Final Assignment written take home exam [629611]

Final Assignment written take home exam
“Ready -made garment industry: is it time to leave Bangladesh?”

COPENHAGEN BUSINESS SCHOOL
Academic year 2017/2018
1st semester

Student: [anonimizat]: George -Cristian Prichinet
CPR: 1 00195 -3229

Course: International Business Environment
Number of Characters: 27.818
Number of Pages: 15
Submis sion date: November 13th 2017

Introduction

The ready -made garment(RMG) sector in Bangladesh, that started as small non -export
oriented sector in the late 1970’s became in the past 3 decades the highest revenue generating sector
in the country, representing 82% of Bangladesh’s exports. The success of the te xtile industry is one
of the reasons why Bangladesh has been able maintain economic growth rates between 5 and 7.10%
in the past decade, being the sector with the highest earnings in foreign currency, it plays a crucial
role in the economy of the country. Offering low production costs and high quality prod ucts,
Bangladesh has become the second largest garments exporter in the world, after China , many
companies from the west like: Nike, Adidas, H&M, Walmart, Tesc o and others producing their
clothes here.
The success of both, the ready -made garment sector and the companies that are investing in it
seems to have come with a grim price attached. Thousands of deaths and injuries have occurred in the
past decade in t he textile industry due to the safety and infrastructure issues, the most catastrophic
incidents being the Tazreen Fashions f ire and Rana Plaza collapse, together leaving more than 1200
dead and more than 2500 injured. The following investigations in the f actories revealed concerning
issues like safety and infrastructural issues, physical and verbal abuse of the workers, child labo r,
improper working conditions and many others, thing that lead to protests for better conditions in
Bangladesh on one hand and intensifying pressure from the media on the RMG industry, especially
on the big corporations that operated from Bangladesh, some of them even announcing the fact that
they are considering stopping the operations in the country. This leaves us with the ques tions: is the
decision of moving the operations is actually a good one , which could be the alternative options for
production and which would be the implications from an international business perspective.
The paper has two main objectives. The first quest ion that needs to be answered is why would
the companies want to stop the operations in Bangladesh . Next I will analyze the competitiveness of
the nations and with Porter’s diamond I will try to see which are the competitive advantages of
Bangladesh and wh ich are the sectors in which they have to improve after which I will address the
implications of the decision to stop the operations in the country , using a PEST analysis from an

international business perspective . The implications will be for both points of view: the one of the
companies and the one of the local stakeholders.

Globalization and garments sector in Bangladesh

Carnegie Endowment defines globalization as “a process of interaction and integration among
the people, companies, and governments o f different nations, a process driven by international trade
and investment and aided by information technology.”
In Bangladesh, the effects of globalization started being felt mostly in the 1970’s, especially
after the change in the political plot in the 1975 when the government decided to withdraw from
business with the soviet bloc, developing relations with United States, Western Europe, Africa, the
Middle East, and China, relations that still exist. The globalization and the rise of the number of
multin ational corporations has changed the world ’s labor and production market ( Maria Gillen ,
2000 ).To maintain a competitive advantage, many multinationals relocated the manufacturing
facilities to developing countries, in order to benefit of the cheap labor, u nprotected by the
government’s regulations.( Robert B. Reich 1996 ) The particular trend can be noticed very easily in
the RMG sector, sector in which Bangladesh happens to be on top of the countries chosen as
destinations for production. The benefits of th e globalization come with a cost attached in this case
though: as media and investigations have unveiled, unsafe working conditions, unreasonable hours,
unlivable wages, both physical and mental abus es by the supervisors and even lethal accidents,

Why wou ld companies leave Bangladesh?

