INTRODUCTION
Research background
Since the implementation of Doi Moi in 1986, Vietnam's foreign policy has significantly shifted from International Economic Integration to Comprehensive Economic Integration and now to In-depth International Integration A crucial aspect of this transformation has been trade liberalization, which has accelerated Vietnam's integration into the global economy A landmark moment in this journey was Vietnam's accession to the WTO in 2007 By December 2020, Vietnam had entered into 15 Free Trade Agreements (FTAs), with 13 already in effect and two more under negotiation These FTAs include commitments for tariff reductions and the elimination of trade barriers, providing substantial benefits that enhance Vietnam's exports, particularly in sectors where the country holds a competitive advantage, such as textiles and garments.
The textile and garment industry is a vital part of Vietnam's economy, significantly contributing to its export revenue In 2007, Vietnam's textile and garment exports were approximately USD 8.60 billion, but by 2019, this figure surged to USD 39.42 billion, marking a fivefold increase This sector is now the second highest in export value in Vietnam, following electrical machinery and equipment In 2019, Vietnam ranked as the world's fourth largest exporter of textiles and garments, trailing only behind China, the EU, and Bangladesh.
In 2018, the industry employed 1,870,239 individuals, representing 12.6% of all employees in registered enterprises across Vietnam Between 2014 and 2019, this sector experienced an impressive average annual growth rate of approximately 17% (T Nguyen, 2020).
The European Union is the second largest market for textile and garment imports, following the United States Since Vietnam's accession to the World Trade Organization (WTO), the export value of its textile and garment products to the EU, including the UK, has seen significant growth, rising from approximately USD 1.65 billion to nearly USD 4.78 billion.
In 2019, Vietnam's export market share of textile and garment products to the EU grew to 2.4%, up from 2.2% the previous year, highlighting the EU's increasing significance as a market for Vietnam's textiles following the implementation of the EVFTA.
2 into effect on 1st August 2020 This FTA is expected to bring expansive preferential market access for these goods to the EU
The increase in Vietnam's bilateral exports does not necessarily indicate improved export efficiency, which is crucial for maximizing international trade opportunities Higher export efficiency can lead to a significant rise in Vietnam's actual trade value Research on countries like China, India, and Bangladesh reveals that despite their growing export values, their export efficiencies remain low due to factors such as economic distance and country-specific issues, including institutional policies and inadequate infrastructure Similar findings have been reported by Vietnamese scholars, highlighting the need for enhanced export performance to fully leverage trade potential.
Problem statement and research purpose
Despite numerous studies on export efficiency in various countries, Vietnam has seen limited scholarly attention on this topic, particularly regarding specific products like textiles and garments Most existing research focuses on overall export efficiency, revealing relatively low performance at an aggregated level (Drysdale et al., 2000; Doan & Xing, 2018) This raises the question of whether the textile and garment sector mirrors this low efficiency or stands out as an exception Additionally, while some studies have explored factors influencing export efficiency, a comprehensive analysis of Vietnam's textile and garment sector is needed By calculating export efficiency and identifying its determinants, policymakers can gain valuable insights to enhance export performance, especially in light of the new opportunities presented by the EU-Vietnam Free Trade Agreement (EVFTA).
3 efficiency of Vietnam‟s textile and garment to EU countries, Vietnam will take full advantage of EVFTA
This thesis aims to evaluate the export efficiency of Vietnam's textile and garment sector by utilizing a model inspired by previous studies, focusing specifically on the latest data regarding exports to EU countries Additionally, it examines the factors influencing export efficiency Based on the research findings, several recommendations are offered to enhance Vietnam's export performance in this industry.
Research questions
This master thesis aims to answer two questions:
1 What is the export efficiency score of Vietnam‟s textile and garment to EU countries from 2007 to 2019?
2 Which country-specific factors affect the export efficiency of Vietnam‟s textile and garment to EU countries during that period?
Scope of the research
The time scope is from 2007 to 2019 The spatial scope is Vietnam‟s textile and garment to 28 EU countries because the UK was still a member of the EU during this period.
Research methodology
This thesis employs a quantitative methodology utilizing two regression models to analyze export efficiency The first model, a stochastic frontier gravity model, assesses overall export efficiency, while the second model investigates country-specific factors influencing this efficiency Both models are estimated simultaneously through a one-step estimation process Export value data is sourced from UN Comtrade, while country-specific factors are derived from the Global Competitiveness Report by the World Economic Forum (WEF) Additional data is gathered from various reputable sources, including the World Bank, Centre d'Etudes Prospectives et d'Informations Internationales (CEPII), and Brugel.org.
Significance of the research
This thesis makes several important contributions: n
This study utilizes the most recent data on Vietnam's export efficiency in the textile and garment sector, focusing specifically on EU countries rather than a broader selection of global partners As a result, the findings provide an accurate and up-to-date assessment of Vietnam's export performance in this industry within the EU market.
This study provides a comprehensive analysis of the efficiency of Vietnam's textile and garment exports, detailing the computation methods and the factors that influence this efficiency Additionally, by examining these determinants, the paper presents recommendations for modifying their effects to enhance export efficiency.
This thesis presents a thorough methodology for assessing the export efficiency score of Vietnam's textile and garment sector to EU countries, while also identifying the influencing factors The research employs the stochastic frontier gravity model utilizing a one-step estimation approach as developed by Battese & Coelli (1995).
Structure of the research
This thesis is organized as follows:
Chapter 1: Introduction This chapter provides an overview of the research including research background; problem statements; definitions of key terms; research purposes; research questions; scope, method and significance of the research
Chapter 2: Literature review This chapter briefly presents previous academic research related to this topic Chapter 2 contains four sections: Overview of textile and garment industry, and textile and garment industry export in Vietnam; research on trade potential, trade efficiency, and export efficiency at aggregated level; research on trade potential, trade efficiency, and export efficiency at disaggregated level The final part summarizes the research gap
Chapter 3: Methodology This chapter discusses the method and methodology I use Several reasons are provided to explain the selection of stochastic frontier gravity model and its variables This part also introduces this model and distinguishes it from conventional gravity model Data collection and data description is also included in this chapter n
Chapter 4: Research findings This chapter is divided into 2 parts First, it shows the impact of country-specific factors such as infrastructure, institution, and policy on export efficiencies of Vietnam‟s textile and garment export to EU countries Second, estimated scores of these efficiencies are also presented The results are compared to results of previous studies in the literature review
Chapter 5: Conclusions This chapter summarizes the main content and findings, provides some policy recommendations, indicates the limitations of this thesis, as well offers some suggestions for further research n
THEORETICAL FRAMEWORK AND LITERATURE REVIEW
Definitions
The export potential between two countries is determined by factors such as GDP, GDP per capita, and cultural and historical characteristics, representing the maximum exports achievable without trade barriers (Kalirajan, 1999) Export efficiency, or export performance, measures the ratio of actual exports to this export potential, indicating the extent to which an exporter has realized its potential with its trading partner.
