining the local market. There is a negative and significant

relationship between supporting and related industry and national competitive advantage. This

shows that supporting and related industries are playing a negative role in developing a competitive

advantage for the textile industry in Pakistan. In the case of India, it showed an insignificant

relationship. The Pakistani textile industry is confronted with gas and electricity shortages. A

majority of looms are closed and shifted to Bangladesh. The industry is also affected by the global

recession, increased the cost of production, which badly affected the growth rate of the industry

(Tahir, 2013). The Indian textile industry is also facing many problems, including low-quality raw

material, the good quality raw material at a reasonable price is not available from the domestic

market, which is largely affected, its competitiveness (USITC, 2004). Handlooms and power loom

for fabric manufacturing are also poor in quality with low technology (Kathuria, 2008). Rodrigues

and Khan (2015) also suggested that the industry is facing problems regarding poor quality

containers, and shipping documentation difficulties, steady availability of utilities, paved roads

and highways. Firm strategy and rivalry showa negative and insignificant relationship with the

national competitive advantage of Pakistan. The same result was also given by the Indian textile

industry. In the case of India, the insignificant result may be due to intense competition in the

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regional market due to the abolition of restriction through SAFTA agreement (Kathuria, 2008).

The variable of government policy shows a positive and significant relationship with national

competitive advantage. In the case of India, it showed a positive, but an insignificant relationship.

In the case of India, the insignificant relationship stems from the negative role of government

played by reducing subsidies, delay in declaration of prices and unchecked growth (Tahir, 2013).

CHAPTER # 7

CONCLUSION, RECOMMENDATION, FUTURE DIRECTION &

LIMITATIONS

This chapter will summarize the work done in the study and conclude it by providing answers to

the questions identified in the beginning.

6.1.CONCLUSION

Exports are an important driver of the economy, which helps to boost the level of economic

growth, the balance of payment and employment. Pakistan had faced economic problems since

its independence in 1947. It was an agrarian economy at the time of independence, showing a

positive growth anddeveloped into a semi-industrialized country, but was not able to bridge a gap

between itself and developed countries. As export is one of the components of aggregate demand,

an increase in exports will increase economic growth. The export growth also accelerates service

sector and benefit the local economy. The surplus balance of trade is beneficial for the economy,

but unfortunately, Pakistan has faced the deficit balance of tradeproblem, since very long. A

serious effort is required to overcome this situation. In this regard series of steps were taken by the

government to liberalized trade. This work had tried to analyzethe prospects of trade liberalization

of Pakistan with India by using secondary data from 2005 to 2015. Based upon the number of

trade patterns, data for 5 Pakistani and Indian industries wereselected, includingtextile, Sugar and

Sugar Confectionaries, Inorganic Chemicals, edible fruits and nuts, and Agriculture. The research

was conducted with the intention to find the sources of competitive advantage for Pakistan and

India. The mixed methodology was applied. First, ratio analysis was conducted for the general

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analysis of trade patterns between Pakistan and India. After ratio analysis, regression analysis was

applied to identify significant independent variables affecting national competitive advantage in

Pakistan and India. As both countries share a common border, culture, climatic condition,

common language, values, rituals and demand patterns, butstill theirtrade patterns are not

significant due to many hurdles in the free trade between both countries. This work had tried to

identify and recommend possible action.

The first objective was to determineand describe the Pak-India bilateral trade regime and

conditions for granting MFN status to India. In order to fulfill this objective a thorough literature

review was conducted which suggested that at the time of independence, India was Pakistan's

major trading partner accounting for 70 % of its total trade. In comparison, India accounted for

less than 5 % of Pakistan's trade. However, thecurrent bilateraltrade is strictly in favor of India.

The main reason might be,the global economic crisis as well as many tariffs and non-tariff barriers

from both sides. At present investment flows from both sides are restricted, despite having a large

potential for cross-border investment. As both sides are charged with elements such as

nationalism, prejudice' bigotry' and religious hostility since independence

In order to resolve this situation efforts had been made from Both sides in the form of bilateral

Composite Dialogue toimprove economic and political relations. For this reason, bothcountries

signedSAFTA (South Asia Free Trade Agreement) in 2006, which was to be fullyoperational

untilthe year 2015 (Baroncelli, 2007). In 2012 both countries decided to cooperate in custom and

recognition of standards, Pakistan also announced to open trade in 6800 fields, previously banned.

Visa policies were also relaxed from both sides the same year. A mutual agreement was also made

business travelers for the improvementof economic partnership (Siddique, 2013). Currently,

Pakistan had ingreater threat of terrorism, which is badly affecting its economy. The conventional

capabilities of Pakistan are not sufficient to address this issue. There is a desperate need for

improving trade relations with our neighboring countries, especially with India; which is a very

fast-growing economy in the region. Pakistan needs hisplatform to boost its economic

growth.Therefore,a visionary approach requiresthe development of an appropriate strategy which

will be based on cost-effective analysis for the nation. So, granting Most Favorite Nation (MFN)

status to India and development of free trade market is very important steps. Mutual confidence

and peaceful dialogues are required to continue trading on an equity basis. This requires an active

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participation of politicalleaders, a neutral thinking on both sides and realistic goal of economic

stability by ignoring existing stereotypes and prejudices about each other. But it is also important

to identify the benefits to Pakistan of granting MFN status to India. The current trade flows

between Pakistan and India are strictly in favor of India, despite granting MFN status to Pakistan

by India in 1996. If Pakistan grants MFN status to India, it will further boost Indian exports

benefiting only to India. The main reason behind this situation is the imposition of high non-

tariffbarriers byIndia on Pakistani exports, which had hinderedPakistan’s entry to India. The

granting of MFN status is only beneficial to Pakistan if India relaxes its non-tariff barriers and

eliminate strict entry barriers for Pakistani products.

The second objective was to identify the effects of SAFTA on trade liberalization between India

and Pakistan and their applied status with likely pros and cons integrated intothe bilateral trade.In

order to fulfill this objective ratio analysis was conducted, six ratios were applied to trade patterns

of Pakistan and India. The values of intraregional trade ratio suggest a very low value for

intraregional future trade, which suggesting acostlytrade between Pakistan and India, this suggests

that even after so many efforts both countries are unable to benefit of trade liberalization. The

reason might be the negative list and non-tariff barrier between both countries. The second ratio

of intraregional trade intensity suggests that collective trade of Pakistan and India is not very

significant in the world. The ratio of Intraregional trade introversion index gives negative values

for all the years which suggest anextra-regional bias. As both countries are trading more with other

countries rather than with each other. The ratio of revealed comparative advantage suggests that

both countries are unable to achieve a sustainable competitive advantage in the selected industries.

But India in more competitive than Pakistan.The regional orientation of Pakistan and India shows

that Textile industry shows trade creation, whereas inorganic chemical and edible fruit and nuts

show regional biases. The ratio of the trade complementarily index shows very high value except

for textile industry suggesting high future prospects for trade in agriculture, edible fruit and nuts,

sugar and confectionary and inorganic chemical industries with India. This shows that Indian

industries are more competitive and gained more than Pakistan in Post SAFTA environment.

The third objective was to identify factors affecting Pakistan National Competitive Advantage in

trade with India during the period 2005 to 2015. In order to identify significant factor affecting

Pakistan and India trade,Porter National Diamond Model was used and a fixed effect model was

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applied to both Pakistan and India. The results suggest that in both countries factor conditions,

demand condition, supporting and related industries, firm strategy and rivalry and government

policy play a significant role in determining nation competitive advantage in trade so, both

countries should work on the improvement of these factors for the achievement of a better position

in the global market. But when individually, factor condition was insignificant or negatively

impacting national competitive advantage. Demand conditions, supporting and related industries

and firm strategy and river were also insignificant but in the case of India firm strategy and rivalry

showed a positive impact. Only government policy was significant in most of the industries.

Therefore, both countries can devise their policy for the improvement of all these variables for the

attainment of sustainable national competitive advantage in trade

As both countries share the same culture, social, geographical conditions and very long

common border so they should cooperate and improve ties with each for attaining the benefits of

economic integration. In the case of individual variables in Pakistan,only government policy was

significant and ispositively affecting the national competitive advantage of Pakistan. In the case of

India firm rivalry and strategy and government policy were positively affecting the national

competitive advantage. The porter national diamondmodel was significant for both for Pakistan

and India for the agriculture industry, but in the case of individual variables only government

policy is significantly impacting the national competitive advantage of both countries. In the case

of edible fruits and nuts industry,the overall model is insignificant for both Pakistan and India,the

only factor condition shows a positive and significant relationship with the national competitive

advantage of India. In the sugar industry the model was significant in the case of India, but

insignificant in the case of Pakistan. Factor conditions show a significantnegative significant

relationship with national competitive advantage in India. In Inorganic chemical industry

Regression Analysis.The model is significant in the case of Pakistan but insignificant in the case of

India.The overall model is insignificant in case of Pakistani textile sector, but the model is

significant in the case of India. In Pakistan supporting and related industries are playing a negative

role, but government policy is playing a positive role.The results suggest that both Pakistan and

India are facing almost the same problems. In factor conditions the main problem is unskilled labor

with deficient technical skills, the improper utilization of land, lack of credit availability facilities,

not sufficient research and development, low purchasing power of general population, poor o

infrastructure facilities, government unnecessary intervention and high tariff and non-tariff barriers

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are hindering the achievement of national competitive advantage. Pakistan is facing more problem

than India, in case of firm strategy and rivalry doing business in India is easier as compared to

Pakistan. The variable, government policy was also significant in the case of both Pakistan and

India.

