Munich Personal RePEc Archive

Export Potential of Cottage Industry: A

Case Study of Sialkot (Pakistan)

Khan, Rana Ejaz Ali and Khan, Tasnim and Maqsood,

Muhammad Farqan

Department of Economics, the Islamia University of Bahawalpur,

Pakistan, Department of Economics, the Islamia University of
Bahawalpur, Bahawalpur Pakistan, Department of Economics,
Government Allama Iqbal Postgraduate College Sialkot, Pakistan

1 September 2010

Online at https://mpra.ub.uni-muenchen.de/34427/
MPRA Paper No. 34427, posted 17 Nov 2011 14:29 UTC
European Journal of Economics, Finance and Administrative Sciences
ISSN 1450-2275 Issue 27 (2010)
© EuroJournals, Inc. 2010
http://www.eurojournals.com

Export Potential of Cottage Industry:

A Case Study of Sialkot (Pakistan)

Rana Ejaz Ali Khan

Department of Economics, the Islamia University of Bahawalpur, Pakistan
Tel: (off) +92 62 9255456 ext.433. (Cell) +92 345 8724744
E-mail: [email protected]

Tasnim Khan
Department of Economics, the Islamia University of Bahawalpur, Bahawalpur Pakistan
Tel: +92 0346 8806011
E-mail: [email protected]

Muhammad Farqan Maqsood

Department of Economics, Government Allama Iqbal Postgraduate College Sialkot, Pakistan
Tel: (off) +92 52 9250502. (Cell) +92 333 8742684
E-mail: [email protected]

Abstract
Sialkot, the export city of Pakistan is earning $900 million per annum by exports. The
major exports are the sports goods, surgical instruments, leather products, martial art
instruments, musical instruments and sports wear. All these products are value-added by
cottage industry. How the export potential of cottage industry in Sialkot may be increased,
that is the question. The current paper estimated the export potential of the cottage industry
by measuring it through Cobb-Douglas production function. The data has been collected
from 354 cottage industrial units selected by random sampling. The results explain that
labor, capital, experience and education of entrepreneur, and working conditions enhance
the export potential of the units. The labor is more used in cottage industrial units as
compared to capital so the elasticity of export production with respect to labor is higher as
compared to capital. The football making units and other sports goods producing units use
a minor ratio of capital and largely depend upon labor for production. Although leather and
surgical producing units use higher ratio of capital in production. The education and
experience of the entrepreneur also lead to increased export production. The better working
condition increases the export production by raising the productivity of labor. The study
proposes the education and training of the individuals involved in cottage industry and
provision of good working conditions by the Export Promotion Bureau, Sialkot Chamber
of Commerce and Industry and vocational training institutes in their respective areas. The
surprising results of the study are that credit availed by the units decrease the export
production while distance to market from the unit raises the export production. The
relationship between credit and export production explains the misutilization of credit
while positive association between distance to market and export production explains the
involvement of more number of household members in production in the units away from
city as compared to the units situated near to market or city. The misutilization of loaning
is needed to be checked.
159 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)

Keywords: Cottage industry, Pakistan, Exports, Cobb-Douglas production function,

Sialkot.