In the wake of the tragedy, Disney announced that they would stop they would stop the
connections with the factories from Bangladesh, being the first corporation in the RMG sector to
withdraw and many others have emitted st atements regarding their decisi ons to leave immediately
after. The question we have to ask ourselves is: what drove Disney and the other companies in taking
such abrupt decision?
First of all , the tragic series of events in Bangladesh has brought the atten tion on supply chain
risks associated with the decision of the big companies to outsource production to countries with low

wages and low safety working conditions (businessinsurance.com, 2013 ). The companies face a
greater risk of being associated with the dangerous and abusive working conditions in Bangladesh,
thing that not only could outrage the costumers, destroy the brand name and lead to lower sales but it
could also attach a “moral guilt” tag to the company and the last thing you want to be accused of is
being the company that is using child labor to produce clothes in the poor countries in order to sell
them to the people in the rich countries. From this point of view, stopping the operations in
Bangladesh in order to hedge the risks could be seen a g ood decision but continuing the production
and helping develop the work conditions is considered by many to be a better option. Since an
importa nt role in associating the guilt with the big manufact urers lays in the hand of media, the same
media could impr ove the way the companies are perceived by the public.
Second of all, remaining in Bangladesh could mean a rise in the costs of production. There is
no exact cost on how much it would cost to bring Bangladeshi factories to Western standards . But
the Worker Rights Consortium estimates the cost at $1.5 billion to $3 billion and the period required
for the upgrade to be around five years. The money invested in the factories during that period of
time would only represent 1.5 to 3 percent of the 95 billion dol lars estimated to be spent on the
manufacturing of the clothes over the same period. In other words , the extra cost would be 10 cents
for each t -shirt created( mercurynews.com ,2013 ). Other possible costs related to remaining in
Bangladesh could be: training for workers, remuneration of the victims of the accidents, reduced
productivity due to the new labor laws and many others. Gap, Walmart and other companies
released statements saying that they were already taking action, including paying for the managers
in Bangladesh to be trained in fire safety. Labor advocacy groups on the other hand are pushing
them to do more adding another type of pressure that the companies feel right now. (Nytimes.com ,
2013 ). Many of the big companies affirmed that they were taking into considerations new plans to
ensure safety at the workplace, most of them pledging money for relief efforts. Immediately after
the accident, forty garment buyers, including Walmart, H&M and many other big representa nts have
met with labor groups to di scuss how they could improve the conditions in
Bangladesh.( Mercurynews.com ,2013 ) When it game to signing though, only PVH and Tchibo have
done it, while the majority of the companies considered that signing it would make them admit the
guilt and would brin g concerns about the binding legal commitments. Adding even more pressure

on the companies, a human rights group has managed to gather more than 900.000 signatures on a
petition aimed to convince H&M and Gap to sign the proposal.
Another reason why the com panies would want to relocate would be the fact that the control
over the supply chain in the third world countries is a major headache that can even have tragic
results, like we’ve seen in the case of the Rana Plaza c ollapse and the Tanzreen fire. There a re
countless reports, most of them after everybody started pointing fingers at each other, that describe
the incapability of the corporations to control the supply chain from the head quarter . Walmart,
whose clothes have been found through the ruins of the factory admitted that it received a safety
audit raising concerns about the factory being a “high -risk” and decided before the blaze to stop
the production at Tazreen But they s aid that a supplier had continued to use the building without
their authori zation. (Seattletimes.com , 2012 ) Sears has made similar comments, saying that they
were unaware that their mercha ndise was produced there while Disney C o. said th at none of their
licensees had the authorization to make products with their brand on it in th at factory for at least
one year the reality of the fact that their products were found between the ruins show how
problematic achieving control over the supply chain can be in Bangladesh.
At last, by deciding not to co llaborate with Bangladesh, the compan ies can send a strong
ethical message that would target the government and the local authorities regarding the child
labor, working conditions, and many other issues in the country. Since the government is eager to
lure Western companies and their jobs , they would be forced to improve the working conditions if
they want their country to remain a top choice for the companies.
As it turns out, most of the companies decided to revoke the decision of leaving Bangladesh
and continue doing business even today an overview on the competitiveness of the country and a
PEST analysis will help us understanding why they decided not to leave and which would have been
the implications in case they did.

Competi tiveness.

