the expansion of bangladesh rmg in foreign markets
Transcript of the expansion of bangladesh rmg in foreign markets
The Expansion of Bangladesh
RMG in Foreign Markets
Term Paper for International Business
Emdadul Haque, Jewel Das, Abdullah Al Mamun, Nahid Rijwan
Report on theoretical and practical knowledge about concurrent business strategy and its possible future expansion strategy
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
theoretical and practical knowledge about Bangladesh RMG sector, its concurrent business strategy and its possible future expansion strategy
The Expansion of Bangladesh
RMG in Foreign Markets Term Paper for International Business
Emdadul Haque, Jewel Das, Abdullah Al Mamun, Nahid Rijwan
Bangladesh RMG sector, its concurrent business strategy and its possible future expansion strategy.
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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
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giant competitors provided a guaranteed market for Bangladeshi garments in USA
and Canada, preferential treatment under GSP allowed Bangladeshi apparels a zero-
tariff 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 China’s 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.
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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 country’s
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.
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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
country’s 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
garment manufacturing is a critical issue for Bangladesh.
Second, Bangladesh needs to improve the factory working enviro
social issues related to the RMG industry. International buyers
compliance with codes of conduct. T
diversification as well as upgrading pro
Moreover, the Government of Bangladesh
The development of the port and other phys
utilities, a corruption-free business envi
priority concerns for the Government to consider
international buyers and investors.
The RMG industry is the only multi
industry in Bangladesh. Whereas the industry contributed
the country’s total export earnings in 1976, its share increase
those earnings in 2005. Bangladesh exported garments worth the equivalen
billion in 2005, which was about 2.5 per cent of the global total valu
billion) of garment exports. The country’s RMG industry grew by more than 1
per annum on average during the last 15 years. The foreign exchange e
employment generation of the
from year to year. Some important
noted in table 1.
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raw materials usable in the 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
social issues related to the RMG industry. International buyers are very
compliance with codes of conduct. Third, issues related to product
diversification as well as upgrading products needs to be addressed with
Moreover, the Government of Bangladesh needs to strengthen its support.
The development of the port and other physical infrastructure, the smooth
free business environment and political stability
priority concerns for the Government to consider in its efforts to attract
international buyers and investors.
The RMG industry is the only multi-billion-dollar manufacturing and export
stry in Bangladesh. Whereas the industry contributed only 0.001 per cent to
country’s total export earnings in 1976, its share increased to about 75 per cent of
earnings in 2005. Bangladesh exported garments worth the equivalen
2005, which was about 2.5 per cent of the global total valu
exports. The country’s RMG industry grew by more than 1
during the last 15 years. The foreign exchange e
employment generation of the RMG sector have been increasing at double
m year to year. Some important issues related to the RMG industry of Bangladesh are
reducing the lead time in
nment and various
are very particular about
hird, issues related to product and market
ducts needs to be addressed with special care.
support.
ical infrastructure, the smooth supply of
ronment and political stability are some
in its efforts to attract
lar manufacturing and export
only 0.001 per cent to
d to about 75 per cent of
earnings in 2005. Bangladesh exported garments worth the equivalent of $6.9
2005, which was about 2.5 per cent of the global total value ($276
exports. The country’s RMG industry grew by more than 15 per cent
during the last 15 years. The foreign exchange earnings and
RMG sector have been increasing at double-digit rates
issues related to the RMG industry of Bangladesh are
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In the decade of the 1980s, Bangladesh’s 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
Narayangonj. Bangladesh RMG firms vary in size. Based on Bangladesh Garment
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
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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 country’s 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 1980-
2004 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.
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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 Bangladesh’s 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.
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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, duty-
free 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 industry’s 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 Bangladesh’s 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. Bangladesh’s 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 247-
250 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 Bangladesh’s 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 Bangladesh’s 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.
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 of RMG sector
A typical coordinated marketing channel for the export of Bangladeshi RMG Products is
The basic business process involves the following steps:
Buy Raw materials from suppliers.
Organize Production methods.
Get Buyers requirements design, style, color, material.
Prepare demo sample product and get approved by Buyers QC.
Product Requirements from Customers after satisfactory sample delivery.
Get Order and Shipment Details.
Before shipment go through Quality Checking Inspection.
Shipment and Payment on Delivery.
Business Process of RMG sector
A typical coordinated marketing channel for the export of Bangladeshi RMG Products is
Product Requirements from Customers after satisfactory sample delivery.
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Business Process Flow Diagram:
RMG
MANUFACTURER
Supplier
Organize
Production
Method
Buyers Provide
Design, Style, Color,
Material Samples
Demo
Sample
Approved
Sample
Customer
Buyer’s
QC
Order, Pricing & Shipment Details
Shipment
Process L/C
Pre-shipment QC Inspection
Revised Pricing
Raw Material
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.
Modes of Market Entry:
Several alternative entry strategies can be considered, as shown in Figure
Indirect export
The market-entry technique that offers the lowest level of risk and the least mark
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
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
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
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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Modes of Market Entry:
Several alternative entry strategies can be considered, as shown in Figure
Fig: Entry Modes
entry technique that offers the lowest level of risk and the least mark
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:
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-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
country. If the exporting firm does not follow up the contact with a sustained
marketing effort, it is unlikely to gain future sales.
Several alternative entry strategies can be considered, as shown in Figure
entry technique that offers the lowest level of risk and the least 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 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
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 firm’s home
country. If the exporting firm does not follow up the contact with a sustained
18
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 firm’s 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:
20
• 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 firm’s 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 licensor’s 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
Control Risk Resource
Commitment
Flexibility Ownership
Investments High Low High Low High
Contracts Medium Med-High Med-High Medium Med-High
Exports Low Low Low High Low
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Choice of an Entry Mode:
It is suggested that to conceptualize a firm’s 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 firm’s 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 country’s 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 Government’s
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 pollution-
intensive 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
30
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 Bangladesh’s 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. Mexico’s 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
RMG’s 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. Public power supply is erratic.
v. 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. Cost of doing business is high because of under table money
viii. Lack of marketing tactics
ix. Absence of easily on-hand middle management
x. A small number of manufacturing methods
xi. Lack of training organizations for industrial workers, supervisors and
managers.
xii. Fewer process units for textiles and garments
xiii. Sluggish backward or forward blending procedure
xiv. 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 non-
cooperation 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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An Examination of Competitiveness vis-à-vis China” Paper 62, Centre for Policy
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2. Razzaque, Abdur & Eusuf, Abu; “Trade and Development Linkage: A Case Study of
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2007
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