4 - Factors influencing profitability at the industry level  pp. 84-106


By Rashid Amjad

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The corporate environment created conditions which led to a high overall rate of return in the manufacturing sector in the sixties. In this chapter we analyse the factors which could explain inter-industry differences in profitability, notably the effects of protection and related government policies in differing market structures and the effect of varying degrees of capacity utilisation. We first consider theoretically the impact of these factors across industries and then empirically test the relationship between profitability and these factors for a sample of industries for the period 1965–70 for which data are available. Our results suggest that profitability is not only influenced by measures taken by the government but that factors like market structure and links between the industrial and trading interests are also extremely important in influencing profitability at the industry level.

Some theoretical considerations

Protection

In Pakistan in both the fifties and the sixties the amount of protection given to an industry was determined not by the tariff structure but by quantitative restrictions, which were generally the effective constraint on imports. The way in which prices will be influenced when quantitative restrictions dominate tariffs can be illustrated by what we call the Pal–Lewis Model (Pal, 1964 and 1965; Lewis, 1969 and 1970a). Three different situations are considered, namely (a) quantitative restrictions on imports; (b) quantitative restrictions on imports together with monopoly in the import trade; and (c) quantitative restrictions on imports combined with existence of a domestic industry.

In figure 4.1, DD is the demand curve and SmSm is the supply curve for imports (including tariff). With no import restrictions OM1 will be imported and the price would be OP1.