UNIVERSITY OF DHAKA

The Expansion of Bangladesh RMG in Foreign Markets

Term Paper for International Business

Emdadul Haque, Jewel Das, Abdullah Al Mamun, Nahid Rijwan

12/20/2011

Report on theoretical and practical knowledge about Bangladesh RMG sector, its concurrent business strategy and its possible future expansion strategy strategy.

CH-1: Introduction
Readymade garment is a success story for Bangladesh. The industry started in the late 1970s, expanded heavily in the 1980s and boomed in the 1990s. The quick expansion of the industry was possible because of the following unique nature of the industry. The technology is less complicated (easy to transfer), Machineries are cheap and easy to operate (sewing machines), A large female labor force that is easy to train is readily available. Besides the low cost of labor, one of the major factors behind the success of RMG is the availability of offshore financing for world-priced inputs through back-to-back letter of credit (L/C) under the special bonded warehouse scheme. Presence of foreign buyers is also a major factor that introduces the system of international subcontracting. Foreign buying houses not only bring the international market to the doorstep of local entrepreneurs, they also ensure the availability of essential inputs such as imported fabrics and accessories for the industry. They also did the greatest favor for the RMG industry of Bangladesh by bringing the latest designs and by monitoring output quality. These measures especially enabled inexperienced garments entrepreneurs to establish a strong foothold.

Cause of Expanding BD RMG More to the Foreign Market

1. Major changes in the trading environment Phasing out of MFA, inclusion of China into WTO, US Trade and Development Act 2000, and inclusion of some social clauses into the WTO Charter. 2. Role of preferential treatment under MFA and GSP Multi-fiber Agreement (MFA) and Generalized System of Preference (GSP1) mostly facilitated the rapid growth and expansion of the industry. Bangladeshi entrepreneurs took advantage of MFA and GSP facilities to successfully enter into the US, Canada and EU market. The World Bank Country Study shows that during 1980s, US importers actively pursued imports from Bangladesh. While quota restrictions on

giant competitors provided a guaranteed market for Bangladeshi garments in USA and Canada, preferential treatment under GSP allowed Bangladeshi apparels a zerotariff access to markets of the European Community. Quota and GSP, therefore, played a significant role in rapid growth and development of RMG industry in Bangladesh. 3. The phasing out of MFA The phasing out of MFA had occurred in four stages. The UR agreement envisages the phase-out of MFA over the period of ten years from January 1, 1995 and a quota free world had begun from January 1, 2005. However, that the integration system is back loaded, most of the items of interest to Bangladesh was integrated only in the last stage of MFA phase out, on January 1, 2005. With the phasing out of MFA over the long term, there is an import surge into all these (western) markets from the most efficient producers, at the cost of less efficient ones. The eventual abolition of quota, and price and exchange rate considerations, could divert foreign buyers to more traditional sources such as Hong Kong and Korea, or to potentially cheaper sources such as Vietnam, Nepal, Laos and Cambodia. 4. Inclusion of China into WTO The high likelihood of Chinas inclusion into WTO is a special concern particularly for Bangladesh, because China is a major competitor in the global market in most of the important categories where the Revealed Comparative Advantage (RCA) of Bangladesh is greater than one. Evidence shows that when Sweden eliminated all quotas on Textile and Cotton (T&C) products in 1991, a massive shift took place towards China, whereas countries in Southeast Asia and South Asia hardly profited. As also revealed a few years ago, when Canada unilaterally removed quotas on shirts and blouses, there was again a massive shift towards China and particularly a large shift away from Bangladesh. While the value of imports from the four non-OECD suppliers in 1996 (i.e. India, Hong Kong, South Korea and Bangladesh) had decreased by 25% through 1998, the value of imports from China had increased by 140%. The general apprehension is that Bangladeshi RMG will face a serious shock if the same thing happens again.

End Result:
The conversion of GATT into WTO has changed the global trading environment remarkably. Particularly, the phasing out of the Multi-fiber Arrangement (MFA) and abolition of GSP is a serious challenge to many developing countries. Bangladesh has been exporting RMG successfully over two decades with the lowest labor cost in the region. It also has substantial experience in subcontracting with foreign buyers. With the abolition of quota and GSP, the trading environment has become fiercely competitive. Bangladesh, whose economy is heavily dependent on this sub-sector, will now have to compete against textile giants like China and India. Analysis of the internal and external environment suggests eliminating inefficiencies and irregularities from the countrys production and exporting processes. This paper found strong arguments for forward and backward integration, as well as the need to penetrate into new markets and diversify into new products.

