Interacting and Sharing the Gains in Buyer-Seller Relationships: Garment in Bangladesh

The last couple of decades has seen an unprecedented expansion of export sectors in developing countries. It has become almost commonplace in policy making that Low Income Countries can benefit, in terms of growth and welfare, from these export-driven processes , through a wide variety of mechanisms. At the micro level, however, the empirical evidence supporting this statement still lags behind theoretical arguments. In particular, in the last ten to fifteen years, disaggregated data has been used to study the effects of exporting in terms of (labor and non-labor) productivity gains at the firm level, but little is known on how these gains are appropriated by each side of the trading relation. There are two inherent difficulties in addressing this question that have made it difficult to uncover robust empirical results. First, some of the key variables are unobservable because they involve decision-making processes within the firm. Second, we need to measure profit sharing rules, which in turn requires detailed data and often costly estimation techniques. We propose to overcome these difficulties by using a novel dataset and exploiting techniques from the “structural IO” literature.

The Ready Made garment sector in Bangladesh is one of the leading examples in recent decades of the export-driven take offs by Low Income Countries. We will use a panel (2003 - 2010) of input-output matched data for the universe of exporter-buyer pairs in this sector. This allows us to identify the gains that the Bangladeshi manufacturers obtain in their trading relations with large foreign buyers. A preliminary exploration of this data suggests the somewhat unexpected idea that when manufacturers start trading with large buyers, the prices they obtain are lower and overall quantities do not increase. It would seem that trading with large buyers improves the cost side of the manufacturers’ profit functions. These cost reductions could be explained by changes in capital or labour, changes in the material inputs or by transformations in organisational aspects of the firm, conditional on the technology. The analysis will focus on the last two dimensions. The main hypothesis to be investigated is that, on the one hand, manufacturers accept lower prices or, eventually, prices below (static) marginal costs; and, on the other hand, they benefit from cost reductions over time through organisational changes that arise from the interaction with large buyers. Whether these gains out-weight the prices and quantity effects is to be explored.

This research plan proposes to explore these questions by adapting a dynamic structural estimation framework to: i) uncover the structural parameters in the cost functions of the players consistent with the observed data; ii) identify the profit sharing rules between upstream and downstream firms; iii) assess the implications of a number of relevant policies through structural counterfactual exercises.


Julia Cajal Grossi

Graduate Institute of Geneva