Overview of Vietnam textile and garment sector
2.2.1 Current status of Vietnam textile and garment industry
The textile and garment industry is a vital export sector in Vietnam, experiencing consistent double-digit growth for several years As of December 31, 2018, there were 1,870,239 employees in 12,031 enterprises within this sector, representing 12.6% of the country's total workforce The industry comprises 7,627 garment manufacturers and 4,404 textile manufacturers, with many textile products primarily aimed at domestic consumption due to quality concerns While a significant portion of firms are in the private sector, most are small and medium-sized enterprises (SMEs), with foreign direct investment (FDI) firms making up 70% of the largest companies in the industry, alongside state-owned enterprises.
Figure 2.1: Main modes of production of Vietnam's textile and garment industry
Vietnam's textile and garment industry is experiencing significant growth; however, its added value remains low, primarily due to its reliance on the CMT manufacturing method, which constitutes 65% of production and yields the least value In contrast, higher value-added methods like OEM/FOB, ODM, and OBM account for only 25%, 9%, and 1%, respectively (ASEAN Securities, 2019) This low added value is further exacerbated by Vietnam's dependence on imported raw materials from China and Korea, coupled with an unstable domestic supply Additionally, challenges such as low-skilled labor and weak competitiveness among domestic firms contribute to the industry's struggles (Hoi, 2012).
2.2.2 Current status of Vietnam textile and garment export to EU countries
In 2019, Vietnam emerged as the 4th largest textile and garment exporter globally, trailing only China, the EU, and Bangladesh The European Union serves as a crucial market for Vietnam's textile and garment industry.
From 2007 to 2019, Vietnam experienced a consistent increase in textile and garment exports, even amidst global economic challenges In 2007, the export turnover for this sector was USD 8.60 billion, and by 2019, it had significantly risen.
Vietnam's textile and garment exports to the EU have shown significant growth, rising from USD 1.65 billion in 2007 to USD 1.85 billion in 2008 Despite a slight dip to USD 1.78 billion in 2009 due to the global economic crisis, exports rebounded to USD 2.10 billion in 2010 and reached USD 2.79 billion in 2011 In 2012, there was a minor decline to USD 2.72 billion From 2013 to 2019, the trend continued to reflect the resilience and expansion of Vietnam's textile and garment sector in the European market.
In 2019, Vietnam's textile and garment exports to the EU reached USD 4.78 billion, establishing the EU as the second largest market for these products, following the USA.
The share of the European Union (EU) in Vietnam's total textile and garment export turnover has declined significantly, dropping from over 19% in 2007 to around 12% in 2019.
Figure 2.2: Export turnover of Vietnam's textile and garment, 2007 – 2019 (USD)
Vietnam's textile and garment exports to the EU have experienced more significant fluctuations compared to global trends Despite these instabilities, the growth rate of exports to the EU has generally remained high, with notable exceptions in 2009 and 2012.
Due to the global economic crisis and the European debt crisis, Vietnam experienced significant changes in its export dynamics Notably, the growth rate of textile and garment exports to the EU outpaced that of global exports during certain periods In 2019, Vietnam's textile and garment exports to the EU saw an impressive increase of over 5%.
Figure 2.3: Export growth rate of Vietnam's textile and garment, 2007 – 2019 (%)
Vietnam's textile and garment exports to the EU exhibit a significant structural variation, with seven primary markets: Germany, the UK, the Netherlands, France, Spain, Belgium, and Italy Notably, Germany stands out as the largest import market, with these seven countries collectively representing 89% of Vietnam's textile and garment export turnover to the EU in 2019, while the remaining 21 markets contributed only 11% The predominant products exported fall under HS codes 61, 62, and 63, which together account for approximately 95% of the export structure.
Figure 2.4: Structure of Vietnam's textile and garment export to EU (by market, and by
HS code), 2019 (%) Data source: UNComtrade
Research on trade potential, trade efficiency, and export efficiency
Batra (2006) employed an augmented gravity model using ordinary least squares (OLS) to evaluate India's trade potential with 145 partners, utilizing cross-sectional data from 2000 In addition to fundamental variables like GNP and GNP per capita, he incorporated additional factors, including dummy variables related to historical and cultural aspects such as borders, common languages, and colonization To address econometric issues, he implemented solutions for endogeneity through instrumental variable (IV) estimations For country pairs with zero trade values, he applied three strategies: omitting these data from the dataset, estimating a restricted model, and other techniques to ensure robust analysis.
This research utilized semi-log formulation and Tobit techniques, revealing that Italy, the UK, and France have the highest potential for expanding trade with India Despite India having reached its export limits to the Commonwealth of Independent States (CIS) region overall, significant opportunities for exporting to many individual countries within that region remain.
Abbas and Waheed (2019) employed a gravity model to assess the trade flow between Pakistan and 47 selected trading partners from 1980 to 2013 They utilized the coefficients from their analysis to estimate Pakistan's trade potential, building upon the framework established by Batra (2006) Additionally, Abbas and Waheed incorporated two dummy variables to enhance their model's accuracy.
The South Asian Free Trade Agreement (SAFTA) and bilateral free trade agreements (BFTAs) were analyzed using three models, with the authors determining that generalized least squares (GLS) estimation was the most effective method The findings indicated that Pakistan has significantly over-exploited its export potential with various Asian and European trading partners However, by diversifying its export portfolio rather than concentrating on a limited range of goods, Pakistan could enhance its export opportunities to several EU countries, including the UK, Bulgaria, France, and Greece.