In order to understand if the firms should pick another country and move the operations there
or co ntinue business in Bangladesh, we need to understand the competitiv eness of the nations and
also the advantages and d isadvantages that Bangladesh po ssesses.
The OECD defines a nation’s competiti veness as “the degree of which a country can, under
free and fair market conditions, produce goods and services while simultaneously maintaining and
expanding the real incomes of it s people over the long term”.
To begin with, we have to state that this con cept is not yet clearly defined. Even the very
essence of the competitiveness of the nations is being discussed: Paul Krugman argues that nations
do not go out of business, therefore they do not compete, while Malcolm H. Dunn considers that
nations compete but in a different way than corporations do but. The idea that they agree on though
is the fact that there is actually a political fight over power. Starting from this rivalry of the nations
over power we on whether companies find Bangladesh or other coun tries to be more competitive in
the RMG industry.
For a better understanding of where the companies might head with their production, we
should take a look a t the statistics in the region.

Source: International Labor Organization

As the table above sh ows, with a minimum salary of 68$/month Bangladesh is one of the
countries with the cheapest labor force in the world, being surpassed o nly by Sri Lanka which has a
salary of 66$/month. From the price related competitiveness perspective, the information ab ove
reduces the possible choices of locations towards which the companies might head up to 3: Sri Lanka,
India and Indonesia. (Considering that the companies do not wish to lose the competitive advantage
gained through the cheap labor costs in Bangladesh) .
It is true, in order to become more competitive, Bangladesh has cut some corners and ev en
disobeyed laws but p eople that advocate for companies remaining and continuing the operations in
Bangladesh argue that even though the retailers decide to move to another country, they will probably
pick another low wage, third world country therefore they will face similar problems in infrastructure
and rule of law, making from the disadvan tages that Bangladesh faces, common ones.
Most traditional theories that deal with global economics mention factors, that a country
possesses, such as l and, natural resources, population size, labor and location, as the main
determinants in a country's comparative economic advantage . In order to achieve a further
understanding of the competitiveness of Bangladesh we will use the “Porter’s Diamond”

Porter ’s Diamond

The Porter Diamond, also referred to as the Porter Diamond Theory of National Advantage,
is a model that has been created in order to help understand the competitive advantage nations possess
due to certain elements available to them, and to exp lain the way governments can improve country’s
position in the international comp etitive economic environment .The “diamond” is composed of 4
topics: factor conditions, strategy, structure and rivalry, demand conditions and related and supporting
industrie s, interconnected just like in the figure below.

1. Strategy, structure and rivalry

In order to achieve a competitive advantage, company goals and their ownership structure are
one of the most important elements to look at . But when it comes to Banglades hi garments
factories ownership structure and goals , it’s been discovered that “around 65 perce nt of firms
are foreign owned” ( Acevedo, L. , Robertson, G & Raymond. 2012 ). The high percentage
points out that the managers and employees have a low motivation and it is clearly that the
motivation is a key element in order to achieve competitive advantage. However, commonly,
instead of getting incentives, workers get long hour shifts, bad working conditio ns, situation
that is detriment al to achieving the compet itive advantage.
Strong rivalry is also part of Porter’s theory, operating in a competitive environment, with
other companies trying to get a larger market share can clearly be an incentive for the company
to be more productive. Bangladesh has over 5600 ga rment factories all over the country,
indicating there is a strong rivalry in the industry.

2. Demand conditions

Demand conditions take into account both the domestic and the international demand and their
trends . In the case of Bangladesh, t he continuing i ncrease of resident’s income and national
income results in an increase in domestic demand for clothing. When it comes to international
demand, Bangladesh is currently the second largest ready -made garments manufacturer with
over 28 billion $ in exports, after China and it is expected that in five years Bangladesh will
become the largest manufacturer of ready -made garments. Excessive demand has proved itself
to be also harmful in the case of Bangladesh, one of the reasons why the workers were forced
to work even 19 hours shifts in the factories was that the demand from foreign companies
would increase over time and with a low bargaining power, the factories had no other choice
than accepting the orders because in case they didn’t they would lose an important client and
also provide their competitors their client’ s order.

