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Draft of Value Chain Paper, 22/03/2006 1

VIETNAMESE T&G FIRMS IN THE GLOBAL VALUECHAIN: IF AND HOW VALUE ADDED PAYS OFF?

Dang Nhu Van

Researcher, Center of Analysis and Forecast, Vietnamese Academy of Social Sciences,

477 Nguyen Trai, Thanh Xuan, Hanoi, Vietnam

Phone: +84 4 5522909. Fax: +84 4 5522905

[email protected]

Hoang Thanh Huong

Lecturer, National Economics University,

Giai Phong Road, Hanoi, Vietnam

[email protected]

June 2005

The authors would like to thank IDRC for financial and technical supports to this research.Also deep gratitude is owed to Remco Oostendorp and John Cockburn for their valuableadvices and comments on methodology and technical issues.

Abstract

Value added creation by upgrading is one of the indications of firm’s successful competitionwhile inserting themselves into a commodity value chain. This paper explores the impact ofupgrading efforts by textile and garment firms in Vietnam on the value added they create, andhow that value added benefit the firms, the government, and the workers through the rent-sharing process. The findings are that the benefit of upgrading varies between capital andlabor intensive firms. Firms that create more value added are also more profitable. The

benefit to the government is proportional to the value added firms create. And workers benefit from higher value added through higher wages.

Key words: value chain textile garment



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Table of Content

Table of Content ........................................................................................................................2

Abbreviations.............................................................................................................................31. Introduction............................................................................................................................42. Vietnam in the global T&G value chain................................................................................4

2.1. Performance and contribution of T&G industry in Vietnam..........................................42.2. Literature on value chain ................................................................................................6

2.2.1. International literature on value chain .....................................................................72.2.2. Literature on global textile & garment value chain .................................................72.2.3. Relevant literature on textile garment in Vietnam.................................................102.2.4. Research rationale ..................................................................................................11

3. Methodology ........................................................................................................................124. Quantitative analysis and findings.......................................................................................135. Findings from firm interview...............................................................................................16

5.1. Interviewed firms ..........................................................................................................165.2. Remarks from firm interviews......................................................................................19

6. Conclusion ...........................................................................................................................19Appendix 1. Data Source .........................................................................................................21Appendix 2: Regression results ...............................................................................................22Appendix 3: Questions for firm in-depth interview.................................................................27References................................................................................................................................30



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Abbreviations

ACT: Agreement on Clothing and Textile

AFTA: Association of Southeast Asian Nations Free Trade Area

CMT: Cut-Make-Trim

EU: European Union

FOB: Free on board

GDP: Gross Domestic Products

GSO: General Statistics Office

LDC: Less developed countries

OBM: Original brand-name manufacturing

OEM: Original equipment manufacturing

PWC: PriceWaterhouse - Cooper

R&D: Research & Development

SOE: State-owned enterprise

T&G: Textile and Garment

UK: United Kingdom

UNIDO: United Nations Industrial Development Organization

WTO: World Trade Organization



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1. Introduction

Textile and garment (T&G) industry has been one of the bread winners for Vietnam over the last15 years in terms of export earnings and job creation. This is so far the most important export-

oriented manufacturing industry of Vietnam. However, the world competitive environment is

changing and its is the time to review the adaptability of this industry. The challenges include

loss of price competitiveness due to lower cost countries and being trapped in the low value end

of the global value chain for textile and garment products. When the ATC is fully phased out in

2005, the currently quota-restricted countries, like China, which are very competitive, will be

able to sell more in the developed countries' market. And given China's WTO membership,

Chinese T&G products have access to all WTO member countries. Both these factors would very

likely to squeeze Vietnamese firms' margin, if not completely drives them out of those markets.

Does cheap labor remain the country's comparative advantage in the long run? How to remain

competitive when the country becomes more integrated into the global value chain? These

questions should be asked for all labor intensive industries, including textiles and garments, to

help the country find its dynamic, instead of relying on its static comparative advantage, over

time. As the country moves to another stage of development and the world competition

environment changes, comparative advantages do not remain the same over time. The current

trend is that increasingly more value added accrued to non-production activities in the whole

value chain. Therefore, to break the cycle of barely earning processing fee, the lowest value

activity in the chain, capacity building is necessary in other areas, such as design, marketing,

trademark development, and distribution.

To reflects on the current and potential competitiveness of Vietnamese T&G firms, this paper

will look at the global T&G value chain and see where Vietnamese firms are, and to analyze

firm's data to see what factors likely affect their competitiveness or ability to move up the value

chain. A number of firms are selected for in-depth interview to provide case study and illustrates

firm's performance and response to the competitive environment. The paper is organized as

follows: Section 2 provides an overview on the global T&G value chain and the position of

Vietnamese firms therein; Section 3 describes briefly the methodology of this study; Section 4

deals with quantitative analysis and data; Section 5 looks at specific firms interviewed for the

purpose of this study; and Section 6 concludes the paper.

2. Vietnam in the global T&G value chain

2.1. Performance and contribution of T&G industry in Vietnam

In Vietnam, T&G industry made impressive performance over the past years. The growth rate of

the industry has been high at 10 percent per annum as opposed to the country’s annual GDP

growth rate of 7.6 percent during the 1990s (GSO, 2001). The T&G industry played an important

role in the economy in general and in the manufacturing sector in particular. The share of textiles

and garments in manufacturing output was around 10.5 percent (GSO, 2001). The export



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performance is spectacular as well, especially since the Bilateral Trade Agreement with the

United States came into effect. From 2002, T&G became the second most important export items,

after crude oil. T&G exports reached US$ 2.7 billion in 2002 and were estimated to be aroundUS$ 3.6 billion in 2003; this makes it account for 18.1 percent of total exports and 27 percent of

non-oil export in 2003 (Table 1). In terms of employment generation, the industries account for

23 percent of manufacturing jobs at the end of 2002 (GSO, 2003). This shows how important this

industry is in the economy, in exports, and in job creation.

