Prof. Premachandra Athukorala

Sri Lanka lags far behind the East-Asian countries in reaping gains in exports as it has failed to join producer-driven Global Production Networks (GPNs) despite the country being either equally or better placed than countries like Thailand and Malaysia, a top academic lamented last week.

Delivering a public lecture on FDI and Manufacturing for Export: Emerging Patterns and Opportunities for Sri Lanka, renowned-Economist Professor Premachandra Athukorala said that in the past, although the country did well in joining buyer-driven GPNs with heavy concentration in apparel exports, it fell short of potential in gaining momentum in joining the producer-driven GPNs, where FDI played a key role.

“There is strong evidence that Sri Lanka missed the opportunity of becoming an assembly centre within producer driven GPN because of political instability and uncertainty,” Athukorala said.

Producer-driven GPNs are common in vertically-integrated global industries such as electronics, electrical goods, automobiles, scientific and medical devices with the ‘Lead firm’ being the manufacturing Multinational Enterprise. The bulk of global production sharing takes place through intra-firm linkages within MNE network rather than in an arms-length manner.

“Successful integration of the manufacturing sector into production networks, in particular producer-driven GPNs, have played a key role in employment generation and poverty reduction in China and other high-performing East Asian countries,” Prof. Athukorale said.
He pointed out that based on 2013 statistics on the total share of GPN products in manufacturing exports, Sri Lanka’s producer-driven GPN stood at a low of 8.5% while buyer-driven GPNs formed a majority of 67.2%.

Meanwhile, Prof. Athukorale said Sri Lanka’s immediate policy priority should be to restore policy emphasis on export-oriented industrialisation, set up institutional safeguards to avert further backsliding from reforms, and continue with implementing the incomplete reform agenda.

“The Sri Lankan experience highlights the complementary role of investment liberalization for exploiting the potential gains from trade liberalization. Trade liberalization increased the potential returns to investment by capitalizing on a country’s comparative advantage, while liberalization of foreign investments permitted international firms to take advantage of such profit opportunities,” he highlighted.

He further emphasized that the island now needs to formulate proactive well-targetted policies to attract foreign investors and not solely rely on roadshows as attracting a big international player has ‘demonstration’ effect on others –the so-called herd-mentality in global industries.