1. Introduction
Sialkot has international fame for its exports of sports goods, surgical instruments, leather products,
martial art instruments, musical instruments and sports wear. Sports goods, surgical and musical
instruments industries are more than a century old. The city is export-oriented hub and a nucleus of
cottage industry. Almost all the manufacturing in these industries is exported to mainly USA and
Europe under the band names of Nike, Adidas, Puma, Green Hill and a variety of other brands of
surgical instruments, leather goods, leather wears, sports goods and sports wears.
There are more than ten thousand registered firms working in the city. Among them three
industries are dominant i.e. of leather goods, surgical goods and sports goods. Sports goods exported
from Sialkot are famous all over the word for their quality based on impeccable craftsmanship. Total
exports of sports goods from Sialkot were amounted US $ 76,189 thousands in 2008-09, and its share
in the total exports was 1.46%.
There are more than 2800 firms manufacturing and exporting the surgical goods. The total
world market for surgical instruments was US $ 30 billion in 2008-09 and exports from Sialkot were
US $ 70920 thousands in 2008-09. The ratio of exports from Sialkot in the world exports of surgical
instruments remained 4.23 percent and it had grown up by 34% from the previous year. Pakistan and
particularly Sialkot is also an established name in the world for leather goods (leather gloves, leather
garments, leather belts and other leather products). This sector contributes 6.5% to the total exports of
Pakistan and provides employment to almost 250,000 people. The industry exported goods of worth of
US$ 104,497 in 2009-10.
Sialkot is exporting many other items like, Knives, Martial Arts, Cutlery, Musical instruments,
Uniform Badges, Rice, Cotton rags and Nylon Goods, etc. It is earning more then US$ 900 million per
annum and the share reaches to 6% of the total exports of Pakistan. Mostly, these goods are produced
in micro, small, medium and large firms. But all these are not produced under the in-house production
facilities. Every exporter is backed up by local manufacturer called “Maker” (Ahmed, 2009). These
makers also work as a middleman or subcontractors between exporters and local workers working in
cottage industry. Cottage industrial units (CIUs) supply finished and semi-finished goods to exporters.
We will attempt to analyze the export potential of cottage industry of Sialkot in terms of export
productivity of CIU through Cobb-Douglas and Transcendental production functions with explanatory
variables of labour, capital, education of entrepreneur, experience of entrepreneur, life of cottage
industry, availed credit, distance from market and working conditions of CIU. Export potential may
also be affected by demand side factors like quality of product and price competition but we are
looking into supply side factors to increase the export potential of CIU.
Cottage industry is not only important for under-developed countries but its importance has
been equally felt in developed economies as well. It can play a vital role in the economic development
of a developing economy like Pakistan. The major issues like unemployment and under-employment,
balanced growth and the regional development may be tacked through it (Bahar, 2001). Cottage
industry acts as a catalyst for transformation from lower level to high level of production. In many
developing countries it has strategic importance through linkage with agriculture which in turn
provides potential for progressive transformation of enterprises (Rubayat, 2009). Its importance can
also be felt through utilization of massive manpower (Tarmidi, 2005; Brata, 2007; Ali, 2007).
Analyzing the cottage industry of Sialkot may give some policy proposals not only to enhance the
exports of Sialkot but also of other regions having cottage industrial base along with advantages of
having elimination of regional disparity and declining unemployment and under-employment.
160 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)

2. Theoretical Background, Model and Estimation Methods

2.1. Theoretical Background
Cottage industry is a primary source of income for both urban and rural lower-middle class of Sialkot.
There are few analytical studies about cottage industries in this city but a plethora of reports exists. The
literature explains that cottage industry requires small plants and less capital equipment because they
heavily rely on abundant labour. Manual dexterity remains the focus of micro/small scale units and
cottage industry with unskilled labor. The school-aged children and housewives participate in
preparatory work. The work force participating in micro/small scale units usually comes from
proprietor families. Another distinguishing feature of cottage industry is that it suffers from lack of
sufficient capital, low access to markets, low technical and educational training, low levels of
productivity and wages, low access to formal credit (Rubayat, 2009; Junejo, et. al. 2009). The
distinguishing feature of cottage industry of Sialkot is that most of the goods produced are exported.
In the recent literature, Wu and Cheng (1999) analyzed the supply and demand side factors for
export performance of China’s Township Village Enterprises. They concluded that export performance
is negatively related with unit labor cost, foreign direct investment and transaction cost but positively
with financial assistance and educational level of labor. However, majority of the studies have
measured the export potential through gravity model. For instance, Akram (2008) measured export
potential of Pakistan through gravity model and pseudo maximum likelihood method. The study
concluded that trade between two countries is negatively affected by tariff to trade, distance between
two trading countries and conflict between two trading partners. While it is positively affected by
common boarder and common language. Eita and Jordaan (2007) applied the same model to see the
export potential of wood products from South Africa. GDP of the importer and exporter country,
population of exporter country and same language (English) of both countries positively while
population of importer country negatively affects the export potential. Abedini (2009) has also
analyzed the export potential of car industry of Iran by the same model. The study concluded that GDP
of importing as well as exporting country, common language between two partners, degree of justice
and law and car production capacity of exporter positively affects the exports but distance between two
trading nations and tariff level of importing country negatively affects the exports.
In our analysis the focus is export potential of cottage industry, that is not directly exporting the
products but supplying it to the makers. So we have used Cobb-Douglas and transcendental function to
see the export potential of cottage industry. Theoretically an increase in labor and capital may lead to
raise the level of export production. Similarly education of entrepreneur and experience of entrepreneur
affects the export production of cottage industry positively (Ezechi, 1999; Ali, 2007; Remi, 2010). As
the entrepreneur is more educated and experienced he can fully utilize the scarce resources. He can
well manage the business, inputs, accounts, production, etc. Conceptually age of the cottage industrial
unit may also positively affect the export production as the unit has traced expansion path, attained the
optimum combination of factors of production during the course of time and obtained experience in
different jobs within the unit. Most of all, such units are more trusted by the exporters/middlemen.
Finance for cottage industry is an important ingredient for boosting production. Generally the
cottage industry does not have reach to formal credit which keeps the production lower and the
household involved in the industry in lower-income group. Empirically the availability of credit
positively affects the cottage industrial production (Ali, 2007; Bahar, 2001). It is assumed that distance
of the CIU from market negatively affects the export production due to non-availability of proper
transport, finance, inputs and skilled labour. Lastly the working conditions, theoretically affects the
export production of CIU positively. In the good working conditions efficiency of the workers is
increased which leads to increased export production of cottage industrial unit.

