Analysis of Pakistan’s Industry

LECTURE 1 : Basic concepts , classification and theories

of Industry

Masood Ahmed Siddiqui

What this course will be about
• Basics concepts about Industry , Firm and Business
• Refresher of Economics of Industry
• Firm theories
• Firms' characteristics
• Firms and markets
• Comparative advantage , Firm productivity , competitiveness
• Trade and globalization and role of Industry in growth

• Analysis of key Pakistani industries

• Writing of an industry policy paper
What will we do ?
• Collection and analysis of industry and firm data to see patterns and trends (descriptive
analysis of data).
• To compare what are the best industrial practices worldwide that make industry globally
competitive and how far behind Pakistan’s industry are from these global practices.
• A comprehensive review of the major industrial Policies in Pakistan in order to analyse
how effective these policies are.
• Talk with industry experts in order to gain a firsthand knowledge about the problems
industries are facing in this country.
• Visit of some factory/company in Karachi
• Open house poster session on different industries in Pakistan.
• I will require students to make groups and each group should work on some particular
industry of their choice right from the beginning of the course
Definitions and key concepts
• What Is an Industry?
• An industry is a group of companies that are related based on their
primary business activities. 
• Similar businesses are grouped into industries based on the primary
product produced or sold. 
• Stocks of companies operating within the same industry tend to
have similar stock price movements. Stocks within the same
industry often rise and fall as a group because the same 
macroeconomic factors impact all members of an industry. 
• Difference between industry and sector
• The terms industry and sector are often used interchangeably to describe a group of
companies that operate in the same segment of the economy or share a similar
business type. The term sector often refers to a larger, general part of the economy,
while the word industry is much more specific.
•  Essentially, industries are created by breaking down sectors into more defined
groupings.
• Example :
• The financial sector can be broken down into several different industries such as
banks, asset management companies, life insurance companies, or brokerages. The
companies that fall into the same industry compete for customers by offering
similar services.
•  Industries can be further categorized into more specific groups. For
example, the insurance industry can be broken up into different,
specialized divisions like home, auto, life, malpractice, and
corporate insurance.
Sectors
• A sector is one of a few general segments in the economy within which economic activity is
caried out and economic agents interact. There are four different sectors in an economy:
• Primary Sector: This sector deals with the extraction and harvesting of natural resources
such as agriculture and mining.
• Secondary Sector: This sector comprises construction, manufacturing, and processing.
Basically, this sector comprises industries that relate to the production of finished goods
from raw materials.
• Tertiary Sector: Retailers, entertainment, and financial companies make up this sector.
These companies provide services to consumers.
• Quaternary Sector: The final sector deals with knowledge or intellectual pursuits
including research and development (R&D), business, consulting services, and education.
•
Classification system of Industry
• The fundamental unit of an industry is an ESTABLISHMENT or an ENTERPRISE
• Establishment or an Enterprise is the statistical unit in an industry from which data is
collected regarding PRODUCTION , RAW MATERIAL & INPUTS , LABOR & WAGES etc
• Establishments (or statistical units) that produce the same good or type of good
regardless of material and techniques are grouped in the same industry in
classification codes
• EXAMPLE:
• such as “the furniture industry”, which would refer to all units classified in Pakistan’s
classification system called PSIC division 31 (Manufacture of furniture), or the
“construction industry”, which would refer to all units classified in PSIC section F
(Construction).
INTERNATIONAL STANDARD
INDUSTRIAL CLASSIFICATION SYSTEM
– ISIC
• Pakistan’s system of industrial classification is based on the international standard
of industrial classification (ISIC).
• Economic activities are subdivided in a hierarchical, generally five-level
• categories at the highest level are called sections, which are alphabetically coded categories e.g
“Agriculture, forestry and fishing” (section A),
“Manufacturing” (section C)
“Information and communication” (section J).

• Detailed categories, which are numerically coded:

two-digit divisions;
three-digit groups;
four-digit level classes and,
the greatest level of detail, five-digit subclasses
The input and product data required to homogenize establishments is obtained from National accounts
Broad industrial
classification in
Pakistan
Detailed
industrial
classification in
Pakistan
Detailed
industrial
classification in
Pakistan
Data sources:
• Pakistan bureau of statistics (PBS)
• UNIDO (United nations industrial development organization)
• World enterprise survey
• UNCTAD , COMTRADE
• https://www.trade.gov/country-commercial-guides/pakistan-market-
overview
• http://www.moip.gov.pk
Theory of Firms

• Two goals of a firm :