Table 1. Vietnam's Export Performance by Key Commodities 2002 and 2003, million $

2002 2003 (Estimated)

$million

% oftotal

% oftotalnon-oil

$million

% oftotal

% oftotalnon-oil

Total 16,706 19,870Total non-oil 13,436 12,929

Crude oil 3,270 19.6% 3,777 19.0%

Garments and textiles 2,752 16.5% 20.5% 3,600 18.1% 27.8%

Aqua Products 2,023 12.1% 15.1% 2,237 11.3% 17.3%

Footwear 1,867 11.2% 13.9% 2,205 11.1% 17.1%

Rice 726 4.3% 5.4% 734 3.7% 5.7%

Electronics, ComputerComponent 492 2.9% 3.7% 685 3.4% 5.3%

Wood products 435 2.6% 3.2% 560 2.8% 4.3%

Handicraft and fine art items 331 2.0% 2.5% 367 1.8% 2.8%Coffee 322 1.9% 2.4% 458 2.3% 3.5%

Rubber 268 1.6% 2.0% 395 2.0% 3.1%

Cashew nuts 209 1.3% 1.6% 284 1.4% 2.2%

Fruit and Vegetables 201 1.2% 1.5% 152 0.8% 1.2%

Electric wire and cable 186 1.1% 1.4% 290 1.5% 2.2%

Coal 156 0.9% 1.2% 181 0.9% 1.4%

Plastic products 153 0.9% 1.1% 173 0.9% 1.3%

Bicycle and Equipment 124 0.7% 0.9% 155 0.8% 1.2%

Pepper 107 0.6% 0.8% 104 0.5% 0.8%

All kind of Tea 83 0.5% 0.6% 60 0.3% 0.5%

Peanuts 51 0.3% 0.4% 48 0.2% 0.4%Source: Ministry of Trade, www.mot.gov.vn

The comparative advantage that has been tapped so far by domestic firms and sought by foreign

investors in T&G industry is cheap labor. Vietnamese firms so far show little capacity in design,

marketing, product development, and especially access to consumers. Therefore, these firms

mainly work as subcontractors for and thereby earn processing fee from larger manufacturers in

the region, who are first tier suppliers to either global traders or retailers (Figure 1).



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Figure 1: Vietnam’s T&G firms in the global value chain

2.2. Literature on value chain

There has been some literature on value chain analysis around the world, among which is studies

by Kaplinsky on value chain research (2001), Gereffi on types of value chain and upgrading in

global apparel chain (1999). Dolan et al. on specific country (Kenya) export in the value chain

(1999).

Kaplinsky provided a simple definition of value chain, which includes the full range of activities

which are required to bring a product or service from conception, through the different phases of

production (involving a combination of physical transformation and the input of various

producer services), delivery to final consumers, and final disposal after use (Kaplinsky, 2001).He also pointed out that in fact, there can be many different value chains linked together through

various actors at different stages. The production per se is only one of a number of value added

links. The primary economic rent in the chain of production are increasingly to be found in the

areas outside the production (Kaplinsky, 2001). Therefore, improving efficiency in production

only is not sufficient to sustain competition and snatch rent in the chain, and cost-based

competition is found to be less important as one move to higher value-added activities in the

chain. A series of other post-production factors affect the producer profit, market share, or even

inclusion or exclusion from the chain.

GLOBAL BUYERS(Retailers)

TRADERS

RegionalManufacturers (1st

tier suppliers) Vietnamese T&Gfirms

ConsumersDesign,Branding,Marketing,Distribution,ProductDevelopment

Sourcing,Outsourcing,

Placing orders

RegionalOffice

Cut-Make-Trim orCut-Make



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Kaplinsky explored different ways that firms and countries can upgrade themselves in the value

chain. He classified the observed upgrading process into four categories:

(i) Process upgrading: increase efficiency of internal processes;

(ii) Product upgrading: introducing new products or improving old products;

(iii) Functional upgrading: increasing value added by changing the mix of activities;

(iv) Chain upgrading: moving to new value chains.

All of these processes are to capture more rent, and thus to benefit more from globalization andthe associated more dispersed division of labor.

2.2.1. International literature on value chain

A study of value chain in vegetables export from Kenya to the United Kingdom was conducted by Dolan et al.. This paper shows that Kenyan producers received only 14 percent of the final price of vegetables sold in a UK supermarket (Doland et al., 1999).

Gereffi analyzed value chains and divided them into producer-driven and buyer-driven chains.According to his definition,

“[...] in producer-driven value chains, large, usually transnational, manufacturers play the centralrole in coordinating production networks. This kind of value chain is typically found in capital-and technology-intensive industries like automobiles, aircraft, computers, semi-conductors, andheavy machinery. Buyer-driven value chains, by contrast, are characterized by highlycompetitive, locally owned, and globally dispersed production systems. Profits in buyer-driven chains derive not from scale, volume, and technological advances as in producer-driven chains, but rather from unique combinations of high-value research, design, sales, marketing andfinancial services that allow the retailers, branded marketers and branded manufacturers to act asstrategic brokers in linking overseas factories with evolving product niches in the main consumermarkets.” (Gereffi, 1999)

Based on this definition, Gereffi considered the apparel industry as typical buyer-driven valuechain.

2.2.2. Literature on global textile & garment value chain

The textile and garment industry is specifically characterized as a buyer-driven commodity chain,in which retailers and branded marketers rather than manufacturers play lead roles. Withoutowning any manufacturing factory, the retailers and branded marketers coordinate a globalsupply chain (Frobel, Heinrichs, and Kreye 1980 ; Gereffi 1994) and capture substantial portionsof the value chain (Craig and Douglas 1997; Krishna, Erzan, and Tan 1994, quoted by Lee).Each country in the apparel commodity chain has a different mix of resources and capabilitiesdepending on its developmental stage, and that a particular country's export position in theapparel commodity chain is determined primarily by available resources and capabilities



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accumulated during the course of industry development (Porter 1998, quoted by Lee). Lead firmsin the buyer-driven commodity chain do not make products. Instead, their core competencies liein understanding end-users' preferences, designing products, forming cost-efficient global

sourcing networks, and selling finished products with the right distribution plan (Lee). At theother end of the apparel commodity chain are less developed countries (LDC). Workers in lessdeveloped countries dye, cut, trim, and sew to manufacture apparel products, following thespecifications given by foreign lead firms in the apparel commodity chain. Because lessdeveloped countries have abundant cheap labor, yet are deficient in capital and technology, theyusually take a labor-intensive position and manufacture ready-made clothing as subcontractors(Lee). Because a proper understanding of, and quick response to, ever- changing demandconditions is a critical success factor, lead firms of the apparel commodity chain tend to locatethemselves geographically and culturally close to end consumers. The lead firms of the apparelcommodity chain spend their resources on R&D, marketing, and distribution functions todevelop innovative products and control the distribution system, knowing that sources of more

profitable and sustainable competitive advantages stem from innovative product development,marketing, and distribution capabilities rather than low cost production. . In doing so, they alsocreate barriers to entry to ensure their superior profit positions within the transnational valuechain. Few firms or new entries would be able to acquire all those skills and capacity in the shortrun to snatch away rent. In this regard, apparel and textiles may as well be capital- andtechnology intensive industries particularly because implementing product designing, marketing,and distributing strategies to create and deliver value to world consumers require substantialfinancial and technological resources (Lee).

Detailed analysis on the apparel value chain can be found in Gereffi's various work (Gereffi,1999; Gereffi and Memedovic, 2003). According to these studies, three different types of

manufacturing are observed in this value chain:

Assembly - a form of subcontracting, in which garment sewing plants are provided withimported inputs for assembly.

Original Equipment Manufacturing (OEM) - firms make product according to a designspecified by the buyer, and the products are sold under the buyer's brand name.

Original Brand-name Manufacturing (OBM) - an upgrading process from OEM to first thedesign and then the sale of own brand products. (Gereffi and Memedovic, 2003).