2.2. Data and Model Specifications

The empirical analysis is done by using cross sectional data collected from cottage industries of Sialkot
through random sampling. We administered a questionnaire for the sample of 354 units of cottage
161 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)

industry producing exportable goods and thereafter interview of the head of unit make the data
available.
We have used Cobb-Douglas production function and transcendental functions to see export
potential of cottage industry. The general form of Cobb-Douglas production function is given as:
Q = a X1b X2c
Where a, b and c are parameters while the general form of transcendental production function is
given as:
Q = a X1b X2c edX1+fX2
Where e is a natural logarithm base, b and c are partial coefficients of X1 and X2, respectively
while d and f are trans-parameters measuring the variability of b and c in response to changes in
production scale and input substitution. If d and f are zero, equation becomes Cobb-Douglass
production function.
The Cobb-Douglas and Transcendental model of export production of cottage industry is shown
in equation 1 and 2 respectively.
EPC = a LAB 1 CAP 2 EDU 3 ACI 4 CRD 5 DIS 6 EXP 7 WRK 8 u (1)
EPC = a LAB 1 CAP 2 EDU 3 ACI 4 CRD 5 DIS 6 EXP 7 WRK 8 e 1LAB + 2CAP+
3EDU + 4ACI + 5CRD + 6DIS + 7EXP + 8WRK u (2)
Where
EPC = Export Production of Cottage Industrial Unit (Rupees)
LAB = Labour (Hours supplied by total labour force of a unit in a month)
CAP = Capital (Value of Physical Capital in Rupees)
EDU = Educational of Entrepreneur (Index of Years of Education1)
ACI = Age of Cottage Industrial Unit (Years)
CRD = Credit (Rupees)
DIS = Distance form Market (Kilometers)
EXP = Experience of Entrepreneur (Years)
WRK = Working Conditions (Index of Working Conditions2)
U = Error Term
For statistical estimation model is in natural logarithm form as shown in equation 3 and 4 for
Cobb-Douglas and Transcendental Production respectively.
lnEPC = a + 1ln LAB + 2ln CAP + 3ln EDU + 4ln ACI + 5ln CRD + 6lnDIS + 7ln
EXP + 8ln WRK +u (3)
lnEPC = a + 1ln LAB + 2ln CAP + 3ln EDU + 4ln ACI + 5ln CRD + 6ln DIS + 7ln EXP +
8ln WRK + 1LAB + 2CAP+ 3EDU + 4ACI + 5CRD + 6DIS + 7EXP + 8WRK + u (4)
Where in both the equation a is the constant, term 1, 2, 3, 4, 5, 6, 7 and 8 are slope
coefficients of respective variables in equation 3 and 4 and term 1, 2, 3, 4, 5, 6, 7 and 8
shows the variability in 1, 2, 3, 4, 5, 6, 7 and 8 respectively to a change in production scale or
input substitution.

