CHAPTER ONE: INTRODUCTION
Introduction
This particular study is associated with understanding how the macroeconomic factors
such as exchange rate, inflation, political stability and other lead to having an impact on
the performance of firms. It has been observed that businesses operating in different
industries and sectors face a set of varied circumstances and situations which they
have to go through. Their operations and activities are affected by several different
factors and these lead to positively or negatively impact the businesses and their output.
It is further understood that both internal and external factors contribute towards theoverall activities of the organization and while some factors may lead to affect one firmin certain situations, the same may not lead to impact the company.
Firm are the organizations that combine and classifies resources for producing goods
and services to sell in the market and earn profit. The ultimate goal of the firm is tomaximize the value of the goods and gain the maximum profit. If the firm performs
better its investors are satisfied. To compete in a market environment, firms have toimprove their efficiency engaging in strategic restructuring, i.e. updation of tools andmachineries. There are different ratios that measure financial health’s of the firms, such
as GDP, Cash Flows, liquidity ratio, turnover ratio, revenue, sales, growth (Van Horne,2008). Since macroeconomics is the study of behavior of the whole economy, thesevariables have a direct impact on the firm’s performance and return on assets. Inflationis also one of the most important indicators to analyze financials and economic
conditions of the markets economy.

Considering that all these aspects play their part in impacting the company, the external
factors could be regarded as more complex and intricate in terms of having an impact
on the financial performance of firms. Every organization focuses on attaining its own
set of goals and objectives and one of the main aims among these is the attention
towards profitability. The strategies and approaches of the businesses are therefore
developed in order to maximize the revenues and improve the overall financial
performance of companies. For such companies to improve their performance andlower down the associated adversities, it is imperative that all the macroeconomic
indicators are clearly understood and the effect of each of these is analyzed to better
understand which element may impact the company in what way.
The study found out that the rate of interest and the increase in price both has a direct
impact on productivity of the organization. The political factor has also a greater
influence on the inflation rate. The regression results discloses that the rates, stability
and size of the firm also has a direct relation on the return of equity in the automotive
sector where as the inflation, gross domestic product and rate of interest has a negative
effect on the equity return which conclude that the macroeconomic indicators has asignificant effect on the equity return in the automotive sector of Pakistan (Omondi andMuturi, 2013). It is also obvious that the higher interest rate and inflation have nosignificance which means that the shareholder‘s return is protected from the external
factor that their wealth in either direction.
The findings by Haider et al (2018) suggested that the macroeconomic conditions havenegative relations with ROE. It was also found that the macroeconomic indicators affectthe return on assets after the regression results. Return on assets is an effective

measure of firm’s gross profit. The correlation results indicated that the relation of returnon assets with size of the firm is positive and insignificant, while it has negative relation
with the increase in prices. ROA has positive significant relation with the exchange rateand interest rate. The research also concludes that the higher inflation in Pakistan
reduces the ROE in Automotive Sector of Pakistan (Cheung and Sengupta, 2013).

Background of the StudyFriedman (1998) studied that monetary growth roughness increases the amount ofsupposed uncertainty. Where investor’s expectations are based on price level offinancial assets, Boyle (1990) projected that changes in uncertainty of money supply willaffect prices of financial instruments and suggests that changes in monetary uncertainty
modify the stock prices risk premium to replicate the added expected prices thatinvestors demand for assuming the risk of keeping stocks.
The Indicators of macroeconomics are used to evaluate the economic performance of
the world economy (Ooi and Liow, 2014). GDP, stock price indicators, interest rates are
the most important factors which determine the welfare of the country’s economy. Policy
makers are always hoping that these factors remain constant to ensure the growths ofthe businesses. Firms have to improve their productivity by engaging in strategic
restructuring to compete in the world’s economy i.e. updating the equipment andproduction process.
Work complexities have increased over time and it has become difficult for businesses
to function at an optimum efficiency level. With high intricacies in this regard, firms have

been focused to make sure that effective strategies are developed and implemented inorder to ensure growth and success (Haidar, 2012). Profit maximization could beregarded as one of the major objectives of every organization and so all the related
activities are associated with achieving the specific goal. In this regard, companies arehighly concerned and keen regarding the factors and aspects that may lead to having
an impact on their profitability and financials. All these factors have to be carefully
understood and assessed to make sure that any associated risks are mitigated and thecompany is aligned with its short and long terms objectives. With a set of different
factors affecting the financial performance of firms, it further becomes imperative toidentify which particular elements are having a higher impact and which ones could beless prioritized (Mokhova and Zinecker, 2014).
Every firm wishes to optimize on its resources and internal strengths, there are a set ofdifferent external factors that have an impact on its performance. While the firm may beable to manage and control the internal factors to a certain extent, the external factors
may become very difficult for an organization to control or to have an influence over it.
These external factors could also be identified as macroeconomic factors i.e. political,
economic, social, competition within the industry and the government policies andregulations. Each of these factors may have different effects on the performance offirms and the impact may vary in different situations and circumstances (Bruneau et al,2012). While it has been understood that controlling external factors may be very
difficult for a business, keen attention and focus towards these may allow firms tomitigate the associated adversities and better manage the consequences. A number ofdifferent macroeconomic indicators are useful and crucial but this study has mainly