Drysdale et al (2000) assessed trade efficiency between China and 57 trading partners, employing a stochastic frontier gravity model (SFGM) that considered GDP, population, geographical distance, common language, and resource complementarity as independent variables Their findings revealed that from 1991 to 1995, China's average trade efficiency as an exporter and importer was notably low, at 0.28 and 0.27, respectively Among EU markets, China demonstrated the highest export efficiencies with Ireland, Belgium-Luxembourg, Finland, and the Netherlands, while Cyprus recorded the lowest at 0.21 To further investigate trade efficiency determinants, the study incorporated a regression model analyzing country-specific policies and mutual understanding through regional blocks like APEC and the EU The results indicated that EU membership adversely affected China's trade efficiency, prompting the authors to recommend policy adjustments to alleviate economic constraints and enhance trade performance.
Kalirajan and Singh (2008) conducted a comparative analysis of the export efficiency between India and China from 2000 to 2003 using two methods Initially, they employed a conventional gravity model with an OLS estimator, incorporating factors such as the GDP and population of the importing country, geographical distance, trade openness, area, weighted average tariff, and non-tariff barriers.
A comparative analysis using the barrier index and growth competitiveness index revealed that China's export performance significantly outpaced India's By applying coefficients from China's model to assess India's export potential, researchers found that India realized only 68% of its potential, while China achieved 86% Additionally, the stochastic frontier gravity model highlighted that, unlike China, which saw an increase in export efficiency over the surveyed period, India's efficiency remained stagnant To enhance its export efficiency, India should adopt policies similar to those of China.
Roperto & Edgardo (2014) aimed to estimate and analyze factors affecting export efficiency in the Philippines to reduce the trade deficit in merchandise exports Utilizing a stochastic frontier gravity model (SFGM), their research examined export data from 69 key trading partners between 2009 and 2012, focusing on three independent variables: the GDP and population of the importer, and the geographical distance to trading partners Unlike previous studies, they addressed "beyond the border" constraints in a second model, evaluating factors such as freedom from corruption, fiscal freedom, business freedom, labor freedom, monetary freedom, trade freedom, investment freedom, and financial freedom of the importer They also included dummy variables for mutual understanding indicators like APEC, ASEAN, and common language Their findings revealed that APEC, ASEAN, common language, freedom from corruption, and labor freedom positively influenced export efficiency, while other factors did not significantly affect export inefficiency.
The study indicated that "beyond the border" factors did not significantly impact the Philippines' export efficiency The authors recommended that future research should focus on "behind the border" elements to better understand the determinants of export efficiency Over the surveyed period, the Philippines' export efficiency score showed a slight decline, with the mean value decreasing.
48% to 42% In 2012, the export flow was least effective with the EU, at 43% Among
The Philippines exhibited the highest export efficiency among EU members, achieving an impressive 93.46% with the UK and 93.34% with Denmark Other countries such as Sweden (76.88%), the Netherlands (75.79%), Belgium (72.24%), and Finland (70.57%) also demonstrated strong export efficiencies In contrast, Croatia (11.79%), Greece (13.79%), and Slovakia (16.20%) reported significantly lower export efficiencies.
Ravishankar & Stack (2014) also used an SFGM to examine the efficiency of trade integration between 17 Western European nations and 10 new members from 1994 to
In 2007, a study utilized maximum likelihood estimation (MLE) to analyze the trade dynamics between EU member states, incorporating variables such as GDP of exporters and importers, absolute differences in logged GDP per capita, geographical distance, and both time-varying and time-invariant factors The researchers introduced two dummy variables to account for the years new members joined the EU Findings revealed that post-dissolution of the Council for Mutual Economic Assistance (CMEA), East-West EU trade integration demonstrated significant performance, with former communist nations achieving two-thirds of their trade potential with established EU countries Notably, Bulgaria and Romania, as the newest members, exhibited higher trade integration levels than their predecessors The authors concluded that by enhancing infrastructure and lowering transportation costs, the ten new EU members could further boost their export capabilities.
Nguyen & Doan (2017) pioneered the use of a stochastic frontier gravity model to assess Vietnam's trade efficiency, analyzing data from 30 trading partners over 11 years (1995-2015) Their two-step estimation approach first employed a stochastic frontier model, incorporating key independent variables from the conventional gravity model, such as GDP, population, weighted distance, relative land area, landlocked status, and time trends In the second step, they utilized the trade efficiency derived from the first model as the dependent variable to explore factors influencing it, including ASEAN membership, weighted tariffs, and economic indicators.
The research highlighted that Vietnam's trade efficiency is notably low, particularly with the EU and NAFTA, with average export and import efficiencies at 21.21% and 19.78% respectively by 2015 Between 2010 and 2015, the highest export efficiencies were recorded with the Netherlands, the UK, Belgium, and France, at 47.57%, 33.59%, 44.08%, and 27.65% Conversely, Greece, Germany, and Finland showed low export efficiencies ranging from 2.39% to 7.24% While AFTA contributed positively to Vietnam's trade efficiency, factors such as tariffs and domestic currency devaluation negatively impacted it Nguyen and Doan recommend that Vietnam pursue more regional free trade agreements and remove artificial barriers, including enhancing economic freedom and reducing tariffs, to boost trade efficiency.
Doan & Xing (2018) conducted a two-step estimation of the Stochastic Frontier Gravity Model (SFGM) to assess Vietnam's export efficiency with 28 trading partners from 1995 to 2013, focusing on the impact of Free Trade Agreements (FTAs) and rules of origin Their findings revealed a notable increase in export efficiency, rising from 19.7% to 37.9% during this period, although significant potential for further growth remained, particularly in the EU market where Vietnam achieved only about one-third of its export potential From 2010 to 2013, Vietnam's highest export efficiencies were recorded with Belgium (61.28%), the Netherlands (59.26%), Germany (43.48%), the UK (40.63%), and France (40.28%), while Greece exhibited the lowest efficiency at 10.91% Following the efficiency calculations, the researchers employed a regression model to identify key determinants, including the restrictiveness of rules of origin, trade agreements, trade freedom index, tariffs, non-tariff measures, and FDI from importing countries The study concluded that Vietnam should negotiate to lower the restrictiveness of rules of origin, reduce tariff and non-tariff barriers, and attract more FDI to enhance its export efficiency.