The upgrading process in the value chain is examined by Gereffi as one that takes place at fourdifferent levels:

(1) within factories— upgrading involves moving from cheap to expensive items, from simple tocomplex products, and from small to large orders;

(2) within inter- firm enterprise network s— upgrading involves moving from mass production ofstandardized goods to the flexible production of differentiated merchandise;

(3) within local or national economies— upgrading involves moving from simple assembly ofimported inputs to more integrated forms of OEM and OBM, involving a greater use of forwardand backward linkages at the local or national level; and



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(4) within regions— upgrading involves shifting from bilateral, asymmetrical, inter-regional

trade flows to a more fully developed intra-regional division of labor incorporating all phases of

the commodity chain from raw material supply, through production, distribution, andconsumption (Gereffi, 1999).

A study on specific clothing sector value chain in EU, with some reference to the global trend in

demand and supply, was done by Baden (2002). Global trends revealed by Baden's study

includes: (i) Prices of clothing are declining as retailers competed for market share; (ii) Cost at

the higher end of the value chain (e.g. design and marketing) are rising, putting pressure on

producers to cut cost at the lower end of the value chain (e.g. basic and core products); (iii)

Manufacturers increasingly become distributors and managers of outward processing trade

operations, producing designs and samples only. Retailers have greater control over the whole

supply chain.

Overall, the basis of competition moved from low labor cost to quick response and capacity for

just-in-time delivery. The lower value added end is also where entry barriers tend to be low and

consequently where cost competition is strongest; and the comparative advantage in higher value

added products usually relates to vertical integration with textiles for some categories (Baden,

2002).

Lee did a study on the relation between a country's position in the apparel commodity chain and

the unit value of their exported products as proxy of profit. Four countries -Hong Kong, South

Korea, Bangladesh, and Italy - that are at different developmental stages and hold varying

positions in the global apparel commodity chain - are compared for the respective unit values ofapparel and textiles exported to the United States. Resources and capabilities that permit a

particular country to take a more profitable position within the apparel commodity chain include

not only labor factors and physical, financial resources, but also relationship-based assets and

marketing-based assets such as brand names (Madhok 1996; Wernerfelt 1989, quoted in Lee).

Countries that possess such resources and capabilities are, therefore, likely to develop advanced

competitive advantages beyond merely offering a low cost product, and can command high

values in the world markets (Lee, year unknown). Lee found that by exporting one square meter

of apparel products, Italy earned $15.91; Hong Kong, $ 5.06; South Korea, $3.91; and

Bangladesh, $2.17. That is, the average import value of "Made-in Italy" apparel is about seven

times that of "Made-in-Bangladesh" apparel, four times "Made-in Korea" apparel, and three

times "Made in-Hong Kong" apparel. The conclusion from the study is that countries exporting

under their own brand names may enjoy the highest profit margins, followed by countries that

engage in full package production without owning brands. In contrast, countries that engage in

mere-assembly production, which exploits low wage labor must utilize mass production of low

value-added apparel to remain profitable. Within the apparel commodity chain, countries that are

capable of designing, marketing, and distributing apparel product to meet ever-changing end

consumers' needs seem to enjoy higher unit values than countries with a production and

manufacturing orientation (Lee).



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The experience of East and Southeast Asia in apparel upgrading is mixed in terms of timing and

speed. The Philippines needed about 40 years to move from cottage based enterprises in the

1950s to a more technology-based exporting garment industry by the 1990s, and still lackedlinkages with the domestic textile industry, and thus had to import 90 percent of its textile

requirement (Antonio et al, year unknown). But Hong Kong firms shifted their production

facilities abroad and moved to design, brand management, and marketing as early as the late

1960s, Taiwanese and Korean firms in the 1980s, due to the rising wage at home and the quota

imposed on their exports to the United States and Europe.

2.2.3. Relevant literature on textile garment in Vietnam

From the analysis in literature on the global textile and garment value chain, it is obvious thatVietnam's position in the chain is at the low end. The T&G industry of Vietnam is characterized

by mere assembly activities, using imported inputs, and selling under buyer's name, with littlevertical linkages, and competition is solely on low price, given its abundant labor. This pattern isso far proven beneficial for the country's export-led growth and job creation, but whether itremains profitable and sustainable in the long run is questionable. Analysis on the situation ofVietnam's T&G industry can be found in studies by Thoburn et al., Nadvi et al., Goto, Hill,Pricewaterhouse Cooper (PWC) et al., among others. Most of these studies provide descriptionand analysis on the current situation of Vietnam's T&G industry and challenges ahead.

A study by PWC et al gives an assessment that for the textile and garment industry in themedium term the outlook remains favorable, based on growing local and international marketsand garment sourcing networks that target competitive labor cost sources. However, the same

paper warns that increasing attention must be on value creation and retention rather than salesmaximization (PWC et al., 2003). Most analyses point out differences between textile andgarment sectors in terms of performance, factor intensity, competitiveness, import dependence,applied trade regime, and trade orientation. Textile companies represent the majority of revenues but are, in total, loss making (PWC et al., 2003). While the textile industry mostly competes withimports in the domestic market, the garment industry is much more export-oriented and becomethe leading manufacturing export industry of the country. According to the 1996 input-outputtable, only 11.3 percent of textile total gross output was exported directly, compared to 84 percent in the case of garments. Imports of textiles were the equivalent of 77 percent of grossoutput in textiles, and imports of clothing were the equivalent of 21.8 percent of the gross outputof clothing (Thoburn et al, 2003). For garment industry, about 75 percent of its exports are on the

CMT basis (cut-make-trim), which means garment firms make clothes using fabrics supplied by buyers, following buyer's design and specifications; the remaining 25 percent is on FOB basis,which means that firms buy fabrics from their own source with own financial resources to makeclothes. This low FOB share in garment export is, as explained by various studies, due to the poor quality of domestic fabrics and thus most garment buyers choose to soppy or specify thesupply source of imported fabrics.

Study by Nadvi et al. on Vietnam's textile and garment industry in the global value chain provides a profile of global buyers that Vietnamese T&G firms deal with, thus showing whereVietnamese firms are in the global value chain. These buyers include leading international



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brands from specialist multiples, department stores, supermarkets, discount and mail orderoutlets (Nadvi et al., 2003).

Based on this industry profile, the government intention in investing heavily in textile to expandits capacity to meet the demand for inputs of the garment industry, thus increasing the localcontent of the latter through this backward linkage, is challenged by various studies. WhetherVietnam should heavily invest in its textile industry to increase the value-added of textile andgarment exports remain a debatable question among government, industry, and researchcommunity. Arguments of the PWC study is that increases in upstream capacity – spinning,weaving, knitting, finishing, and fiber supply - will not in themselves guarantee the uptake ofthese capacities by the market. The capacities will only be filled if the market, which isdominated by foreign buyers with well-developed supply chains, chooses to use the output (PWCet al., 2003). Goto (2003) also argues that it takes time and tariff protection to develop the textileindustry, while the AFTA and other international commitments of Vietnam for trade

liberalization do not give this industry that opportunity. Furthermore, increasing the domesticvalue-added of garment exports has not much to do with developing the local textile industry.Goto believes that CMT-based export is currently the competitive edge and thus appropriate orthe country, it is also safe as exporters do not have to bear risk in sourcing and distribution.