CH-2: RMG and Bangladesh Economy

The ready-made garment (RMG) industry of Bangladesh started in the late 1970s and became a prominent player in the economy within a short period of time. The industry has contributed to export earnings, foreign exchange earnings, employment creation, poverty alleviation and the empowerment of women. The export-quota system and the availability of cheap labour are the two main reasons behind the success of the industry. In the 1980s, the RMG industry of Bangladesh was concentrated mainly in manufacturing and exporting woven products. Since the early 1990s, the knit section of the industry has started to expand. Shirts, T-shirts, trousers, sweaters and jackets are the main products manufactured and exported by the industry. Bangladesh exports its RMG products mainly to the United States of America and the European Union. These two destinations account for more than a 90 per cent share of the countrys total earnings from garment exports. The country has achieved some product diversification in both the United States and the European Union. Recently, the country has achieved some level of product upgrading in the European Union, but not to a significant extent in the United States. Bangladesh is less competitive compared with China or India in the United States and it is somewhat competitive in the European Union. The phase-out of the export-quota system from the beginning of 2005 has raised the competitiveness issue of the Bangladesh RMG industry as a top priority topic. The most important task for the industry is to reduce the lead time of garment

manufacturing. The improvement of deep-level competitiveness through a reduction in total production and distribution time will improve surface-level competitiveness by reducing lead time. Such a strategy is important for long-term stable development of the industry, but its implementation will take time. In contrast, the establishment of a central or common bonded warehouse will improve surface-level competitiveness by reducing lead time, but deep-level competitiveness will not be improved and long-term industry development will be delayed. Therefore, granting permission to establish in the private sector such warehouses with special incentives, such as the duty-free import of

raw materials usable in the expor export-oriented garment industry for reducing the lead time in garment manufacturing is a critical issue for Bangladesh. Second, Bangladesh needs to improve the factory working environment and various environment social issues related to the RMG industry. International buyers are very particular about compliance with codes of conduct. Third, Third, issues related to product and market

diversification as well as upgrading products needs to be addressed with special care. products Moreover, the Government of Bangladesh needs to strengthen its support. The development of the port and other physical infrastructure, the smooth supply of physical utilities, a corruption-free business environment and political stability are some free environment priority concerns for the Government to consider in its efforts to attract international buyers and investors. The RMG industry is the only multi multi-billion-dollar manufacturing and export lar industry in Bangladesh. stry Whereas the industry contributed only 0.001 per cent to

the countrys total export earnings in 1976, its share increased to about 75 per cent of increased those earnings in 2005. Bangladesh exported garments worth the equivalen of $6.9 equivalent billion in 2005, which was about 2.5 per cent of the global total valu ($276 value billion) of garment exports. The countrys RMG industry grew by more than 1 per cent 15 per annum on average during the last 15 years. The foreign exchange e earnings and employment generation of the RMG sector have been increasing at double double-digit rates from year to year. Some important issues related to the RMG industry of Bangladesh are m noted in table 1.

In the decade of the 1980s, Bangladeshs exports doubled from US$0.9 billion to US$1.8 billion, which in the next decade increased to just over US$ 5 billion on its way to reach US$10 billion by the end of the fiscal year 2005-06 (Figure 1). Since the beginning of the 1990s exports in US dollars have increased at a rate of 14 percent per annum as against a comparable GDP growth rate of about 5 per cent. This apparently impressive performance of export trade has been single-handedly driven by the RMG sector, which has witnessed its share in total exports rising from virtually nothing in 1980 to 75 percent in 2006. RMG exports comprise woven and knitwear products. Although woven items have traditionally dominated RMG exports, knitwear items, as shown in Figure 2, has demonstrated a very robust growth performance in recent times, increasing its share in total RMG exports from as low as 10 percent in 1992 to 48 percent in 2006.

Currently, there are more than 4,000 RMG firms in Bangladesh. More than 95 percent of those firms are locally owned with the exception of a few foreign firms located in export processing zones (Gonzales, 2002). The RMG firms are located mainly in three main cities: the capital city Dhaka, the port city Chittagong and the industrial city Bangladesh RMG firms vary in size. Based on Bangladesh Garment

Narayangonj.

Manufacturers and Exporters Association (BGMEA) data, it is found that in 1997 more than 75 per cent of the firms employed a maximum of 400 employees each. Garment companies in Bangladesh form formal or informal groups. The grouping helps to share

manufacturing activities, to diversify risks; horizontal as well as vertical coordination can be easily found in such group activities. Ready-made garments manufactured in Bangladesh are divided mainly into two broad categories: woven and knit products. Shirts, T-shirts and trousers are the main

woven products and undergarments, socks, stockings, T-shirts, sweaters and other casual and soft garments are the main knit products. Woven garment products still dominate the garment export earnings of the country. The share of knit garment products has

been increasing since the early 1990s; such products currently account for more than 40 per cent of the countrys total RMG export earnings (BGMEA website). Although

various types of garments are manufactured in the country, only a few categories, such as shirts, T-shirts, trousers, jackets and sweaters, constitute the major production-share (BGMEA website; and Nath, 2001). Economies of scale for large-scale production and export-quota holdings in the corresponding categories are the principal reasons for such a narrow product concentration. Highly labour-intensive nature of production process characterizes the garment industry. Even as late as in 1985, just about 0.1 million people were employed in RMG industry, but within the next 20 years it grew rapidly to reach about 1.9 million, accounting for 35 per cent of all manufacturing employment in the country 80 per cent of whom were women (Rahman, 2004). The trend growth rate of employment for the period 19802004 has been estimated to be 24 percent per annum. It has been suggested that if one considered the jobs created in the complimentary enterprises as a result of the growth in this sector, the number of people either directly or indirectly depending for their employment on the existence and expansion of the RMG sector would rise to three millions. Currently, for every US$3,600 worth of RMG export there is one worker in the industry and over the past two decades the employment elasticity of RMG export has decreased considerably. This is mainly attributable to rising labour productivity and partly due to the changing composition of clothing exports as reflected in the growing share of knit-RMG, which is relatively less labour intensive. The woven sector with an export volume of US$3.5 billion in 2004 employed 1.4 million workers, while there were 0.5 million people in the US$1.9 billion knitwear industry.