Trung et al (2018) utilized Stochastic Frontier Gravity Model (SFGM) to investigate the influence of the ASEAN–India Free Trade Agreement (AIFTA) and the ASEAN–China Free Trade Agreement (ACFTA) on Vietnam's bilateral trade and trade efficiency, analyzing data from 2000 to 2015 Their model incorporated various factors, including Vietnam's GDP, partner countries' total expenditure, the weighted distance to trading partners, and both time-invariant and time-varying dummy variables related to trade agreements The study found that Vietnam's trade efficiency was generally low, with export efficiency being 15% higher than import efficiency Notably, Vietnam's accession to the WTO resulted in a decline in trade efficiency, with export efficiency dropping from 47.4% to 46.3% and import efficiency from 33.8% to 32.6% Additionally, while most ASEAN FTAs negatively impacted Vietnam's trade efficiency, AIFTA positively influenced bilateral trade flows, whereas ACFTA significantly harmed Vietnam's exports without affecting imports.
Research on trade potential, trade efficiency, and export efficiency by sector
Ahsan & Chu (2014) utilized a stochastic frontier gravity model to analyze the potential and constraints of Bangladesh's environmental goods and services (EGs) exports, using cross-sectional data from 41 major importers across six regions between 2001 and 2007 Key factors included GDP, trading partner population, geographical distance, cross exchange rates, imported tariffs, and a dummy variable for free trade agreements (FTAs) The study revealed significant unexploited trade export potential for Bangladesh with all surveyed partners In 2001, Bangladesh's export performance was highest with the UK at 77.96%, followed by Spain at 61% and the Netherlands at 42.72% However, by 2007, exports to the UK plummeted to 28.03%, while the Netherlands, Spain, and Greece emerged as the top three countries for export efficiency Denmark and Portugal exhibited the lowest efficiencies at 1.14% and 8.08%, respectively The authors attributed the low export efficiency to "behind the border" factors but were unable to pinpoint specific constraints due to data limitations.
“implicit beyond the border” constraints helped Bangladesh increase its export of EGs
Atif et al (2017) assessed the export potential of Pakistan's agricultural products using a stochastic frontier gravity model, analyzing data from 1995 to 2014 across 63 trading partners Their model incorporated key factors such as the GDP of both exporter and importer, geographical distance, and various time-invariant and time-varying variables, including dummy variables for shared borders, common language, colonial ties, average tariffs, bilateral exchange rates, and preferred trade agreements The study further segmented the analysis period into four distinct intervals to enhance the evaluation.
Between 1995 and 2014, Pakistan's average export efficiency with various trading partners showed a declining trend, indicating that the country did not achieve optimal export efficiency Notably, in the EU, the Netherlands recorded the highest export performance for Pakistan's agricultural goods at 16.37% during 1995-1999, but this figure subsequently fell to 14.27%, 12.31%, and 10.50% in later periods Similar declines were observed in export efficiency with Belgium, Denmark, France, Germany, Italy, Spain, and the UK, highlighting the significant export potential Pakistan holds within the EU market.
Zaman and Kalirajan (2019) examined the export performance of primary and renewable energy sectors across 20 countries in South, Southeast, and East Asia, focusing on the potential for enhancing this performance through intraregional trade from 2006 onwards.
In 2016, researchers utilized a stochastic frontier gravity model to analyze trade dynamics, incorporating key factors such as the GDP of both the importer and exporter, geographical distance, tariffs imposed by the importer, the cross exchange rate between the two countries, and a dummy variable for regional trade agreements (RTAs) as explanatory variables.
To analyze export efficiency, the authors developed a model incorporating variables such as the quality of institutions, infrastructure, market efficiency, and technological readiness for both exporters and importers The findings indicated that the stochastic frontier gravity model was unsuitable for countries like Cambodia and Laos, leading to their exclusion from further analysis The overall average export efficiency for primary energy and renewable energy products in the region was found to be 56.5% and 63.1%, respectively Additionally, factors such as institutional quality, infrastructure quality, market efficiency, and technological readiness positively influenced export efficiencies across nearly all examined countries.
Nguyen (2020) utilized a stochastic frontier gravity model to analyze the determinants influencing Vietnam's rice and coffee exports, focusing on their export performance from 2000 to 2018 The study incorporated independent variables such as the GDP of both Vietnam and its trading partners, as well as population metrics.
Vietnam's export performance in rice and coffee remains relatively low compared to trading partners, with the exception of China, Hong Kong, and Algeria The efficiency of exports for these commodities has shown a declining trend, particularly in the EU, which is the primary market The average export efficiencies for rice and coffee in this market are notably low at 0.2 and 0.25, indicating a significant gap between potential and actual exports Among EU countries, Vietnam achieved the highest export efficiency for coffee with Germany (0.47), Spain (0.43), Italy (0.37), and Belgium (0.36), while efficiency to the Netherlands was only 0.13 Nguyen highlighted that "behind-the-border" constraints hinder Vietnam's ability to reach optimal export levels, though specific constraints could not be identified due to data limitations.
Nguyen & Wu (2020) analyzed the export efficiency of 11 key exporting products in Vietnam, including agricultural goods, textiles, leather, footwear, and electrical equipment, using a 1-step estimation method While there was an upward trend in export efficiency for these products, it remained lower than the overall aggregated export efficiency At a disaggregated level, Vietnam appeared to concentrate on specific markets Notably, the export efficiency of textiles, leather, and footwear declined from 43.03% to 42.89% between 1996 and 2010, before rising to 44.65% in 2014 The authors highlighted that enhancing governance, participating in more Regional Trade Agreements (RTAs), and negotiating tariff reductions could significantly boost Vietnam's export efficiencies and actual export values for these major products.
Research gap
Numerous researchers have explored trade potential, trade efficiency, and export efficiency at both aggregated and disaggregated levels, employing various methods such as the conventional gravity model and stochastic frontier gravity model However, studies specifically focusing on Vietnam's export efficiency are scarce, with existing publications primarily concentrating on broader export analyses.
Research on Vietnam's export efficiency reveals a mix of findings, with only two studies focusing on specific products like rice and coffee (Nguyen, 2020), and a broader analysis of 11 major exports (Nguyen & Wu, 2020) While some scholars argue that Vietnam's export efficiency is relatively low (Nguyen & Doan, 2017; Doan & Xing, 2018; Nguyen, 2020), others suggest that the country demonstrates high export efficiency, particularly with significant trading partners (Nguyen & Wu, 2020).
Previous research has identified key determinants of export efficiency, summarized in Table 2.1 However, many studies utilize a two-step approach, which can lead to inaccurate estimations To address this issue, the current research employs a one-step estimation of the stochastic frontier gravity model to assess the export efficiency of Vietnam's garment textiles to EU countries and to identify the factors influencing this efficiency.