3. Related and supporting Industries

When local suppliers and supporting industries are competitive, home country companies will
eventually get more cost efficient and will be able to get more innovative inputs . This will
lead to greater competitiveness for national firms. Unfortunately, Bangladesh hasn’ t put
enough effort into this issue, reason why it is actually ranked last among SAFTA countries
when it comes to related and supporting indust ries. There are though projects like Dhaka –
Chittagong Economic Corridor that is aiming towards improving this sector.

4. Factor conditions

The factor conditions is by far the most important of the four elements. Factor condition covers
the fact of productio ns and the importance of production in any sector. Porter has divided the
factors into two types: general or traditional ones, which cover “ “natural resources, climate,
locations, unskilled labor and semi -skilled labor and even capital” and the specialized ones
that are “ educated personnel, digital data, communications, and infrastructure ’. (Porter, M.

1990. ) In the case of the RMG industry of Bangladesh, location , cheap labor, and favorable
climate are the main reasons behind the rapid growth of the indust ry. But adva nced factors
such as educated personnel, skilled labor, and skilled infrastructure are behind the sustainable
economic growth and they cannot be inherent; they must be developed over the period of time.
Unfortunately for Bangladesh, this is whe re the RMG sector lack’s the most, their
infrastructure is still far from being advanced or even safe even after the efforts of the
government and foreign companies to develop it and most of the workers are uneducated since
they start working since they ar e young. In order to remain or become even more competitive,
Bangladesh has to continue the reforms they started in this direction

PEST analysis

A PEST analysis is an acronym for a t ool who’ s aim is to identify the external forces facing
an organiz ation. The letters stand for political, economic, socia l-cultural, technological, legal and
environment al. (oxfordcollegeofmarketing.com ,2016 )
The PEST Analysis is a useful tool for the companies that wish to analyze the business environments
and aiding the m with the decision of entering a new market. On the other hand, t he analysis can also
provide a holistic view of the implications of the decision of stopping the operations in Bangladesh
and moving it somewhere else. When analyzing the case of Bangladesh, we will be able to understand
the implications from the both perspectives: the ones of the firms and the ones of the local
stakeholders.

Political
In order to benefit from economic growth and development, a country largely depends on the
smoothness and stability of the political system. The Bangladesh government has proposed and
implemented several support measures specifically targeting the sector of ready -made garment . For
the expansion of the industry the government plays a crucial role by providing p olicy supports at
every step including investment incentives, bonded wareh ouse facilities, export -import policies , duty
drawback incentive, stable exchange rate and the facility of procuring raw materials.

On the other hand, the country still battles with political unrest, con flicts, strikes, labour unrest
which end up disturbing the production, distribution and the other processes. Some of the most
noticeable reasons are: corruption, absence of a proper democratic system, weak rule of law.
Following a cha in of tragic events that caused the death of thousands in Bangladesh, the
government has implemented a labo r reform regarding worker’s pay and rights, reform that was. On
top of that t wo major agreements have been made between global retailers, brands and trade unions:
the Accord on Fire and Building Safety in Bangladesh and the Allian ce for Bangladesh Worker Safety.
The statements that have been released since indicated that they are making progress but there is still
more work to be done in this field.

Economic
When it comes to RMG sector, t he combination of cheap labo r, specialized skills and capacity
turned out to be the perfect combination that managed to attract most of the biggest brands from the
west in the industry to Bangladesh. With almost 4 mi llion workers in the RMG s ector and with wages
as low as 6 8$ per month, it is not difficult to understand why the western companies took interest in
outsourcing in this country. Right now, garments sector represents 80% of the country’s exports and
it is c ontributing with about 10% to GDP, being the high est contributor of the economy.
Stopping the operations in Bangladesh would cause enormous harm to both the country and
the companies. On one hand the lack of production demand would cause many factories to close,
leaving hundreds of thousands unemployed, the economic growth rate would be severe affected and
not last, left without a source of income, most of the people would be living on the edge of subsistence,
causing the country to plunge back into povert y. On the other hand, the companies that choose to
leave, would lose the competitive advantages offered by outsourcing in Bangladesh and actually
ending up having a competitive disadvantage. Since they decided stopping the operations in
Bangladesh, the com panies are now facing a choice: returning and producing in the home countries
or outsource in another country. None of the options seem to be viable, not being able to produce at
the same low price, and at the same pace, the return on investment will be lo wer therefore companies
would be forced to raise the prices in the countries where they sell, decision that would make
customers think twice before buying their products.