Structural Factors and the Growth of the Sector

International Trade Environment: The Demand Side The international trade in textiles and clothing was long restricted in developed countries and the resultant quota system for controlling imports caused global dispersion of production in the sector by limiting imports from countries that would have a larger volume of exports were they not constrained by their quota allocations. While the intention was to provide protection to domestic manufacturing units in the importing countries from the relatively efficient producers in developing countries, the operation of the managed trade regime in the process led to exporting opportunities in countries where textile and clothing were not traditional export items. Many

international business firms, in particular those from the Asian newly industrializing economies (NIEs), facing binding quota restrictions in their own countries, relocated part of their production and trade to other relatively poor developing countries including Bangladesh. As the process of production was labour intensive in nature, especially in the production of apparels, the availability of cheap and easily trainable labour in these countries facilitated the growth and development of the sector. The quota system ensured a reserved market status for the new suppliers and gave them some time to develop and learn the skills required in the production and marketing. Domestic Trade Policy and Producers Response: The Supply Side Apart from the international trade environment, the growth of the RMG sector in the country coincided with Bangladeshs changing trade policy regime, providing the much needed policy support to the export sector. Up till the early 1980s Bangladesh followed a very rigid import-substituting trade regime. This generated a highly distorted incentive structure resulting in widespread allocative and productive inefficiency, which not only inhibited the prospect for growth but also led to a policy induced anti-export bias thereby undermining the potential for export growth. In the face of serious macroeconomic imbalances and stagnating export performance, the policy of reforms for stabilization and structural adjustment was undertaken. This policy reversal introduced generous promotional measures for exports so that the erstwhile bias against the export-oriented investment could be reduced significantly.

Important export-promotion schemes include, inter alia, allowing exporters to open letter of credit (L/Cs) for the required imports of raw materials against their export L/Cs (popularly known as the back-to-back L/Cs), bank credit at a subsidized rate of interest, duty free import of machinery, providing intermediate inputs at world price either by bonded warehouse or by duty draw back facilities, cash subsidies, and exemption from value-added and other taxes. The most important incentive schemes that Bangladesh has so far undertaken for the promotion of RMG exports in particular. Along with these promotional schemes, dutyfree and quota-free access to the EU market greatly contributed to the growth of the RMG sector. These incentives available to exporters to a large extent mitigated the problem of policy induced anti-export bias especially against the RMG sector. Amongst other supply side issues, infrastructure has always been and continues to be a prime cause for concerns for industrial and export growth. Inefficiencies in ports and inland transportation along with the industrys critical dependence on imported raw materials (especially for woven RMG products) would imply much longer lead time i.e. the time between the receipt of export orders and their reaching the importing countries ports. Currently, the average lead-time for Bangladeshs export consignment varies between 90-120 days in comparison with an envisaged ideal situation of 30-45 days. When a significant proportion of the raw materials for the finished products have to be imported from abroad, which is usually procured under a back-to-back L/C, the delivery chain involves a two-way shipping, requiring a relatively long delivery time. This problem is exacerbated by poor management and lack of equipments in ports. Bangladeshs main seaport, Chittagong, handles about 100-05 lifts per berth a day, which is far below the standard 230 lifts a day as suggested by UNCTAD. Ship turnaround time is five to six days compared about one day in efficient ports thus causing severe congestion (World Bank-BEI, 2003). All this makes the Chittagong port as one of the most expensive routes to international trade. Another major supply side issue has long been affecting the Bangladeshi producers and overtime has only deteriorated is the inadequate and unreliable electricity supply. According to one survey, firms in Bangladesh experience power interruptions 247250 days a year causing 3-3.3 percent output loss. More than 80 percent of the producing units therefore have to rely on generators for uninterrupted power supply.
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Since electricity produced from the generators are much more expensive than the supplies from the national grid, excessive costs undermine the competitiveness of the exporters. Shortage of skilled labour is another problem. As Bangladesh mainly produces low value added bulk products with relatively unskilled workers, entrepreneurs so far have managed to tackle this problem through low-paid on-the-job training. However, in the absence of readily available skilled workers and managers the task of diversifying into high-value added items has proven to be difficult. Apart from the above-mentioned factors, invisible costs of doing business, and poor institutions, political unrest and natural calamities have affected the business of RMG firms in Bangladesh. Since Bangladeshs exports of RMG grew taking the advantage of MFA quotas that restricted the export supply from many other relatively efficient and advanced developing countries (such as India and China) and since supply side factors did not show any marked improvement, there had been a great deal of apprehension about Bangladeshs continued success in clothing exports after the expiry of MFA. In fact, several academic exercises predicted severe consequences for Bangladesh. However, after two years of the quota elimination, Bangladesh has managed to maintain it past growth performance. Safeguard measures slapped on China by the EU and US are thought to have protected sourcing from Bangladesh. From 2008 when these measures will have to be withdrawn, it is now feared that, the real pressure on the country will begin to emerge.