2.3. Estimation Methods

The OLS (Ordinary Least Square) has been used to estimate the equation 3 and 4. Because both the
equations are log linear in parameters and also fulfill the other assumptions of CLRM.

1
Education of entrepreneur is measured as five years of education is equal to one, eight is equal to 2, ten is equal to 3 and
so on.
2
Working conditions includes Availability of light, Fan, Safe drinking water, First aid and Building condition and one
number is given to each facility for construction of index.
162 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)

3. Empirical Results
3.1. Results of Cobb-Douglas Production Function
The results of Cobb-Douglas production function are given in equation 5.
LnEPC = 2.552599* + 0.644675*LnLAB + 0.253975*LnCAP + 0.173293*LnEDU +
0.095924**LnDIS + 0.293923*LnWRK + 0.179513*LnEXP - 0.009205LnCRD - 0.018991LnACI (5)
The parameters3 shows that the labour, capital, education of entrepreneur, distance of market
from CIU, working conditions of cottage industry and experience of entrepreneur positively affect the
export production of cottage industry. The credit availed and age of CIU negatively but insignificant
affects the export production of cottage industry.
Results of Transcendental production function are given in equation 6.
LnEPC = 2.972721* + 0.626075*LnLAB + 0.276811LnCAP + 0.029957LnEDU -
0.099056LnDIS + 0.593381***LnWRK + 0.074206LnEXP - 0.011093LnCRD - 0.081273LnACI +
4.73E-05LAB - 1.96E-06**CAP + 0.043851EDU + 0.013810**DIS - 0.115473WRK + 0.009082EXP
+ 1.82E-06CRD + 0.007637ACI (6)
The parameters4 of transcendental production function shows that only log of labour, log of
working conditions of CIU, capital and distance of CIU from market significantly affects the export
production of cottage industry. Remaining parameters are insignificant so we will consider only Cobb-
Douglas production function.

3.2. Measurement of Export Productivity

The export productivity of cottage industry (from Cobb-Douglas production function) is measured as
EPCI = [EPC/LAB] 1 [EPC/CAP] 2 (7)
Or
lnEPCI = lnEPC- 1lnLAB - 2lnCAP (8)
The model for export productivity of cottage industry is given in equation 9.
lnEPCI = + 1lnEXP + 2lnWRK + 3lnEDU + 4lnDIS + 5lnCRD + 6lnACI (9)
The empirical results explaining the export production of cottage industry are given in equation
10.
lnEPCI = 2.552599* + 0.179512*lnEXP + 0.293923* lnWRK + 0.173292* lnEDU +
0.095924* lnDIS – 0.009205 lnCRD – 0.018991lnACI (10)
The parameters5 indicate that the experience of entrepreneur, working conditions of CIU,
education of entrepreneur and distance from market positively affect the export productivity of cottage
industry. The credit and age of cottage industry negatively but insignificant affects the export
productivity of cottage industry. The insignificant effect of the loan on export productivity explains the
misutilization of loan.

4. Conclusion and Policy Recommendations

The study attempted to identify the factors affecting the export production and export productivity of
cottage industry of Sialkot. The important findings are that the experience of entrepreneur, working
conditions in CIU, education of entrepreneur and distance from market positively affects the export
production and productivity of cottage industry. Labor (working hours) and capital also positively
affects the export production of cottage industrial unit. The explanation may be that cottage industrial
units heavily depend on labour that is why the elasticity of export production with respect to labour is
very high. It may be concluded that production in CIUs is labor intensive and an increase in working
hours leads to increase the export production of units. Amount of capital also positively affects the

3
* and ** represent 1 percent and 5 percent level of significance
4
* , ** and *** represent 1 percent, 5 percent and 10 percent level of significance
5
* represents 1 percent level of significance
163 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)