The last objective was to identify challenges and opportunities for Pakistan in a trade with India

and suggest a response to trade creation.As Pak- India trade is lessthan 1 % of India's international

trade. There are many factors which are hindering trade relation between Pakistan and India

including informal trade, which results in the loss of tax revenues and the high process of products

due tothe increased transportation cost. The Second issue was Non-Tariff Barriers and other

measures, other than tariffs, which restrict trade and protect domestic industry. Pakistan has

allowed almost 1,900 Indian products and is regularly imported, but Pakistan exports are restricted

to very few items due to NTBs imposed by India. The Indian tariff rates also remained high for

Pakistani exports intensive goods, such as leather, mineral onyx,and textile. In 2009 the exports of

Pakistan to India were only 30% of total imports from India, in 2010 it fell to 24 % and to 20% in

2011. Pakistan had sought clarification on non-tariff barriers which its trading groups face in India.

These are related to Visas, requirement sampling or customs inspection, the requirement of

technical or standard certification (e.g.Cement, textiles, leather), labeling and marking rules

(e.g.Processed foods), packaging rules specification, multiple certifications (eg.Surgical

instruments) and investment-related issues. The third problem was land route restrictions, which

is restricting trade of many commodities by land, this problem is now reduced due to bilateral

dialogue. The fourth issue was VISA restrictions, which is rigid on both sides and need to be

liberalized to minimize the unnecessary harassment of genuine and potential trader. The fifth issue

was, restriction on FDI’s, to open new doors for investment, businesses from Pakistan and India,

which were previously fearful and reluctant in these kinds of investments want to invest. But,

there is a risk dueto the Hindu extremist policy adopted by the Indian government. Sixthly,

inefficient telecommunication channels, as currently, Pakistan and Indian do not allow travelers to

use their mobile phones in the other country. The purchase of localSIM is not easy as it required

a lotof documentation; as a result, travelers and businessmen have to use certain informal

mechanisms to attain local SIM cards via relatives and friends. The seventh issue was, thepayment

and dispute resolution system, whichneeds to be improved for better trading relations, it is

important to have forums that bring buyers and sellers together. Guaranteed payments are essential

178

for building new and lasting business partnerships, for which banking channels need to be

improved. An innovative dispute resolution system should also be put in place. The eighth issue

wasan information gap, which exists on both sides. This can be improved with collaborative

efforts from both sides. There are very few items, which have trade potential with Pakistan and

are in the positive list of Pakistan. Additionally, there are many products which India imports from

other parts of the world and not from Pakistan. Lastly, the most important and critical issueis

political tensions which are the major hurdle in trade normalization. The violent partition of British

India in 1947, the Kashmir issue and various military conflicts had been plagued their relationship

by suspicious and hostility.As the amount of ill legal tradeand trade through third countries

suggests a tremendous potential for bilateral trade between Pakistan and India. Restrictions on

official trade between these countries compel traders from sides to import certain products from

far off sources, which are costly and also insecure. As, increased in bilateral trade would ensure

low transportation cost, cheaper raw materials and insurance cost which will enhance the qualityof

goods and their availability at competitive prices for both countries. While consumers would gain

in terms of lower prices, higher purchase power and greater choice of trade goods, manufacturers

will have access to the wider markets in the neighborhood. The Government would have revenue

gains by bringing ill legal tradeinto the formal channel. Ultimately, this would result in a win-win

situation for everyone. Trade in Electricity between both the Countries will also help in reducing

problems associated with electricity load shedding.

6.2.Recommendations

In order to increase national competitive advantage following recommendations are suggested

by the work for both Pakistan and India:

• Trade integration is very critical for the economy as it will help countries to cooperate and

offer more products at reasonable cost and efficiency in the international market. The

government od both Pakistan and India are trying to liberalize their trade policy, but still,

results are not up to the expectation. Therefore, a serious revision of policies and their

implementation is required to achieve the benefits of trade liberalization.

• Both countries had unable to achieve a sustainable competitive advantage in the selected

industries. The reason is that they are unable to provide a competitive environment for the

179

business. This requires serious policy reforms for the development of factor conditions,

demand condition, supporting and related industries and firm strategy and rivalry.

• In order to improve Factor conditions, both countries should improvethe education system

and allocate more budget for education and health,increase number of training institutes

should be established, for the improvement in human resource skills. Health reforms should

be introduced for the improvement of the quality of the labor force. In order to improve per

hectare yield of the crops, the farmers should be given easy credit and facilitated with

superior quality seeds. The communication gap between research and development and the

farmers should be eliminated for better results. Additionally, the feudalism system should

be monitored and regulated and farmers should be given lands. Credit availability should

be eased for entrepreneurs. The major problem of the fruits and nuts industry was the

unavailability of storage facilities, the government should establish and provide proper

storageso that fresh fruits and nuts can be exported for the generation of foreign exchange.

A research and development environment should be maintained, research grants and

support should be given. Increase coordination between different research institutions and

educational institution should be increased.

• For the improvement in demand conditions, population growth should be monitored, the

Strict quality standard should be maintained and regularly monitored. For increasing

international demand for domestic products. Increase employment opportunities should be

created for increasing the purchasing power of the people, Consumer friendly policies

should be introduced. Working of consumer courts should be enhanced, for consumer

protection.

• For the improvement of supporting and related industries, Transportation system should be

upgraded.Technological advancement should be incorporated in every field of life for

better results.

• For the improvement of firm strategy and rivalry More dams should be constructed, solar

power should be used for electricity generation. Other sources of energy like wind, biogas,

coal should be used for generation of power for industries. A business-friendly

environment should be maintained within the country. More industrial zones should be

established, with the facilitation of energy availability and tax benefits. Government

180

procedure should be simplified. The Private sector should be involved and public-private

coordination should beestablished in different industries.

• In order to improve government policy, a rigorous policy should be designed for the

improvement of infrastructure and business environment of the country. The unnecessary

intervention of the government should be restricted. The Prices of sugar or wheat should not

be utilized asa political tool, unnecessary tariffs should be abolished against each other. More

RTAs should be signed for an increase in regional integration, Unnecessary non-tariff barriers

should be abolished, Research grants should be given priorities for increasing the

competitiveness of the country, Measures should be taken to decrease corruption,

accountability and check and balance should be maintained for government officials, efforts

should be made for maintaining normal law and order situation will attract new investment. It

will also decrease the brain drain from the country. Additionally, Healthy competition should

be maintained, in order to attract investment from abroad.

• Corporate sector should feel their corporate social responsibility and work for the development

of their suppliers and employees. And also, for the protection of the environment. Private

institute providing technical facilities should be established. The Private sector should be

involved and public-private coordination should be established in different industries.

6.3. Direction for Future Research

Future research should be conducted by applying other models likea double diamond model

and nine-factor model for better understanding of the factor affecting competitive advantage

in trade for Pakistan. Further research can also be done by adding more items to the

development of variables to Potter National Diamond model. More industries can be included

for a better understanding of the Pakistani economy. The current study has discussed on two

members of SAFTA (i.e. Pakistan and India)., future study can be done by including all the

member countries.

6.4.Limitation of the Study

There are some limitations of this work which cannot be overlooked, the major limitation

is that few industries were selected from both countries, although the sample was

representative, still, the results cannot be generalized to the whole economy,other industries

have their own resource requirements and management practices. The future studies can be

181

directed toward other industries. The second limitation was that the majority of the data was

unorganized and undocumented in both countries, due to which limited items were included in

the development of variables. The third limitation of the study was ill legal tradepatterns

between Pakistan and India and was not included. Lastly, another limitation was political

tensions between both countries, due to which trade was suspended at different time periods

during the study period.

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Annexure1

Comparative Table Revealed Comparative Advantage of Pakistan and India In Different

Industries (2005-2015)

Years Textile and

clothing

Inorganic chemicals Agriculture a Sugar and sugar

confectionaries

Edible fruits and nuts

Pakistan India Pakistan India Pakistan India Pakistan India Pakistan India

2005 12.19 3.23 0.01 1.08 0.88 0.74 0.39 0.74 0.21 1.82

2006 1.80 3.16 0.007 1.00 0.10 1.06 0.32 1.06 0.21 1.59

2007 1.53 3.00 0.01 0.72 0.093 1.26 0.191 1.26 0.19 1.35

2008 1.35 2.87 0.01 0.85 0.09 1.20 0.64 1.20 0.18 1.40

2009 0.113 0.25 0.02 0.68 0.12 0.82 0.22 0.82 0.21 1.07

2010 1.16 2.73 0.017 1.37 0.10 1.26 0.13 1.26 0.22 0.98

2011 1.179 2.89 0.016 0.603 0.11 1.08 0.07 1.08 0.21 0.9

2012 1.282 3.24 0.017 0.855 0.14 1.32 0.30 1.32 0.24 0.97

203

2013 0.94 2.77 0.01 0.65 0.09 1.40 0.68 1.40 0.24 0.94

2014 0.97 2.73 0.013 0.701 0.099 1.19 0.55 1.195 0.24 0.92

2015 1.13 3.25 0.013 0.70 0.077 1.167 0.551 1.167 0.248 0.88

Source: Prepared by the Researcher

City University Research Journal Volume 08 Number 02 July 2018 PP 143-154

DETERMINING THE TRADE POTENTIAL OF TRADE BETWEEN PAKISTAN AND SAFTA COUNTRIES USING GRAVITY MODEL

1 2 3

Samra Kiran , Qadar Bakhsh Baloch and Syed Mohsin Ali Shah

ABSTRACT The study tried to identify main determinants of exports between Pakistan and SAFTA countries by applying the

gravity model of trade. Panel data were used from the period 2003 to 2016. The independent variables include

GDP, GDP per capita, distance, border, and inflation to investigate their impact on trade patterns. The Multiple

Regression models were applied. The results suggested the gravity model fits into data reasonably well and

Pakistan's GDP, distance, and border showed a significant negative relationship with trade patterns of SAFTA

countries. Whereas inflation and per capita GDP showed a significant positive relationship with trade patterns

between Pakistan and SAFTA countries. This work has tried to apply theoretical concepts and empirical analysis

to add to the limited literature already available. The results suggest significant potential in SAFTA regions for

Pakistan, which is still untapped. This suggested a development of liberal trade policies, decreasing Non- tariff

barriers to increase trade within the region.

Key Words: Trade, gravity model, SAFTA

INTRODUCTION Globalization had posed many changes at the local and international level, creating windows of opportunities.

Economic integration the outcome of trade liberalization, the main pillar of which is the world trade organization

(WTO) and international monetary fund (IMF). The modeling of trade patterns had received considerable attention

in the research academia. As the emergence of the global market had made it necessary for countries to integrate

into international trade. Various models had been identified to explain bilateral trade flows within the regional

blocs and individual trading partners, but the most popular model used was gravity model of trade based on

Newton's law of gravitation. Tinbergen (1962) used a gravity model to identify the relationship between GDP and

trade flows. Later on, Poyhonen (1963) identified that the amount of trade between countries depends upon their

distance and incomes which was further investigated by Rasoulinezhad (2016).

