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

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

Introduction: Although Bangladesh is not developed in industry, it has been enriched in Garment industries in the recent past years. In the field of Industrialization garment industry is a promising step. It has given the opportunity of employment to millions of unemployed, especially innumerable uneducated women of the country. It is making significant contribution in the field of our export income. The garments industries relationship with factor endowment theory is discussed below:

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

Features of the model

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

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

ASSUMPTIONS:

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

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

3.  The theory assumes barter system of exchange.

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

5.  No transport cost.

6.  Perfect competition and full employment.

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

Assumption of factor endowment that related to our Garments industry:

A) Perfect competition: The garments industry in Bangladesh is affected by perfect competition. China, India & Vietnam are the main competitor for Bangladesh in this sector.

B) Competitive advantage: Bangladesh gets some competitive advantage in this sector because of cheap labor & raw material is available.

C) Perfectly mobile: Bangladesh exports their product in USA & other European country. For this we can say that the nature of garments industry is perfectly mobile

D) Nature of factor endowment: The nature of factor endowment theory is different from other countries. Bangladesh get some resource advantage which don’t get the other competitor of Bangladesh.

The ultimate effects of factor endowment theory on International trade of emerging garments industry in Bangladesh:

1. In equalization of commodity price:

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

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

2. In Equalization of factor prices: The effect of interregional trade is a tendency toward equalization of prices of productive factors.

From each region goods containing a large proportion of relatively abundant and cheap factors are exported, and these factors therefore become scarcer than before, whereas, goods containing a large proportion of scarce factors are imported, and the latter factors therefore become less scarce.

The same result could be obtained by a transfer of the factors.

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

In Bangladesh garments industry sector factor of labor is very cheap in compare to other competitor. The following diagram shows the actual condition

 Here,

Wa = Wage in Bangladeshi labor

Wb= wage in other countries

La= labor number in Bangladesh

Lb= labor number in other countries

3. Increasing foreign currency:

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

3

Trade based on factor endowment

Wa increases while Ia decreases.

Wb decreass while Ib increases.

(W/I)b falls

(W/I)b

(W/I)a

(W/I)i

4. Increasing our GDP:

FY GDPs contribution in RMG sector

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

Source: Bangladesh economic review 2008-9

Possible diamonds of garments industry according to Porter’s diamond theory: There are possible four diamonds for garments industry in Bangladesh to take the advantage. They are:

1) Factor conditions2) Related & supporting industry3) Demand conditions4) Firm strategy, structure & rivalry

1) Factor conditions:Competitive advantage from factors depends on how efficiently and effectively they are employed.a) Advance factors: In Bangladesh garments industry has many advance factors.

i. Modern digital data communication infrastructureii. Research industry

iii. Highly educated personnelb) Specialize factors: in Bangladesh garments industry has many specialize factors.

I. Narrowly skilled personnelII. Infrastructure with specic properties

III. Knowledge based in particular fieldsC) Basic factor: in Bangladesh garments industry has many basic factors.

I. Natural resourceII. Climate

III. LocationIV. Unskilled & semi-skilled labor

D) Generalize factors: in Bangladesh garments industry has many generalize factors

I. High way systemII. A supply of debt capital

III. A well motivated educated employees2) Related & supporting industries:In Bangladesh the present in the related & supporting industries that are internationally (such as: neat wear industry ) competitive creates advantages in downstream industries in several ways such as the supply of most cost effective inputs in an efficient and sometimes preferential way. More important however, is the advantage they provide in innovation and upgrading based on close working relationship.

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

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

I. The composition of home demandII. The size of pattern of growth of home demand

Chance

Firm strategy, structure & rivalry

Demand condition

Government

Related & supporting industries

Factor conditions

III. Mechanism by which a nation’s domestic demands are transmittedIn Bangladesh the composition of home demand are very high. But the producer can’t meet the demand because of less production. On the other hand the size of pattern of growth of home demand is decreasing in alarming rate. Besides mechanism by which Bangladesh’s domestic demands are easily transmitted can’t be improved.

5) Firm strategy, structure & rivalry: The main strategy for the garments industry is to minimize the cost and the maximize the profit. Sometimes they get the aid from the govt. to improve their conditions. Structures in the most cases are partnership in garments sector. That’s why the profit they get is equalized by the owners. So the target is to generate lots of profit. There is huge competition in recent time in nationally is facing by the garments industry.

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