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An Empirical Assessment of An Empirical Assessment of Technology Transfer Emerging from Technology Transfer Emerging from
Integration into Buyer-Driven Integration into Buyer-Driven Commodity Chains in the Global Commodity Chains in the Global
Apparel IndustryApparel Industry
ByBy
Jonathan A. FinkJonathan A. Fink& &
Shahdad NaghshpourShahdad Naghshpour
University of Southern MississippiUniversity of Southern Mississippi
Research ObjectiveResearch Objective
• Discuss Emerging Academic Debate: Does Discuss Emerging Academic Debate: Does integration into value/commodity chains in apparel integration into value/commodity chains in apparel industry lead to process of industrial upgrading?industry lead to process of industrial upgrading?
• Present empirical test on impact of value chain Present empirical test on impact of value chain integration and the shift from maquiladora integration and the shift from maquiladora assembly to a more advanced form of integrated assembly to a more advanced form of integrated manufacturing, on industrial upgrading in the manufacturing, on industrial upgrading in the cotton denim apparel industry of Torreon, Coahuila, cotton denim apparel industry of Torreon, Coahuila, Mexico.Mexico.
Why Is Our Study Important?Why Is Our Study Important?
• Allows for deeper understanding of Allows for deeper understanding of implications of outsourcing production on implications of outsourcing production on economic development in LDC’s.economic development in LDC’s.
• Provides policymakers at both national and Provides policymakers at both national and local levels with roadmap for design of trade, local levels with roadmap for design of trade, investment and industrial policies that investment and industrial policies that contribute to growth in wages, employment, contribute to growth in wages, employment, income and sustainable development.income and sustainable development.
Literature Review: Origins and Literature Review: Origins and Development of Commodity Chain Development of Commodity Chain TheoryTheory
• Hopkins and Wallerstein (1978). Developed theory Hopkins and Wallerstein (1978). Developed theory that production based on integrated network of that production based on integrated network of transnational processing nodes. transnational processing nodes.
• Wallerstein’s World Systems Theory = chain Wallerstein’s World Systems Theory = chain domination by core country firms with no positive domination by core country firms with no positive developmental benefits for LDC’s arising out of chain developmental benefits for LDC’s arising out of chain integration.integration.
• Gereffi (1994, 1999) Defines commodity chains as Gereffi (1994, 1999) Defines commodity chains as either producer or buyer-driven. Gereffi’s research either producer or buyer-driven. Gereffi’s research focus = buyer driven chains in the apparel industry.focus = buyer driven chains in the apparel industry.
Diagram #1
Producer Driven Supply Chain
Firms located in the domestic economy Foreign firms
Subsidiary Lead Manufacturer Subsidiary
(Located in an industrialized country)
(High Value Added/Lead Governance)
Dealer Dealer Dealer Dealer Importer
Retailer Retailer Retailer Retailer Retailer Retailer Retailer Retailer
Buyer- Driven Supply Chain
Foreign Firms Foreign Firms
Production Production Production Production Production Production Production Production
Foreign/LDC Foreign/LDC Foreign/LDC Foreign/LDC Foreign/LDC Foreign/LDC Foreign/LDC Foreign/LDC
Trading Co. Dealer Trading Co. Dealer
Foreign/LDC Foreign/LDC Foreign/LDC Foreign/LDC
Importer Retailer/Branded Manufacturer Importer
(Located in an industrialized country)
(High Value Added/Lead Governance)
UPSTREAM
UPSTREAM
Industrial Upgrading HypothesisIndustrial Upgrading Hypothesis
• Upgrading defined as shift into higher value Upgrading defined as shift into higher value added manufacturing as documented by added manufacturing as documented by movement in upward trajectory:movement in upward trajectory:
Assembly OEM OBMAssembly OEM OBM
• Upgrading is a function of technical transfer & Upgrading is a function of technical transfer & learning from foreign buyers in the chain. learning from foreign buyers in the chain.
Industrial Upgrading Hypothesis: Industrial Upgrading Hypothesis: AssumptionsAssumptions
Technical knowledge transfer from buyers leads Technical knowledge transfer from buyers leads to:to:– Improvements in LDC human capital and quality control Improvements in LDC human capital and quality control
= gains in output per worker.= gains in output per worker.
– LDC manufacturers taking on additional production (raw LDC manufacturers taking on additional production (raw material processing) and service oriented roles (logistics material processing) and service oriented roles (logistics management, order processing etc) within the chain.management, order processing etc) within the chain.