PWC study focuses on analyzing the industry profile and its biggest company, Vinatex, the statecorporation with about 45 member companies. The study points out that for garments, without product development and design, the industry will be locked in its continuing niche to supplyC&M or CMT products to a sourcing chain which is mobile and has little loyalty. Anotherexplanation for the industry being captive to low value end is due to the passive marketing, salesrather than return maximization; plus not matching product to market demands (PWC et al.,

2003). Due to the lack of design, marketing and brand development capacity, the countryremains a "price taker", mainly produces low value basic products without differentiation.

Though elements on Vietnam's position in the global textile and garment value chain are foundand analyzed by various studies cited above, no attempt is known so far to link betweenquantitative and qualitative studies. The question of interest is whether it is the best strategy foreach country at each point in time to move up the value chain, given the cost of doing so and the benefit gained by different stakeholders. The study of Vietnam's distribution system in textileand garment industry by Goto concluded that it is not beneficial for Vietnam to move up thevalue chain at this point. But the Vietnamese government believes that the country should moveup by investing more in the textile industry to move up the chain that way. This research paper

aims at probing the benefit of Vietnam's moving up the value chain through empirical evidenceand qualitative information obtained from firm interview.

2.2.4. Research rationale

This research therefore intends to fill in these gaps in methodology and in policy analysis. The

effort here is to explore whether firms that move away from CMT-based export, manufacture

higher quality products, employ higher skilled labor, use more domestic (versus imported)

materials, investing in upgrading themselves in the value chain, are more profitable, pay

higher wages to their worker, can create more value added, and pay more taxes to the



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government. The findings of research will therefore be expected to contribute to the

development of this important manufacturing sector, and some key findings could also be valid

for other labor-intensive export-oriented manufacturing industries.

3. Methodology

Based on the productivity and rent-sharing theories, this research tries to examine howVietnamese textile and garment firms can become more competitive and how the value addedthey create can benefit the country and the firms themselves. In this exercise, we use the surveydata of 150 textile and garment firms for 1999 and 2000 for quantitative analysis (See Appendixfor survey details). We assume that stakeholders in this process include the economy, the firms,the workers, and the government. We try to see whether firm’s efforts to become morecompetitive, to upgrade themselves in the value chain would result in higher value added,

profitability, higher wages paid to workers, and more taxed paid to the government. In otherwords, how the firm’s position in the value chain benefit the different stakeholders. Based on thedataset obtained from the multi-purpose T&G firm survey, we select the following proxies ofupgrading for this analysis: doing own design, R&D spending, worker skill intensity, percentageof workers with high education level, the export share in revenue, the CMT share in total export,garment as share of total revenue, and the share of domestic raw materials. This data availabilityand variables do not allow to distinguish between different types of upgrading that takes place inthe firm. But interview with firms provide more insight on what types of upgrading that firmsmight have involved in.

In the first step, we will explore how firms' upgrading will have impact on value added. On theone hand, more efforts in doing own design, more spending on R&D, employing more skilledworkers, more staff with higher education, and export more mean firms are more upgraded ortake efforts to move up the value chain. On the other hands, larger CMT share in total exportindicates that firms are less upgraded and mostly rely on low value activities. We include thevariable of domestic materials to answer the policy question of whether Vietnam should developmore upstream industries (e.g. textile) to produce input materials for the downstream industries(e.g. garment), or it is better to import. The variable of garment share in total revenue aims atcharacterizing firms as garment or textile, as many firms in the sample do both activities. Wecontrol for firm’s different characteristics such as location, ownership, size, and age. If firms'efforts in upgrading result in higher value added, then obviously they would benefit the countryas the whole. But if the efforts indeed result in higher value-added, but not higher profitability,then they may not have incentives to do so, and further steps may be needed to study why firmsor the industry are not ready yet to move to higher value added activities for the benefit of firmsand the country as the whole.

Second, we therefore also analyze how the benefit of upgrading is distributed among thestakeholders, in the forms of higher value added to the economy, more profit to firms, higherwages to workers, and tax paid to the government. Third, we will examine what kind ofupgrading efforts pays off in terms of value added for all firms, labor intensive firms, and capitalintensive firms through a simulation exercise. And finally, there are costs involved in upgrading,which may or may not outweigh the benefits, and we need to take that into account in theanalysis.



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Quantitative analysis is however in itself a limitation in explaining factors behind thecompetitiveness (or the lack of) of textile and garment industry. Therefore, results fromregression analysis are then brought to interview with selected firms to find out if that is true and

the reasons behind such performance. Firms selected for intensive interviews are all exportingfirms, with the size from 200-500 workers, producing either textiles or garments, or both.

4. Quantitative analysis and findings

Table A1 shows that doing own design, R&D spending, skill intensity, percentage of workerswith high education levels are positively and significantly correlated to value added. Meanwhile,CMT share is negatively related to value added. Likely, lower CMT share, higher export share,doing own design, spending more on R&D, employing higher skill and more educated workersindicate that firms are more upgraded .

However, bivariate correlations may reflect other factors and therefore the observed correlations between upgrading and value added may be spurious. Therefore, we run regressions of valueadded as functions of capital, labor, and proxies of upgrading, with interactions between theupgrading and size (capital and labor) variables (Table A2). The results show that withinteractions between firm’s size and the share of garment in its revenue (Regression 1), valueadded is strongly and positively correlated with firm size, both capital and labor.

The signs of the interaction terms between garment share and the size variables imply that capital productivity is lower in firms with a larger garment share, while labor productivity is higher.This confirms that garment firms are labor intensive and textile firms are capital intensiveindustries and that garment production is more appropriate for a labor abundant country.

Next we introduce the proxies for upgrading in the regression to test whether upgrading increasesvalue added. It was found that none of the upgrading variables was significant if includedadditively. However, when interaction variables are added between size and each upgradingvariable (Regression 2), value added is still strongly and positively correlated with capital andlabor size, but the coefficient for labor size is no longer significant (p-value 0.17) . Therelationship between size (both capital and labor) in garment firms and value added still holds.

Interestingly most of the proxies for upgrading are now jointly significant at a significance levelof 5% (based on F-tests). Also notable is that for each proxy for upgrading that the coefficientson the interaction term with capital and labor have opposite signs, implying that upgrading

makes the production process more or less labor-intensive. In particular, we find that exports, professional level intensity, R&D, and skill intensity are relatively capital-intensive, while designis labor-intensive (the proxies for CMT and domestic material share were jointly insignificant at5% significance level). This implies that the impact of upgrading is greater for capital-intensivefirms (except for design upgrading). But the complementarities between upgrading and capitalalso raise the question whether upgrading is the most appropriate strategy for a labor-intensivecountry such as Vietnam. Therefore it is important to test whether upgrading is actually profitable for the firms.