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CH-3: Business Process of RMG sector

A typical coordinated marketing channel for the export of Bangladeshi RMG Products is as shown below:

The basic business process involves the following steps: 1. Buy Raw materials from suppliers. 2. Arrange Organize Production methods. 3. Get Buyers requirements design, style, color, material. 4. Prepare demo sample product and get approved by Buyers QC. 5. Product Requirements from Customers after satisfactory sample delivery. 6. Get Order and Shipment Details. 7. Process L/C. 8. Before shipment go through Quality Checking Inspection. 9. Revised pricing. 10. Shipment and Payment on Delivery.

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Business Process Flow Diagram:

Supplier

Raw Material Organize Production Method Buyers Provide Design, Style, Color, Material Samples

RMG MANUFACTURER

Demo Sample

Buyers QC

Approved Sample

Order, Pricing & Shipment Details

Customer

Process L/C

Pre-shipment QC Inspection

Revised Pricing

Shipment

Payment of Delivery

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CH-4: Market Entry Strategy for Bangladesh RMG

When an organization has made a decision to enter an overseas market, there are a variety of options open to it. These options vary with cost, risk and the degree of control which can be exercised over them. The simplest form of entry strategy is exporting using either a direct or indirect method such as an agent, in the case of the former, or countertrade, in the case of the latter. More complex forms include truly global operations which may involve joint ventures, or export processing zones. Having decided on the form of export strategy, decisions have to be made on the specific channels. Many agricultural products of a raw or commodity nature use agents, distributors or involve Government, whereas processed materials (as like RMG products), whilst not excluding these, rely more heavily on more sophisticated forms of access.

Basic issues
An organization wishing to "go international" faces three major issues: 1. Marketing - which countries, which segments, how to manage and implement marketing effort, how to enter - with intermediaries or directly? 2. Sourcing - whether to obtain products, make or buy? 3. Investment and control - joint venture, global partner, acquisition?

Marketing Issues:
Product support Product sourcing New products Product management Product testing Manufacturing specifications Labeling Packaging Production control Market information Promotion/selling support Advertising Promotion Literature Direct mail Exhibitions, trade shows Printing Selling (direct) Sales force Agents commissions Sale or returns
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Price support Establishment of prices Discounts Distribution and maintenance of pricelists Competitive information Training of agents/customers

Inventory support Inventory management Warehousing Distribution Parts supply Credit authorization

Service support Market information/intelligence Quotes processing Technical aid assistance After sales Guarantees Warranties/claims Merchandising Sales reports, catalogues literature Customer care Budgets Data processing systems Insurance Tax services Legal services Translation

Distribution support Funds provision Raising of capital Order processing Export preparation and documentation Freight forwarding Insurance Arbitration

Financial support Billing, collecting invoices Hire, rentals Planning, scheduling budget data Auditing

Market Choice Decision:

The choices of foreign markets depend on their long run profit potential. Favorable markets are: Politically stable developed Developing nations with free market systems Relatively low inflation rates and private sector debt
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And less desirable markets are: Politically unstable developing nations Developing nations with mixed or command economies Developing nations with excessive levels of borrowing

Markets are also more attractive: When the product in question is not widely available Satisfies an unmet need

Cunningham identified five strategies used by firms for entry into new foreign markets: 1. Technical innovation strategy - perceived and demonstrable superior products 2. Product adaptation strategy - modifications to existing products 3. Availability and security strategy - overcome transport risks by countering perceived risks 4. Low price strategy - penetration price and, 5. Total adaptation and conformity strategy - foreign producer gives a straight copy. In building a market entry strategy, time is a crucial factor. The building of an intelligence system and creating an image through promotion takes time, effort and money. Brand names do not appear overnight. Large investments in promotion campaigns are needed. Transaction costs also are a critical factor in building up a market entry strategy and can become a high barrier to international trade. Costs include search and bargaining costs. Physical distance, language barriers, logistics costs and risk limit the direct monitoring of trade partners. Enforcement of contracts may be costly and weak legal integration between countries makes things difficult. Also, these factors are important when considering a market entry strategy. In fact these factors may be so costly and risky that Governments, rather than private individuals, often get involved in commodity systems.