Table 2.1: Summary of research on identifying determinants of export efficiency
Restrictiveness of rule of origin Doan & Xing (2018) -
Tariff by importer Drysdale et al (2000), Nguyen &
Doan (2017), Doan & Xing (2018), Nguyen & Wu (2020)
Non-tariff barrier by importer Doan & Xing (2018) - / +
FDI from importer Doan & Xing (2018) +
FTA Drysdale et al (2000), Roperto &
1 Details on the disadvantages of two-step approach can be seen in section 3.1 Stochastic frontier gravity model n
Trade freedom index Roperto & Edgardo (2014), Doan
Economic freedom of exporter Drysdale et al (2000), Nguyen &
Exchange rate of exporter Nguyen & Doan (2017) -
Cost of importing not significant
Business freedom index of importer not significant
Investment freedom index of importer not significant
Freedom of corruption of importer
Fiscal freedom index of importer not significant
Labor freedom index of importer
Monetary freedom index of importer not significant
Financial freedom index of importer not significant
Quality of institution of both exporter and importer
Quality of infrastructure of both exporter and importer
Level of good market efficiency of both exporter and importer
State of technological readiness of both exporter and importer
World governance indicator of both exporter and importer
METHODOLOGY
Stochastic frontier gravity model
The stochastic gravity model can be defined as:
X ijt = f(Y ijt ; β)exp(vijt – uijt)
X ijt : Actual export of country i to country j at time t
f(Y ijt ; β): Function of factors determining the export potential Y ijt
v ijt : Double-sided or statistical error term, which is assumed to follow a normal distribution with 𝑁 (0, 𝜎 v 2 )
u ijt : Single-sided error term or export inefficiency, capturing man-made constraints or country-specific factors v ijt and u ijt are independent
Battese & Coelli (1995) propose that the inefficiency term \( u_{ijt} \) is independently distributed, following a non-negative truncated normal distribution characterized by the parameters \( (z_{ijt} \delta, \sigma_u^2) \) This term is influenced by a range of explanatory variables The model used to determine the factors affecting export inefficiency is expressed as \( u_{ijt} = z_{ijt} \delta + w_{ijt} \).
z ijt : Explanatory variables, associated with export inefficiency of country i with country j at time t
w ijt : Error term, assumed to follow truncated normal distribution with 𝑁 (0, 𝜎 w 2 ) such that w ijt ≥ - z ijt δ
The second regression in the two-step approach for analyzing factors influencing export efficiency challenges the assumption of independent identical distribution (Battese & Coelli, 1995) Additionally, numerous scholars acknowledge that the two-step procedure may yield biased results due to misspecification in the initial step (Wang & Schmidt, 2002) Consequently, this thesis employs a one-step estimation method developed by Battese & Coelli (1995).
Then, the export efficiency is calculated as ratio of actual to potential export:
Kalirajan (2008) highlights several advantages of the stochastic frontier model, including its ability to eliminate the bias from the "economic distance" term, as all relevant factors are captured in the error term This model allows for a more accurate calculation of export efficiency, facilitating a better analysis of the factors influencing it Additionally, the stochastic frontier gravity model provides trade potential estimates that closely align with free trade estimates, reflecting the upper limits of data from economies with minimal trade restrictions Lastly, this approach is grounded in strong theoretical implications for trade policy.
Maximum Likelihood Estimation (MLE) is utilized for the simultaneous estimation of coefficients in models 3.1 and 3.2 To assess the impact of man-made resistance on export suitability in the SFGM framework, the parameter γ is introduced, which ranges from 0 to 1 If the null hypothesis that γ equals 0 is accepted, it indicates that 𝜎u² is 0, allowing for the removal of uijt, as it does not exert any influence.
The conventional gravity model is established when model (3.1) is applied, indicating that the inclusion of uijt is essential A higher value of γ signifies a stronger influence of country-specific factors, thereby supporting the effectiveness of the stochastic frontier approach.
Expansion of model
Kalirajan & Singh (2008) classified factors influencing actual export flow into 3 main groups: Natural factors, export country factors (“behind the border” factors), import country factors (“beyond the border” factors)
Natural factors influencing demand and supply in products encompass variables such as GDP, GDP per capita, geographical distance, and the cultural and historical connections between nations These elements serve as fundamental determinants in various gravity models.
"Behind the border" factors refer to country-specific elements controlled by exporting nations, including institutional, political, and infrastructural conditions, which can significantly influence trade facilitation.
“Beyond the border” factors are country-specific factors of importing countries
"Beyond the border" encompasses both explicit and implicit factors affecting trade Explicit factors, such as tariff and non-tariff barriers, are easily identifiable and measurable by exporting countries In contrast, implicit factors stem from the importing country's institutional, political, or infrastructural characteristics, making them challenging for exporting countries to observe and control.
This study employs a stochastic frontier gravity model, as classified by Kalirajan & Singh (2008), to assess the export efficiency of Vietnam's textile and garment sector to EU countries The model is represented by the equation lnX jt = β 0 + β 1 lnY jt + β 2 lny jt + β 3 lnDIS j + β 4 COMMU j + β 5 LANDLK j + (v jt – u jt ).
X jt : Actual export value of textile and garment from Vietnam to country j at time t
Y jt : GDP of country j at time t
y jt : GDP per capita of country j at time t n
DIS j : Geographical distance between Vietnam and country j
COMMU j : Dummy variable which takes a value 1 if both countries are/were communist country and 0 otherwise
LANDLK j : Dummy variable which takes a value 1 if the importer is a landlocked country and 0 otherwise
v jt : Double-sided error-term which captures the effect of inadvertently omitted and unobservable variables
u jt : Single-sided error term which indicates export inefficiency
Independent variables in gravity models include GDP and GDP per capita, which indicate economic size and income levels The geographical distance between Vietnam and its trading partners, along with a dummy variable for landlocked countries, highlights transportation costs Additionally, cultural and historical ties help reduce transaction costs associated with cultural differences.
This thesis analyzes the factors influencing export efficiency, highlighting the differing perspectives among researchers regarding the error term u jt Some economists argue that u jt is solely influenced by "behind the border" factors (Kalirajan & Singh, 2008; D D Nguyen, 2020), while others contend that it is affected by both "behind the border" and additional elements.