A practical issue is that garment exports of Vietnam to the major markets are subject to quotafrom importing countries, and SOEs are claimed to have more favorable access to quota, thus



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they may perform differently from the rest. However, a test for SOE dummy variable, withinteraction with their capital and labor size, does not show that it is significant.

In addition, there is also a time lag problem in this cross-section regression. What comes out asvalue added today might be a result of investment or upgrading efforts made a few years or manyyears back, or the benefit of the fact that firms upgrade today may not show up until years later.

To check whether firms that create more value added are more profitable, we run a regression of profitability as a function of value added, controlling for firm’s characteristics (Table A3). Theresults indicate that value added is strongly and positively correlated with profitability.Furthermore it can be seen that firms located in the South are relatively less profitable for thesame level of value added. The implication here is that profitable firms tend to create highervalue added, thus benefit themselves and the country as the whole. The other way around:firms with higher value added are more profitable. However, given the low R-square the

equation only explains a small part of the relationship..

Next, we want to see how value added benefits the government in the form of value added tax.The value added tax rate is run against value added, controlling for firm’s characteristic (TableA4). The regression shows that none of the variables is significant implying that the value addedtax rate is not affected by firm characteristics. Therefore, the benefit to the government ofincreased levels of value added is proportional.

We then try to see how value added benefit workers in the form of higher wages. We regresshourly wage against value added, controlling for firm’s and worker’s characteristics like age,experience, sex, skill, etc (Table A5). We found that value added is positively and significantly

correlated with wages, regardless of firm’s age, worker experience, skill level, or sex, exceptin private firms. And this relationship is quite robust. This means workers benefit from thehigher value added created by firms where they work. There can be a question about impact ofhigher capital intensity on employment. In other words, when firms invest more in capitalequipment and machinary, they may lay off labor or stop hiring more labor, in which case thelaid-off workers and job-seeking workers do not benefit from the firm's upgrading.

To illustrate how value added varies with and without each proxy of upgrading, a simulation isrun for all firms, labor intensive firms, and capital intensive firms (Table 2). For all firms, doingown design and export are very value adding, but export on CMT basis and using domesticmaterial bring very little value added. This confirms the regression results. However, the valueadding proxies are not the same for labor intensive firms and capital intensive firms. If thesimilar simulation is made for labor intensive firms, doing own design, export, and CMT arevalue adding, while spending on R&D, employing more skilled labor, and more professionalstaff are not. For capital intensive firms, export, doing own design, and spending on R&D arehighly value adding. Employing professional staff is a little more value adding than without. ButCMT brings very low value added. Using domestic raw materials is always not value adding inall cases.

This simulation indicates that for labor intensive firms, the effort to upgrade by investing inR&D, skilled labor, and professional staff is not rewarding in terms of value added, but forcapital intensive firms, it does.



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Table 2: Simulation of value added change by proxies of upgrading

Variable Observations Mean % change

Al l f irmsVA 280 6232 0%

VA_CMT 280 5864 -6%

VA_design 280 9503 52%

VA_rdpct 280 6827 10%

VA_skilpct 280 6236 0%

VA_matdpct 280 6223 0%

VA_expsh 280 11521 85%

VA_propct 280 6301 1%

Labor intensive firms

VA 89 3705 0%

VA_CMT 89 4111 11%

VA_design 89 6844 85%VA_rdpct 89 3373 -9%


VA_matdpct 89 3706 0%

VA_expsh 89 5920 60%

VA_propct 89 3602 -3%

Capital intensive firms

VA 121 7519 0%

VA_CMT 121 6298 -16%

VA_design 121 9251 23%

VA_rdpct 121 9138 22%


VA_matdpct 121 7501 0%VA_expsh 121 15220 102%

VA_propct 121 7791 4%

There is an issue of causality, however, between firm’s upgrading and the value added theycreate or their profitability. More profitable firms are more likely to invest more in R&D, orafford more upgrading efforts, which in turn would result in higher value added.

Another factor to bear in mind in this analysis is the cost of upgrading, be it capital investment,human resources, or any other form of investment. This empirical research has found a strong

correlation between profitability and value added. As indicated in Regression 3, Table A2, thecoefficient for capital labor ratio is far less than one. This can be interpreted that a dollar ofinvestment in capital would result in less than one dollar of value added. This means that it iscostly to upgrade.

However, it is not always easy to upgrade while competing in the global value chain. And forthis particular research, the data was obtained from a survey in 1999-2000, when a number offirms started their upgrading plans, by investing in new technology, R&D, design, etc. But theeffects of this upgrading may not show up until a few years later. Therefore, findings in thisquantitative analysis may not fully capture the relationship between upgrading and reward in theforms of value added and profitability. Moreover, empirical evidence needs supplementary



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anecdotal evidence from firm interview to explain or challenge some of the findings. In-depthinterview with firms will shed some light on the difficulties faced by firms in moving to highervalue activities to catch more rent.

5. Findings from firm interview

5.1. Interviewed firms

Three T&G firms were interviewed under this study to find out about their position in the valuechain, their efforts (if any) to move to higher value activities, and their readiness for futurecompetition when the quota to the biggest market is removed for free competition. Questions forinterview are provided in Appendix 3.

Firm A: A joint venture garment company, export 100% on CMT basis

This is a joint venture with 30% of local equity. The company employs 300 workers, an optimalsize for efficiency and profitability purposes, as expressed by managers, after experiencing lowerefficiency due to larger size in the past. One hundred percent of the company's products are madeon CMT basis. Very small fractions of raw materials are sourced domestically (e.g. thread andzippers), all the remaining are imported. Design, raw materials, and marketing are all provided by the buyer. The company does not have R&D activities.

The buyer is from Taiwan and the target market is Japan. The company is completely ignorantabout the price at which its product would be sold and the trademark for it in the Japanese market.

The company so far has no plan to move to higher quality and thus higher value-added products.Higher quality products require investment in technology and equipment, and not necessarily promise any higher profitability, as viewed by the managers.

When asked about anticipation of potential competition with other garment exporters after theATC expires and the lift of quota, the company shows no concern about it. The explanation is itonly targets the Japanese market, which has no quota, and thus the quota removal does not affectthe company. Currently, the company is also allocated with quota to export to the EU market, butnever uses it, therefore sells it to those that need.

The company does not have its own distribution network in Vietnam. And since it is a full CMT

manufacturer, the managers believe that it does not have to develop distribution and marketingnetwork, and has no plan to do so. The buyer always takes care of this function. The companydid not have any promotion activities in the past year, and in general does not invest in its ownimage or trade name. The company may have some promotion and marketing in the future, butfor its laundry part, which targets the local market only, not in the core business or targetingexport market.

The company does not see any competitor in Vietnam that targets the same market. Instead, itsees more cooperation between local companies in supplying materials to each others at hightime. The company does not anticipate any stronger competition in the future, either.