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Modes of Market Entry:

Several alternative entry strategies can be considered, as shown in Figure

Fig: Entry Modes

Indirect export
The market-entry technique that offers the lowest level of risk and the least mark entry market control is indirect export, in which products are carried abroad by others. The firm is not engaging in international marketing and no special activity is carried on within the firm; the sale is handled like domestic sales. There are several different methods of indirect exporting: 1. The simplest method is to deal with foreign sales through the domestic sales organization. For example, if a firm receives an unsolicited order from a customer in Spain and responds to the request on a one one-off basis, it is engaging in casual exporting. Alternatively, a foreign buyer may approach to the firm. Products are sold in the domestic market but used or resold abroad. This type of arrangement may arise if, for example, a foreign department store has a buying office in the firms home country. If the exporting firm does not follow up the contact with a sustained marketing effort, it is unlikely to gain future sales.
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2. A second form of indirect exporting is the use of international trading companies with local offices all over the world. Perhaps the best-known trading companies are the Sogo Sosha of Japan such as Mitsui or Mitsubishi. The size and market coverage of these trading companies make them attractive distributors, especially with their credit reliability and their information network. The trading companies of European origin are important primarily in trade with former European colonies, particularly Africa and Southeast Asia. The drawback to the use of trading companies is that they are likely to carry competing products and the firms products might not receive the attention and support the firm desires. 3. A third form of indirect exporting is the export management company located in the same country as the producing firm and which plays the role of an export department. That is the firm has the performance of an export department without establishing one in the firm. The economic advantage arises because the export company performs the export function for several firms at the same time. The producer can establish closer relationships and gains instant foreign market contacts and knowledge. The firm is spared the burden of developing in-house expertise in exporting. The method of payment is the commission and the costs are variable. Export management companies handle different but complementary product lines which can often get better foreign representation than the products of just one manufacturer. Indirect export can open up new markets without requiring special expertise or investment. Both the international know-how and the sales achieved by these indirect approaches are generally limited. In this approach, the commitment to international markets is very weak.

Direct export
Exporting requires a partnership between exporter, importer, government and transport. Without these four coordinating activities the risk of failure is increased. Contracts between buyer and seller are a must. Forwarders and agents can play a vital role in the logistics procedures such as booking air space and arranging documentation. As we can see, it is still in the indirect exporting stage. If the apparel manufacturers intend to implement the direct exporting channel, for sure they are going to be benefited.

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In direct exporting, the firm becomes directly involved in marketing its products in foreign markets, because the firm itself performs the export task (rather than delegating it to others). This necessitates the creation of an export department responsible for tasks such as: Market contact Market research Physical distribution Export documentation Pricing.

This approach to export requires more corporate resources and also entails greater risks. The expected benefits are: Increased sales Greater control Better market information Development of expertise in international marketing.

To implement a direct exporting strategy, the firm must have representation in the foreign markets. This can be achieved in a number of ways: Sending international sales representatives into the foreign market to establish contacts and to directly negotiate sales contracts. Selecting local representatives or agents to prospect the market, to contact potential customers and to negotiate on behalf of the exporting firm. Using independent local distributors who will buy the products to resell them in the local market (with or without exclusivity). Creating a fully owned commercial subsidiary to have a greater control over foreign operations. (In most cases, the commercial subsidiary will be a joint venture created with a local firm to gain access to local relationships.)

Foreign manufacturing
Under certain conditions, a firm may find it either impossible or undesirable to supply foreign markets from domestic production sources. For example:
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Transportation costs may be too high for heavy or bulky products Custom rates or quotas on imports can render products non-competitive Government preferences for local products can prevent entry in the foreign market

Any of these conditions could force the firm to manufacture in foreign markets in order to sell there. Positive factors can also induce the firm to produce abroad for example: The size and the attractiveness of the market Lower production costs Economic incentives given by public authorities.

Varied approaches can be adapted to foreign manufacturing.

Assembling
Assembling is a compromise between exporting and foreign manufacturing. The firm produces domestically all or most of the components or ingredients of its product and ships them to foreign markets to be put together as a finished product. By shipping CKD (completely knocked down), the firm is saving on transportation costs and also on custom tariffs which are generally lower on unassembled equipment than on finished products. Another benefit is the use of local employment which facilitates the integration of the firm in the foreign market. Notable examples of foreign assembly are the automobile and farm equipment industries. In similar fashion, Coca-Cola ships its syrup to foreign markets where local bottle plants add the water and the container.

Contract manufacturing
In contract manufacturing, the firms product is produced in the foreign market by local producer under contract with the firm. Because the contract covers only manufacturing, marketing is handled by a sales subsidiary of the firm which keeps the market control. Contract manufacturing obviates the need for plant investment, transportation costs and custom tariffs and the firm gets the advantage of advertising its product as locally made. Contract manufacturing also enables the firm to avoid labour and other problems that may arise from its lack of familiarity with the local economy and culture.
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A drawback to contract manufacturing is loss of profit margin on production activities, particularly if labour costs are lower in the foreign market. There is also the risk of transferring the technological know-how to a potential foreign competitor. This risk is lessened, however, where brand names and the marketing know-how are the key success factors. A frequent problem is also quality control.

Licensing
Licensing is another way to enter a foreign market with a limited degree of risk. It differs from contract manufacturing in that it is usually for a longer term and involves greater responsibilities for the local producer. Licensing is similar to franchising except that the franchising organization tends to be more directly involved in the development and control of the marketing program. The international licensing firm gives the licensee patent rights, trademark rights, copyrights or know-how on products and processes. In return, the licensee will- Produce the licensors products, Market these products in his assigned territory and Pay the licensor royalties related to the sales volume of the products. This type of agreement is generally welcomed by foreign public authorities because it brings technology into the country. The major drawback of licensing is the problem of controlling the licensee due to the absence of direct commitment from the international firm granting the licence. After few years, once the know-how is transferred, there is a risk that the foreign firm may begin to act on its own and the international firm may therefore lose that market.

