The Incentive Structure for Manufacturing

Abstract

The analysis now attempts to explain Sri Lanka’s lack of export upgrading and diversification using the technological capabilities approach which emphasizes incentives and supply-side factors. Two issues about shifts in comparative advantage over time are examined: (a) whether without appropriate selective interventions in an outward-oriented trade regime export growth would concentrate in activities in which technological learning is ‘easy’ while entry into complex activities would be restricted; (b) whether foreign direct investment would be an efficient means of overcoming market failures in achieving export growth and deepening. Chapters 6 and 7 discuss supply-side factors and the issues about shifts in comparative advantage. This chapter examines the influence of the incentive structure facing firms particularly, market competition (the outcome of trade and competition policies) and the macroeconomic and political environment. Section 5.2 discusses the 1977 policy reforms. Section 5.3 discusses macroeconomic and political stability. Sections 5.4 and 5.5 discuss incentives for export-oriented FDI and domestic firms. Section 5.6 examines industrial policies in electronics in Sri Lanka and the NICs. Section 5.7 summarizes.