Global International Finance Context

Introduction

In this report, we will evaluate the possibilities of setting up a soft drink industry in Pakistan. We will look upon the overall competitive advantages in the country and advised on the possibility if the soft drink will be a lucrative business to put their investment in.

In part 1, we will analyse the current Pakistan situation by applying the Porter’s National Diamond model to the Pakistani soft drinks industry. With the results, we will be able to make clear recommendation in part 2, on the type of Foreign Direct Investment (FDI) to Kraft Food Group to enter Pakistan also illustrating the Pros and Cons of using FDI.

Part 3 of this report will then identify 2 Key issues that the company management should take extra caution on, before beginning their operation Pakistani soft drinks industry.

Part 1: Porter’s National Diamond (PND) Analysis

By using PND as the basis framework (as shown in Fig. 1), we identify the determinants of the national competitiveness with respect to the Pakistani soft drinks industry.

[pic 1]

1.1 Porters National Diamond Analysis

1. Factor (Input) Conditions

1. Pakistan World Top 10th Largest Labour Force

Pakistan is the 10th largest country in the world by their labour force. According to statistics, a total 9 million people join the Pakistan labour force from 2006 to 2013; this gives the country a strong labour force of 59.7 million people.  In the same 7 years period, employment also increase to 56.0 million, which also means there will be a possible labour force of estimated 3.73 million people ready for employment.

Unemployment rate increase since 2006 till date, this is mainly because the employment sector was not able to cope up with the population changes.  (Pakistan Ministry of Finance, 2015)

It is good to know we have a ready pool of labour force in the market, so we know filling up job opening will be fast, however, at the same time we should not be ignoring the rising unemployment rate in the country.  The increase of unemployment shows that the potential market was not fully utilized and this could also cause more complex issue like rising of criminal offences and instability of the economy.

1. Low minimum wage requirement in Pakistan

Minimum wage remains relatively low in Pakistan. The low hourly wage makes setting up operation in Pakistan for foreign multinational companies very favourable. Labour and Human Resource department of the Punjab government states that the minimum wage for a lowly skilled worker is at Rs 43.28 (US $0.68) per hour. If by comparing this to the minimum wage in the United States where Kraft Food Group is base, the requirement is at US$ 7.25 per hour.

This difference in minimum wage does give a US based company a good edge to begin with in Pakistan.

1. Limited Services and poor Infrastructure

Pakistan has been experiencing severe energy shortages for several years. Electricity power was cut off in some area of the country occasionally. Electricity demand has rose up to 19,000 MW in the recent year but the current capacity of Pakistan can only serve to 12,000 MW maximum.

Pakistan energy sources rely very much on foreign companies on their monetary investment in building power plants. Majority of the country’s total energy requires premium imported thermal fuel to generate electricity.   Thus relying on such sources has led to high electricity prices for businesses and end consumer at the same time.  (Zofeen T. Ebrahim, 2015)

While energy shortages is one gap that the Pakistan need to address, deficits performances in other area of the infrastructure like, Transportation, road networks, water and sanitation are all calling for funding support. In 2009, Pakistan calls for a $40bn funding for infrastructure development. (DAWN, 2009)

In view of the under-performing infrastructures in Pakistan, Private sector participation is strongly encouraged due to limited public resources.

1. Poor management of its rich natural resources

Pakistan is one of the richest countries in natural resources. However, due to the incompetency of the governor, corruption in the country causes the poor management in their own natural resources. Natural resources were mostly underutilized.  Immediate issue of Pakistan to address is their lack in new technology innovations which were needed for energy conversion, solar electricity generation and a proper water storage capacity.

Water shortage is also another key issue in the country. The per capita water availability in Pakistan has now dropped to 1,000 cubic metres per person, from 2,490 cubic metres per person in YR1955. This number is expected to fall further to 837 cubic metres person by year 2050. (Refer to Fig 1.2) Due to poor irrigation system, water wastages are not in control through agricultural activities. The gap between demand and supply of water now is recognized as its dangerous state globally. Therefore it is the utmost priority that the country starts to adopt water-conservation measures.

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1.2 Water availability VS Demand in Pakistan

The country has been economically dependent on foreign aid and debt, which has adversely affected her standing in international community. The external debts and liabilities have seen increasing year on year.  Companies considering in a FDI in Pakistan, must be aware on this shortfall. (Kahlown)

For a soft drink industry, availability of potable water is important. In view of the water shortages, we should be prepared on the possible requirements to set up water generation plants to cater for their own needs.

1. Demand Conditions

1. Pakistan, one of the world largest population

Taking reference from the 2013 World Population Data estimates, Pakistan remains the Top 6 Most Populous country in the world standing at 194 million in 2014. With the rapid population growth rate forecasted of 1.95% annually, Pakistan is expected to reach a population of 348 million by 2050. Life expectancy in Pakistan had seen improving since back in the 1970s. Life expectancy increase from 53 Years old in 1970s to the current at 65 Years old. Neighbouring countries to Pakistan, India, has a similar life expectancy rate and both countries score better when we compare them with the rest of the least developing countries.