**15 |** P a g e

two. Production characteristics of fibers production stand in marked contrast to production of garments: the former vis-à-vis the latter has high capital intensity, low labor intensity, high material costs, large average size of production units, and sophisticated technology. Fabrics experienced the fastest growth followed by clothing accessories contributing 35 percent to total exports of textiles in 2010 up from 29 percent in 2005. The share of textiles and other inputs in garments production increased from 12 percent of total T&C exports in 2005 to 15 percent in 2010. Interestingly, the 2009 slump in global import demand affected these exports more than exports of clothing: the latter contracted 5 percent whereas the former fell 15 percent.

Incidentally, this also suggests that Sri Lankan clothing exporters operate increasingly in upper-niche markets less susceptible to changes in demand and the sector had grown beyond a simple stage of decentralized small workshops engaged in outward processing. Indeed, there are large local firms with international ties. For instance, the largest producer of intimate apparel in South Asia is Sri Lanka’s MAS Holdings with an annual turnover over US$700 million and employment of more than 45 thousand people in its 28 factories and design centers located not only in Sri Lanka but also in other countries in South and East Asia.<sup>14</sup> It is also a strategic partner cooperating with several companies worldwide such as Victoria’s Secret, Nike, Speedo, and Marks & Spencer.<sup>15</sup> Second, the T&C network is well-developed with strong supply links in Sri Lanka. The T&C network usually develops in stages with simple assembly of imported cut fabrics and accessories being the first step, followed subsequently by a series of upgrading to replace some imported intermediate inputs with domestically produced ones and ultimately to develop its own R&D and design facilities. This upgrading does not always take place. The development of backward linkages depends not only on friendliness of domestic investment regime, availability of capital and entrepreneurial skills but also on liberal foreign trade regime. As Bair and Gereffi (2001) show in their study of Mexican T&C networks, trade liberalization has contributed to the development of backward linkages and upgrading for two reasons: it has provided flexibility for the production and it has made rules of origin less of a problem. Without a field study, it is impossible to precisely assess the extent to which a full blown T&C network operates.

Change in Sri Lanka’s weighted averages of unit values in time and in comparison to those of Bangladesh, China and the world in two major markets for its clothing in the US and EU, accounting for almost 90 percent of T&C exports, suggests that Sri Lanka’s producers has been moving from supplying lower value added segments to supplying foreign retailers in the middle and upper tier. Several observations can be derived from the data tabulated in Table 4. First, the weighted average unit values displayed different tendencies in EU and US markets: while they fell in both markets between 2001 and 2005, the downward trend continued in the US market but not in the EU market where the weighted average was 23 percent higher in 2010 than in 2005.

Second, weighted average unit values of Sri Lankan exports to the EU dramatically improved in both periods increasing 23 percent and 33 percent, respectively; but in US-destined exports, the increase took place only in the post-MFA era in 2005-10. It was a reflection of Sri Lanka’s businesses’ focus on higher value added products such as lingerie including underwear, mainly bras and swimwear, as well as the shift from woven to knit apparel production (Lopez-Acevedo and Robertson 2011a, p. 123-25). The increase in Sri Lanka’s unit values contrasted with the contraction of these values for total imports as well as imports from China and Bangladesh in 2001-05. The increase was the largest in 2010 as set

> 14 This would suggest that MAS Holdings operates also as ‘middlemen’ in a _triangle_ geometry of buyer-driven chain, observed in many East Asian countries (Gereffi 1996), which consists outsourcing some of the requested production by EU or US retailers and designers to affiliated offshore factories in countries with lower labor costs.

> 15 See their website http://www.masholdings.com/index.html, accessed on August 18, 2011.