– Higher skill = better quality garments. Allows for Higher skill = better quality garments. Allows for marketing to higher end foreign retailers = higher per marketing to higher end foreign retailers = higher per unit price & increase in firm/industry value added.unit price & increase in firm/industry value added.
Industrial Upgrading HypothesisIndustrial Upgrading Hypothesis
• Developed by Gereffi (Early 1990’s). Major case Developed by Gereffi (Early 1990’s). Major case study of upgrading in Torreon, Coahuila-Mexico study of upgrading in Torreon, Coahuila-Mexico denim apparel industry performed by Bair and denim apparel industry performed by Bair and Gereffi (2003)Gereffi (2003)
• Theory advanced in qualitative case studies of Theory advanced in qualitative case studies of apparel and other labor intensive industries by: apparel and other labor intensive industries by: Korzeniewicz (1992); van Grunsven and Korzeniewicz (1992); van Grunsven and Smakman (2002); Humphrey and Schmitz (2000); Smakman (2002); Humphrey and Schmitz (2000); Schmitz & Knorringa (2000) & other scholars at Schmitz & Knorringa (2000) & other scholars at Institute of Development Studies (IDS), Univ. of Institute of Development Studies (IDS), Univ. of Sussex, Brighton, England.Sussex, Brighton, England.
Industrial Upgrading: Theory Industrial Upgrading: Theory CritiqueCritique
Empirical case work:Empirical case work:– Schrank (2004) Mixed Methods case study in Schrank (2004) Mixed Methods case study in
the apparel industry of the Dominican Republic.the apparel industry of the Dominican Republic.– Hassler (2003) Qualitative Case in IndonesiaHassler (2003) Qualitative Case in Indonesia– Gibbon(2004) Qualitative Case study of the Gibbon(2004) Qualitative Case study of the
apparel industry in Sub-Saharan Africa.apparel industry in Sub-Saharan Africa.– Appelbaum (2004) Emphasizes need to Appelbaum (2004) Emphasizes need to
measure and operationalize the concept of measure and operationalize the concept of industrial upgrading in order to extend Gereffi’s industrial upgrading in order to extend Gereffi’s pioneering exploratory work.pioneering exploratory work.
Our StudyOur Study
• Develop exploratory model to measure impact of Develop exploratory model to measure impact of movement within the value chain in an upward movement within the value chain in an upward trajectory from assembly to OEM/full package trajectory from assembly to OEM/full package productionproduction) on per unit value added the denim ) on per unit value added the denim apparel cluster of Torreon, Coahuila, Mexico.apparel cluster of Torreon, Coahuila, Mexico.
• Does the transfer of knowledge from foreign Does the transfer of knowledge from foreign buyers to LDC manufacturers lead to upgrading buyers to LDC manufacturers lead to upgrading and increases in value added at the firm level?and increases in value added at the firm level?
Why Denim? Why Torreon, Why Denim? Why Torreon, Coahuila?Coahuila?
• Mexico = Leading world exporter of denim Mexico = Leading world exporter of denim trousers (men’s and women’s to the USA with 55% trousers (men’s and women’s to the USA with 55% and 48% market shares of U.S. imports. (OTEXA)and 48% market shares of U.S. imports. (OTEXA)
• 50% of Mexico’s denim exports produced in denim 50% of Mexico’s denim exports produced in denim cluster of Torreon, Coahuila and surrounding cluster of Torreon, Coahuila and surrounding areas. (Gereffi, 1999b)areas. (Gereffi, 1999b)
• Cluster growth: 500,000 pieces/week in 1993 to Cluster growth: 500,000 pieces/week in 1993 to 6.5 Million/week by 2000. (van Dooren, 2003)6.5 Million/week by 2000. (van Dooren, 2003)
Leading Five Exporters to the USA of Men's/Boy's Cotton Denim Pants
$0$50,000,000
$100,000,000$150,000,000
$200,000,000$250,000,000
$300,000,000$350,000,000
$400,000,000$450,000,000$500,000,000
$550,000,000$600,000,000
$650,000,000$700,000,000
$750,000,000$800,000,000
$850,000,000$900,000,000
$950,000,000$1,000,000,000
Year
Exp
ort
s (
in c
urr
en
t $U
S)
Mexico
Guatemala
Hong Kong
Colombia
China
Source: U.S. Department of Commerce, Office of Textiles and Apparel Major Shippers Report. Online at www.otexa.ita.doc.gov.