The concept of "beyond the border" significantly affects the non-negative error term in trade models, as highlighted by Armstrong (2015) and Nguyen & Wu (2020) My thesis supports the idea that maximum export potential is achieved when both exporters and importers eliminate trade barriers Additionally, the policies of one trading partner can influence the other, such as when a country receives support from a partner with superior infrastructure to enhance its own Therefore, it is essential to consider "across the border" factors that reflect country-specific determinants for modeling export efficiency, acknowledging that the impact of one country on another varies.
A prevalent notion is that economies with higher GDP possess greater influence over others Consequently, the "across the border" factors represent a weighted average of "behind the border" and "beyond the border" elements, with the weights determined by each country's share of the total GDP between the two nations.
Armstrong (2007) identified various "across the border" factors, including openness, governance indicators, economic freedom, and competitiveness indices, which influence trade efficiency rather than directly affecting exports Competitiveness indicators serve as trade facilitation factors, impacting the trade environment and management processes (Baccini et al., 2017; Galle et al., 2017; Grossman et al., 2017) Wilson et al (2003) proposed a measurement for trade facilitation consisting of four key indicators: port efficiency, regulatory environment, customs environment, and e-commerce, which are reflected in the Global Competitiveness Report as infrastructure quality, institutional strength, market efficiency, and technological readiness Infrastructure quality assesses the effectiveness of transportation modes, while institutional strength denotes the fairness of policies Market efficiency gauges competition and trade openness, and technological readiness highlights the importance of technology in trade digitalization Additionally, Vietnam's macroeconomic factors and those of its partners, including the real effective exchange rate and trade policy variables such as tariffs and non-tariffs, also influence trade activities However, since these trade policy factors remain consistent across EU members during the study period, they were excluded from the model, except for Croatia, which joined the EU in 2014.
This article examines the equation used to determine the country-specific factors that affect the export efficiency of Vietnam's textile and garment industry to EU countries The equation is represented as: u jt = δ 0 + δ 1 INSTW jt + δ 2 INFRW jt + δ 3 GMKEW jt + δ 4 TECHW jt + δ 5 ratio t + w jt (3.5) This model incorporates various variables, including institutional quality, infrastructure, market knowledge, technology, and economic ratios, to analyze their impact on export performance.
INSTW jt : Weighted average of the strength of institution in Vietnam and country j at time t
INFRW jt : Weighted average of the quality of infrastructure in Vietnam and country j at time t
GMKEW jt : Weighted average of the level of the good market efficiency in Vietnam and country j at time t
TECHW jt : Weighted average of the state of technological adoption and readiness in Vietnam and country j at time t
ratio t : Ratio of the real effective exchange rate of country j at time t to the real effective exchange rate of Vietnam at time t
w jt : Normal statistical error term
Data description
Export value: All export data from Vietnam to trading partners are extracted from UN
Comtrade, a trade database from the United Nations Statistics Division (UNSD), serves as the foundation for this thesis, which analyzes the textile and garment sector using 14 HS codes at the 2-digit level, specifically from HS 50 to HS 63 The HS 50 to HS 60 codes pertain to textiles, while HS 61 to HS 63 relate to garments, with detailed descriptions available in the Appendix The study examines export data collected from 28 EU countries over the period from 2007 to 2019, measuring bilateral export value.
US Dollars Nominal export value from UN Comtrade is converted to real value, using
US GDP deflator given by World Development Indicators of the World Bank
GDP and GDP per capita: Real GDP and real GDP per capita in constant 2010 US dollars by countries are collected from World Development Indicators of the World Bank
Geographical distance, measured in kilometers, is derived from data provided by the Centre d'Etudes Prospectives et d'Informations Internationales (CEPII) This distance is calculated using the latitudes and longitudes of the capital cities of Vietnam and its trading partners.
2 HS code: Harmonized Commodity Description and Coding System, also known as the Harmonized System (HS) is an international nomenclature for the classification of products n
30 distances based on the great circle formula which means that this distance is the minimum distance along the surface of the earth
Cultural and historical factors: Communist, and landlocked country dummy variables are taken from the EU‟s website and CEPII
Trade facilitation data on institutional strengths, infrastructure quality, goods market efficiency, and technological readiness is sourced from the Global Competitiveness Report by the WEF, covering 2007 to 2019 A higher score indicates improved performance To ensure comparability between the 2007-2017 and 2018-2019 data, all values were normalized to a consistent scale using a specific normalization method.
The trade facilitation index is normalized using the formula x' = (x - x_min) / (x_max - x_min), resulting in values ranging from 0 to 1 Each indicator's value is determined by the simple or weighted average of its sub-indicators, primarily sourced from the Executive Opinion Survey conducted by WEF partners at the national level This survey is performed in the first quarter of each year, allowing the final score to reflect a weighted average of the most recent and previous year's data.
The real effective exchange rate data for Vietnam and 28 EU members from 2007 to 2019 is comprehensively sourced from Bruegel.org This dataset includes the CPI-based real effective exchange rate for Vietnam in relation to 171 trading partners during the same period Table 3.1 below provides a detailed description of the data utilized in this thesis.
Variable Obs Mean Std Dev Min Max lnX 364 16.50751 2.822219 0 20.54763 lnYi 364 26.10211 1.56559 22.84437 29.00331 lnyi 364 10.22928 0.632687 8.776132 11.62597 lnDIS 364 9.033411 0.09189 8.873682 9.263786
INSTW 364 0.5567502 0.107273 0.3964256 0.7866918 INFRW 364 0.6278813 0.151425 0.278434 0.9240967 GMKEW 364 0.5840087 0.053783 0.4933925 0.7151791 TECHW 364 0.6021192 0.127198 0.3743571 0.8664929 ratio 364 0.7813768 0.128665 0.5303222 1.024995
Source: Author‟s calculation based on data collection
The analysis includes 364 observations across various model variables, with export, GDP, GDP per capita, distance, and real effective exchange rate all transformed into logarithmic values The independent variables are comprehensively covered, although there are three instances of zero observations for the dependent variable, which may indicate either unreported data or zero exports Following the methodology of Pham et al (2014), this study treats all missing values as zero trade To address the issue of undefined logarithms for zero exports, these values are replaced with 1 prior to taking the natural logarithm, ensuring the retention of the maximum number of observations.
RESEARCH FINDINGS
Regression results
The Global Competitiveness Report reveals a significant positive correlation among four trade facilitation indicators, as indicated in Table 4.1 of model 3.5 To mitigate the issues of multicollinearity, each variable will be regressed independently in four distinct models.
