ANALYZING THE WORKING CAPITAL MANAGEMENT AND PRODUCTIVITY GROWTH OF MANUFACTURING SECTOR IN PAKISTAN

Abstract

Working Capital Management and Productivity growth plays an important role in the performance and value creation of a firm. In order to analyze these two issues in detail for manufacturing firms of Pakistan, the objectives of the current study are to analyze sector-wise WCM and profitability of manufacturing sectors, to empirically analyze the impact of WCM on performance of manufacturing firms listed at Karachi Stock Exchange and also to estimate and compare this impact on sectoral basis, to estimate sector-wise total factor productivity growth and to decompose the TFP growth into technical change and efficiency change. The present study covers a period of 10 years from 1998 to 2007 for manufacturing firms listed at Karachi Stock Exchange (KSE). Secondary data is extracted from the annual reports of 204 selected firms belonging to 24 manufacturing sectors. The impact of WCM on performance of manufacturing firms and also on sectoral basis is tested by using panel data fixed effect model. Furthermore, TFP growth and its sources are estimated by Malmquist TFP Index based on non-parametric, Data Envelopment Analysis approach. Sector-wise WCM and profitability analysis have found divergence among sectors over study period. Oil & Gas Exploration & Refinery, Oil and Gas Marketing, Cement and Fertilizer sectors have the shorter CCC and NTC. All Textile sectors are among the laggard sectors in terms of WCM measures and operating profitability. In most cases, the CCC and NTC are driven by the inventory turnover of the firms. Regarding impact of WCM on performance of manufacturing firms we found that WCM has a significant impact on profitability of the firms and played a significant role in value creation for shareholders of manufacturing firms. The CCC, NTC and ITID have significant negative association with NOP. The negative association between ITID and NOP implies that keeping lesser inventories, increases profitability The negative association of ACP with NOP and positive association of APP with NOP are not proven in case of fixed effect model. It shows problem with the collection and payment policy in general for the manufacturing firms. The findings related to other variables of the model are presented in this research. Sector-wise impact analysis results of CCC model shows that the CCC has negative association with NOP for Automobile & Engineering, Chemical & Fertilizer and Textile sectors. Sector-wise negative impact of ACP on NOP is only proven for the Synthetic & Leather sector. Regarding sector-wise estimated results of inventory turnover model, there exist negative impact of ITID on NOP for Automobile, Cement, Sugar and Textile sector where inventory management policy can play a significant role in enhancing performance. Sector-wise results of APP model reveal that positive association with NOP is proven in case of chemical & Fertilizer and Auto & Engineering sectors. It implies that for these sectors lengthening the payment period increases profitability and it does make economic sense because longer a firm takes time to make payments to credit suppliers, the higher level of working capital it reserves and use to improve profitability. The significant negative impact of APP on the NOP for Sugar and Allied sector implies that less profitable firms wait longer to pay their bills. Analysis of TFPG and its components in Pakistan’s manufacturing sector finds that the TFP for the overall manufacturing sector declined by -0.3%. Managerial Efficiency improved by 1.2% while technical (technological) change deteriorates by - 1.5%. TFP and its components for manufacturing sector presents year-wise divergent trend and TFP declined in 5 out of nine years. TFP growth is mainly affected by technical change which is negative for nineteen out of twenty four sectors indicating that manufacturing sectors are lacking in terms of technological adoption. The Textile sectors are among the worst performers in terms of productivity growth over the study period mainly due to non-adoption of new technology. Other worst performers in terms of TFP growth are Power Gen. & Dist., Paper and Board, Tobacco and Vanaspati & Allied sectors. Year 2006-07 is the most crucial year for most of the sectors where TFP declined almost for all sectors. Finally the policy implications and future research are also highlighted towards the end of dissertation.