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Firm A case is a complete subcontractor that operates in purely assembly business. None of thefour types of upgrading can be observed. As the buyer takes care of the marketing, design, andinput materials sourcing, the company is completely passive in all of those activities. Based on

the findings from the quantitative analysis, if firms of this type (labor intensive and exportoriented) take effort to upgrade in terms of R&D and design, it would create much higher valueadded compared to the complete reliance on buyers for such activities.

Firms B: A state-owned enterprise, producing both textile and garment, export 60 percent onCMT basis

This company has annual sales of about US$26 million, 77percent of which is from export. Ninety percent of its export sales is from garment products, and 10percent is from textiles products like fabrics and yarn. Its garment products are exported to the U.S. and EU., whiletextiles are exported to EU and Southeast Asia. Domestic sales are through orders from parent

company. And the company takes this as a secured source of order that makes it less dependenton the export market.

The company imports about 80percent of its materials to produce for export. Though thecompany produces fabrics, it is mainly for domestic market and does not meet the qualitystandard required by export garment. In other words, the fabrics the company produces cannot beused as materials for its own export garment. But the company plans to upgrade its textile quality by purchasing technology, hiring foreign consultants for technical assistance. The companyexpects that this upgrading in technology would potentially increase the profitability of itsgarment business, as it will be able to produce fabrics for its own garment production. Currently,domestic materials for garment production only accounts for 10percent, and are produced by

foreign firms located in Vietnam.

About 60percent of the company's export sales is on CMT basis. The remaining is FOB export.This is FOB1, as the buyer designates the supplier of fabrics, provides design and marketing, andthe company only earns 7percent of management fee. The company plans to expand FOB exportin the future, since FOB export is more profitable. However, financial risk associated with FOBwill also be higher, as the buyer may not accept the product quality and features. The companyknows where their products would end up, and the price at which they are sold to end consumers.However, it can do nothing to increase its bargaining power while signing contracts with buyers,or to increase its margin. The managers are aware of the labor division and the margin for eachactors in the whole commodity chain, e.g. how much for manufacturer, broker, and department

stores, etc. But they do not see much that they can do to influence their own margin.

The company spends about 2 percent of its revenue on R&D activities. Currently, the companyhas its market research unit, with about 10 people. However, this unit does not function well on a professional basis due to restrictions in the accounting regime. According to accounting rules,there is a ceiling on deductible cost on such things as promotion, research, etc. Therefore, if thecompany spends more than the ceiling, the extra cost will not be deducted for tax purposes, andthis prevents the company from developing the marketing function. Moreover, the company believes it is more of the parent company and the line ministry's responsibility to do research andmarketing.



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The company plans to move to more sophisticated and skilled-intensive products like men suit.To that end, the company will have to invest more in new equipment and technology, recruitmore workers and their train them.

In anticipation of the quota removal from 2005, the company plans to compete in price, exploreother markets, like Japan. There will still be preferential tariff for Vietnamese garment andtextile exports to some countries in 2005.

The company has its own distribution network in Vietnam, and plans to further expand it, sincedomestic market also promises high profitability. The company has been conduction many promotion and marketing programs for many years to boost sales and to learn experience and business skills.

The company can foresee more competition in the domestic market in the future, as it expects

more foreign and local entries in the coming years.

Firm B case indicates some upgrading efforts. From the information obtained from this interview,we can observe three types of upgrading: process upgrading (by investing in technology, foreignexpertise), product upgrading (improving old products), and functional upgrading (moving toexport more on FOB basis). The company also anticipated that this upgrading to higher value-added activities would pay off in terms of profitability. This is consistent with the findings fromour empirical analysis. However, this upgrading is not without cost. The type of cost mentioned by the company is in financial risk and market risk. This is not captured by our regression.Furthermore, there are institutional and regulatory restrictions on upgrading. The ceiling ondeductible spending on marketing and R&D mentioned by the company is a barrier to its

upgrading effort, which is not captured by our regression either.

Firm C: A state-owned enterprise that produces mainly textile and recently started producingsome garments.

This company has annual sales of about VND 700 billion, 40 percent of which is from textiles,and 60 percent from garments. More than 60 percent of its annual sales is from export. Thecompany imports about 80 percent-90 percent of its materials for producing textiles. Thecompany exports on FOB basis, mostly through intermediaries to EU, USA, Japan, and Asianmarkets. The company sometimes does not know the price at which its products are sold to endusers. The company spends 1 percent of its revenue on R&D annually. The R&D unit isresponsible for doing market research, finding new materials, trial production, and recently

started innovating product designs. These self-designed products represents 20-30 percentcatalogue used in mass production.

To cope with fiercer competition in the markets in the near future, the company is looking for achance to cooperate with foreign corporate to penetrate markets and develop its distributionsystem. In addition, restructuring of the company will be conducted. More focus will be placedon improving skills of workers, finishing techniques and design. Besides, the company isinvesting in developing new materials which raise values of its products. The company plans todevelop its own distribution system in the domestic market to expand its market share and to bemore responsive to end user’s need.



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From the interview with Firm C, three types of upgrading are observed: process upgrading(improving worker’s skill, finishing techniques and design), product upgrading (spending onR&D, design of new product, developing new materials to increase the product value), functional

upgrading (developing own distribution network). However, all of these efforts are only in the plan and not materialized yet, so one cannot tell whether they pay off in terms of profitability orother rewards.

5.2. Remarks from firm interviews

As this research was able to approach SOEs and joint ventures only, the findings are also aboutthese types of firms only, and may not apply to private or foreign invested firms. Interviews withfirms in the sample show that most firms are operating at the low or very low end of the textileand garment value chain. Two out of three interviewed firms show efforts of upgrading to moveup the value chain, to higher value-added activities,. One firm shows little concern about

upgrading, as it believes that it is still possible and profitable to do business as usual, and theirclient base is still quite secured, and no strong competition pressure to change. Upgrading alsoinvolves risk, which is quite discouraging to firms. The government tax policy is another barrierto firm’s upgrading. Firms also seem to be concerned more about price rather than qualitycompetition, which is sometimes considered as the race to the bottom in the global competition.

6. Conclusion

Findings from quantitative analysis show that depending on firm’s size, efforts to move up the

value chain, i.e. employing professionals and skilled workers, spending on R&D, pay off interms of higher value added. Garment industry is more appropriate for Vietnam as the laborsurplus country. Firms that can create more value chain are also more profitable. More valueadded also benefits workers in the form of higher wages. The benefit to the government in theform of value-added tax payment when firms create more value added is proportional. So whenfirms upgrade and become more profitable, they benefit themselves, their workers, and thecountry as the whole.

The reward in terms of value added to different upgrading efforts vary between labor and capitalintensive firms. For all firms, export and doing own design are highly value adding. For laborintensive firms, export on CMT basis is value adding, but spending on R&D is not. For capital

intensive firms, R&D is value adding, but CMT is not. The policy implications from thesefindings are that export promotion and investing in own designing capacity for the textile andgarment industries help the country move up the value chain, by moving to higher value-addedactivities or products. Export on CMT basis still can benefit the country if done by laborintensive firms. For capital intensive firms, upgrading by investing in R&D is very rewarding.