export production of unit. The units producing footballs and other sports goods depend less on capital
or machinery. On the other hand units producing leather and surgical goods depend equally on labour
and capital. The increase in capital in these units directly leads to increase the export production of
unit.
The increase in experience and education of entrepreneur leads to increase in export production
and productivity of unit (see also Remi, 2010). The explanation is based on the fact that the educated
and experienced entrepreneur can use the human as well as the capital resources more efficiently
through division of labour, provision of better working conditions, etc. The educated entrepreneur can
handle problems more professionally and competently. Similarly, working conditions in unit also raise
the export production and productivity of unit. It explains the fact that in the presence of light and fan
(particularly in summer season), workers can work longer hours in a day. The availability of safe
drinking water, first aid box and satisfactory building conditions helps the workers to stay physically
healthy and strong which leads to increase in export production and productivity of unit.
Conceptually the distance from market to unit should affect the production of the unit
negatively based on a number of factors like the availability of inputs in the market, marketability of
output, availability of technical hands, etc. In our case there is a unique result showing that the distance
of the unit from market positively affects the productivity of the unit. It may be explained as in the
households living near city few members of the families are working in cottage industries. On the other
hand the households living at distance from the city, the more number of family members work in CIU
and give more time for work.
The empirical findings have important implications for export production and export
productivity of CIUs. First of all, Ministry of Commerce and Industry should make a comprehensive
policy plan for cottage industry for technical support and education. Training and education of
entrepreneurs should be increased through workshops and training programmes. It may be done
through Sialkot Chamber of Commerce and Industry. Working conditions of the unit should be
developed. Loans should be provided to the unit in order to improve the working conditions of unit.
But these loans should be tied to proper utilization. The micro-finance bank, khushhali bank and
commercial banks can play an important role.
164 European Journal of Economics, Finance and Administrative Sciences - Issue 27 (2010)

Reference
1] Abedini J. and N. Peridy (2009) The Emergence of Iran in the World Car Industry: An
Estimation of its Export Potential. The World Economy, 32:5,790-818.
2] Ahmed, M. A. (2009) The Romance of Promotion of Small and Medium Enterprises.
unpublished manuscript.
3] Akram, W. B. (2008) Pakistan’s Export Potential: A Gravity Model Analysis. SBP Working
Paper Series, State Bank of Pakistan (SBP), Pakistan
4] Ali, A. M. (2007) The Competitiveness and Viability of Cluster Based Cottage Industries The
Case of Handloom Sector in Ethiopia. Paper presented in Ronald H. Brown Institute for Sub-
Saharan Africa 1st International Business Conference, Pretoria
5] Bahar, H. (2001) Financing for Micro-Enterprises, Small, Medium-Sized and Cottage
Industries: Bangladesh Perspective. Paper presented at the ESCAP-ADB Joint Workshop on
Mobilizing Domestic Finance for Development: Reassessment of Bank Finance and Debt
Markets in Asia and the Pacific held in Bangkok, 22-23
6] Brata, A. G. (2007) Spatial Concentration of the Informal Small and Cottage Industry in
Indonesia. MPRA Paper No. 12622, http://mpra.ub.uni-muenchen.de/12622/ retrieved on 09
August 2009
7] Eita, J. H. and A. C. Jordaan (2007) South Africa’s Wood Export Potential Using a Gravity
Model Approach. Working Paper Series No. 2007-23. Department of Economics, University of
Pretoria, South Africa.
8] Ezechi, N. C. (1999) Vocational/Technical Education and the Development of Cottage-
Industries in Nigeria. Journal of Nigerian Educational Research Association, 13:1.
9] Junejo, M. A., C. L. Rohra and H. A. Kanasro (2009) Investigating the Major Constraints in
Creation and Growth of Small Scale Industries of Pakistan. Australian Journal of Basic and
Applied Sciences, 3:4, 3116-3122
10] Remi, A. J., Abdul-Azeez., I. Adegoke and N. A. Opoola (2010) Impact of Socio-Economic
Factors on the Performance of Small-Scale Enterprises in Osun State, Nigeria. International
Business Research, 3:2, 92-99.
11] Rubayat, J. (2009) Financing the Small Scale Industries in Bangladesh the Much-Talked about,
but less Implemented Issue. (ASBBS Annual Conference: Las Vegas), Proceedings of ASBBS.
Vol. 16, No. 1.
12] Tarmidi, L. T. (2005) “The Importance of MSEs in Economic Development of Developing
APEC Countries. Paper presented at the APEC Study Center Consortium Conference 2005,
Jeju, Korea, 22-25 May 2005.
13] Wu C. and L. K. Cheng (1999) The Determinants of Export Performance of China's Township-
Village Enterprises. Available at www.econ.kuleuven.ac.be/licos/dp/ DP1999/DP82tve.PDF