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Impact | Planting the seeds for business knowledge exchange

Volume 18, Number 6
June 2012

The research of Romel Mostafa investigates tacit knowledge.

mostafa-impact-12.jpgDuring the past 30 years, an industrial miracle has taken place in Bangladesh. One of the world's poorest countries in the late 70s, Bangladesh has become one of the top garment producers in the world. Last year exports reached more than $20 billion.

Ivey Professor Romel Mostafa studies entrepreneurship in emerging countries. He's particularly interested in how knowledge spillover takes place, and how entrepreneurs gain access to that knowledge.

In one of his research studies he focused on the Bangladesh garment industry. The story began in 1978, when Bangladesh was a young, technologically backward country with little economic future. Garments were made by individual tailors, who created their products by hand and sold them locally.

The Korean company Daewoo was at that time a strong player in the garment industry, and had developed an advanced assembly line production process. Wages were rising in Korea, and Daewoo was looking to exploit its knowledge through a foreign partner. Daewoo was interested in Bangladesh, but didn't want to make a big investment there. The firm made an agreement with Desh, a Bangladeshi start-up, to train its new recruits in return for a share of profits.

Desh sent 126 employees to the Daewoo plant in Korea for hands-on training. After six months they returned to Desh, set up assembly lines, and began producing garments. The partnership with Daewoo didn't last long, as the Korean multinational began moving in other directions. But Desh was the first Bangladesh firm to succeed in the garment export market, spawning an entire new industry. Less than 10 years later, there were 664 firms in Bangladesh producing garments.

The key question for Mostafa was whether the knowledge and skills of Desh workers spilled over to other firms to create this new industry. "This knowledge is tacit in nature, which means it requires on the job training to get it," says Mostafa. "So how did the other firms get this knowledge?"

To conduct the study Mostafa retraced the movements of most of the Desh workers who were trained by Daewoo. He also interviewed entrepreneurs who subsequently founded firms in the industry. He conducted archival research to follow the performance of individual firms, as well as the industry as a whole.

By 1984, five years after the initial training by Daewoo, some 75 percent of the trainees had left Desh for other firms. Interestingly, Mostafa found that the entrepreneurs most likely to hire them were the most educated and experienced. "Desh wasn't able to exploit all the knowledge these workers had," says Mostafa. "Other firms wanted that knowledge really badly, so they offered salaries many times higher in order to hire them away." As these workers moved into other firms, those firms prospered.

The mobility of these workers also resulted in what Mostafa describes as "secondary diffusion."  Workers who moved from Desh trained workers at other firms, who then left to train workers at new firms.

Mostafa found the industry's success came from the synergy between entrepreneurial skills and the knowledge originally infused through Daewoo. "The entrepreneurs didn't know much about the technical aspects of the business," he says. "They needed the knowledge workers to set up the assembly lines and train employees, but the entrepreneurs provided the art of management."

Interestingly, very few knowledge workers formed their own firms. Some Desh workers told Mostafa they would have liked to, but were constrained by poorly developed capital markets. In developed countries, on the other hand, many knowledge workers are able to make the jump from employee to entrepreneur. In Silicon Valley, for example, many start-ups in the semi-conductor business were started by employees of Fairchild, the industry's founder.

Mostafa says that the Bangladesh garment industry was in some ways an "historical accident." Unlike Daewoo, multinational firms today are reluctant to train foreign workers without tight controls to ensure that key knowledge stays within the firm.

Bangladesh is a good example of how a developing economy can be catalysed when tacit knowledge is seeded and starts to spread.  Mostafa says that these countries should encourage "tacit knowledge seeding" by giving incentives to foreign companies to relocate. Policies such as tax breaks and low set-up costs may not be enough, though. The challenge is to induce foreign firms to train local workers so they in turn can train those in other organizations.

Knowledge is often viewed as a public good, something that is easily transferred. Mostafa's study shows that tacit knowledge can spread and diffuse rapidly, but only when the conditions are right. "The key finding in our study is the importance of knowledge spillover, and the need for mechanisms that allow that knowledge to transfer first internationally and then locally."

 

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