Case study 2: Bangladesh’s LCPs in the booming garment industry The Bangladeshi garment industry started to take off in the 1980s, and from 1983/84

to 2015/16, exports increased from US$31.57 million (representing about 4 per cent of total Bangladeshi exports) to US$28,034.16 million (accounting then for 82 per cent) (Weiss, 2016). Investors in the industry were attracted to the country in the 1980s due to the Multi-Fibre Arrangement quota systems and the low cost of labour in the country, as well as the large domestic market (Weiss, 2016). Various phenomena helped Bangladeshi firms take advantage of this influx of investors and boost exports, including: financial incentives (such as tax exemption on export profits and import duty exemption for exporters); the encouragement of joint ventures with foreign firms (such as Daewoo, a Republic of Korea firm; and Desh Garments of Bangladesh in 1979 (Khan, 2013a)); and export processing zones establishment (Weiss, 2016; Yunus and Yamagata, 2012).

The partnership between Daewoo and Desh can be seen as a local content policy, in that Daewoo was permitted to operate in Bangladesh, and reap 8 per cent of sales revenue as a royalty (very high for a low-margin sector) from garments sold by Desh, only on the condition that the Republic of Korea company helped the

development of Bangladeshi managers’ skills. Daewoo hosted about 130 garment industry production managers from Bangladesh in Busan, the location of an advanced garments factory. On their return, 115 of these managers set up their own establishments, producing garments, thus creating new employment opportunities in their country. Moreover, by feeding their new technical knowledge to managers within their firms, the multiplier effect of the policy became clear. Desh grew at a rate of 90 per cent annually from 1981 to 1987 (Khan, 2013a). The partnership was a huge success because all parties were incentivized to follow through on the agreement: in order to gain anything from the 8 per cent royalty, Daewoo had to ensure Desh was able to capitalize on its preferential access to the United States market via the Multi-Fibre Arrangement by learning to become internationally competitive. In this sense it was an ex post rent (unlike a subsidy given before competitiveness is achieved) with lower requirements for government monitoring and enforcement.

The Government also introduced a number of explicit local content requirements to foster local linkages, especially regarding the use of domestically produced fabrics (BIDA, 2017). For example, currently, 5 per cent subsidies are granted to garment producers, conditional on local content (UNCTAD, 2012), and firms are eligible to cash compensation or access to duty drawback facilities, granted the raw materials used to produce garments are sourced locally (CPDBEI, 2001). In 1992, a cash incentive of 15 per cent of the export of garments made from locally produced fabrics was put in place, increasing in 2002 to 25 per cent before returning to 15 per cent in recent years (ITC, 2002; BIDA, 2017). If garment exporter products were manufactured with 100 per cent domestically sourced inputs, or duty-paid imported ones, the Bangladesh National Bank provided additional subsidies (United Nations, 2004). In terms of employment restrictions, quotas were placed on skilled foreigners for both foreign and domestic companies, whereby the ratio of foreign to domestic employees could not exceed 1:20 in industrial enterprises (Kathuria et al., 2016).

6. Policy implications

Based on the case studies described here, four clear policy implications can be traced out.

(a) Contextual specificity: LCPs come in a range of different forms, and which policy structure will be the most effective varies hugely across countries and regions, sectors, and firms. In order to design LCPs appropriately, attention to multiple factors is paramount, including the country development context, macroeconomic and microeconomic conditions, and means of implementation and

monitoring. The Africa Natural Resources Center (ANRC) step-by-step guide for local content policy formulation and implementation provides a good roadmap for planning LCPs in line with prevailing objectives, conditions, and institutional capacities of the country in question (see figure V.2 for a simplified visual representation).

(b) Compulsions and incentives: In the Bangladeshi textile industry, compulsions were placed on lead firms, such as domestic employment quotas and the training of Bangladeshi managers in Busan. However, lead companies were also incentivized to adhere to local content requirements that were not compulsory, but that granted fiscal benefits to compliant firms. Similarly, the Republic of Korea firm Daewoo was incentivized to host Bangladeshi textile managers in Busan, because it was granted access to the Bangladeshi market and royalties on Desh’s sales to the United States market in return.

(c) Cooperation: One of the key factors that enabled the success of the LCPs in both the Bangladeshi garment sector and Mozlink in Mozambique was the cooperative relationships between stakeholders. By ensuring effective communication between investors, local firms and Governments, information asymmetries can be overcome and long-term relationships of trust can be constructed. This will enhance the sustainability of linkages between lead firms and local suppliers, even once the Government has withdrawn the LCP.

(d) Monitoring and adaptation: In order to gauge what kinds of incentives will encourage adherence to LCPs, it is important to monitor the policies closely.

Close monitoring will also enable Governments to respond to changes in the production system and adapt LCPs accordingly, as the Government in Mozambique adapted its LCPs to changing capabilities in the aluminium smelting industry, and the Government of Bangladesh has adjusted financial incentives related to LCPs over time.

Figure V.2

Visual adaptation of ANRC step-by-step roadmap for LCP

Source: ANRC (2016).

F. Technical and vocational skills development