The size of the economy matters. The size of the domestic market, popularly known as the "scale effect" in growth theory, has a strong bearing on the paths of industrialisation of an economy.

Although in an open economy, production structure does not necessarily correspond to the preference patterns of the consumers, we observe a strong association between them in Bangladesh's economy.

This is largely due to the emergence and growth of domestic enterprises and conglomerates in recent years, producing a wide range of products for the local economy, thanks to the burgeoning consumer class.

I hypothesise that the size of the consumer class has crossed a tipping point or a threshold when the growing local demand has started to support a large number of industries – the Malthusian curse may have turned into an opportunity.

Two factors determine the effective demand for industrial products of an economy: the size of the population with "purchasing power" (N) and their per capita income (Y).

Suppose that the size of the local industry M increases with the size of the effective demand, which is the product of N and Y: M(NY). This M(.) is nonlinear and after some critical value, (NY)*, M grows at a faster rate.

I believe our economy has surpassed this (NY)* and this has occurred over the last five years or so. Because of the economies of scale, firms can now produce at lower average costs than before competing with the imported goods. The massive investments in plants, machines and technology have become profitable due to the sheer size of the market.

I believe foreign investors always look for such thresholds in deciding where to invest and when to invest. An increase in foreign direct investment (FDIs), which are characterised by "jumping tariff", also indicates that Bangladesh may have crossed such thresholds.

If a sector is protected but the size of the sector is large then foreign investors locate their plants in the protected country to avoid the trade barriers. This type of FDI can be of both joint-venture with local partners or purely foreign-owned.

The mobile phone set market of Bangladesh comprising 170 million subscribers is an example of such a protected sector which is subject to about 58 per cent tariff rate for the imported smartphone. But the locally assembled and manufactured handsets bear about 15 per cent taxes.

Samsung, Nokia, Xiaomi, Vivo and a few other global mobile phone set manufacturers have invested in Bangladesh in recent years to assemble and manufacture sets in order to avoid tariffs.

The market for automobiles, which is subject to very high tariff rates, has also been receiving "jumping tariff" FDI by Hyundai Motor Company, Malaysian Proton and Maruti Suzuki.

We also observe such FDIs in motorcycles as well as in household electronics goods such as refrigerators, TVs, washing machines. This rise in such FDI in the country in recent years trying to avoid trade barriers indicates strongly that the country has surpassed such a tipping point.

The paths of industrialisation of the economy with large local markets are supposed to be different from the ones with smaller population size.

First, countries of large domestic markets can afford protections without losing much efficiencies by ensuring competition among domestic firms. If the size of the effective demand can accommodate a large number of firms, local competition can ensure efficiency closer to the international level.

Second, even with protection, FDIs can flow in to capture the local market as long as the economy crosses the tipping point. These FDIs can also promote competition between the domestic brands and foreign brands produced in the country – one can think of the competition between Walton and Singer in the refrigerator market.

Third, the large size of the economy allows firms to diversify their products to minimise the risks of investing in one sector.

We observe a large number of conglomerates in Bangladesh producing a wide range of products from a plastic bucket to smart TV. This is known as the "portfolio theory" of product diversifications.

Now the question is: how can a country like Bangladesh leverage its market size to steer the paths of industrialisation, given that the economy has crossed the tipping point?

The economies of China, India and Brazil are good examples of how the market size can be used as a bargaining chip for negotiations in the case of FDIs and bilateral trade agreements.

An interesting textbook example is the Brazilian automobile industry.

Brazil started its plan to produce automobiles locally in 1956 as a part of its import substitution industrialisation policy. This plan forced multinational companies to accept the local content rules, which allow a very high degree of local value addition. This was possible only because of the large market size of Brazil – the foreign investors wanted to access the market at any cost.

I believe Bangladesh's economy has now come to the point where the benefits of large market size have begun to materialise. We need to think hard about how we can use the market size more effectively in our favour.

The author is a senior research fellow of the Bangladesh Institute of Development Studies