Joint ventures
Foreign joint ventures have much in common with licensing. The major difference is that in joint ventures, the international firm has an equity position and a management voice in the foreign firm. A partnership between host- and home-country firms is formed, usually resulting in the creation of a third firm. This type of agreement gives the international firm better control over operations and also access to local market knowledge. The international firm has access to the network of
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relationships of the franchisee and is less exposed to the risk expropriation thanks to the partnership with the local firm. This type of agreement is very popular in international management. Its popularity stems from the fact that it permits the avoidance of control problems of the other types of foreign market entry strategies. In addition, the presence of the local firm facilitates the integration of the international firm in a foreign environment.

Direct investments
According to Kotler and Keller the ultimate market entry mode is direct investment where the company has direct ownership of foreign-based facilities for manufacturing or assembly. This can happen either by buying part or full interest in a local company or by building its own facilities. If the ownership is complete this is referred to as sole venture or wholly owned subsidiary. If a part of a local company is bought it might be easy to confuse with a joint venture, but the distinction is clear. A joint venture results in a new legal entity whereas partial ownership through direct investment means investing in an existing legal entity. In this arrangement, the international firm makes a direct investment in a production unit in a foreign market. It is the greatest commitment since there is a 100% ownership. The international firm can obtain wholly foreign production facilities in two primary ways:

- It can make a direct acquisition or merger in the host market - It can develop its own facilities from the ground up.
In some countries, governments prohibit 100% ownership by the international firm and demand licensing or joint ventures instead.

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Comparative Entry Strategies

The various entry mode options form a continuum; as shown on this slide, the level of involvement, risk, and financial reward increases as a company moves from market entry strategies such as licensing to joint ventures and ultimately, various forms of investment. When a global company seeks to enter a developing country market, there is an additional strategy issue to address: Whether to replicate the strategy that served the company well in developed markets without significant adaptation. To the extent that the objective of entering the market is to achieve penetration, executives at global companies are well advised to consider embracing a mass-market mind-set. This may well mandate an adaptation strategy. Here is analyzed the characteristics of export, contractual and investment entry modes from five aspects of control, dissemination risk, resource commitment, flexibility and ownership. Entry Method Investments Contracts Exports High Low Control Risk Resource Commitment High Med-High Low Low Medium High High Med-High Low Flexibility Ownership

Medium Med-High Low Low

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Choice of an Entry Mode:

It is suggested that to conceptualize a firms desired level of different mode characteristics without considering its actual entry mode used; the efficacy of mode choice models would be improved. Based on this advice a diverse range of situational influences that could bear on a firms desire for certain characteristic of mode choice. Some factors would influence a firm to choose a desired entry mode. These factors were summarized in the following table-

Situational influences

Firm factor

Firm-specific advantages Experience Strategic considerations

Environmental factors

Demand and competitive conditions Political and economic conditions Socio-cultural conditions

Moderating variables

Government policies and regulations Firm size Corporate policies

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Entry Decision Framework

Fig: Entry mode choice framework Here is introduced a dynamic mode choice framework different from previous conceptualization of mode choice which just depict a series of situational influence directly affecting mode choice. Therefore a firm cannot just consider an institutionalizing mode; it needs to consider the characteristics of modes, the firm factors, environmental factors and other factors when it chooses entry mode.

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CH-5: SWOT Analysis

The new environment represents a serious threat to Bangladesh. On the one hand, it is opening a vast market with unlimited export potentials; on the other hand, it signals fierce competition from textile giants like China, India and, from efficient producers like Thailand, Sri Lanka and Vietnam. Competition may also come from Sub Saharan Africa and the Caribbean countries due to preferential treatment from USA through TDA 2000. Different regional agreements like NAFTA also appear to be unfavorable for the RMG sector of Bangladesh. Given the changed scenario described above, the following sections focus on SWOT (strengths & weaknesses and opportunities & threats) analysis of the RMG industry of Bangladesh.

Strengths
One of the strengths behind the success of RMG of Bangladesh is the availability of low cost labor compared to other countries in the region. The labor rates in textile industry (compiled by Warner International) show that the average hourly wage rates for Bangladesh, India, Pakistan and Sri Lanka were respectively US$ 0.23, $0.56, $0.49 and $0.39 (Bhattacharya 1999a). Being in the manufacturing of RMG for two decades, Bangladesh now possesses a large pool of skilled & semiskilled manpower. Moreover, there are many unemployed young men and women who can easily be converted into a skilled workforce if needed. Given the fairly long learning curve in this industry, extensive experience in dealing with foreign buyers, offshore bankers, shippers, and Clearing and Forwarding (C&F) agents is a valuable asset for the exporters of Bangladesh.