Table 4.1: Correlation between four trade facilitation indicators
By using STATA application version 15.1, the estimation results of one-step regression for Vietnam‟s textile and garment export to EU countries (2007–2019) is shown in the 4.2 table
Table 4.2: One-step estimation for Vietnam‟s textile and garment export to EU countries (2007–2019)
VARIABLES Model 1 Model 2 Model 3 Model 4
Note: Robust standard errors in parentheses
The analysis presented in Table 4.2 highlights that the high parameter γ across four models confirms the effectiveness of the stochastic frontier gravity model in explaining Vietnam's textile and garment exports to the EU The findings reveal a significant positive correlation between the import demand in EU countries, as indicated by GDP and GDP per capita, and Vietnam's textile and garment exports Additionally, the historical ties between Vietnam and former communist countries in the EU further facilitate export growth However, while geographical distance is associated with increased transportation costs and risks that can hinder export activities, Model 3 indicates that lnDIS has an insignificant impact Furthermore, the landlocked status of certain regions does not significantly affect exports to EU countries.
Impact of institution on export efficiency of Vietnam‟s textile and garment to
Table 4.2 indicates that institutions have a negative impact on the export inefficiency of Vietnam's textile and garment sector to EU countries, with statistical significance at the 10 percent level This suggests a positive correlation between strong institutions and export efficiency Enhanced institutional frameworks promote transparency in policymaking, ensure effective governance, and minimize trading uncertainties, thereby improving export performance (Schwab, 2017).
Impact of infrastructure on export efficiency of Vietnam‟s textile and garment
The infrastructure in Vietnam has a notable negative impact on the export efficiency of the textile and garment industry to EU countries Improved infrastructure, including high-quality roads, railways, seaports, and airports, plays a crucial role in enhancing export efficiency By facilitating both domestic and international transportation of goods, effective infrastructure minimizes risks and reduces delivery times for merchandise.
Impact of goods market efficiency on export efficiency of Vietnam‟s textile and
The efficiency of the goods market negatively affects the export inefficiency of Vietnam's textile and garment sector to EU countries An efficient goods market enhances export efficiency by fostering healthy market competition and ensuring fair treatment of imported goods Additionally, it signifies a high level of trade openness, facilitating easier entry and exit of products, ultimately improving export efficiency (Schwab, 2017).
Impact of technology readiness on export efficiency of Vietnam‟s textile and
The analysis in Table 4.2 highlights that inadequate infrastructure adversely impacts the export efficiency of Vietnam's textile and garment sector to EU countries Conversely, a robust infrastructure system, characterized by high-quality roads, railways, seaports, and airports, enhances export efficiency by streamlining both domestic and international transportation This improvement minimizes risks and reduces delivery times for merchandise, ultimately benefiting trade operations.
4.4 Impact of goods market efficiency on export efficiency of Vietnam’s textile and garment to EU countries
The efficiency of the goods market negatively affects the export inefficiency of Vietnam's textile and garment sector to EU countries A more efficient goods market enhances export efficiency by encouraging exporters to engage with countries that have healthy market competition and fair treatment of imported goods Additionally, a high level of trade openness, characteristic of an efficient goods market, facilitates the easier movement of products in and out of the country, ultimately improving export efficiency.
4.5 Impact of technology readiness on export efficiency of Vietnam’s textile and garment to EU countries
Technological adoption plays a crucial role in influencing the export efficiency of Vietnam's textile and garment industry to EU countries, exhibiting a significant negative impact The integration of advanced information and communication technologies (ICTs) in trade operations facilitates faster information exchange between importers and exporters, thereby enhancing overall trade efficiency.
36 exporters, minimize transaction costs (Schwab, 2017) As a result, export efficiency will be enhanced.
Export efficiency of Vietnam‟s textile and garment to EU countries
The inefficiency term derived from one-step estimation will be utilized to assess the export efficiency of Vietnam's textile and garment sector for each EU partner annually, as outlined in equation (3.3) The findings are presented in tables A2, A3, A4, and A5, with export efficiency scores ranging from 0 to 1, where a score of 1 signifies that full export potential has been realized A higher export efficiency score indicates superior performance in Vietnam's textile and garment exports to EU partners, suggesting limited future expansion potential This study categorizes export efficiency levels into five groups, as detailed in table 4.3.
Table 4.3: Level of Export efficiency
Export efficiency score Efficiency level
0 < XE < 0.3 Low efficiency 0.3 ≤ XE < 0.6 Average efficiency 0.6 ≤ XE < 0.1 High efficiency
Between 2007 and 2019, Vietnam's textile and garment export efficiency to EU countries ranged from 0.4754 to 0.4919, indicating an average level of export performance This suggests that Vietnam has been achieving nearly half of its maximum export potential, highlighting significant opportunities for expanding actual exports in this sector.
Recent studies indicate a shift in Vietnam's export efficiency to the EU, contrasting earlier findings by Nguyen & Doan (2017) and Doan & Xing (2018), which reported a low mean export efficiency of approximately 0.2121 in 2015 These authors also noted that from 1995 to 2013, Vietnam achieved only about one-third of its export potential to the EU Similarly, Nguyen (2020) found that the export efficiencies of Vietnam's rice and coffee to the EU were around 0.2 and 0.25, respectively Variations in results may stem from differences in data sets and methodologies, as previous studies utilized two-step estimations while the current analysis employed a one-step estimation Notably, my findings align more closely with Nguyen & Wu (2020), who reported an aggregated export efficiency of approximately 0.48 for Vietnam from 1996 to 2014, with specific efficiencies for textiles, leather, and footwear around 0.414.
This thesis aligns with the findings of Trung et al (2018), which indicated that Vietnam's average trade efficiency was 0.463 from 2007 to 2015 Notably, this figure was lower than the mean trade efficiency recorded from 2000 to 2006.
2007 In other words, Vietnam‟s trade efficiency has reduced after joining WTO Nguyen (2020) confirmed this conclusion in his research
Recent analysis, as shown in tables A2, A3, A4, and A5 of this thesis, reveals a notable upward trend in the export efficiencies of Vietnam's textile and garment sector to EU countries Specifically, the yearly mean export efficiencies, denoted as Mean1, indicate that the lowest performance occurred in 2007, where efficiency scores fell within the lower average efficiency group However, over the span of twenty years, these efficiencies have significantly improved, allowing Vietnam's textile and garment exports to transition into the upper average efficiency group.