Social
Bangladesh is a country of about 163 million people and the country with th e highest density
on the planet. 85% of the population is under 50 years old, a high percentage compared to the rest of
the world. By employing around 4 million people directly , of which 80% are women, mostly with a
low education that migrated from the rural areas, the garment industry is seen as contributing to
poverty reduction, by providing higher salaries for the poor, who would otherwise be engaged in in
agriculture or other low -wage economic activities in the rural areas and also as combating the social
mores that have determined how women see themselves.
Even though, it is proven that the growth in the RMG sector has many social benefits like:
facilitating skill development for the workers, offering the chance to provide for families and better
conditio ns to educate the children , reducing gender education gap and raising awarenes s about the
health and safety i ssues, the social situation in Bangladesh’s RMG sector is still not great, t he
employment quality is not really satisfactory as po or health and saf ety conditions can still be
encountered, t he minimum wage is still very low compared to what the Internati onal Labor
Organiz ation (ILO) considers ‘Decent Work, child labour has been discovered to still be part of the
work force and most of the workers stil l live in slums.

Technological
The immediate need for faster technological development can be felt in Bangladesh.
Development plans in Bangladesh focus on science and technological research to improve the
technologies through imported technology as well a s develop ment of local technologies. Since the
country is heavily dependent on the technologies they import , proper planning is required for an
effective transfer that involves acquisition, assimilation and adaptation. In order to boost the process,
the National Science and Technology Policy adopted by the government .
From the point of view of the producers, the decision of the main retailers to stop the
operations in Bangladesh would be tragic, the only reason the RMG industr y has been evolving from
a tech nological point of view so far is because of the high demand and requirements for higher
productivity. Once the companies would move the operations to another country, the quest for
innovation would stop making the country even less attractive in the futur e.

Conclusion

In the first part it , became clear that the companies that announced their withdrawal from
Bangladesh had real good reasons to do so. From facing risks like being associated with child labor,
abusive and improper working conditions to being pressured to admit the moral guilt by the public,
to destroying the brand name and to facing increased costs of production, all together seem to be
enough reasoning to move the operations to another country. But, through competitiveness and
Porter ’s Diamond we got to underst and that Bangladesh still has import ant competitive advantages
like being one of the countries with the lowest salaries in the world, and increased productivity and
that even though there are plenty of disadvantages, they ar e not found only in Bangladesh, contrary,
problems like child labor, infrastructure problems, poor working conditions and safety issues can be
found in most of the countries with similar characteristics as Bangladesh.
Through the PEST Analysis we managed to understand the possible implications the firms
and the country could face in case companies actually decide to leave as they firstly intended to and
the a nalysis shows that not only that the firms would not be able to produce at the same cost
somewhere else therefore l osing a competitive advant age but the country would suffer major losses
in both economic and social perspectives in terms of unemployment, economic growth a nd poverty.
To conclude, and to answer the main symbolic question: “is it time to leave Bangladesh?” the
answer would be categorically “no”. Instead of just packing an d leaving the companies should instead
continue the business with Bangladesh, agree with the local authorities on a plan to fix the actual
problems and to develop the RMG sector even further, this way, not only they spare themselves and
millions of people from harm but they actually will be able to benefit of future profits knowing they
did the right thing from both financial and moral perspective.

Taking into account the limitations of the study, f or future research I would recommend
analyzing the issue from the corporate social responsibility point of view, also focusing on the impact
on the environment. Another reco mme ndation would be focusing more on empiri cal material rather
than theory and also and also including a statistical/forecasting analysis in order to get a better
overview of the possible future situation of the macro and microeconomic indicators.

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