Leading Five Exporters to the USA of Women's/Girl's Cotton Denim Pants
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
$400,000,000
$450,000,000
$500,000,000
$550,000,000
$600,000,000
$650,000,000
$700,000,000
$750,000,000
$800,000,000
$850,000,000
$900,000,000
$950,000,000
Year
Ex
po
rts
(in
cu
rre
nt
$U
S d
oll
ars
)
Mexico
Hong Kong
China
Cambodia
Guatemala
Source: U.S. Department of Commerce, Office of Textiles and Apparel Major Shippers Report. Online at www.otexa.ita.doc.gov.
Test of HypothesisTest of Hypothesis
• HH00:: There is no tangible relation between the denim There is no tangible relation between the denim apparel commodity chain and industrial upgrading apparel commodity chain and industrial upgrading in apparel manufacturing as firms move from in apparel manufacturing as firms move from assembly processing to OEM. assembly processing to OEM.
• HHaa: Integration into the denim apparel commodity Integration into the denim apparel commodity chain by apparel manufacturers has led to a chain by apparel manufacturers has led to a statistically significant increase in industrial statistically significant increase in industrial upgrading (as measured by per unit value added) upgrading (as measured by per unit value added) as firms move in the upward trajectory from as firms move in the upward trajectory from assembly to OEM. assembly to OEM.
Our ModelOur Model
Our estimated regression model is:Our estimated regression model is:
Y = βY = β00 + β + β11XX11 + β + β22XX22 + β + β33XX3 3 + β+ β44XX4 4 + + εε
Where Where Y = Estimated Value Added per unitY = Estimated Value Added per unit
XX11= Annual Fabric Prices—Imports by Maquiladora firms (based= Annual Fabric Prices—Imports by Maquiladora firms (based
on Mexico import data for H.S. 5209.42.01)on Mexico import data for H.S. 5209.42.01)
XX22= Annual Labor Productivity in the Torreon, Coahuila apparel = Annual Labor Productivity in the Torreon, Coahuila apparel IndustryIndustry
XX33 = Integration dummy A (1 for 1989-93 & 0 for 1994-2003)= Integration dummy A (1 for 1989-93 & 0 for 1994-2003)
XX4 4 = Integration dummy B (1 for 1999-2003 & 0 for all other years)= Integration dummy B (1 for 1999-2003 & 0 for all other years)
Data CollectionData Collection
• Per Unit Export Prices for both men’s and women’s Per Unit Export Prices for both men’s and women’s denim trousers derived from H.S. Line items in U.S. denim trousers derived from H.S. Line items in U.S. Department of Commerce, Office of Textiles and Department of Commerce, Office of Textiles and Apparel (OTEXA Major Shippers Report) Database.Apparel (OTEXA Major Shippers Report) Database.
• Imported raw material fabric prices derived from INEGI, Imported raw material fabric prices derived from INEGI, Anuario Estadistico del Comercio Exterior de los Anuario Estadistico del Comercio Exterior de los Estados Unidos MexicanosEstados Unidos Mexicanos..
• Annual Labor Productivity Figures for Torreon, Coahuila Annual Labor Productivity Figures for Torreon, Coahuila derived from 5-Year Mexican Economic Census.derived from 5-Year Mexican Economic Census.
Model Results (t-values in Model Results (t-values in parenthesis)parenthesis)
• Men’s/Boy’s denim apparel:Men’s/Boy’s denim apparel:Value Added = 6.05 + 6.66 Labor Productivity -1.21 Fabric Price - .120 dummy A - .653 Value Added = 6.05 + 6.66 Labor Productivity -1.21 Fabric Price - .120 dummy A - .653 dummy Bdummy B
(26.61) (2.30) (12.67) (.425) (26.61) (2.30) (12.67) (.425) (3.50)(3.50)
Adjusted RAdjusted R22 = 95%. = 95%.
• Women’s/Girl’s denim apparel:Women’s/Girl’s denim apparel:Value Added = 5.09 + 1.34 Labor Productivity -1.02 Fabric Price - .094 dummy A - .250 Value Added = 5.09 + 1.34 Labor Productivity -1.02 Fabric Price - .094 dummy A - .250 dummy Bdummy B
(23.36) (4.83) (11.13) (.347) (23.36) (4.83) (11.13) (.347) (1.40)(1.40)
AdjustedAdjusted RR22 = 96.3%. = 96.3%.
Model AnalysisModel Analysis
• Coefficients comparable for the two models.Coefficients comparable for the two models.• F-test indicates good fitF-test indicates good fit• T-test indicates constant, fabric price and T-test indicates constant, fabric price and
labor productivity significant in both models.labor productivity significant in both models.• In men’/boy’s model D2 is significant, but In men’/boy’s model D2 is significant, but
wrong sign (negative) meaning value added wrong sign (negative) meaning value added is inversely related to the shift from is inversely related to the shift from assembly to OEM? assembly to OEM?
