Industrial upgrading in the apparel value chain: Evidence from Bangladesh

Abstract

The objectives of this thesis comprises are three-fold. First, the objective is to investigate the key drivers of Bangladesh apparel export performance and examine how Bangladesh has become the second largest exporter against the gloomy predictions. Second, the thesis addresses how Bangladesh performs differently compare to other top apparel exporting countries. Finally, the purpose of this thesis is to identify the status and magnitude of industrial upgrading and whether there are potentials for the industry to shift itself to the upper segments of the value chain.

The first two chapters explain the historical evolution of the industry in the country and analyze different national and international policy interventions in the apparel value chain. The next three chapters are three self-contained research papers, which forms the core of the thesis, examining how Bangladesh apparel industry sustained in the global market contrary to the gloomy predictions made by industry experts following the multi-fiber arrangement (MFA) quota abolition in 2005.

The first essay (chapter 3) investigates through an econometric analysis based on time-series data from 1976 to 2018. To provide the context for the econometric analysis, the chapter examines the trends of changes in commodity composition, and export similarity index (ESI), that Bangladesh observes over the last four decades by analyzing the top 20 apparel export products. The econometric analysis aims to capture the role of various national policies such as the introduction of back-to-back letter of credit (BBLC), special bonded warehouses (SBWs), as well as different international policies namely generalized system of preference (GSP) and abolition of MFA. A newly constructed real effective exchange rate (REER) index is used to capture the impact of international competitiveness of the economy on export performance. The results support the view that the predictions made by some of the experts about Bangladesh's losing market share following the MFA abolition were erroneous since they considered apparel products as homogeneous products rather than a bunch of apparel items in which any given country may specialize.

The second essay (chapter 4) examines key factors of Bangladesh's competitive edge in garments export. How Bangladesh performs differently compared to other top apparel exporting countries? This chapter addresses these issues by examining patterns of global apparel trade during the post-MFA era using a large data set for a large sample of 27 countries exporting to 163 destinations with coverage of 90% of the world apparel exports. The methodology involved estimating an export equation, specified within standard gravity modelling framework is estimated using the Poisson Pseudo Maximum Likelihood (PPML) estimator. The results suggest that the estimated effects of long distance from the major markets such as the US and the EU did not place Bangladesh in a specific disadvantage given the country specializes in low-end standard garments that have longer turnover time on the shop floor.

The next essay (chapter 5) investigates the status and magnitude of structural adjustment and industrial upgrading by conducting a firm-level survey. This essay (chapter 5) argues that the industrial upgrading and structural adjustment that have been taking place in the Bangladesh apparel industry and at the firm level are not satisfactory. The approximate time to get orders and manufacture product is 135 days which indicates that an exporter can have 2 to 3 shipment orders in a year while if the lead-time can be reduced to 60 days, it can receive 6 shipment orders per year.

The final chapter emphasizes that Bangladesh needs to have a deep sea port in order to upgrade its product base from basic to basic-fashion items. This chapter closes with suggestions and potential areas for future research.