PAKISTAN’S presence in global IT services exports is small but has seen significant growth, increasing from 0.17 per cent in 2017 to 0.30 per cent in 2021. Its overall IT export volume surged from 7.2 per cent in 2006 to an impressive 37.7 per cent in 2022. Ireland holds the top spot with over 28 per cent, followed by India with over 11 per cent and China with over 7 per cent. Similarly, in 2021, Pakistani startups gained global recognition, attracting investors and raising around $375 million in funding. Most of these startups were focused on technology-driven enterprises and Pakistan is experiencing a steady rise in the prevalence of such ventures.
Approximately 500 technology-based startups have emerged, effectively establishing their businesses, products and services. The rise in tech startups can be attributed, in part, to the remarkable growth of the IT sector. By January 2023, Pakistan boasted an impressive 71.70 million social media users and 191.8 million active cellular mobile connections which accounted for a significant 80.5 per cent of the total population.
Tech startups show higher resilience and success rates, but face limitations in scaling their operations. A research study conducted by a writer, sponsored by RASTA at PIDE is aimed to unravel the reasons behind this anomaly. To understand the journey of entrepreneurs, it’s important to know the different stages startups go through. The first stage is called the “standup” phase, where ideas are conceived, business plans are developed and prototypes are created.
During this phase, they require careful nurturing and mentorship. To address this need, HEC has established 38 business incubation centers, while Ignite (a project of Ministry of Information Technology) has set up four National Incubation Centres (NICs), alongside PITB Plan 9 and other incubation centre eg P@SHA, Enabler, Extreme Commerce etc. Transitioning from this stage to the subsequent phase, the “startup” stage, entrepreneurs launch their businesses, products and services. While the success rate for general businesses during this transition is a mere 5-7%, tech-startups surpass this figure with success rates exceeding 10%.
The primary cause of this anomaly stems from the rigorous and burdensome business ecosystem prevailing in Pakistan, characterized by minimal ease of doing business. Technological startups experience minimal engagement with the physical market, exemplified by platforms such as Daraz, Bykea and KASB Securities. Conversely, general startups are obligated to navigate interactions with local authorities and contend with established businesses that have their monopolies. These startups must acquire numerous permits, approvals and contend with the informal sector which is supported by influential interest groups.
For instance, if the owners of Bykea desire to initiate physical operations, they must amass substantial funds for bike procurement or outsourcing and then compete against well-established business magnates. These tycoons hold significant sway over both the public and administrative spheres. Consequently, these educated, young graduates find it arduous to sustain themselves within this challenging business environment. Consequently, Pakistan’s ranking has remained persistently low, fluctuating between the 85th and 148th positions from 2010 to 2020.
Tech-startups thrive on the foundations of expertise assessment, technological prowess and effective marketing strategies, often helmed by owners who are already IT virtuosos. Conversely, general startups necessitate robust research and development efforts encompassing market needs assessment, local sourcing of material and forging robust connections within the local value chain. Unfortunately, avenues for comprehensive market evaluation remain scant, with a dearth of dedicated newspapers catering to local market dynamics, impeding the identification of issues, market demands and supply dynamics. Similarly, research on local challenges, viable solutions, products and services remains lacking.
Pakistan has 207 business schools but lacks publications like Harvard Business Review and similar magazines that provide insight into local obstacles. Although the HEC has allocated billion rupees’ funds for research on local challenges, the findings are not widely accessible. Technological grants often lead to products with limited commercial success. The absence of local case studies hinders inspiration and guidance for startups. Surprisingly, individuals with limited education excel in real estate ventures, yet universities lack specialized programs in real estate investment and finance, despite it being a thriving market worth 400 billion USD in Pakistan.
Conversely, although tech-startups boast a higher success rate, they struggle to achieve substantial growth within Pakistan. These startups encounter obstacles in scaling-up their business by issuing IPOs on the PSX Main and the GEM Board, as well as attaining prominent positions in the global market. Various factors contribute to this anomaly at third stage i.e. Scale-up, with the prevalent “Seth” culture emerging as the most significant. A majority of angel investors and seed funders are not adhering to an entrepreneurial culture and even within NICs, successful tech-startup products often result in investors seizing control and appointing the startup owners as mere CEOs, thereby eradicating the entrepreneurial culture altogether.
Scaling-up stems from multiple market-level factors e.g. Pakistan’s IT infrastructure is weak and university graduates lack the necessary skills. Additionally, internet blockages, protests and strikes pose further obstacles. Moreover, regulatory policies by the State Bank of Pakistan and other governing bodies do not encourage tech industry to get FDI. Secondly, labour and tax laws primarily cater to traditional industries, causing issues for IT sector firms. Furthermore, the foreign policy lacks a strong emphasis on business, despite strong ties with China. Unfortunately, we have been unable to align our IT sector with China and reap its benefits. The US and India has decided to establish Joint Task Forces for advanced telecommunications, focusing on Open RAN and 5G/6G tech research and development.
The ICT services industry in Pakistan reached $2.6 billion in 2022, with the potential to reach $10 billion by 2025. Nevertheless, substantial support at the market and governmental levels is necessary to achieve this potential. The mere establishment of a Special Investment Facilitation Council falls short in its ability to augment foreign direct investment. Pakistan must go beyond and create a conducive ecosystem, not only for the tech industry but also for general businesses.
—The writer is an Assistant Professor (PhD Financial Economics) at the National University of Modern Languages, Islamabad.
Email: [email protected]
