THE institution-based view is an important theory in the study of economics, international business, and management. The external business environment of firms operating in an industry can have great effects on them. Policies taken by macro-level players and institutions like individual countries or regional economic blocs e.g. the EU, Asean, Nafta, etc. can have enormous influence on the fate of foreign industries like the RMG sector of Bangladesh.
Institutions are formal and informal rules, regulations and organisations, which give certainty in the conduct and transactions of business and economic activities. G.A. Akerlof, in his famous article The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, cites one common example of institution -- 'guarantee' by the seller against risk of 'quality uncertainties' for goods bought. Brand-names, licensing, certificates etc. are all forms of institutions for ensuring trust in business transactions. Likewise, governments, intergovernmental and multilateral organisations like the World Bank, WTO, and regional economic arrangements all act as formal institutions serving and affecting business, both regionally and worldwide, with their rules and policies.
Institutions are a major reason for business and firm strategies to differ from region to region and from country to county. Many scholars argue that when crafting and implementing business strategy, firms need to take into account influences from 'institutional frameworks' like the state, the wider society and the international environment, since there is no way firms can escape from their embedded environment. If Bangaldesh is to do business internationally, it cannot ignore the political and economic order that is in place globally.
The international business scene has changed immensely over the last few decades with the emergence of far-reaching and influential regional arrangements. These kinds of economic blocs offer opportunities and also pose some operational problems for firms. In order to benefit from lower barriers to trade, like duty-free or quota-free access, some companies invest in or outsource manufacturing and supplying orders to a given country. This is exactly the case when EU retail companies place orders to Bangladeshi apparel factories for reaping the benefits of the special GSP scheme by importing finished garments from an LDC.
On the other hand, one of the key challenges for businesses in utilising such opportunities is to act in accordance with regulations. One of the focuses should be on reducing the 'institutional distances' with buyer countries and blocs. Concerns over workplace safety and labour rights must be addressed by local firms immediately, as these issues are embedded into the various legal and ethical institutions of foreign buying nations and regional entities. Therefore, the managers of both, the foreign buying firms and Bangladeshi selling firms, need to be very particular to ensure they comply with the various rules and regulations of the buying country.
Many customers of the retail outlets in Europe and North America are becoming more conscious about the workplace safety situation in Bangladesh. If they decide to boycott Bangladeshi RMG, that can have severe effects on the sector. Concerns of these customers are now pushing the big international buyers like Wal-Mart, H&M, Inditex, etc. to consider enforcing stricter industrial safety control on Bangladeshi garments manufacturers. Many of the international buyers have recently come together for signing a legal commitment to ensure workers' safety and security.
The US is seriously considering a “suspension, reduction, or withdrawal” of its GSP facilities for Bangladesh, citing the violation of workers' rights that GSP demands. If that happens, it will send a torrent of negative images around the world for all sorts of products of Bangladeshi origin. If the EU imitates the US, that could be a fatal blow for our RMG sector, as the EU-GSP is like the lifeblood of the Bangladeshi RMG industry. The US, the EU, and rest of the international community, basically want the institutional gaps in the business culture, ethics, and environment between Bangladesh and the former to close down to an acceptable level.
Internationally accepted norms and practices of allowing the workers the right to form trade unions to voice their demands; giving them a minimum wage for a reasonable living; and a workplace which is not life threatening or hazardous are the basic requirements on the part of the international community for sustaining long-term business and trade ties with Bangladesh. For this, they are pressurising the international buyers, in whatever way they can, to compel their Bangladeshi suppliers to yield to these prerequisites.
The UK government has announced a plan to disburse a fund of ₤18 million for working towards better building and fire safety standards; effective building inspection systems; improved skills of the workers; and for enacting a common compliance standard in Bangladesh; all of which could be seen as efforts to reduce the existing institutional distances.
Now, it is the task of Bangladesh government, BGMEA, and the industry owners to understand the formal and informal institutional position of destination countries and their societies. In doing so, they must readjust their institutional practices by official and unofficial means to continue enjoying the fruitful economic relations that they have, which is an imperative for the Bangladeshi economy.
The writer is a Research Faculty at the Institute of Governance Studies (IGS), Brac University. He is also one of the founding members of Foreign Affairs Insights and Reviews (FAIR), a bimonthly magazine.