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close this bookDeveloping the non-farm Sector in Bangladesh: Lessons from other Asian Countries (WB, 1996, 116 p.)
close this folderRural industry and export-led growth
View the document(introduction...)
View the documentPossibilities for foreign investment
View the documentDomestic hardles
View the documentFinancing of new enterprises
View the documentNiche exporting

Domestic hardles

Commercial production of fruit and vegetables is already well established in Bangladesh.

But a modern food processing industry has not yet taken root. Again, the technological and capital-related barriers to entry are not daunting. Two changes are needed: the willingness to enter a higher technological milieu and the development of a marketing environment that enforces international standards. Important to these developments is the established, conventional, and widely traded nature of the technology, which eases entry and offers a technological fix for initial teething difficulties. Also, mature external markets establish clearly what is required of a new producer. Standards, protocols, and business expectations are explicit and easy to imitate. There is a number of hurdles that exporters of garments made from indigenous handwoven fabrics or exporters of Asian vegetables must surmount. First, undeveloped local markets pose a serious handicap. Consumers in Bangladesh do not demand consistently high standards of quality, cleanliness, uniformity of products, ultra-high temperature processing for perishable foodstuffs, aseptic packaging, and adherence to precise specifications (such as color, shape, size, texture, moisture content, acidity, and so on for fruits and vegetables.). In the case of indigenous material-based garments, consumers are also not looking for frequent changes in styles, weaves, colors, and blends of fiber-details for maintaining international competitiveness.

Thus producers have no exposure to a modern market environment and are easily discouraged by the demands of foreign buyers. Psychological capital must be expanded before successful exporting can begin. Aside from the mental readiness to accept an alien set of market rules, in many instances a "traditional" production function must be deconstructed and replaced by technologically sophisticated procedures that, initially, require training in techniques and in the conscious acceptance of new standards. Eventually, as East Asian experience has clearly revealed, producers learn to accommodate divergent rules and business practices, dealing with the domestic and foreign markets differently.

Second, rural areas in Bangladesh, especially those far from the main cities, often lack electricity. This absence does not hinder agriculture, but it impedes growth of rural manufacturing and circumscribes its location. Producers of horticultural products that are unable to invest in generators are handicapped because the product, is perishable and thus 35 dependent on a cold chain, refrigerated storage and rapid processing.

Third, meeting international standards almost inevitably calls for additional investment in equipment and technology, much of which must be imported. Equipment and technology can be obtained with relative ease, but the appropriate channels must be identified, search costs incurred, false starts accepted, and information distinguished from noise. Learning to use a new technology can be expensive. And although an exportoriented production system can be introduced with foreign assistance, it must eventually be sustained and serviced by a home grown support network. This is another element of sunk costs: exporters must shoulder part of the costs of network development by entering into contractual arrangements with suppliers. Manufacturers in southern China were able to break into foreign markets with amazing speed because Hong Kong had already incurred the sunk costs of building a support system network, which provided new Chinese entrants with intermediate inputs.

Overseas marketing networks will be decisive to success for every exported good. Bangladeshi producers can link up with multinational marketing companies, such as del Monte, and use the companies' brand names and distribution systems to sell worldwide. Or, large Western retailers that purchase ready-made garments might provide outlets for rural industry. The overseas Asian business community may offer a third possibility. Asians are becoming better represented among businessmen and professionals in industrialized countries. They have the capital, market information, and connections to advise which products from Bangladesh have good sales prospects and to orchestrate marketing and distribution strategies. The Asian community in Britain was instrumental in helping Kenyan vegetable producers find a market (Jaffe 1994). Asians overseas also boast a reservoir of technical skills, which could help launch new industries and could be transferred to Bangladeshis.

Fourth, export financing, the opening of letters of credit (L/Cs), and arranging payments through banks can be problematic for beginners, especially for rural producers that have access to only the most rudimentary banking facilities. In southern China the Hong Kong nexus aided the inexperienced enterprises from the Pearl River Delta, in ping their toes in export markets. The plight of Senegalese manufacturers attempting to sell textiles and ethnic goods to major US retailers is more typical. After a promising trial run, the effort by the two sides to consummate the first sizable order was extremely trying.

Biggs and others (1994) observe that from the perspective of the Senegalese firm, "the financing of [export] transaction was the greatest obstacle to successful completion of the order. The letter of credit (LC) was finalized only four months after the original order was placed. This delay in financing delayed production. The [Senegalese manufacturer] had no previous experience financing exports using LCs, and was overwhelmed by the financial aspects of the transaction. This was compounded by the complex structure of the LC".

Fifth, most producers in developing countries plunge into the export business carrying high discount rates. They expect to earn large profits within a year or two and quickly recoup the initial outlay. But mature businesses, such as garments or horticultural products, such a performance is nearly impossible. Because of the ease of entry, intense competitiveness of international markets, and necessity of building a reputation, profits accrue only after a lag, and net returns on capital are rarely more than single digit. Winners must be prepared to stay the course, acquire a reputation, and export large volumes, preferably in more than one important market. In mature markets supplying first-tier mass consumption products, exporters must aim for volume if they want large gross earnings. Profitability improves with higher quality items aimed at smaller, albeit more prosperous, segments of the market. But scaling the quality ladder takes time and progressive investment in skill development and equipment.