204

An unevenness of the production patterns of different industries in different countries, unlimited production

tendencies, international production patterns for availing benefits of low wages and cheap raw material from

developing countries is the major reason for the emergence of international trade. Sun and Heshmati (2010)

suggested that international trade had significantly impacted the economic growth of China, resulting in expansion

and higher economic growth. It will also help in achieving development goals through inclusive and sustainable

economic growth, which results in acceleration of job creation, efficient resource utilization, an entrepreneur

incentive achievement which ultimately upgrades living standards (UNCAD, 2015). Wani, Dhania, and Rehman

(2016) suggested that international trade is integral to the economic development of any country. The trade policy of Pakistan showed many ups and downs, in the beginning, it was restricted, but had to liberalize

its policy with the help of the WTO and IMF. This trend was seen in 1980. The open 1

2

3

Ph.D. Scholar, Abdul Wali Khan University, Mardan. Assistant Professor, City University of

Science & I.T. (CUSIT), Peshawar. skirran_0647@yahoo.com Director, Institute of Business Studies & Leadership, Abdul Wali Khan University, Mardan Assistant

Professor, Institute of Business Studies & Ledarship, Abdul Wali Khan University, Mardan

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open trade policy gave a boost to exports and imports majorly with China, USA, Germany, UK, France, Italy,

Spain, and Bangladesh, which comprise almost 50% of the total Pakistani exports. The major importing

countries are Germany, India, USA, Kuwait, Malaysia, Japan Saud Arabia, China and Indonesia. Exports can

impact economic development significantly. Pakistan had faced with problem negative balance of payment

consistently the exports are decreasing with its neighboring countries and also with the rest of the world. The

introduction of the Generalized Scheme of Preference (GSP) has offended window of opportunity for

boosting with European countries. Despite many free trade agreements (FTAs) and Preferential Trade

Agreements (PTAs), the regional trade is not increasing. The Second World War ended up with a huge amount of destruction and distress. This marked the start of a new

era in which it was recognized that increase in international trade would greatly contribute in the development of

weak economies of the world, this framework of increased cooperation rapidly increases international trade. This

rapid increase in international trade was the resulting establishment of GATT in 1944. It was actually a multilateral

trade agreement between 23 nations, who were agreed to leave protectionist policies of the past and increase

cooperation among member countries. GATT was in effect till 1995, after which it was replaced by the WTO in

1995. These both political institutions facilitated world trade by providing procedures for increased cooperation

and facilitate trade negotiations. Now many governments are utilizing this multilateral trading system to decrease

trade barriers to increase international trade. These multilateral trade agreements rapidly increased at the end of

the 20th century. There were 34 new RTAs between 1990 to 1994 notified by the WTO. In 1995 to 2001 their

number doubled to 68 and in 2001 to 2005 almost 100 new RTAs were signed. until 2015 406 RTAs are active.

Examples of free trade agreements from North-North establishment the European Community in 1957 among

Belgium, Germany, Italy, Luxembourg, Netherlands, and France under Rome treaty another example is the

establishment of European free trade area among Denmark, Norway, Austria Sweden, Portugal, Switzerland, and

UK at Stockholm convention in 1960. Free Trade Areas found in south –south is CACM (Central American

Common Market), which was established in 1960, members of this agreement were by Honduras, Guatemala,

Costa Rica, El Salvador, and Nicaragua. In 1958 CARICOM (Caribbean Community) among by Suriname,

Barbados, Antigua, and Barbuda, Belize, Bahamas, Dominica, Guyana, Haiti, Jamaica, Granada, St. Kitts and

Nevis, St. Lucia, St. Vincent, Tobago. and Trinidad. The new wave of regionalism started in the 1980s by featuring

developing and developed countries one example is NAFTA (North American Free Trade Area) in this agreement

Canada and America was from developed countries and Mexico as a developing country and the EU (European

Union) established agreements with countries of Eastern and Central Europe and also with some Mediterranean

countries these agreements are EU-Cyprus in 2001, EU-Turkey in 1996 and Euro-Mediterranean Agreements

in1995 an in 1998 EU-Mexico trade agreement. In order to achieve advantages of Regional Trade Agreement

(RTA). South Asian Association for Regional Cooperation (SAARC) was formed among the eight nations of South Asian

1885 these countries- India, Pakistan, Nepal, Sri Lanka, Bangladesh, Maldives, Bhutan, and Afghanistan. Due to

many political reasons, this RTA had not resulted in providing considerable gains to member countries and regional

integration is very much slow. The recognition of this fact in 1993-member countries signed an agreement named

as South Asian Preferential Trading Agreement (SAPTA). This agreement had to be effective in 1995 In this

agreement trade concessions were offered to the member countries in the selected list of items. In order to boost

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Kiran et al. member countries continued their negotiations ad in 2005 SAFTA was replaced by SAFTA. This agreement was

to be operational till 2006 and achieve full integration till 2013. After the signing of these agreements' member

countries are struggling to increase regional cooperation by reducing tariffs and quotas and other non-tariff barriers.

Pakistan is an emerging economy and export revenue will help and support the country for economic development

if they untap their hidden trade potential. The policymakers in Pakistan are trying to adopt trade liberalization

policies. The country under the structural adjustment by the international monetary fund reduced or eliminated

many tariff and non-tariff barriers and also signed many trade agreements with its trading nation. Pakistan has

trapped into a trade deficit problem, which is due to the concentration of international trade in low-value items and

restricted toward few trading partners (Abass and Waheed, 2015). Exports are an important driver of economic

development, it's very important to identify factors which can help in accelerating exports within the country.

Pakistan is facing the problem of deficit balance of trade. Therefore, it's very critical to conduct research on factors

which can accelerate exports from Pakistan. The work will try to explore different factor which is contributing to accelerating trade patterns between

Pakistan and SAFTA countries. The current study had tried to use the gravity model for the overview of the

bilateral trade between Pakistan and SAFTA countries from the period 2003 to 2016. These countries were

selected to have an analysis and checking the outcome the liberalization efforts by South East Asian countries,

for the development of the overall region. As, the benefits emerged include more utilization of abundant

natural resources available and achievement of economies of scale (Helpman and Krugman, 1985) and

specialization, import needed products which cannot be produced domestically, it increases the efficiency of

domestic industries due to the international competitive environment. Earn foreign exchange for the country

(Chenery & Strout, 1966). It is also an important driver of the economy (Frankel &Romer, 1999). The main objective of this work is to quantify Pakistan's trade potential with its other regional pattern and to

analyze the main determinants of trade flows with its neighboring countries. This work will provide important

insight into the direction of trade flows of Pakistan with its SAFTA member countries. This will provide

various policy implications for the increasing trade potential of Pakistan. The gravity model is used in finding

trade potential of Pakistan with its SAFTA member countries for the period 2004 to 2016.

Research Objectives To investigate factors which can accelerate exports of Pakistan with SAFTA Countries by

applying the gravity model.

To investigate factors which can accelerate Pakistani exports to SAFTA countries.

Research Questions What are the factors which can accelerate bilateral trade patterns of Pakistan with

SAFTA countries?

LITERATURE REVIEW The role of trade and development is identified by many theoretical and empirical work, several dimensions of

trade have been discussed so, but the important question is to find the future options and determinants for country's

trade expansion. The gravity model is one of the prominent tools used

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for measuring the number of trade flows. Ravenctein (1889) used a gravity model to measure migration

patterns in the UK. In 1967, the Newton postulated the “Law of Universal Gravitation” which described the

attraction between the two forces as the result of the product of the e mass the f the two bodies divided by

the squared distance between the two bodies multiplied by a gravitational constant (Head, 2003). Fij = G* Mi α * Mjβ /Dij θ

This model was further used by Tinbergen (1962) in his study trade flows. First, they used variable like the

size of the country and geographical distance. The fitted model was able to measure variation up to 80-90 %.

Tinbergen's Old Gravity Model of 1962 was as follows: The model identified by Tinbergen (1962) was specified as:

In Exports ij = β0 + β1InYi+ β2 In Yj+ β3 DIS ij + εij

the above equation shows that the exports of the country I with country j are dependent on the GNP of the

country I and in the country j the value of DIS is taken as a proxy for the transportation cost. His work

identified that a direct relationship between bilateral trade flows and economic size and indirect, whereas the

indirect relationship with the distance between two trading partners. Linneman (1996) derived gravity model

from partial equilibrium model by incorporating three costs including-, time-related cost, physical cost and

other cost arising from social and cultural differences. Anderson (1979) derived gravity model from the

constant elasticity of substitution (CES). Bergstrand (1985) suggested that gravity model is just a reduced

form of demand and supply general equilibrium. Deardorff (1995) derived gravity model from H-O theory

of factor endowment and specialization. Frankel and Romer (1999) used cross-sectional data from 63

countries gravity model to identify the impact of international trade on the living standards. Their results

suggest a positive relationship between income and trade flows between countries which further increases

with increase in geographical, human and physical capital formation. Heckscher –Ohlin theory suggests that

trade patterns are based on factors endowment. Countries having some factors in abundance use these factors

in their production process. According to Chicago school, this theory has the potential of explaining all the

trade-related factors. But, Ohlin (1913) himself argued that the world is much more dynamic and it cannot solely have explained by

comparative advantage theory. Later on, may empirical work have supported his argument. Leontief (1986) worked

on the US economy and explained that the US is a capital-intensive industry but, still they export many labor-

intensive products. Linder (1961) proposed Linder Hypothesis in which he suggests that when different countries

have similar demand patterns they tend to trade more with one another. This was a demand-based theory which

was opposite to supply based theories of the past. Linder did not give a proper model for his hypothesis, therefore

his findings were tested in different ways by different researchers. Anderson (1979) used a gravity model based on

product differentiation. The Tinbergen's ad hoc formula was progressively micro-founded by Anderson (1979), he

was of the view that gravity model can be explained by expenditure share model by taking certain assumption

which included maximization of the utility of trade goods which are differentiated and have homothetic preferences

(similarity-based preferences). Deardorff (1998) suggested a model in which he considered differences in factor endowment perfect competition,

homogeneous products and-homothetic preferences. Helpman (1999) suggested that C 2018 CURJ, CUSIT 146

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Kiran et al. gravity models were previously used and have a long history, but these models are different from another

model as it tries to ascertain the volume of trade, but does not explain the composition of trade. The gravity

model uses an equation to predict bilateral trade between two countries. Eaton and Kortum (2002) presented