focused upon inflation, exchange rate, political stability, interest rate, GDP and money
supply. All of these defined aspects are highly critical specifically in the case of Pakistan
and could be used for conducting an effective analysis (Haddow et al, 2013).
Problem Statement
The macroeconomic indicators have a significant impact on financial performances of
the country because they show the risks of loss and capital of the firm. The behavior ofboth internal and external macroeconomic variable has an effect on the financial
performance of the firm (Taylor, 2013). The automobile sector is so important to theeconomy, knowledge of its relationship with the macroeconomic variables present in its
economic environment, is crucial. It is a vital facilitator for economic growth in many
developing countries worldwide and in Pakistan. The effects of these indicators on
automotive industry of Pakistan are very high. Financial analysis depends totally on
information provided by the financial intermediaries; the basic statements are thebalance sheet, cash flow statement and the income statement. Besides these threemajor reports, the earning statement, changes in equity and discussions by themanagements take place to see the profitability or loss of the firm.
According to Bastic (2012), the price level shocks have severe effects on prices of theassets. The modern theories show that the returns of firm are interconnected to few
factors associated to the collective economy.
Omondi and Muturi (2013) along with various other researchers have identified theimpact of external factors on firms’ performance. In this regard, while all such studies
have been established related to the study topic, less has been studied and understood
regarding Pakistan and its varied industry. This has created a gap in the literatureregarding this domain particularly in the automotive industry and requires thedevelopment of critical studies which may put light on such aspects and theirimplications.
Aim and Objectives
The main aim of the study is to assess the impact of macroeconomic indicators on thefinancial performance of Pakistani automotive firms. In this regard, the following
research objectives have been developed:•To assess what strategies can firm apply to mitigate the influence of external
factors influencing the business•To understand that to what extent does the macroeconomic indicator influence
the returns of equity (ROE) of the automotive firms in Pakistan•

To find out the extent to which the macroeconomic factors affect the returns on
assets (ROA)of the automotive firms in Pakistan

Research Questions
Several studies earlier have presented their findings regarding the impact of external
factors on the performance of the firms. However, there is still a gap in studies
regarding the same domain specifically from the context of the Pakistan automotive
industry that is dominated by few major firms and is an important industry from thecontext of the country’s growth. In this regard, the researcher has focused uponassessing; what is the impact of macroeconomic indicators (inflation, exchange rates,political instability, interest rate, GDP and money supply) on the financial performanceof the Pakistani automotive firms? The other secondary questions that have beendeveloped are as follows:•

What strategies can firms apply to mitigate the influence of external factors
influencing the business?

•To what extent do the macroeconomic indicators influence the returns of equity(ROE) of the automotive firms in Pakistan?

•

To what extent do the macroeconomic factors affect the returns on assets (ROA)of the automotive firms in Pakistan?

The rationale of the Study
The study basically uses four major macroeconomic variables that have higher effects
on the financial performances of the automotive industries in Pakistan. The variable isinterest rate, inflation, GDP and exchange rates which are measured through return on
assets return on equity and gross profit margin. This study also reveals the relationshipof important factors of macroeconomics with automotive assembling sector of Pakistan
stock exchange that these variables influence on the performance of this sector. One of
the basic purposes to conduct this study is to provide the stake holders with a clearer
picture of what company’s growth is like, so having all the data around they can gauge
performance of the company and make their strategies accordingly.
Businesses are highly concerned with their financial performance and other related
objectives. In order to attain the desired objectives, firms develop and implement
different strategies and approaches. Considering that the macroeconomic factors leadto impact the company, it is further essential to understand how and which factors
specifically have an effect on the same (Jalil et al, 2012). Also, while there have been
several studies that have focused on assessing the factor that impacts the financial
performance of organizations, less has been studies regarding the automotive sector ofPakistan. Through this study, it has become clearer and justified as to which factors
lead to having an effect on the financial performance and in what manner do they havethe impact. The reason to conduct this study was basically to understand how themacroeconomic factors (inflation, exchange rates, political instability, interest rate, GDPand money supply) have an impact on the financial performance of firms in theautomotive industry of Pakistan and how these may differ in terms of implications inother industries and areas. Realizing that less has been studied and analyzed regarding
the specific sector, this particular study adds significant value through its findings for thesame.
Significance of the Study
The automotive sector has been at highest in the past years; there is no guarantee thatthe country can maintain such growth especially in the light of recent times, whereeconomies like of Pakistan are heading towards inflation and the exchange rates are
getting higher. Investors are looking for a long term solution to stabilize the Pakistani
rupee and stop its fall against the US dollar. The industries should reduce its imports
due to the rupee depreciation.
The study is focused towards assessing the impact of macroeconomic factors (inflation,exchange rates, political instability, interest rate, GDP and money supply) on thefinancial performance of firms in the automotive sector of Pakistan. The findings of thestudy, therefore, are highly valuable and significant for academicians, practitioners andbusiness owners who are associated with the research topic. As the study provides
information regarding the macroeconomic factors and their impact on financial
performance, it may become easier and clearer for the stakeholders to better
understand the phenomenon and develop strategies and interventions in accordance tooptimize the results and outcomes in the automotive sector of Pakistan. The Automotive
sector has been used as the evidence to assess the impact of macroeconomic factors,
and this provides a clear view regarding how different indicators may lead to become
critical for organizations.
Structure of the Study
This particular study comprises of five different chapters, each of which provides adetailed understanding regarding the topic of research. Chapter one is of introduction,
which provides a background to the study along with defining the research questions,objectives, problem statement, rationale and significance of the research. Chapter two
further leads to provide theoretical information regarding the study and discusses thefindings of previous researchers who have presented their studies in the relevant field.
The third chapter is of research methodology which provides information regarding themethod that has been selected to conduct the study on the whole along with inculcating
aspects such as research philosophy, research design, research strategy, research
approach, data collection method, sampling and data analysis. Chapter four is on
analysis and findings where all the gathered information has been analyzed andinterpreted. Lastly, chapter five provides the conclusion and recommendations.