• Short term goal = profit maximization
• Long term goal = sustainability in the market
Cost & Revenue
Profit maximization occurs where there is the
maximum distance between the slopes of the two
TC curves. At this point the slopes of the two curves
are equall so the
MR
R
PROFIT MAXIMISING POINT IS MC= MR
T R The OR-OC is the maximum profit , after which the
C
MC profits keeps on declining when TC = TR at this
point the firm is earning zero profits.
O Q
Theory of Firms
• But firms and businesses do not have profit maximization as the main
goal. There is lot of criticism on the profit maximizing firm theory
• If firms maximize profits they wont be investing in capital. Utlimatley, they
have to survive in the market only if they make capital investments in their
business
• Most industries are oligopolistic : don’t maximise profits but collude on
certain profits among them. Automobile , sugar , flour industry in Pakistan is
an example
• Managers and BOGs control and manage businesses not the actual owners in
todays corporate world. Profit maximization is not the goal of these managers
but company prestige , market competition and innovation
How do Firms and industry grow
1) Static cost curve theory
• Firm will grow to U-Cost curve- Means it will grow until cost declining to scale. If cost started rising it will stop to grow
further. Also until when profit maximize
• Thus firm grow to relation C= αXβ when β> 0; increasing return to scale
• Physical Capital inputs have no limits so firm can grow due to economies of scale (wheat can be imported if less urea is
imported if less oil imported in local energy short)
• Human capital input/Managerial less limits or when exhausted creates diseconomies of scale.

2) Dynamic cost curve

• Firm reduces cost size due to learning new technologies not by expanding from given resources (economies of scale)
• Firms grow when they explore rather exploit resources, managers came up with new ideas and new technologies to do
business (whether or not they are same about their success)
• Learning curve is useful to calculate cost/unit of output.
LC is steeper because employees are not able to produce
more output because they are learning (although AVC is
declining)
Then when they learn the slope get more flat as output
increases more or cost/output declines faster. Then it
became completely flat when no more cost reduction is
possible
Marginal and average cost of production: two
important decisions in firm productivity
• The marginal product (MP) of a variable factor
• measures the increase in output from a small increase
• in the variable factor.
MPl = q/ l
MPl is the slope of the short-run production function.
• The average product (AP) of a variable factor, measures how much output each unit of input yields
• on average.
APl = q / l
• APl is the slope of the line from the origin to the corresponding point on the production function.
Firm production decision based on marginal
and average productivity to maximise profits
Firm production decision based on marginal
and average productivity to maximise profits
When we talk about GDP growth, or investment rates, or export
growth, we sometimes slip into language that gives the impression that
these are instruments rather than the outcome of a complex process
that we are only beginning to understand. What are ultimately behind
this complex process are people and firms. Growth, investment, and
exports are the outcome of the processes by which people with ideas
start firms; some of them turn out to be successful because they are
able to deliver products for which global customers are willing to part
with their hard earned money. When this happens systematically for a
large number of firms, growth takes off. This, in a proximate sense at
least, is what has happened in some countries, such as China, but has
generally failed to occur in many countries around the world.

(POLICIES FOR PRODUCTIVITY GROWTH By Chang-Tai Hsieh )

Some important questions regarding firms
and industrial growth
• How and why some firms become more productive, and some
couldn’t
• Why are barriers for the productive firms to access resources that
they need ?
• What are the constraints that prevent individuals with the potential to
create world class firms
Firm productivity
• Resources should be allocated to firms with high productivity i:e output
per worker from the firms that have low productivity. Misallocation of
resources among firms is one of the main reasons of poor industrial
productivity
• Firm or business productivity is measured by
Average revenue productivity (ARP) = PQ / inputs (labor and capital)
• When resources are misallocated among firms in an industry ARP
differs among firms and that industry has poor growth. So resources
must be reallocated among more productive firms.
• By this reallocation ARP is equalized and industry grow
Problems of industrial productivity and
growth
• Why industrial growth in the US is higher than it is in India and China?
there are substantial gaps between firms in revenue productivity in India and China. These
gaps are also present in US data, but to a much smaller extent.
• If larger and powerful firms receive more resources of the economy than the smaller but
capable firms industry growth is negative
• Rigid labor laws in developing countries prohibit labor movements from less to more
productive establishments (government sector employees in Pakistan- the unionism in
many organistions in Pakistan)
• State owned firms usually less productive but have more control over resources
• Most developing and poor countries have large informal sectors. Firms in the informal
sector are less productive and capture more resources than formal firms.
• Problems of skill mismatch , gender and race selection in employment
Problems of industrial productivity and
growth
• Average productivity growth of firms in Pakistan
IMPORTANT STATISTICS OF INDUSTRIAL
PRODUCTIVITY AND GROWTH
data sources:
Pakistan bureau of statistics pbs.gov.pk
economic surveys of Pakistan
census of manufacturing industries
Labor force survey datasets and reports
To find these data for the industries and different sub industries
in Pakistan refer to the reports of Economic survey of Pakistan
Descriptive analysis of industrial data
• Industrial manufacturing value added MVA
• Growth rate
• Trend line
• Moving averages
• Computation of TFP (Paul Krugman method of growth accounting)
GDP Growth = Growth in Labour Input + Growth to Capital Input + Total Factor Productivity
(TFP)
• Growth comes about either through the application of more inputs or through a rise in output per unit of input i.e. improvements
in TFP
• The labour input variables captures all the influences that increase either the quantity or quality of labour used in the production
process. These include growth in population rising participation rates, growth in employment and improving levels of education
• the stock of physical capital used in production and is measured by spending on plant, machinery, equipment, roads, and
telecommunications and so on.
Calculating industrial growth statistics