Ricardian model with the certain assumption in which he took differences in production technology, constant

returns to scale and homothetic preferences. The equation had transformed and various variable were included by different scholars to extend the model,

artificial trade resistance and population size was included by Linnemann (1966).income of the countries

were included by Frankel (1992) foreign direct investment was included by Pfaffermayr(1994) the trade

policy index was introduced by Chen and Wall (1999) in 2010, Nguyen include trade preference and

exchange rate. Based upon the above discussion the gravity equation was identified: Xij = α0 + α1(Yi) + α2(Yj) + α3(Ni) + α4(Nj) + α5(Dij) + α6(Aij) + α7 (Pij)

The role of trade and development is identified by many theoretical and empirical work, several dimensions

of trade had been discussed so, but the important question is to find the future options and determinants for

country's trade expansion. Nicholls (1998) used data from Central American Common Wealth (CACM) and applied Compensating and

equivalent variation Heckhrian measures and suggest that for this area RTAs are strictly trade diverting in

some selected commodities sectors. Thirlwall (2000) contributed that trade is very beneficial for the country

as it contributes in the fuller utilization of resources and this growth is not limited to the home country about

expanded to other parts of the globe. Hassan (2001) used gravity model by using data for SAARC countries and suggest a very low trade that

among SAFTA countries as compared to other RTAs. He identified that there are many areas which are not

been exploited by member countries, as RTAs have a positive impact on the welfare of member countries so,

all member countries should take steps for the increase of regional trade for gaining welfare impact. This

requires proper policies for decreasing political tensions, non-tariff barriers, and other tariffs. Ghosh and

Yamarik (2004) used extreme bound analysis for measuring trade creation and diversion effect of RTAs and

found that very insignificant impact of RTAs on trade creation. The SAARC region is home to an almost

one-fifth population of the world, which are mostly below the poverty level, hindering the achievement of

the goals of the SAARC. The other reasons are political tensions, Lack of trust and ups and downs in relations

between India and its neighboring countries Dahal and Pandey (2005). A gravity model was used by Carrere and Celine (2006) by using data from 130 countries and found that RTAs

can produce a significant impact on trade creation of member countries, but produce a negative impact on non-

member countries. Lee and Shin. (2006) used data from East Asia and suggest that geographical proximity and

having natural trading partners can be more trade creating join a common RTA. He also added that RTAs will

result in welfare for member countries. Hilbun and Dufour (2006) try to find impacts of RTAs in Western

Hemisphere related to the agriculture sector by applying the gravity model for 24 Western Hemisphere Nations.

Many agreements were analyzed, including NAFTA, AC, MERCO, LAIA, and CACM. The results suggested a

positive, but the insignificant effect of trade creation of NAFTA and LAIA. While for AC, MERCO, and CACM

they found the negative and insignificant effect of trade creation. The result found the positive significant

diversionary effect of NAFTA with other agreements all was negative and significant related to

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diversion GDP had positive and distance has a negative relationship with trade flows. They also found that

RTAs affect more at the inter-industry trade as compared to intra-industry trade. Moktan (2009) also used

data from SAARC member countries by using pooled data from 1980–2005, and applied to augmented

gravity model, suggesting that SAPTA had a positive impact on trade between member countries in the

later period of study. As Indian growth can become an important economic driver for the whole region, but

unfortunately, the whole region is stuck in the economic trap of poverty, poor infrastructure, income

disparity, energy shortages and another environmental issue. Other reasons are internal conflicts between

member countries, ranging from high intensity (India- Pakistan) to low intensity (India-Bangladesh) and

also India Sri Lanka as the presence of Indian army in Sri Lanka. Additionally, these relations were further

worsened by cross-border terrorism, the arms race and hostile propaganda. Rivalry among two nuclear

powers- Pakistan and India continue to treat to the region. These all reason had absolutely make SAARC a

failure (Thapar, 2011). Sridharan (2008) compared the performance of SAARC and ASEAN for their role

in resolving regional conflicts and suggest that ASEAN had contributed a lot in this regard as compared to

SAARC. SAFTA was signed to boost free trade between SAARC member countries therefore, it's

important to analyze the effectiveness of SAFTA after many years of its operation. Karemera et al. (1990)

applied gravity model using pooled data from 1984 to 1993, incorporating GDP, trade flows, inflation,

domestic wholesale prices, import and exports values, distance and other geographical values and found all

variable significant in case of Pacific Rim. Lai and Zhu (2004) used cross-sectional and panel data from 34 countries using labor productivity, total

factor productivity-adjusted wages. distance, average tariffs, time-varying tariffs, labor and productivity-

adjusted wages. the results suggested that that trade liberalization are more beneficial for poor countries as

compared to rich countries. Rahman (2005) used panel data from 1972 to 1999m, to analyze trade

performance of Bangladesh with NAFTA, ASEAN, SAARC, EEC and Middle East countries. the results

follow the theoretical foundation of the gravity model. The results suggest distance, economic size, import

demand, and trade opens to be important determinants of Bangladesh trade flows. Malik and Chaudhry (2012) used gravity model by applying the least square method on panel data from 1996 to

2006. The results suggest an income of trading partners and exchange rate to be important determinants of Pakistan

's import volume. Achakzai (2006) used pooled data from 1337 countries for the year 2005 and applied the standard

gravity model to find the trade potential of Pakistan with ECO countries. The result suggests a significant potential

for Pakistan, which is not properly explored as bordering countries have greater scope for regional integration.

Rahman et al. (2006) used panel data from 51 countries from the period 1991 to 2003, in order to find trade creation

and trade diversion of the effect of SAFTA, by applying gravity model. the results suggest that SAFTA had created

a trade in the region, but it also caused net trade diversion in the region Ruiz and Butt (2008) identified that Pakistan

has a significant trade potential with India, China USA, and Hong Kong by applying Gravity model with the Pseudo

maximum likelihood method for 19 Pakistani sectors examined. Khan et al. (2013) used biennial panel data from

1990 to 2010 of Pakistan with its major trading partner countries. Gravity model was applied with distance, GDP,

and GDP per capita and found that Pakistan has an untapped trade potential with Malaysia, Turkey, Japan, Iran,

and India. Based on the above discussion, the work had identified five independent variables to check their impact

on the trade flows of selected SAFTA countries to test the following hypothesis. C 2018 CURJ, CUSIT 148

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Kiran et al. Hypothesis: H1: GDP has a significant impact on trade flows between countries H2: Per capita GDP has a significant impact on trade flows between countries H3: border has a significant impact on trade flows between countries H4: RTA has a significant impact on trade flows between countries H5: inflation has a significant impact on trade flows between countries H6: Distance has a significant impact on trade flows between countries

METHODOLOGY The work had tried to investigate main determinants of trade between SAFTA countries. this section will

provide details of main independent and the dependent variable, sample, data sources.

3.1 Data To evaluate hypotheses of the study the work had relied on Panel data. Data from the SAARC countries was

collected, based upon their trade with Pakistan. From all the SAARC countries, India, Bangladesh,

Afghanistan and Sri Lanka were selected. Maldives, Nepal, and Bhutan were excluded as they do not have

any significant trade with Pakistan. All observations were taken on an annual basis. GNP, GDP, GNP per

capita and GDP per capita, inflation, population taxes on international trade, imports, exports, and CPI was

extracted from world bank data portal. The data of trade patterns between Pakistan and SAFTA countries

was extracted from trade map website. Data on the distance between Karachi and other capitals of the

countries included in the sample was obtained from www.indo.com/distance.

3.2 Gravity model Ravenctein (1889) used a gravity model to measure migration patterns in the UK. In 1967, the Newton

postulated the “Law of Universal Gravitation” which described attraction between two forces as the result of

the product of the mass of the two bodies divided by the squared distance between the two bodies multiplied

by a gravitational constant (Head, 2003). Fij = G* Mi α * Mjβ /Dij θ

This model was used by Tinbergen (1962) in his study trade flows. First, they used variable like the size of

the country and geographical distance. The fitted model was able to measure variation up to 80-90 %.

Tinbergen's Old Gravity Model of 1962 was as follows: The model identified by Tinbergen (1962) was specified as:

InExportsij =β0+β1InYi+β2 In Yj+ β3DISij+ εij

the above equation shows that the exports of the country I with country j are dependent on the GNP of the

country I and in the country j the value of DIS is taken as a proxy for the transportation cost. Xij = trade

flows from country I to j Yi = GDP of country i Yj=l GDP of country j Ni = population size of country The nj= population size of country j 149 C 2018 CURJ, CUSIT

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Aij= any other factor affecting trade between country I and j The Augmented Gravity Model Log (tradei) = α +ß1(log GDPiGDPj) + ß2 log(PCDGPiPCDGPj) ß3 LOG (Distanceij)+ ß4log(Borderij ) +

ß5 (PCDGDPD) B6 LOG (INFLATION) +μ

(PCGDPD) shows the absolute value of per capita income differentials and dummies for a common border

(BORDER) etc., the dummies can take values of units or zeros.

3.3 Variables 3.3.1 Dependent variable

1. Trade would be measured by the total sum of imports and exports between countries

3.3.2 Independent variables 1. GDP

As GDP of the trading nation can be used as a proxy for the economic size of the country, it can be used as

a core variable for gravity model. Ehsan (2017) Found a significant positive relationship between GDP and

trade flows. Apostolov and Josheski, (2018) also found a significant positive relationship between trade flows

and GDP.

2. Capita GDP (PCGDP) Per Capita GDP Differential - Absolute (PCGDPD) It accounts for the effective distance between neighboring

countries that are likely to be engaged in mutual trade more frequently.

3. BORDER

A dummy variable is used for borders, which takes the value 1 if countries have common border and 0 otherwise.

It is commonly believed that countries which share common border usually share common language traditions

culture values customs and similar consumption patterns. So, there is an expectation of positive relationship

between border and trade flows. Ehsan (2017) found a contradictory in case of China trade with OPEC countries.

4. EXCHANGE RATE The exchange rate can be used to find its impact on trade flow. As international trade increase exchange rate

risk so it has an impact on trade flows. The depreciation of the currency encourages exports and discourage

imports. Ehsan (2017) found an insignificant relationship between trade flows and exchange rate.

5. INFLATION This variable measures the price levels of the countries. Most of the previous work had found a negative

relationship between inflation and trade flows. Rahman (2005), Roy and Rayhan (2011). Found positive,

whereas Kaur and Nanda (2010) and Gul and Yasin (2011). Iqbal et al. (2014) and (Apostolov & Josheski,

2018) found a negative relationship between inflation and trade flows.

