Topic of Assignment: Analyze the factor endowment theory in the light of emerging

garments industry in Bangladesh

& find out possible diamonds of these industries in the basis of porter’s diamond of
competitive advantage

Introduction: Although Bangladesh is not developed in industry, it has been enriched in

Garment industries in the recent past years. In the field of Industrialization garment
industry is a promising step. It has given the opportunity of employment to millions of
unemployed, especially innumerable uneducated women of the country. It is making
significant contribution in the field of our export income. The garments industries
relationship with factor endowment theory is discussed below:

Factor endowment theory

The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical
model of international trade, developed by Eli Heckscher and Bertil Ohlin at the
Stockholm School of Economics. It builds on David Ricardo's theory of comparative
advantage by predicting patterns of commerce and production based on the factor
endowments of a trading region. The model essentially says that countries will export
products that utilize their abundant and cheap factor(s) of production and import products
that utilize the countries' scarce factor(s).

Features of the model

Relative endowments of the factors of production (land, labor, and capital) determine a
country's comparative advantage. Countries have comparative advantages in those goods
for which the required factors of production are relatively abundant locally. This is
because the prices of goods are ultimately determined by the prices of their inputs. Goods
that require inputs that are locally abundant will be cheaper to produce than those goods
that require inputs that are locally scarce.

Example: A country where capital and land are abundant but labor is scarce will have
comparative advantage in goods that require lots of capital and land, but little labor—
grains, for example. If capital and land are abundant, their prices will be low. As they are
the main factors used in the production of grain, the price of grain will also be low—and
thus attractive for both local consumption and export. Labor intensive goods on the other
hand will be very expensive to produce since labor is scarce and its price is high.
Therefore, the country is better off importing those goods.

ASSUMPTIONS:

1. The theory of international trade is based on the labor theory of value. With this,
value of any product can be explained in term of labor units.

2. IT is a 2x2 model, 2 countries and 2 commodities.

3. The theory assumes barter system of exchange.

4. IT is a case of free trade without any restriction from either country.

5. No transport cost.

6. Perfect competition and full employment.

But all of these assumptions are not related to our garments industry. The assumptions
which related to our garments industry are given below:

Assumption of factor endowment that related to our Garments industry:

Perfect competition: The garments industry in Bangladesh is affected by perfect

competition. China, India & Vietnam are the main competitor for Bangladesh in
this sector.
Competitive advantage: Bangladesh gets some competitive advantage in this sector
because of cheap labor & raw material is available.
Perfectly mobile: Bangladesh exports their product in USA & other European country.
For this we can say that the nature of garments industry is perfectly mobile
Nature of factor endowment: The nature of factor endowment theory is different from
other countries. Bangladesh get some resource advantage which don’t get the other
competitor of Bangladesh.

The ultimate effects of factor endowment theory on International trade of

emerging garments industry in Bangladesh:

1. In equalization of commodity price:

International trade tends to equalize the prices of internationally traded goods in all
the regions of the world, because trade causes movements of commodities from areas
where there abundant to areas where there scarce.

In Bangladesh for exporting the RMG product there is the level of shortage which
created on the local market. That’s why the price is in equalizing between the local
products & exporting foreign product.

2. In Equalization of factor prices: The effect of interregional trade is a tendency

toward equalization of prices of productive factors.

From each region goods containing a large proportion of relatively abundant and
cheap factors are exported, and these factors therefore become scarcer than before,
whereas, goods containing a large proportion of scarce factors are imported, and the
latter factors therefore become less scarce.
 The same result could be obtained by a transfer of the factors.

As it is, interregional trade serves as a substitute for such interregional factor

movements.

In Bangladesh garments industry sector factor of labor is very cheap in compare to

other competitor. The following diagram shows the actual condition

(W/I)b

Wa increases while
Trade based Ia decreases. (W/I)i
on factor
endowment Wb decreass while (W/I)b falls
Ib increases.
(W/I)a
3

Here,

Wa = Wage in Bangladeshi labor

Wb= wage in other countries

La= labor number in Bangladesh

Lb= labor number in other countries

3. Increasing foreign currency:

The amount of foreign currency is increasing for Bangladesh. Although the world crisis
exists in current time Bangladesh’s foreign currency increase day by day.
4. Increasing our GDP:

FY GDPs contribution in RMG

sector
2004-05 8.49%
2005-6 11.09%
2006-7 13.25%
2007-8 14.7%

Source: Bangladesh economic review 2008-9

Possible diamonds of garments industry according to Porter’s diamond theory:

There are possible four diamonds for garments industry in Bangladesh to take the
advantage. They are:
1) Factor conditions
2) Related & supporting industry
3) Demand conditions
4) Firm strategy, structure & rivalry

1) Factor conditions:
Competitive advantage from factors depends on how efficiently and effectively they are
employed.
a) Advance factors: In Bangladesh garments industry has many advance factors.
i. Modern digital data communication infrastructure
ii. Research industry
iii. Highly educated personnel
b) Specialize factors: in Bangladesh garments industry has many specialize factors.

I. Narrowly skilled personnel

II. Infrastructure with specic properties
III. Knowledge based in particular fields
C) Basic factor: in Bangladesh garments industry has many basic factors.
I. Natural resource
II. Climate
III. Location
IV. Unskilled & semi-skilled labor
D) Generalize factors: in Bangladesh garments industry has many generalize factors
I. High way system
II. A supply of debt capital
III. A well motivated educated employees
2) Related & supporting industries:
In Bangladesh the present in the related & supporting industries that are
internationally (such as: neat wear industry ) competitive creates advantages in
 downstream industries in several ways such as the supply of most cost effective
inputs in an efficient and sometimes preferential way. More important however, is the
advantage they provide in innovation and upgrading based on close working
relationship.

Chance Firm strategy, structure

& rivalry

Factor conditions Demand

condition

Related &
supporting Governm
industries ent

Figure: Factor determining competitive advantage of Bangladesh’s garments industry

3) Demand condition: There are three attributes of home demand which influence
the competitive advantage, e.g.

I. The composition of home demand

II. The size of pattern of growth of home demand
III. Mechanism by which a nation’s domestic demands are transmitted
In Bangladesh the composition of home demand are very high. But the producer can’t
meet the demand because of less production. On the other hand the size of pattern of
growth of home demand is decreasing in alarming rate. Besides mechanism by which
Bangladesh’s domestic demands are easily transmitted can’t be improved.
 5) Firm strategy, structure & rivalry: The main strategy for the garments industry
is to minimize the cost and the maximize the profit. Sometimes they get the aid
from the govt. to improve their conditions. Structures in the most cases are
partnership in garments sector. That’s why the profit they get is equalized by the
owners. So the target is to generate lots of profit. There is huge competition in
recent time in nationally is facing by the garments industry.

Conclusion: in the whole assignment we see that in different way factor endowment
theory affecting our emerging garments industry. It might be beneficial or it might be
harmful. We can conclude that Govt. & industry should work with hand to solve some
restrains which directly affected our garments industry & also consider the variables of
porter’s diamond to take the best use of the chances to develop in this sector