by high domestic tariffs to produce for the domestic market in a developing
country can lead to negative spillovers by contributing to the efficiency costs of
import substitution,that is,producing something because subsidies make it
profitable rather than because it can be produced efficiently (Brecher and Diaz-
Alejandro, 1977). If the aim of FDI is to avoid tariff or quota restrictions on the
import of fully assembled/final goods, then limiting production to simple
assembly operations may be the most cost-effective activity for the FDI firm,
Technology and Economic Growth 115Box 5.1 Spectacular spillovers: textiles in BangladeshPerhaps the most spectacular example of FDI leading to positive spillovers is
that of the South Korean firm Daewoo investing in the textile sector of
Bangladesh. In the mid-1970s restrictions on garment exports from South Korea
to the US and other OECD markets did not apply to Bangladesh (then a marginal
exporter of textiles). The Desh Garment Company was founded in 1979.
Daewoo signed an agreement to assist Desh with technical training (six months
in Korea), purchase of machinery and fabric, plant start-up and marketing. In
return Desh were to make royalty payments to Daewoo equal to 3 per cent of its
sales (Rhee, 1990). The crucial and unusual aspect of the FDI was the agreement
to train 130 workers at Daewoo’s Pusan plant in South Korea. These workers
‘received some of the most intensive on-the-job training in garment production
ever seen in the history of LDCs’ (Rhee, 1990:337). The emphasis was on actual
experience of running a factory that produced world-quality exportable goods
and transferring relevant skills in production, marketing and management. At
Desh average monthly exports increased from US$70,000 in 1985/86 to over $5
million after two and a half years. 115 of the original 130 trained workers left
Desh, most to set up their own firms, and they became a powerful medium for
transferring know-how throughout the entire garment sector. In 1985, before the
US imposed quotas on Bangladeshi garment exports, there were more than 700
garment-manufacturing factories in Bangladesh exporting $300 million of
garments. Rhee (1990) calls this relation ‘the catalyst model of development’.
The success of the model owed much to the peculiar conditions of world trade at
the time, in the late 1970s and early 1980s, including the Multi-Fibre Agreement
(MFA) limiting textile exports from many developing to developed countries to
protect domestic industries in the latter. By the late 1970s South Korea was
reaching its quota limits and shifting into more high-technology sectors. China
was still embroiled in an ideologically charged struggle for political control after
the death of Mao and remained largely closed to international trade. India was
still promoting self-sufficient growth focusing on import substitution in heavy
industry. Bangladesh,hitherto considered a development disaster by many
experts, was not subject to any textile quotas – few ever thought it was likely to
successfully export manufactured goods. So Daewoo had an incentive to trans-
fer production to Bangladesh and with it, the skills necessary to successful
produce and export textiles. And Bangladesh offered low-wage labour, no
restrictions on exports and no competition from China or India. Such circum-
stances are unlikely to be replicated in the world economy in the near future.