The interviews with selected firms, SOEs and joint ventures, show that firms are aware of thechanging competitive environment, but not all of them plan to upgrade themselves, the reason being the perceived risks involved and lack of competitive pressure to change. Firms in thesample seem not to see a long term trend in competition or to have a strategy to move from pricecompetition to quality competition through value-added creation. The global textile and garment



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chain is increasingly becoming a place of fierce competition, with new and low cost countries joining the scene. In this context, price competition is a race to the bottom, while quality andvalue-added competition, and efforts to find niche markets, is the race to the top. As reflected in

this research, efforts to upgrade in the value chain pay off. Unfortunately, firms in the sampleseem to be in the race to the bottom, rather than to the top, by sticking to the low value-added, but secured activities in the short run in the chain.

The global value chain picture and Vietnam's position in there shows that the country and itsfirms have a long way to go to upgrade and increase its own margin. It is very important in this process to make firms aware about their competition strategy, to create and build their ownfoothold and image in the picture, rather than having a common strategy of selling cheap bydoing more for less.



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Appendix 1. Data Source

The primary data used for the quantitative analysis exercise is based on 150 T&G firms surveyconducted by the Institute of Economics in 2001 under the project “Trade Liberalization andCompetitiveness of Selected Manufacturing Industries in Vietnam”. The sample represents 27.3 percent of total number of established firms, 54 percent of total labor, and 46.1 percent of totalrevenue of Vietnam’s T&G industries in the sampling frame, which was constructed based onthe census of manufacturing firms in Vietnam carried out by GSO and UNIDO in 1998. Smallfirms with less than 50 workers are excluded in the sampling frame. In addition to the firminterviews, worker interviews also were conducted. Eight workers from each firm in the samplewere interviewed with the worker questionnaire. As a result, the worker dataset includes anumber of socio-economic characteristics indicators of 1200 workers. The quantitative exerciseemploys the full dataset by pooling the firm data of two years 199 and 2000, and merging the

firm dataset with the worker one.



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Appendix 2: Regression results

Variable names/abbreviation:age (= 2000 - year of establishment)ageW Age of workersCMT CMT share in total revenueD_loc (= 1 if firm based in the South; = 0 if firm based in the North)D_private (= 1 if private enterprise)design Own design (1: own design, 0: otherwise)designpdt Number of products of own designexpsh Export share in total revenueExp Number of working years (for employees)Exp2 Exp squared

garsh Garment share in total revenueK CapitalMan (= 1 if manager)matdpct domestic material shareP ProfitabilityPro (= 1 if profesional qualification) propct Professional level intensity (college/university and above/total labors)rdpct R&D spending shareSex (= 1 if male)Size (or L) Labor (# of workers)Size2 (= 1 for firms with 250-500 workers)Size3 (= 1 for firms with 500-1000 workers)Size4 (= 1 for firms with more than 1000 workers)Skill (= 1 if skilled worker)skilpct Skill Intensity ((skilled labor + professionals + managers)/total labor)soe (= 1 if State-owned enterprise)Tech (= 1 if workers complete technical/vocational training)Uni (= 1 if employees graduate from university)VA Value-added



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Table A1: Correlation among key variables

Hourlywage VA size K CMT design designpdt rdpct skilpct matdpct expsh

Hourlywage 1.000

VA 0.098 1.000

(0.001)

size 0.084 0.645 1.000

(0.004) (0.000)

K 0.090 0.687 0.688 1.000

(0.002) (0.000) (0.000)

CMT -0.021 -0.268 -0.193 -0.371 1.000

(0.463) (0.000) (0.001) (0.000)

design -0.061 0.237 0.200 0.185 -0.450 1.000

(0.036) (0.000) 0.001 (0.001) (0.000)

desingpdt 0.087 0.057 0.036 0.045 -0.152 0.123 1.000

(0.003) (0.327) (0.534) (0.439) (0.008) (0.034)

rdpct -0.066 0.071 0.054 -0.020 0.059 0.226 -0.031 1.000

(0.023) (0.222) (0.348) (0.732) (0.312) (0.000) (0.593)

skilpct -0.121 0.072 0.139 0.069 -0.029 0.231 -0.088 0.109 1.000

(0.000) (0.212) (0.016) (0.234) (0.622) (0.000) (0.129) (0.059)

matdpct -0.053 -0.112 -0.107 -0.140 0.133 0.074 -0.046 0.059 0.101 1.000

(0.066) (0.054) (0.065) (0.015) (0.021) (0.204) (0.423) (0.309) (0.080)

expsh 0.071 -0.207 -0.132 -0.304 0.432 -0.235 0.024 0.009 -0.050 0.114 1.000

(0.014) (0.000) (0.022) (0.000) (0.000) (0.000) (0.684) (0.883) (0.388) (0.048)

propct 0.031 0.263 0.036 0.141 -0.256 0.292 -0.010 0.044 0.171 0.041 -0.249

(0.288) (0.000) (0.535) (0.014) (0.000) (0.000) (0.865) (0.447) (0.003) (0.483) (0.000)

P/L 0.040 0.647 0.016 0.253 -0.189 0.149 0.002 0.102 -0.010 -0.088 -0.188

(0.169) (0.000) (0.780) (0.000) (0.001) (0.010) (0.968) (0.079) (0.861) (0.128) (0.001)

P/K 0.020 0.347 -0.024 0.033 -0.027 0.158 0.003 0.096 0.065 -0.021 -0.006

(0.493) (0.000) (0.681) (0.566) (0.646) (0.006) (0.965) (0.097) (0.263) (0.714) (0.915)



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Table A2: VA = f(upgrading, K, size, interaction)

(1) (2) (3)

lnVA lnVA lnVAK/ L -0.003

(0.052)*

lnK 0.536 0.377 0.524

(0.000)*** (0.000)*** (0.000)***

lnsize 0.451 0.325 0.102

(0.006)*** (0.171) (0.719)

lnKgarsh -0.241 -0.225 -0.227

(0.056)* (0.080)* (0.107)

lnsizegarsh 0.478 0.612 0.683

(0.018)** (0.007)*** (0.006)***

garsh -0.748 -1.859 -2.286

(0.454) (0.133) (0.059)*

lnKdesign -0.302 -0.308(0.008)*** (0.005)***

lnKexpsh 0.130 0.149

(0.333) (0.240)

lnKpropct 0.034 0.040

(0.015)** (0.005)***

lnKrdpct 0.151 0.145

(0.003)*** (0.004)***

lnKskilpct 0.004 0.004

(0.006)*** (0.004)***

lnKCMT -0.156 -0.261

(0.364) (0.168)

lnKmatdpct -0.001 -0.002

(0.237) (0.096)*

lnsizedesign 0.649 0.645

(0.001)*** (0.000)***

lnsizeexpsh -0.188 -0.196

(0.527) (0.518)

lnsizepropct -0.044 -0.054

(0.245) (0.151)

lnsizerdpct -0.171 -0.172

(0.000)*** (0.000)***

lnsizeskilpct -0.003 -0.003

(0.168) (0.189)

lnsizeCMT 0.202 0.297

(0.343) (0.207)lnsizematdpct 0.001 0.002

(0.579) (0.269)