6. DISTANCE Distance can use as a proxy for transportation and time-related cost. Ehsan (2017) found a significant negative

relationship between distance and trade flows. It shows that increased

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Kiran et al. distance decreases trade flows between countries as a result of higher transportation cost. The same result

was found by Wang et al (2010) in case of 19 OECD countries, by Apostolov and Josheski (2018) in case f

Asia Pacific Rim and byKhan et al. (2013) in case of Pakistan.

RESULTS In order to test the hypotheses related to the relationship between trade flows and GDP, GDP per capita, inflation,

distance, border, and exchange rate. A regression model was developed and applied. The Table # 1 shows

descriptive statistics of all the independent variables used in the model. The value of kurtosis is less than the

absolute value of 2. This show the normality of the data.

Table 01: Descriptive Statistics

Mean Median Minimum Maximum Standard C.V. Skewness Ex. kurtosis

deviation

Trade 1.01E+06 7.51E+05 1.26E+05 2.85E+06 7.76E+05 0.763 0.64 -0.95

Flows

GDP 4.0E+011 7.38E+010 4.5E+09 2.2E+012 6.6E+011 1.6330 1.63 1.15

GDP per 1224.2 904 198.73 3844.9 988.6 0.80760 1.50 1.34

caita

Inflation 7.4742 7.01 -8.2831 30.5 5.3 0.70872 1.39 2

Distance 1746.4 1735.4 1093.6 2421 655.6 0.37545 0.002 -1.99

Border 0.500 0.50 0 1 0.50 1.0090 0 -2

Exchang 0.93 0.81 0.53 1.82 0.368 0.39609 0.92 -0.28

e Rate Table 02 shows the correlation matrix of all the independent variables. The results suggest that the data is

free from multicollinearity and fit for further analysis.

Table 02: Correlation Matrix

GDP GDP PER CAPITA INFLATION DISTANCE BORDER EXCHANGE

GDP 1 0.0638 0.0067 -0.4934 -0.3469 0.4899

GDP per capita 1 -0.0854 0.4377 0.8358 -0.4217

Inflation 1 0.01585108 0.0444 1.1656

Distance 1 -0.0999 0.529

Border 1 0.7379

Exchange rate 1

Table 03: Regression Results

VARIABLE COEFFICIENT STDERROR T STAT P-VALUE

Const 1078.08 84.9819 12.686 <0.00001 **

GDP -0.492635 0.0513077 -9.602 <0.00001 ***

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GDP percapit 1.63163 0.136857 11.922 <0.00001 ***

Distance -136.859 10.8898 -12.568 <0.00001 ***

Border -104.279 8.40317 -12.409 <0.00001 ***

Inflation 0.0646092 2.853 2.853 0.00638 *** Unadjusted R-squared = 0.91769 Adjusted R-squared = 0.909116

F-statistic (5, 48) = 107.032 (p-value < 0.00001) The Table # 3 shows results of the regression model the coefficient of the GDP is statistically significant and

show a negative relationship with trade flows of the counties. GDP per capita shows a significant positive

relationship with trade flows. The coefficient of distance shows a negative relationship with trade flows. The

coefficient of the border also shows a significant negative relationship with trade flows. The coefficient of

inflation shows a positive significant relationship with trade flow. All the variables were significant at 1%

significant level. The adjusted R square is 91.7% which suggest that 91.7 % variation in trade bilateral trade

flows of Pakistan is due to the independent variables in the model. The value of f-statistic is 107.032 p-value

0.00001m, which suggests that overall model is significant at 1 % significant level.

DISCUSSION AND ANALYSIS The results suggest that the all the variable identified in the model have a significant impact on the trade patterns

n between Pakistan and other SAFTA countries. The GDP was used to measure the size of the economy and shows

a negative and significant relationship with trade patterns which does not follow the results of Wang and Badman

(2016) which shows a positive relationship, between GDP and trade flows. The reason might be political tensions

between member countries, many tariffs and non-tariff barriers, political tensions and extreme poverty levels of

SAARC countries. The negative sign of estimated coefficient shows that Linder hypothesis dominates H-O

hypothesis which means that those countries usually trade less who has a different factor of the endowment. The distance shows a negative relationship with trade flows confirming the proposition of the gravity model,

as increased transaction cost due to the increased distance of the country will decrease trade flows between

countries this follows the results of Wang and Badman (2016)which shows a negative relationship with trade

flows. The coefficient of per capita GDP shows a positive and significant relationship with trade flows

confirming the results of Wang and Badnam (2016). Abass and Waheed (2015) attempt to investigate

Pakistan trade patterns with 40 trading partners from 1991 to 2011, using panel data on augmented gravity

model. The study intends to investigate and identify potential trading partners for Pakistan. The results

suggest that Pakistani exports are determined by Pakistan's supply capacity and import country's demand

potential and additionally by market size, it shows a negative relationship with distance. The relative price

shows significant positive, but less elastic impact. The result of export potential shows that Pakistan has

higher export potential with India. The coefficient of the border also shows a significant negative relationship

with trade flows. Ellahi, Mehmood, and Ahmad (2011) also found a significant impact of trade flows on the

economic development of the country and its import for developing countries to adopt liberal trade policies

of openness for the development of the standard of living of the people. The coefficient of inflation shows a

positive significant relationship with trade flow.

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CONCLUSION The work had tried to find the main determinants of exports in Pakistan with SAFTA countries by applying

gravity model. The panel data was used from 2003 to 2016. The major intention was to identify any untapped

trade potential for Pakistan in SAFTA area. The major independent variable identified and tested were GDP,

GDP per capita, distance, border, inflation, and exchange rate. The workers tried to find the impact of these

independent variables on the trade flows between Pakistan and SAFTA countries. The result follows the

prediction of gravity model in case of distance and per capita GDP. But, in case of the size of the economy

and Border, it does not follow gravity model. The reason might be political tensions between the regional

partners and extreme poverty levels of many countries in the region. Therefore its very import for all the

SAFTA countries to increase trade liberalization and effective implementation of SAFTA policies.

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Turkish Economic Review.3(4). .562-577.

1

2

An Application of Porter's Diamond Model: A case of Pakistani selected industries

Samra Kiran

PhD Scholar (Abdul Wali Khan University, Mardan)

Prof. Dr. Qadar Bakhsh Baloch

Director (Institute of Business Studies & Leadership)

Abdul Wali Khan University, Mardan

Abstract

The aim the study was to identify factor contributing in Pakistan’s national competitive

advantage in trade. The panel data was applied to five Pakistani industries from 2005-15.

Fixed effect model was applied to the data. The results suggest the overall model is

significant, but only government policy was found significant in individual variable case.

As, International competitiveness is critical for the attraction of investment, tourism and

Other services. The current work will analyze variables through which international

competitiveness can be attained for Pakistani industries. The future studies can be directed

toward other industries, additionally majority of the data was unorganized and

undocumented, due to which limited items were included in the development of variables

future studies can include more items in the development of variables.

Keywords: Competitive Advantage, Trade, Pakistan

Introduction

3

Pakistan came into existence on 14 August 1947. The country has very significant

development potential. It is located at the crossroads of China, Middle East, and South

Asia. It is thus at the fulcrum of a regional market, having large population untapped

potential for trade and diverse resources. At the time of independence, Pakistan was an

agriculturally based country. In the first five decades, its average economic growth was

above the world economy in the same period (Ahid & Wali 2017). Pakistan purchasing

power parity (PPP) in 1980 was $71.81 billion. It grew up to $793.85 billion in 2013.

Pakistan was ranked 42nd in terms of GDP and 24 in terms of PPP. With a population of

over 190 million (the world's 6th-largest) with 6% of the total population is below the

poverty line, its nominal GDP per capita is $1,428 in 2016. Pakistan was ranked 25th in

2017. Growth in GDP was 4.5 % in 2015 and 6.7% in 2016 and 5.2% in 2017 with the

expectation of 5.5% growth in 2018, with the agriculture sector contributing 25%. services

54 %, and industrial sector 20% in the total GDP (Wikipedia, 2017).

The main issue which is threatening its economic stability and growth is decades of

war against terrorism and political instability which had seriously damaged its

infrastructure and other managerial issues. Pakistan economy is semi-industrialized, which

is growing along the Indus River (Henneberry, 2000). A seminar on Pakistan

competitiveness by Zia (2006) suggested a weak Competitive position of Pakistani firms

with stagnant growth. As compared to newly emerging economies. The exports are mainly

composed of low technology products. But, despite weak competitive position the

economy is showing signs of recovery, which might be the result of economic reforms,

concessional financing, debt restructuring, structural reforms, designing of policies with

resulted in increased GDP (Zia, 2006). Currently, the country is in the process of trade

liberalization and privatization of many public organizations for the attraction of FDI and

also for decreasing the problem of the budget deficit (Pakistan Country Report, 2010).

Primary export commodities include chemicals, leather, textiles, sports goods, medical

instruments, and carpets/rugs. (Workman, 2017). Other item exported by Pakistan are

Cotton, Cereals, Ores, slag, ash, Salt, Sulphur, stone, cement, Rawhides excluding fur skin,

Plastics, Food waste, animal fodder, Copper, Fish, Gums, resins, Other textiles, worn

4

clothing, Knit or crochet, Clothing (not knit or crochet), Leather, animal gut articles,

Medical, technical equipment, Textile floor coverings, Furniture, lighting, signs, Plastics,

Fruits, nuts, Footwear, Toys, games, Toys, games, Manmade staple fibers, Salt, Sulphur,

stone, cement, Vegetables, Alcoholic beverages, Sugar, Base metal tools, cutlery, Coffee,

tea and spices, organic and inorganic chemicals and oilseed (Pakistan Defense Forum,

2015).

Research Questions

• What are the factors which contribute to the competitive advantage of Pakistan

international trade.?

Research Objectives

• To identify factors affecting Pakistan National Competitive Advantage in trade

with India during post SAFTA period (2005 to 2015).

Significance Of Research

The study could provide information on Pakistani industries and sources of their

competitive advantage. Countries like companies compete in the international market. At

the firm level, the competitiveness can be attained by the combination of strong political

and legal system, with stable institutions and social frameworks, this work will identify

factors which can play important role in the development of competitive advantage.

