Shifting Gears to Propel Bangladesh’s Growth Engine

Bangladesh’s manufacturing miracle is much celebrated. Labor-intensive, export-oriented growth driven by the ready-made garments (RMG) industry has propelled Bangladesh’s recent economic transformation. But this growth engine is under duress.  Bangladesh will cease to benefit from duty-free quota-free market access to advanced economies once it graduates from least-developed country (LDC) status in 2026. Shifting global trends are also generating new challenges. The COVID-19 pandemic has introduced pressure points in reshaping global value chains. The European Union’s Carbon Border Adjustment Mechanism is poised to penalize countries where climate change-related policies are less ambitious. And the growing use of industrial robots in high-income countries is reducing the importance of wage costs in determining international competitiveness. All in all, Bangladesh’s emphasis must shift to broader considerations of efficiency and quality as it seeks to diversify its export basket and move up the value chain.  Innovation and technology adoption are becoming increasingly central to enable this transition. This was illustrated during the pandemic when digital solutions made firms more resilient but also when weak firm capabilities hampered bringing vaccine manufacturing to scale for the world.

 Technology matters for firm performance  

Our report finds that firms with higher technology levels in Bangladesh’s manufacturing sector perform better.  After accounting for key differences, such as size, physical capital and age, a 25 percent increase in the overall technology level is associated with a 3 percent increase in profits per worker. Industrial technologies such as robots, informational technologies  such as business management software, transactional technologies such as digital payment systems, and management practices such as incentivizing employees and monitoring performance are all associated with better firm performance. In fact, as much as 18% of the total variation in the performance of manufacturing firms (as measured by indicators such as profits per worker) is explained by their observed differences in technology. This is comparable to the share of the variation in performance that is explained jointly by other key attributes, such as firms’ size, capital, age, sector, and location.  

Figure 1: In Bangladesh’s manufacturing sector, firms with higher technology levels earn higher profits and revenue per worker  

Even incrementally better technologies need to be diffused much more widely 

While some firms in Bangladesh’s manufacturing sector are at an advanced technological level, most use rudimentary technologies. In terms of business processes, the use of digital tools is few and far between. For example, 72 percent of firms practice manual quality inspections and 47 percent of them still use handwritten processes for business management.  In terms of industrial processes, most firms in Bangladesh still use basic machinery (that is, fully manual or powered but manually operated) in most production stages. The sewing stage in the RMG industry is the exception to this norm; 80% of RMG firms use semi-automated technology and another 9 percent use fully automated methods.  In terms of management techniques, many firms do not even use basic management practices for setting targets, providing incentives to workers, and monitoring performance. For example, 32 percent of firms do not monitor any key performance indicators (KPIs).  

Figure 2: Most firms in Bangladesh’s manufacturing sector use basic technologies for quality control and business administration  

Improving firm capabilities holds the key 

COVID-19 has provided an impetus to the advent of digitalization around the world. In Bangladesh, however, the increased use of digital platforms by businesses during the pandemic considerably lagged that in other countries. So how can policy makers accelerate the adoption of better technologies?  Improving firm capabilities is key. Firms typically underinvest in foundational managerial and organizational practices because of limited awareness of their true value.  Manufacturers in Bangladesh are no exception to this norm. They systematically underestimate the extent to which they are behind other firms in terms of technology use; nearly 84 percent of firms do not believe that they need external advice about adopting new technologies. The direct provision of business advisory services to firms can help overcome these information market failures. They are best implemented by private providers in competitive markets, with the government providing financial and regulatory support. More advanced firms such as RMG exporters or more technology-intensive industries such as pharmaceuticals can also benefit from technology extension services. 

Connectivity to international markets must also be leveraged to strengthen firm capabilities. For example, firms that most often used information from foreign buyers or suppliers to make decisions about technology adoption, on average, used mobile apps to complete tasks  related to business administration, human resources, and inventory management compared with other firms that, on average, used handwritten processes or standard computer packages. This matters for the RMG industry where supplier development programs can enhance technology transfer to domestic firms that are well ensconced in GVCs. But it matters just as much for the more nascent pharmaceutical industry where partnerships with multi-national enterprises through FDI, contract manufacturing, and joint ventures can enable domestic firms to acquire world-class experience.  

Strengthening firm capabilities can enable manufacturers in Bangladesh to better withstand the headwinds in the world economy.  There is little time and space for business-as-usual and technology adoption is necessary to change the equation from competing on wages to competing on productivity. In turn, productivity growth is a precondition for sustainably generating well-paid jobs. It can provide the very successful export-led manufacturing model in Bangladesh a second wind.