Weaknesses
Dependence on others for raw materials, low productivity, limited knowledge in international marketing information, poor infrastructure, political instability, disruptive trade unionism, inefficiency in port management, and excessive dependence on RMG sub-sector are the major weaknesses of the industry.
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The industry is heavily dependent on others for outsourcing of raw materials such as clothing and accessories. Bangladesh is currently importing raw materials (gray fabrics) for its RMG factories from countries like India, China and Thailand under back-to-back L/Cs. In a quota free environment, these countries will obviously try to export finished apparels to North American markets rather than sell fabrics to countries like Bangladesh (Bhattacharya 1999b). With equal access to the world market, these direct competitors will either stop selling materials to their competitors like Bangladesh (a strategic move) or charge higher prices for their materials (because of increased internal demand). In either case, Bangladesh will face difficulty in procuring the required raw materials at reasonable prices. Another major shortcoming of the apparel sector is the low productivity of its workers. The laborer productivity of Bangladesh is much lower than that of Sri Lanka, South Korea and Hong Kong (Reza, Rashid and Rahman 1998). Low productivity might erode the advantage of low cost of labor of Bangladesh. Exporters of Bangladesh also have limited access to current market intelligence and international trade information because, so far, foreign buying houses have been dominating the marketing part of the business. In a post MFA era, if these buying houses shift their bases to other countries, Bangladeshi exporters may face serious problems in finding their ultimate buyers. At present problems in port management is a serious challenge to RMG industry of Bangladesh. The Chittagong Port is the most important entry and exit point for trade and commerce of the country. Almost 90 percent of the exports and 75 percent of the imports of Bangladesh are accomplished through the Chittagong Port. Therefore, it is considered as the countrys economic lifeline. The Chittagong Port is one of the most inefficient and corrupt ports in the world. A World Bank study estimated that handling charges for a 20-foot container were $640 in Chittagong compared with $220 in Colombo and $360 in Bangkok. The study added, inefficiency at Chittagong port could be costing the economy as much as $600 million annually. Besides this, there are numerous demands for under-the-table payments that are reportedly required at every step of export processing, from opening of letters of credit to the clearance of goods from Customs. According to a survey, the hidden costs paid by importers per consignment ranged from Tk.4, 700 to Tk.36, 800 (about US$100 to $735). These inefficiencies and corruption seriously hamper the competitiveness of Bangladeshi garment in the world market.
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Besides numerous procedural, physical and/or infrastructure related bottlenecks; some sociopolitical consequences have added fuel to the chronic go-slow and congestion problem at the port. Some of these problems are: Frequent work stoppage by different service providers, dock laborers, transport workers etc. Excessive dock labor unionism (there are about 30 different agencies/groups including 22 workers unions). Politicization of Collective Bargaining Agents (CBA). Direct involvement of powerful local politicians, elite and musclemen Illegal gratification practices (it has been a common phenomenon since long).

These vested interest groups are so powerful that they were able to stop the Governments attempts to construct a private container terminal near the Chittagong Port and another at Patenga which were supposed to be funded by the Asian Development Bank. This and many similar activities of different groups are undoubtedly unlawful but it seems that nobody has the ability to stop it.

Opportunities
The greatest opportunities lie on the unlimited market outside Bangladesh. In a quota free world, the United Nations Commission for Trade and Development (UNCTAD 1986) estimated that removal of the MFA and tariffs by developed countries will expand exports of clothing by 135 percent and textile by 78 percent. Trela and Whalley (1990), using a global general equilibrium model, estimated that the change will be much larger: the value of imports of textiles and clothing will rise by 305 percent in the US, 200 percent in Canada, and 190 percent in EU. This indicates that phasing out of quota will expand the market tremendously. Asia by far is the largest player in the world textile and clothing market and, industry experts are confident that, overall, Asia still will dominate. Although Bangladesh lags behind in the textile sub-sector, it is very likely that the sector will get a boost through forward integration with RMG. In the knitting sector,

Bangladesh gained substantial competitive advantage over her competitors. According to the Bangladesh Knitwear Management and Exporters Association (BKMEA), the cost of yarn production per kg. In the private sector of Bangladesh is only US$1.48, whereas in
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India it is $1.78 in Pakistan $1.60, in Japan $2.38, in Korea $1.73 and in Thailand $2.78. Therefore, knit-RMG has a good prospect for Bangladesh in post MFA period. The apparel sector of Bangladesh mainly exports low-cost products to the international market. But she can move into high value added products through diversification. This is not impossible given her two decades of experience, good relationship with buyers, worldwide reputation, and presence in quality-conscious United States and EU markets. Recently it has already penetrated the difficult but lucrative quality-conscious Japanese market.