Additionally, the macro, as well as micro-conditions of the nation, will help to attain and

sustain competitiveness in the global market. As, International competitiveness is critical

for the attraction of investment, tourism and Other services. The current work will analyze

variables through which international competitiveness can be attained for Pakistani

industries.

Literature Review

5

There are certain countries in which companies are consistently engaged in innovation

and improvement and able to gain and sustain competitive advantage in different industries.

They are also able to overcome barriers to reach different markets. The reason for their

success lies in four important attributes of that country. These attributes individually and

as a constitute diamond of national competitive advantage. This actually a playing field

which is developed by that country for its industries. These attributes are:

Factor Conditions include the condition of a factor of production, including human,

physical, informational, infrastructure and capital necessary for the competition in a

particular industry. Demand Conditions include the composition of home demand and

number and sophisticated customer in the home country. For particular goods and services.

Related and Supporting Industries are the existence or absence of supplier’s industries and

other internationally competitive supporting and relates industries for a particular product

or service. Firm Strategy, Structure, and Rivalry are the business environment of the nation

in which companies develop their strategies and also the nature of domestic rivalry in the

countries. The role of government the policies and procedures perused by the government

to boost the competitiveness of the country.The role of chance is the sudden incidents or

6

events which might have affected the competitiveness of the country.

Figure 1 Porter Diamond Model

Source: Porter (1980)

Factor Conditions

Factor conditions are the backbone of any economy. They play a vital role in the

development and acceleration in the economic development of any country. These factors

are a combination of basic and advanced factors. As Pakistan is a factor driven economy,

Therefore, the factor condition plays a very important role in the development of national

competitive advantage in Trade. The detailed analysis of different factors of Pakistan is as

follows:

7

Human Resource

Human capital and its development play an integral part in the development of

competitive advantage. In this regard, professional experts have strategic importance

(Debrah and Ofori, 2006). For the development of the knowledge-based economy, it’s very

essential to develop human resource of the country which reduces skill mismatch in the

labor market and creates a competitive advantage for the nation by enhancing economic

and social development for the improvement of the wellbeing of its citizens (Khan, 2005).

The Agriculture sector has employed 43% of the total workforce, whereas, wholesale and

retail sector, 9.2 %, manufacturing sector, 13.3 %, and transportation and communication

sector contribute 7.3% of the total workforce (Pakistan economic survey 2013). Afridi

(2016) suggests a positive relationship between human capital and economic growth using

data from 1972 to 2013 from Pakistan they applied ARDL and VECM models. The study

suggested that it’s very important for Pakistan to invest in education and health sector from

its budgets for long-term benefits for the economy.

Pakistan has a population of over 220 million. But it is utilizing almost or less than 20% of

its workforce on the professional, managerial and technical positions, a Major portion of

its workforce is engaged in the industrial and agricultural workforce at the front line (Afza

& Nazir, 2007). Pakistan is situated in South East Asia and the majority of this workforce

is comprised of the labor force, the majority of countries in this region have a labor-

intensive economy. As compared to other economies of South Asia, Pakistan is in a better

position, as it is using its workforce at technical, administrative and professional positions.

However, improvement is still needed in many areas. The current education system has to

be modified and upgraded, the industry and academia should bridge the gap and work

together for the development of the required skills and technical expertise needed. New

institutes for training and development should be established. Pakistan is in the top ten

(9th) labor forces of the countries of the world (Brinkhoff, 2013).

The education sector is dominated by poor infrastructure, ghost teaching staff in many

village schools, poor teaching staff and very inadequate learning outcomes (Arshad, 2016).

8

In the health sector, government spending was 1% of GDP in 2013, which makes it the

lowest spender in the health sector in the world. The outcomes of the health sector have

improved but showed very low improvement in nutritional outcomes. Which is not

improved since two decades, and even worsened. According to the survey on National

Nutrition, the 44% of child stunning rates remained static since 1965, with 15% acute

malnutrition in under 5 years of age. The official statistic suggested reduced poverty rates.

Reductions in poverty have been strong in both urban and rural areas, and the fall in rural

poverty from 40 to 16 percentage points between 2002 and 2011 is particularly striking.

This decline in poverty is confirmed when examining the poverty headcount according to

the international poverty line of $1.25 per capita. According to this metric, poverty in

Pakistan declined from 36 % in 2002 to 11 % in 2011. Pakistan now has the second lowest

headcount poverty rate in the South Asia region, after Sri Lanka (4 %). A large mass of the

population moved from just below to just above the official poverty line, which is why

small improvements in households’ real consumption. Despite increased growth in many

sectors, Pakistan is faced with the problems of very low human development and very low

labor force participation and economic growth. It ranked 146 out of total 187 countries in

2014. Which is lower than most of the South Asian countries. Access to education is very

low with primary completion very low. Government spending on education is 2.1 % of

the total GDP in 2013 (Wikipedia, 2017).

Physical Resources

The major resource of Pakistan’s is its arable land and water. Pakistan has a larger

irrigation system with 25% of arable land under cultivation. It irrigates almost three times

more acres than, Russia with a favorable climate, agriculture contributes 23 % in the GDP

and employs 44% of the total workforce of the country (World Bank, 2008). The country

is endowed with a large number of mineral resources and a very promising area for

exploration of mineral reserves. The country is gifted with almost 6,00,000 km² of the

outcrops area demonstrates a geological potential of different varieties metallic and non-

metallic mineral reserves (Wikipedia, 2017).

9

Knowledge Resources

There is a dire need to increase research and development culture in Pakistan to

increase exports (Manan, 2013). There are a large number of research institutions set up at

federal and provincial level by the government, but the main problem is inconsistent

financial support from the government, lack of linkage between academia and industry and

lack of funding for market-based surveys. The science and technology board of

management has made significant efforts for the development of national science policy

(Butt, 2015).

Capital Resources

The banking sector of Pakistan remained very strong during the financial crises of

2008-9, attracting a huge amount of FDI (Wikipedia,2017). The consumer financing

greatly flourished in the country during the last few years due to the privatization of banks.

There is an inadequate finance to many sectors. The FDI is the major external source of

finance, which can help modernize the industries and it helps to integrate the economy in

world markets. Pakistan had taken reasonable steps to increase the amount of FDI. It is

categorized as one of the top ten destinations of Asia (SBP, 2017).

Infrastructure Resources

The Pakistan telecommunication industry has shown remarkable growth due to

regularization measures. In 2008 mobile subscribers reached 140 million in 2014, which

was the world’s highest mobile tele densities (Wayback machine,2010). There are above 6

million landlines having 100% fiber-optic network. Which provide coverage to the

remotest areas of the country (Wikipedia, 2017). There are almost 3.1 million fixed line

users, additionally 2.4 million wireless users. The liberalization measures had attracted

almost $90 million FDI During 2007-8 (Wikipedia, 2017). This sector attracted $1.62

billion FDI which almost 30% of the FDI received by the country. The Current growth of

state-of-the-art infrastructures in the telecoms sector is due to the efforts of PTA’s vision

and implementation of the updated policy. Internet and mobile phones were adopted with

10

laissez-faire policy. There is a rapid increase in internet users with an increased number of

people speaking in English; the Pakistani society has shown a remarkable revolution in

communication. In terms of growth in broadband internet, Pakistan is ranked 4th in the

world (Wikipedia, 2017). In 2009 the country had 20 million internet users with the

capability of absorbing 50 million in the next 5 years (Wikipedia, 2017). Every government

department has their own website. The used of search engines and messaging devices is

accelerating very rapidly. This sector had provided almost 80000 directly and 500000 jobs

indirectly (Wikipedia, 2017).

Supporting and Related Industries

An efficient and modernized communication and transportation system is a key for the

success of a country. Public and private investment in this sector greatly reduces

transportation cost and also generates employment. Pakistan has reasonably developed its

transportation infrastructure. The country bears a load of almost 239 billion passenger

kilometers domestic transport and 153 billion kilometers per year. The demand for

domestic transportation services, higher than the growth in GDP. The road transport

system plays a vital role in the overall transport system. The network of about 3.65% of

the total road network in the country. It carries loads of about 80% of the total road traffic.

Over the last few decades, the freight and passenger traffic has significantly grown even

more than the national economy. But there is negligence in the other modes of

transportation; the government is now trying to improve them as well. The port traffic is

increasing at the pace of *8% per annum. There are three major ports efficiently working

including Karachi, Port Qasim, and Gwadar port. There are also 14 dry ports working to

cater to foreign trade. Pakistan Railways (PR) provides service for inland transportation,

which cheaper than land routes. It consists of the main North-South corridor, which

connects the Karachi port and the primary production and different population centers

within Pakistan. There are 36 operational airports in the country which handle both

domestic and international cargo (Pakistan Economic Survey, 2007-8).

11

Firm Strategy and Rivalry

According to the world bank, Pakistan had made a significant progress in doing

business index in medium and small size business. It is included in the top ten improvers

of the world. The country has also announced a roadmap for the next three years for further

improvement in the global ranking of doing business. The country has also implemented

reforms in the last three years for registering property, trading across the border and getting

credit (Wikipedia,2017).

The introduction of digitalization process land transferring and other land has improved

and became more reliable. Introduction of cross-border electronic custom platforms both

in Karachi and Lahore had decreased time for fulfilling border regulation. The government

of Pakistan has also improved access to credit information and provided a legal guarantee

to borrower right for the inspection of their data. This has also increased the country

ranking in getting credit. Despite these efforts, the domestic businessmen still face many

problems in different areas including enforcing the contracts and also getting electricity. It

also takes almost 3 years to clear a dispute in Pakistan as compared to world average of

637 days. The companies in Karachi and Lahore faces power outages on a daily basis

(Pasha & Saleem, 2013).

Government Policy

Amjad.et.al (2012) performed a firm-level survey using data from Pakistan and

suggested that the key impediment to Pakistan export competitiveness are, skilled labor

shortages, energy crises, poor infrastructure, and market imperfection. Which needs a clear

and practical government policy to be devised to solve these problems, and help to expand

the export market of the country. The growth strategy of Pakistan followed a pattern of

sector-picking for the sake of import substitution and later for export promotion. This kind

of policy results in negligence of other sectors and distortion of incentives in the public and

12

private sectors. There is an urgent requirement of deregulation of subsidies and tax

incentives for true innovation and entrepreneurship (Hussain &Ahmed, 2011).