CMT 0.089 0.394

(0.938) (0.732)

design -1.229 -1.174

(0.157) (0.160)

rdpct -0.243 -0.180

(0.386) (0.524)

skilpct -0.016 -0.017

(0.138) (0.102)

matdpct 0.005 0.003

(0.577) (0.683)



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expsh 0.623 0.471

(0.691) (0.768)

propct -0.031 -0.025

(0.818) (0.849)Constant 1.017 2.831 3.038

(0.201) (0.019)** (0.015)**

Observations 280 280 280

R-squared 0.789 0.846 0.849

Robust p values in parentheses

• significant at 10%; ** significant at 5%; *** significant at 1%

Table A3: P/K = f(Va, control variables)

PCAP

VA 0.00000676

(0.001)***

D_loc -0.1871609(0.058)*

age -0.0042043

(0.297)

soe -0.0210687

(0.850)

D_private 0.0150867

(0.824)

Constant 0.2225299

(0.014)**

Observations 299

R-squared 0.145


* significant at 10%; ** significant at 5%; *** significant at 1%

Table A4: VAT = f (VA, control variables)

VAT

VA 0.0000000407

(0.891)

D_loc -0.0310142

(0.271)

Age 0.000963

(0.298)

SOE -0.0225384(0.391)

D_private -0.0310786

(0.363)

Constant 0.0177901

(0.589)

Observations 299

R-squared 0.0107



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Table A5: Wage = f ( VA, control variable)

lhwage

VA 0.00000275(0.076)*

D_loc 0.5834359

(0.000)***

soe -0.0915216

(0.500)

D_private -0.1797377

(0.096)*

age -0.0049105

(0.281)

tech 0.1874976

(0.003)***

uni 0.391107

(0.000)***exp 0.0248151

(0.099)*

exp2 -0.0010286

(0.052)*

sex 0.1133345

(0.000)***

man 0.5013572

(0.000)***

pro 0.2585856

(0.000)***

skill 0.1972534

(0.000)***

Constant 0.8327464

(0.000)***

Observations 1187

R-squared 0.411


* significant at 10%; ** significant at 5%; *** significant at 1



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Appendix 3: Questions for firm in-depth interview

QUESTIONNAIRE FOR FIRM INTERVIEW ABOUT THEIR POSITION IN AND EFFORTS TOMOVE UP THE VALUE CHAIN

Purpose of the study:

The T&G industry of Vietnam currently exports heavily on the CMT basis, taking cheap labor as themajor comparative advantage. This model is proven beneficial so far for the country's economicdevelopment and job creation. However, while comparing Vietnam and other T&G exportingcountries, the export pattern of Vietnam is at the low end of the value chain, focusing mainly on lowvalue-added activities. As the international environment will become more competitive after 2005when T&G quota will be removed according to the Agreement on Textile and Clothing, Vietnam willface competitive of currently quota restricted countries like China. Further, in the value chain today,the biggest value added and thus profit are not generated in the production stage, but in marketinformation, design, trademark, and distribution. Most Vietnamese T&G manufacturers are weak at

these skills.

Therefore, the purpose of this study is to explore whether Vietnam can upgrade in the global T&Gvalue chain, to move to compete in knowledge, technology, and new comparative advantages, insteadof solely relying on cheap labor and low value products with little innovation and profit. Firms,researchers, and the government should be aware of this issue to find way to improve thecompetitiveness of the industry and the country as the whole.

Questions for qualitative information:

1. Does your firm have the demand for higher skilled workers? Why? And how skilled workersor the lack thereof affect the firm's profitability?

2. What is the share of imported input materials in total firm's inputs? If domestic materials areavailable with equivalent quality and price, does firm choose to use them instead ofimporting? And how does that affect firm's performance?

3. What are the types of domestic materials that firm uses for inputs?

4. How much (%) in total cost of firm is spent on R&D, marke research, marketing, design, new product development, and quality improvement? How does this spending benefit the firm?

5. Is wage/bonus paid on the basis of firm's export performance? How does export-based bonusvary between levels of skill and education?

6. How much ( percent) of CMT in firm's total export revenue? Does firm have any strategic plan to increase the FOB-based export (FOB1, 2, 3), or direct export? Does increase in FOBexport benefit firm? Is there any barrier to firm's moving to FOB export (e.g. financial andcredit risk, sourcing for materials, export market, et.)?

7. Does firm have plan to move to produce higher value/quality products? If yes, what kind ofinvestment is needed (human resources, machinery, technology, capital)? Does this promisehigher profitability?

8. While exporting on CMT basis or through intermediaries, does firm know where its productswould end up, in which market and which segment? Does firm know about the final selling

price to end consumers (thus knowing how much it get in the total final price)?



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9. Does firm have any plan to cope with the removal of T&G quota under the ATC by 2005,when it has to compete in third market with the now quota-restricted exporting countries?

10. Does firm have its own distribution network (showroom, exclusive distributors, outlets) inVietnam? If yes, move to question 13.

11. Why firm does not develop its own distribution network?

Most important reason:

Second most important reason:

Third most important reason:

Others:

12. Does firm have plan to develop own distribution network in

one year:

5 years:

13. The reason why firm develops (or not develop) its own distribution network?

Most important reason:

Second most important reason:

Third most important reason:

Others:

14. During the lass year (2003-2004) did firm have any marketing or trade promotion activity?

Yes........... No..............

If no, move to question 16

If yes, list the major activities

................................................................................................................................

15. How does firm benefit from the promotion (please elaborate in as much details as possible)

16. In the near future, does firm plan to do marketing and trade promotion?

Yes........... No..............

Reason:........................................

17. How many competitors does firm have in the Vietnamese market (for its 3 most important products)?

18. What measures does firm apply to cope with these competitors?



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19. In your view, the number of major competitors next year in Vietnam (for its 3 most important products) will:

Increase (by what level).........................

The same.................................

Decrease..................................



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References

Antonio, E., Padojinog, W., Rodolfo, C., and Molina, L., "Direction for IndustrialRestructuring in the Twenty-First Century: The Philippine Case", (year unknown).

Baden S., Trade Policy, Retail Markets and Value Chain Restructuring in the EUClothing Sector, 2002.

Dolan, Humphrey, and Harriss-Pascal, "Horticulture Commodity Chains: The Impacts ofthe UK Market on the African Fresh Vegetable Industry", 1999.

General Statistical Office (GSO), "Statistical Yearbook 2000. Hanoi: StatisticalPublishing House", 2001.

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