Vietnam's textile and garment exports to EU countries demonstrate varying levels of efficiency, with 9 countries exhibiting high efficiency, 13 countries showing average efficiency, and 6 countries categorized as low efficiency The detailed list of countries is provided below, highlighting the diverse export performance of Vietnam in the European market.
- Low efficiency trading partners: Cyprus, Ireland, Lithuania, Malta, Portugal, Slovenia n
- Average efficiency trading partners: Austria, Croatia, Czechia, Estonia, Finland, France, Greece, Hungary, Italy, Latvia, Poland, Romania, Slovakia
- High efficiency trading partners: Belgium, Bulgaria, Denmark, Germany, Luxembourg, the Netherlands, Spain Sweden, the UK
Belgium, the Netherlands, and Germany exhibit the highest export efficiencies in textiles and garments, with bilateral efficiencies exceeding 0.7267 when trading with Vietnam In contrast, Portugal records the lowest efficiency at 0.1247, while Lithuania and Malta also fall below the 0.2 threshold These findings align with previous studies discussed in the literature review.
CONCLUSION
Research summary
This thesis aims to calculate the export efficiency of Vietnam's textile and garment to
28 EU countries and identify its determinants over the 2007 – 2019 period I apply one-step estimation of the stochastic frontier gravity model to achieve these research purposes
This thesis examines the determinants of export efficiency, focusing on four key trade facilitation indicators from the Global Competitiveness Report: institutional strength, infrastructure quality, market efficiency, and technological readiness The analysis reveals a strong positive correlation among these indicators, leading to their separate inclusion in the regression model The findings indicate that all four indicators significantly enhance the export efficiency of Vietnam's textile and garment sector to EU countries.
Since I use four separate models to estimate, four mean export efficiencies are computed from the SFGMs Overall, the mean export efficiency of Vietnam's textile and garment to EU countries is in the average efficiency group Mean export efficiencies for models with institution, infrastructure, goods market efficiency, and technological adoption and readiness are 0.4794, 0.4919, 0.4754, and 0.4854 respectively This means that if export efficiency is improved, there will be great room for Vietnam to increase actual export of textile and garment to EU countries in the future In addition, in spite of slight fluctuation, the 2007 – 2019 period sees an overall upward trend in score of export efficiency of Vietnam's textile and garment to EU countries Belgium, the Netherlands, and Germany are countries with the highest export efficiencies with Vietnam, achieving at high efficiency level Meanwhile, the lowest export efficiencies are recorded in Portugal, Lithuania, and Malta with the values in the low efficiency group.
Policy implication
Only a half of Vietnam‟s export potential to EU countries has been realized Therefore, Vietnam should continue exporting textile and garment to high export efficiency n
40 trading partners while finding more opportunities to promote actual export of these products to importers with lower export efficiencies
The study reveals that Vietnam's textile and garment export efficiency to EU countries is significantly enhanced by strong institutions, quality infrastructure, efficient markets, and advanced technological readiness Improving these trade facilitation indicators is essential for boosting export efficiency Collaboration between Vietnam and its trading partners is crucial to enhance the trade facilitation environment Additionally, some EU member states already possess effective trade facilitation systems from which Vietnam can learn and gain valuable experience.
Limitation of the study
There are a few limitations of this thesis that can be improved in further research:
This thesis focuses on the export efficiency of Vietnam's textile and garment industry to EU countries, intentionally excluding the analysis of tariffs, non-tariff barriers, and trade agreements, as these factors have remained relatively constant throughout the surveyed periods.
The research focuses solely on the EU market, overlooking the influence of non-EU countries Vietnam exports textiles and garments not only to EU member states but also to various nations globally Consequently, the characteristics of non-EU countries can significantly affect Vietnam's actual export performance and efficiency in exporting textiles and garments to the EU.
The thesis examines "across-the-border" factors that reflect the traits of both Vietnam and its trading partners, but a limitation of this approach is the challenge in isolating the effects of Vietnamese policy on the export efficiency of its textile and garment industry to EU nations Nevertheless, enhancing trade facilitation indicators could significantly boost Vietnam's export performance.
"behind-the-border" constraints, “across-the-border” factors also will be affected As a result, the export efficiency of Vietnam's textile and garment to EU countries will be enhanced n
Future research should extend the analysis period to assess the impacts of tariffs, non-tariff barriers, and trade agreements Since the EVFTA took effect in 2020, it has introduced various tariff preferences and stricter rules of origin for Vietnam Therefore, further studies are recommended to explore how this free trade agreement influences the export efficiency of Vietnam's textile and garment industry to EU countries.
This study employs trade facilitation indicators from the World Economic Forum's Global Competitiveness Reports to assess country-specific factors These factors can also be represented by various other variables, including the World Governance Indicators and components of the Economic Freedom Index Future research could enhance its analysis by sourcing trade facilitation indicators from alternative resources, such as The Global Enabling Trade Report by WEF, the World Bank's Trading Across Borders, or the UN Global Survey on Trade Facilitation and Paperless Trade Implementation.
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Table A1: Description of HS code
51 Wool, fine or coarse animal hair, horsehair yarn and woven fabric
53 Other vegetable textile fibres, paper yarn and woven fabrics of paper yarn
56 Wadding, felt and nonwovens, special yarns, twine, cordage, ropes and cables and articles thereof
57 Carpets and other textile floor coverings
58 Special woven fabrics, tufted textile fabrics, lace, tapes- tries, trimmings, embroidery
59 Impregnated, coated, covered or laminated textile fabrics, textile articles of a kind suitable for industrial use
61 Articles of apparel and clothing accessories, knitted or crocheted
62 Articles of apparel and clothing accessories, not knitted or crocheted
63 Other made up textile articles, sets, worn clothing and worn textile articles, rags (Source: General Department of Vietnam Customs n
Table A2: Export efficiency of Vietnam textile and garment to EU countries, 2007 – 2019 (model with institution)
Table A3: Export efficiency of Vietnam textile and garment to EU countries, 2007 – 2019 (model with infrastructure)
Table A4: Export efficiency of Vietnam textile and garment to EU countries, 2007 – 2019 (model with goods market efficiency)
Table A5: Export efficiency of Vietnam textile and garment to EU countries, 2007 – 2019 (model with technology adoption)