Hussain (2017) identified that the decline in the international price of oil and gas were

not passed to exporters of the country, who are not able to take advantage of cost-saving

and innovate new product to be introduced in the market. Exporters are continuously

stressed by the government to increase their exports, but they are continuously faced with

the problem to load-shedding. Additionally, their inconsistency and lack of coordination

between various government policies. Import tariffs are purely driven by or protection of

domestic, import-substituting industries or revenue mobilization. It is not being realized

that a restrictive import regime with the tariff, nontariff and regulatory barriers, and

customs clearance procedures which are very cumbersome and with autocratic powers

enjoyed by low-level customs officials which are amenable to corruption, would restrict

entry of Pakistan into the global market. Large-scale manufacturer enjoys higher tax

incentives which restrict medium-sized firms to attain economies of scale.

13

Conceptual Framework

Based on the above discussion the following conceptual framework was designed

H1

H3

Figure 2 Conceptual Framework

Human resources

Physical resources knowledge resources

Capital resources

infrastructure

Skilled labor

technology

Supporting industries

Related industries

Irrigation system

Home demand

composition

Demand size and

pattern

Internationalization

of domestic demand

Intense competition

Quality and

quantity of

products

Industry status

RTAs

Tariffs

Accountability and transparency

Factor conditions

Government Policy

Demand conditions

Supporting and related

industries

Firm strategy,

structure and rivalry

National

Competitive

Advantage

in Trade

14

Hypotheses

Based upon the discussion above and the conceptual model following hypotheses was

generated

H1= Factor endowment has a significant relationship with National competitive advantage

in trade.

H2= demand conditions have a significant relationship with National competitive

advantage in trade.

H3= Supporting industry has a significant relationship with National competitive advantage

in trade.

H4= Firm strategy, structure, and rivalry has a significant relationship with National

competitive advantage in trade

H5= Government policy has a significant relationship with National competitive advantage

Methodology

Exports are the important driver of the economy, which helps to boost the level of economic

growth, the balance of payment and employment. After independence Pakistan had faced

since its independence in 1947. At that time, the economy was based on agriculture. The

economy had shown a positive growth since independence and developed as a semi-

industrialized country, which was greatly based on agriculture, food products, and textiles.

But it is not able to bridge a gap between itself and developed countries. As export is one

of the components of aggregate demand, an increase in exports will increase economic

growth. The export growth also accelerates service sector and benefit the local economy.

There are many factors which will determine the level of exports conducted by the country

are its - Competitiveness, value addition of exports, exchange rate, sustained productivity

15

and economic growth. The balance of trade compares the value of a country's export of

goods and services against its imports. When the export of the country is greater than its

imports the country tends to have a positive or surplus balance of trade. The surplus

balance of trade is beneficial for the economy, but unfortunately, Pakistan is facing the

deficit balance of trade since very long. A serious effort is required to overcome this

situation. In this regard series of steps has taken by the government to liberalized trade

The study had analyzed different industries of Pakistan and India with an intention to

identify sources of competitive advantage of Pakistan by applying Porter National diamond

model. The ultimate purpose was to ascertain that after so many trade liberalization efforts

and implementation of SAFTA there exist trade creation or trade diversion in Pakistan.

The current study had used secondary data. The panel data was collected for the period

2005 to 2015. 5 Pakistani industries were selectedincluding textile, Sugar and Sugar

Confectionaries, Inorganic Chemicals, edible fruits and nuts, food and agriculture. In

assessing the competitiveness of different industries, Revealed Comparative Advantage

(RCA)was calculated. Which was also used by Mukhtar and Javed (2009) Rattanavijit,

Somboonwiwat and Khompatraporn. (2012).

Table 1 Variable Proxies Data Source and references

Variables Components Proxies Sources References

Factor

conditions

(FC)

Human Resources

(HR)

Labor force

Participation

rate

World bank Wijinads, et.al

(2005)

Tuerck et al.

(2007b, 2008)

16

Education

Index

HDR Report Wang, Chaing,

and Yin (2004)

GDP Per

Capita

World bank Wijinads, et.al

(2005)

Physical Resources

(PH)

Agricultural

land

World bank Wijinads, et.al

(2005)

Gawad, lkhteeb,

Intezar (2014)

Knowledge

Resources (KR)

R&D

expenditure

(% of GDP)

World Bank Wijinads, et.al

(2005

Balcarova (2013)

Capital Resources

(CR)

Getting

credit

World bank Wijinads, et.al

(2005)

FDI Inflows

(billion

USD)

World

Development

Index

Wijinads, et.al

(2005)

Infrastructure (IF) Internet

Users per

1000

individuals

World

Development

Index

Wijinads, et.al

(2005)

17

Demand

conditions

(DC)

Home demand

composition (HD)

Total

population

(million

people)

World bank Wijinads, et.al

(2005)

Vu and Pham

(2016

Demand Size and

Pattern (DSP)

GDP (billion

USD)

Pakistan

Bureau of

statistics

Vu and Pham

(2016)

Internationalization

of Domestic Demand

(IDD)

Total export

value

industry

(billion

USD)

Pakistan

Bureau of

statistics

Vu and Pham

(2016)

Home Demand

Composition (HDC)

GDP per

capita (USD)

World bank Wijinads, et.al

(2005)

Vu and Pham

(2016)

Related and

Supporting

Industries

(RSI)

Domestic Supporting

Industries (DSH)

Mobile

subscription

World bank

Related

industries(RI)

Rail lines

(total route-

km) and

Roads,

World bank Wijinads, et.al

(2005)

Balcarova (2013)

18

Sources of Data

paved (% of

total road

Firm

structure,

rivalry, and

strategy

(FSRS)

Domestic Rivalry

(DR)

The

intensity of

local

competition

Prices of

products

Wijinads, et.al

(2005)

Business Context

(BC)

World bank

DTF points

World bank Vu and Pham

(2016)

International Rivalry

(IR)

Market share

of the

country in

the global

market

World bank Vu and Pham

(2016)

Government

Policy (GP)

Regional Trade

Agreement (RTA)

Dummy

variable

World bank Herath, Liang,

Yongbing (2014)

Tariffs (TF) Average

Tariff Rate

World Bank David (2007).

National

Competitive

Advantage

In Trade

(NCA)

Exports Revealed

comparative

advantage

Pakistan

statistical

bureau

Mukhtar. and

Javed (2009)

Rattanavijit et al

(2012)

19

The work was based on secondary data, various data sources were used in the work.

The list of data sources is given below:

• World Integrated Trade Statistics (WITS)

• UN COMTRADE.

• Bureau of Statistics Pakistan.

• State Bank of Pakistan.

• Pakistan Economic Survey.

• Trade map

Data

The population of this work was industries of Pakistan. The work had tried to find the

source of competitive advantage in different industries of Pakistan, applying national

diamond model presented by Porter (1990). The panel data was used to analyze the export

competitiveness of Pakistan.The sample consists of five industries from Pakistan. The

industries include Agriculture, textile, Sugar and Sugar confectionaries, Edible fruits and

nuts and inorganic chemical industry. The sample consists of five industries from Pakistan

for the period 2005-2015.The sampling techniques used for the analysis were purposive

sampling. In order to analyze industries of Pakistan.

The data were collected from the sources mentioned above. After the collection of the

data, the thorough check was done for identifying error entries, outliers etc. The z- values

were calculated for standardization. After those descriptive statistics were calculated for

checking the normality of the data. The correlation matrix was also calculated between the

independent variables for the detection of the multicollinearity problem. In order to select

between fixed effect or random effect model, the Hausman test was calculated. In order to

check before applying the model data should be tested for Stationary and autocorrelation.

20

For stationary unit root test and for testing of autocorrelation Durban Watson test was used.

Individual variables were tested for stationary.

The Multiple Regression Analysis.

This work had used a fixed effect model panel data, Housman’s test was applied to

select between fixed and random effect model for the analysis and fixed effect model was

preferred. For a fixed effect model, the values of Bayesian criterion (SBC) Akaike

information criterion (AIC), Schwarz and Hannan-Quinn criterion (HQC) were also lower.

By including fixed effect, the average differences across variables were controlled in any

observable or unobservable predictors. The Fixed Effect Model greatly reduced the threat

of omitted variable bias. This work will use the linear regression model, but Following

model will be used:

NCA = α0 + α1 (FC) + α2 (DC) + α3 (FSRS) + α4 (RSI) + α5(GP) + u

Where:

FC = HR + PH +KR + CR + IF

DC = HDC +DSP+ IDD+HDC

RSI= SH+RI

FSRS = DSI +RI +IR +BC

GP =RTA + SD + TC

RESULTS

This section will apply the methodology identified in the previous section. The results

will be analyzed and discussed thoroughly. The regression analysis is a technique used to

identify the variation independent variable caused by individual or more than one

21

independent variables. Before calculating regression, the normality of the data was checked

the descriptive statistics for each model was calculated. For checking the problem of multi-

collinearity Pearson correlation test was applied. ADF test was applied to check stationarity

of each variable.

Table 2 Summary Statistics Pakistan

Variables Mean Median Min Max SD skew Kurt

FC 6.3e019 -0.026 -0.0784 0.193 0.077 0.270 1.022

DC 7.2e-008 0.0378 -0.0378 0.274 0.183 -0.051 -1.361

SRI -9.0e-009 0.0090 -

0.186

0.106 0.081 -0.903 0.202

FSSR 0.0042 -0.002 -0.396 0.263 0.114 -0.901 2.000

GP -0.0002 0.0060 -0.104 0.060 0.048 -0.595 -0.433

Table 5.6 shows the summary statistics of Pakistan. In order to check the normality of the

data the value of kurtosis was analyzed and suggests that all the variable shows less than 2

value. This suggests that the data is normally distributed.

Table 3 Correlation Matrix Pakistan

FC DC SR FSSR GP

FC 1.00 0.65 -0.31 0.14 -0.47

DC 1.00 0.021 0.34 0.19

22

SR 1.00 0.30 0.51

FSSR 1.00 0.22

GP 1.00

Table 5.7 shows the correlation matrix of explanatory variables of the overall Pakistan

model. The result suggests that the problem of multicollinearity is not present in the data.

