There have been a flurry of announcements over the last few years by various multinational corporations (MNCs), either exiting Pakistan or significantly scaling down their operations here. Some of the prominent ones include Procter & Gamble, Shell, Caltex and Eli Lily, among others.

There has also been a significant slowdown in manufacturing activity, where more than half of products tracked by the Pakistan Bureau of Statistics through the Large Scale Manufacturing index have exhibited a median drop in production of 10 percent annually, over the last two years.

The gradual exodus of MNCs from Pakistan is a multifaceted affair that cannot be viewed through a mundane political lens. It is a mix of evolving strategies at a global or regional level for the respective entity, as well as a lacklustre economic and investment environment locally.

This write-up explores how the business models of MNCs have evolved over the years and how a shift in global trade is catalysing the exodus. There is also some introspection about how consistently elevated sovereign risk, and one of the more regressive taxation regimes in the world, has pushed any kind of formal business over the edge in Pakistan.

Even as the government touts policies to attract foreign investment, a number of multinational giants have been scaling back or exiting from Pakistan in recent times. What is going on here? Is this the global economic environment at play or does this reflect deep fractures in the country’s economic and regulatory framework? And can anything be done about it?

HISTORIC CONTEXT

Many MNCs that exist in developing markets were birthed by parent entities operating in those areas, mostly to serve the interests of colonial powers, or to consolidate the same.

As the sun started to set on colonialism after World War II, the emperor got new clothes, the MNC in this case, and they all got a makeover, trying to shy away from a troubled history. It can be an MNC that sold soaps and was notorious for operating palm plantations through bonded labour in Central Africa, or an MNC that basically led the Nazi war machine but now sells innocuous chemicals.

The history of MNCs has been dramatic and they have evolved with time. Only recently, after 355 years in operations, did the Hudson’s Bay Company shut down, after laying the foundations of Canada through trading fur across the Atlantic and eventually morphing into its largest landowner — only to be succeeded by a chain of department stores that were killed by e-commerce. They could survive multiple wars and the death of the Empire, but could not survive the post-pandemic transition to e-commerce shopping.

During the late 2000s, there was a similar mass exodus of financial institutions, not just from Pakistan but from other developing markets as well. This was largely due to higher compliance costs and the realisation that the only way to give economic returns to shareholders was to scale up and become one of the top five institutions in the respective country. It is only through scale that one can extract economic returns; without scale, they struggle and keep losing market share.

Many of these institutions survived the Opium Wars in China, and others, only to be forced to scale down by activist shareholders. Currently, only one bank from the times of the Empire continues to exist as a shell of its former self, while the rest have exited not just Pakistan but other emerging markets as well.

THE CHINESE CENTURY

The current wave of MNC exits can be partially attributed to the emergence of China as the world’s factory. This led to production of goods at a scale never seen before, and with scale comes lower cost. In emerging markets with relatively low household incomes, cost competitiveness remains critical and China provided the same.

Most MNCs operating in Pakistan, or those that have left, were largely involved in production of low value-added or primary products. Making diapers, washing detergent, or a basic generic drug does not require sophisticated knowledge or skill that cannot be replicated elsewhere. As China continued to compete on cost, local production became increasingly uncompetitive.

This led to the emergence of local brands that competed on price and made the overall competitive environment more intense. MNCs, instead of doubling down and attempting to scale, figured it might be easier to shut down operations and revert to a distribution model. Why bother manufacturing when you can import and trade the same? This is where the industrial policy of the country completely failed.

In many cases of consumer goods, some MNCs even produced advertisements at scale in Southeast Asia, assuming that all people of the Subcontinent look the same, subtly mocking actual paying consumers in the process. One can mock consumers only for so long and, in the case of primary products, consumers are often very price sensitive — a strong brand can compensate only to a certain extent for a price-conscious customer. As local brands started to prop up, the operating space for MNCs became further constrained, eventually leading to a point where the consumer gravitated towards local brands.

‘GREED IS GOOD’

The fictional character, Gordon Gekko, uttered the famous words “Greed is good” in the film Wall Street, while exemplifying the role of free markets in arriving at an optimal solution that benefits everyone and shareholders the most. In matters of capital allocation, shareholders lately are not swayed by emotional concepts such as patriotism or nationalism.

More recently, German engineering and chemical behemoths........

© Dawn (Magazines)