• In women’s/girl’s model both D1 and D2 are In women’s/girl’s model both D1 and D2 are negative and insignificant.negative and insignificant.
Study LimitationsStudy Limitations
• Limited Data PointsLimited Data Points. .
Labor Productivity statistics only available in 5 year intervals Labor Productivity statistics only available in 5 year intervals based on based on Censos Economicos. Due to weak data storage by Censos Economicos. Due to weak data storage by INEGI, time series analysis in excess of 15 years not feasible. INEGI, time series analysis in excess of 15 years not feasible. Almost all trade and census data prior to 1989 no longer Almost all trade and census data prior to 1989 no longer archived.archived.
• Inconsistent data reporting by INEGI:Inconsistent data reporting by INEGI:
1) Trade data prior to 1993 not segmented by maquila/non-1) Trade data prior to 1993 not segmented by maquila/non-maquila.maquila.
2) Reporting of fabric import data, prior to 1996 is in kilograms 2) Reporting of fabric import data, prior to 1996 is in kilograms instead of M2. Leads to less precise calculation of raw instead of M2. Leads to less precise calculation of raw material material
requirements per apparel piece.requirements per apparel piece.
How Can there be Upgrading How Can there be Upgrading Amidst Price Stagnation?Amidst Price Stagnation?
Women's/Girls Cotton Denim Bottoms: Export Prices in Current and Constant (Base Year = 2000) Mexican Pesos
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
Year
Me
xic
an
Pe
so
s
Current Mexican Pesos
Constant Mexican Pesos
Source: U.S. Department of Commerce Office of Textiles and Apparel (OTEXA) Database. Per unit prices converted to Mexican Pesos based on the ILO Laborsta CPI-Mexico Database. (see appendix four)
Are Labor Productivity Gains in Coahuila Correlated to Are Labor Productivity Gains in Coahuila Correlated to Learning from Foreign Buyers? Learning from Foreign Buyers?
Are other variables the causal agents for productivity Are other variables the causal agents for productivity
gains ?gains ? Percentage Change in Labor Productivity in the
Apparel Industries of Three Mexican States (measured in current Mexican Pesos), 1993-2003
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
%Δ 1988-1993 %Δ 1993-1998 %Δ 1998-2003
Year
% C
ha
ng
e in
Ou
tpu
t p
er
Wo
rke
r
(in
Pe
so
s)
Coahuila
Guerrero
Chiapas
Source: INEGI. La Industria Textil y Del Vestido en Mexico: Serie de Estadisticas Sectorales. Editiones 1998 and 2005
ConclusionConclusionOur study extends literature on industrial upgrading Our study extends literature on industrial upgrading
at the firm level by:at the firm level by:
• Developing an operational definition of upgrading as Developing an operational definition of upgrading as measured by an increase in per unit value added. measured by an increase in per unit value added.
• Creating an operational measurable definition for learning Creating an operational measurable definition for learning from from foreign buyers/technology transfer as expressed from from foreign buyers/technology transfer as expressed by changes in labor productivity.by changes in labor productivity.
• Providing an exploratory analysis of the impact of Providing an exploratory analysis of the impact of commodity chain integration by denim apparel commodity chain integration by denim apparel manufacturers in Torreon, Coahuila, Mexico on upgrading at manufacturers in Torreon, Coahuila, Mexico on upgrading at the firm level. the firm level.
ConclusionConclusion
• Findings of our model indicate no correlation between industrial Findings of our model indicate no correlation between industrial integration and transformation from assembly to OEM and integration and transformation from assembly to OEM and increases in value added in denim apparel manufacture. increases in value added in denim apparel manufacture.
• Data analysis indicates movement from assembly (maquiladora) Data analysis indicates movement from assembly (maquiladora) to OEM to OEM has nothas not led to significant gains in inflation adjusted per led to significant gains in inflation adjusted per unit export prices for the denim apparel industry of Torreon, unit export prices for the denim apparel industry of Torreon, Coahuila, Mexico, however: Coahuila, Mexico, however:
• Gains in value added highly correlated to a) general pattern of Gains in value added highly correlated to a) general pattern of declining fabric prices and b) gains in labor productivity. declining fabric prices and b) gains in labor productivity. However, our model indicates that productivity gains in the However, our model indicates that productivity gains in the Torreon industry are Torreon industry are notnot associated with technical transfer of associated with technical transfer of knowledge from foreign buyers. knowledge from foreign buyers.