Table 4 Regression Results

VARIABLE Coefficient Std. Error t-ratio p-value

FC −0.01 0.074 −0.12 0.89

DC 1.14 2.19 0.51 0.60

SR 0.23 0.83 0.28 0.77

FSSR −0.64 1.13 −0.57 0.56

GP 2.44 0.74 3.27 0.002

Adjusted R-squared 0.28

F statistic 5.23

P-value (F) 0.00

Durbin-Watson 1.79

23

Table 5.10 presents regression results Pakistan. The adjusted R square was 28.14 %, which

suggests that almost 28.14 % changes in the selected data were due to above motioned

explanatory variables. The coefficient for factor conditions variable is −0.01 and shows a

negative relationship between factor condition and competitive advantage. The coefficient

of demand conditions is 1.14 which shows that there is a positive relationship between

demand conditions and competitive advantage. The coefficient for supporting and related

industries is 0.23 and shows a positive relationship with the competitive advantage of the

country. The coefficient for firm strategy and rivalry is −0.64 and shows a negative

relationship with the competitive advantage of the country. The coefficient for

government policy variable is 2.44 and shows a positive relationship with the advantage of

the country. The overall model is statistically significant with F value of 5.23 and P-

value 0.00. The T-statistics show that only government policy is statistically significant

at 5% significance level. The DW statistics suggest the data is free from Auto Correlation.

Regression Analysis

The results of the fixed effect model show that overall model is significant, which

suggests that, Pakistan’s national comparative advantage can be explained by the

independent variables tested and identified in the model. This favors the national diamond

model presented by Porter (1990). The regression results for Pakistan suggested a

significant impact of factor conditions, demand condition, supporting and related industries

and government policy on the national competitive advantage. This shows that Pakistani

exports are positively affected by the abundant natural resources available in the country

which supports the results of Zia (2006) who also suggest that Pakistan is factor driven

country and there are signs of growth in the economy. This also supports the results of Raja

(2015) that Pakistan is endowed with fertile soil, climate, hardworking human resource

working in the areas of information technology, finance and engineering, who is providing

a strong base for exports. The variable of factor conditions suggests an insignificant

24

negative relationship with the national competitive advantage of Pakistan. This contradicts

the results of Abbas and Waheed (2015), who suggested a positive relationship between

the irrigated land area and exchange rate against US dollars with the export competitiveness

of Pakistan. It also contradicts the results of Afridi (2016). Who found a positive

relationship between different factor conditions, including human capital on the economic

growth of Pakistan and suggested an investment in education and health sector to achieve

long-term benefits. As the p-value is greater than 0.05 therefore, the hypothesis of a

significant relationship between factor conditions and the national competitive advantage

is rejected. The reason might be unskilled labor situation with an increase in the flight of

both skilled and unskilled human capital to developed countries suggested by (Husain,

2001). As compared to India and China the development of human capital is very weak,

with very low productivity. There is also a very slow growth in private investment with

poor infrastructure which are major impediments to the growth of the economy (Chaudry,

2007). As suggested by Afza and Nazir (2007) that despite having a large population

majority, Pakistan has utilized only 20% of its population on professional, managerial and

technical positions, a Major portion of its workforce is engaged in the industrial and

agricultural workforce at the Frontline. Financial resources for the business sector are also

rudimentary and very restricted as compared to countries following export growth led

policies. FDI can be identified as a potential external source of finance and continuous

inflow of its help in value addition of much industry, transfer of technology and

improvement of labor skills but Pakistan is also lagging behind to attract the potential

amount of FDI. Additionally, Pakistan is not efficiently in research and development as

compared to East Asian countries, for the achievement of sustainable growth (Mahmood

& Ahmed, 2017).

The results of demand conditions suggest positive and insignificant with national

competitive advantage. This suggests that demand conditions are not playing a significant

role in the national competitive advantage of Pakistan. This contradicts the results of

Abbas and Waheed (2015) suggested who suggested a negative relationship between

domestic consumption demand with the export competitiveness. The reason might be the

low technology production trap identified by Zia (2013), the preference of buyers to

25

purchase to export items, lack of purchasing power of the majority population due to high

poverty levels. Therefore the hypothesis of a significant relationship between demand

conditions and the national competitive advantage is rejected

The variable of supporting and related industries suggests a positive but insignificant

relationship with national competitive advantage national competitive advantage. The

reason might be the critical challenges faced by the transport and logistics sector include

non-declaration of transport and logistics as an industry by the government, lack of proper

investment in transport infrastructure by the government, no government licensing

authority for freight cargo transporters, no official law enacted for transport sector in

Pakistan, outdated legal framework for carriage of goods by roads, lack of rail services and

logistics to transport containers from ports, damage of roads and other infrastructure due

to floods, run down roads and transport network, restrictions on provision of bonded

transport, high cost for less than container load, non-operation of Pakistan Railways on

commercial basis, lack of road safety devices, resulting in road accidents (Masood ,2011).

Therefore, the hypothesis of a significant relationship between related and supporting

industries and the national competitive advantage is rejected

Firm strategy and rivalry show a negative and insignificant relationship with the national

competitive advantage of Pakistan. Therefore, the hypothesis of a significant relationship

between firm strategy and rivalry and the national competitive advantage is rejected. The

reason might increase the cost of doing business in Pakistan identified by the Department

of International Trade (2015). Mahmood and Ahmed (2017) also identified the increased

cost of setting and running a business in Pakistan, which might be the result of high

inflation and poor security situations. National Tariff Commission (NTC),(2015) also

identified the high cost of doing business and the very unfriendly socioeconomic

environment in Pakistan.

The variable of government policy shows a positive and significant relationship

with national competitive advantage showing government positive role in increasing the

national competitive advantage of the country. The reason might be the liberalization

26

policies introduced in the country. It is also supported by Pakistan country report (2010),

whi9ch suggest that the country is trying to adopt trade liberalization policies, privatization

of many public owned organizations and attracted FDI which might have impacted the

positive impact on the national competitive advantage. According to Mahmood & Ahmed

(2017), increased tariffs had restricted the imports of certain items which boosted some

domestic and increases exports of the country, but in the long run, they will seriously

damage the competitive advantage of the country so applied tariffs should be decreased.

Amjad.et. al (2012) performed a firm-level survey using data from Pakistan and suggested

that the key impediment to Pakistan export competitiveness are, skilled labor shortages,

energy crises, poor infrastructure, and market imperfection. A clear and practical

government policy should be devised to solve these problems which help to expand the

Pakistan export market. Another issue identified by Husain and Ahmed was sector picking

for export promotion which boosts exports of the certain sector but seriously damages

others. Therefore, uniform policies should be devised for the balanced growth of the

economy. The benefits of decreased Soil prices should be passed to manufacturers for cost

saving (Hussain, 2017). Another issue of customs clearance and shipping documentation

should also be revised for better performance. Therefore, the hypothesis of a significant

relationship between government policy and the national competitive advantage is

accepted is rejected.

Conclusion and Recommendation

The main aim of this work was to identify sources of competitive advantage for

Pakistan by applying porter diamond model. Panel data was collected from 5 Pakistani

industries. The independent variable was national competitive advantage in trade which

was calculated by revealed comparative advantage. The independent variable includes

factor conditions, demand conditions, supporting and related industries, firm structure,

strategy and rivalry and government policy. In order to develop variables different proxies

were identified, and composite variable was developed. Fixed effect model was applied

and the results suggests only government policy is playing a significant role in determining

nation competitive advantage in trade. Therefore, Pakistan can devise its policy for the

27

improvement of all the other variables for the attainment of sustainable national

competitive advantage in trade

Recommendations

Trade integration is very critical for the economy as it will help countries to cooperate

and offer more products at reasonable cost and efficiency in the international market. The

government of Pakistan is trying to liberalize their trade policy, but still, results are not up

to the expectation. Therefore, a serious revision of policies and their implementation is

required to achieve the benefits of trade liberalization. In order to improve Factor

conditions, both countries should improve the education system and allocate more budget

for education and health, increase number of training institutes should be established, for

the improvement in human resource skills. Health reforms should be introduced for the

improvement of the quality of the labor force. In order to improve per hectare yield of the

crops, the farmers should be given easy credit and facilitated with superior quality seeds.

The communication gap between research and development and the farmers should be

eliminated for better results. Additionally, the feudalism system should be monitored and

regulated and farmers should be given lands. Credit availability should be eased for

entrepreneurs. For the improvement in demand conditions, population growth should be

monitored, the Strict quality standard should be maintained and regularly monitored. For

increasing international demand for domestic products. Increase employment opportunities

should be created for increasing the purchasing power of the people, Consumer friendly

policies should be introduced. Working of consumer courts should be enhanced, for

consumer protection. Transportation system should be upgraded. Technological

advancement should be incorporated in every field of life for better results. More dams

should be constructed, solar power should be used for electricity generation. Other sources

of energy like wind, biogas, coal should be used for generation of power for industries. A

business-friendly environment should be maintained within the country. More industrial

zones should be established, with the facilitation of energy availability and tax benefits.

Government procedure should be simplified. The Private sector should be involved and

public-private coordination should be established in different industries. In order to

28

improve government policy, a rigorous policy should be designed for the improvement of

infrastructure and business environment of the country. The unnecessary intervention of

the government should be restricted. The Prices of sugar or wheat should not be utilized as

a political tool, unnecessary tariffs should be abolished against each other. More RTAs

should be signed for an increase in regional integration, Unnecessary non-tariff barriers

should be abolished, Research grants should be given priorities for increasing the

competitiveness of the country, Measures should be taken to decrease corruption,

accountability and check and balance should be maintained for government officials,

efforts should be made for maintaining normal law and order situation will attract new

investment. It will also decrease the brain drain from the country.

Direction for Future Research

Future research should be conducted by applying other models like a double

diamond model and nine-factor model for better understanding of the factor affecting

competitive advantage in trade for Pakistan. Further research can also be done by adding

more items to the development of variables to Potter National Diamond model. More

industries can be included for a better understanding of the Pakistani economy.

Limitation of the Study

There are some limitations of this work which cannot be overlooked, the major

limitation is that few industries were selected from both countries, although the sample was

representative, still, the results cannot be generalized to the whole economy, other

industries have their own resource requirements and management practices. The future

studies can be directed toward other industries. The second limitation was that the majority

of the data was unorganized and undocumented in both countries, due to which limited

items were included in the development of variables. The third limitation of the study was

ill legal trade patterns between Pakistan and India and was not included. Lastly, another

limitation was political tensions between both countries, due to which trade was suspended

at different time periods during the study period.

29

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