Threats
The biggest threat will be the fierce competition from efficient producers like Hong Kong, China, India, Thailand, and Sri Lanka, Vietnam and many SSA and Caribbean countries. Threats might come not only from marketing but also from outsourcing. As mentioned earlier, more than 95 percent fabrics are imported from direct competitors. The potential danger after 2005 is that these countries might either stop selling their raw materials to Bangladesh or increase the price of their materials tremendously. Whatever may be the case, Bangladesh will lose some competitive edge in the world market. Environmental issues, labor standard, Trade Related Aspects of Intellectual Property Rights (TRIPs) etc. might also appear as a deadly threat to developing countries like Bangladesh. Although developing countries are not being singled out for environmental issues, being poorer, they cannot obviously maintain rigorous environmental standards. Moreover, the fact that their competitive advantage often lies in natural resources and pollutionintensive industries implies that they are vulnerable to being pressured to enforce stricter standards or face less market access for their exports to developed countries. Other issue like child labor has already proved as a sensitive issue in the western market. Compliance to the Rules of Origin4 (ROO) may threaten the future market access and performance of RMG sector of Bangladesh. In the case of woven-RMG, a two-stage, and in the case of knit-RMG, a three-stage transformation (cotton to yarn, yarn to fabrics, and fabrics to RMG) process is required for imported yarn from India. Bangladesh exporters

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also had to pay back exempted duties amounting to about US$60 million to EU on the grounds of ROO violation and circumvention. Regionalism is another threat to the industry. The World Bank country study expresses its concerns that Over the medium term it is also possible that NAFTA may lead to a displacement of East Asian RMG imports into the U.S. and Canada. To the extent these exports by the more efficient East Asian producers are then diverted to the European Community, they may tend to displace Bangladeshs RMG exports into Europe. In the US market another challenge will come from Mexican apparel industry where it has zero tariff access because of NAFTA. Mexicos share in US clothing imports increased by over 200% in the period 1993-98.

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CH-6: Recommendations & Conclusion

Recommendations:
Based on this Report findings, we hereby states that, though Bangladesh is now the third largest country in RMG production, there are several problems still standing in between RMGs success and smooth running. We noticed while preparing this report, there are numbers of drawbacks in this sector which needs to be taken care of by proper authority (Government, BGMEA and other stakeholders). These are as follows: i. Bangladesh produces mostly basic products- which are low cost items; the share of fashion products i.e., high value added product is very low. ii. Bangladesh does not produce the basic raw materials (only a negligible quantity of cotton but no manufactured fiber) and as such has to depend totally on sensitive global market. iii. Because of inadequate backward linkage, lead-time happens to be long, nearly 3 months. iv. v. Public power supply is erratic. Bank interest rate is still high enough, particularly of private sector bank, for investment of export oriented high value project. vi. HRD facility, productivity and quality support, testing and accreditation support, design support and compliances are yet to be enhanced. vii. viii. ix. x. xi. Cost of doing business is high because of under table money Lack of marketing tactics Absence of easily on-hand middle management A small number of manufacturing methods Lack of training organizations for industrial workers, supervisors and managers. xii. xiii. xiv. Fewer process units for textiles and garments Sluggish backward or forward blending procedure Incompetent ports, entry/exit complicated and loading/unloading takes much time

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xv.

Unless new strong market is explored in home or abroad, any noncooperation from USA & EU may jeopardize the whole Bangladesh RMG export business and consequently the textile manufacturing.

xvi.

Sudden price hike of cotton and yarn in the global market may push Bangladesh to a very awkward situation to devastate the business.

xvii.

The type of labor and political anarchies of the recent days if prevails in the future, Bangladesh may lose the business in the way Sri Lanka has lost.

Conclusion:
Bangladesh economy at present is more globally integrated than at any time in the past. The MFA phase-out will lead to more efficient global realignments of the textile and clothing industry. The phase out was expected to have negative impact on the economy of Bangladesh. Recent data reveals that Bangladesh absorbed the shock successfully and indeed RMG exports grew significantly.

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BIBLIOGRAPHY
1. Rahman, Mustafizur & Anwar, Asif; Bangladesh Apparels Export to the US Market: An Examination of Competitiveness vis--vis China Paper 62, Centre for Policy Dialogue (CPD), September, 2006 2. Razzaque, Abdur & Eusuf, Abu; Trade and Development Linkage: A Case Study of Ready Made Garment Industry in Bangladesh Unnayan Shamannay, Dhaka, April 2007 3. Haider, Mohammed Ziaul; Competitiveness of the Bangladesh Ready-made Garment Industry in Major International Markets; Asia-Pacific Trade and Investment Review; Vol. 3, No. 1, June 2007 4. Murshid, Khan Ahmed Sayeed; THE GLOBAL FINANCIAL CRISIS

IMPLICATIONS FOR BANGLADESH; BIDS-PRP WORKING PAPER SERIES, 2009; Working Paper No. 1 5. Economic Policy Paper on Improving Access for Bangladesh in Global Markets; Prepared under the DCCI-CIPE/ERRA Project, 2005; Dhaka Chamber of Commerce and Industry (DCCI) 6. INTERNATIONAL MARKET EXPANSION; Calx Europe, November 2007 7. Robbani, M Golam; WORLD TRADE ORGANIZATION AND THE

READYMADE GARMENT INDUSTRY OF BANGLADESH: A CRITICAL ANALYSIS; 2005 8. Entry Modes for International Markets; International Review of Business Research Papers; Vol.3 No.1. March 2007, Pp.183 196 9. Market-Driven Management: Entry Strategies in Foreign Markets; 2007; chapters: 10 (page 249), 13 (page 300) 10. http://www.fao.org/docrep/W5973E/w5973e0b.htm; Chapter 7; FAO Corporate Document Repository Market Entry Strategies:

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