This paper assesses the technical efficiency and profitability of the knitwear industry
in Bangladesh taking into account the sector’s role in poverty reduction. While stochastic frontier
analysis was invoked to assess technical efficiency, three alternative measures, namely the rate of
return, total factor productivity and the Solow residual, were used to gauge the extent and
determinants of the profitability of the industry based on firm-level data collected in 2001. The
estimation results indicate the high profitability of the knitwear firms. In Bangladesh, the
dynamic development of the industry has entailed great diversity in efficiency in comparison with
the garment industries of other developing countries. While there is a significant scale effect in
profitability and productivity, no supporting evidence was found for the positive impact on
competitiveness of industrial upgrading in terms of usage of expensive machinery and vertical
integration and industrial agglomeration.