comparative advantage of vietnamese textile and clothing industry

ABSTRACT This Study is the first to attempt a systematic evaluation of the comparative advantage for Vietnam’s Textile and Clothing Industry in the global market.. The study is timely as

COMPARATIVE ADVANTAGE OF VIETNAM’S TEXTILE AND CLOTHING

INDUSTRY

(SUMMARY)

A Research Proposal Presented to the Faculty of Graduate School

Southern Luzon State University Lucan, Quezon, Philippines

Thai Nguyen University S.R Vietnam

In Partial Fulfillment of The Requirements

for The Degree Doctor in Business and Administration

SUPERVISOR: ASSOCIATE PRO DR NGUYEN KHANH DOANH

STUDENT NAME: LE ANH TUAN

ENGLISH NAME: JOHN

Thai Nguyen, 2013

ABSTRACT

This Study is the first to attempt a systematic evaluation of the comparative advantage for Vietnam’s Textile and Clothing Industry in the global market The study is timely as Vietnam has made an extensive effort to change its international trade for some years and the consequent increase in competitive pressures and technology transfers, is expected to have led to a restructuring of the economy such that the composition of Textile and Clothing exports Volumne reflects Vietnam’s comparative advantage in the global economy

The timeliness of the study is also reinforced by the fact that increased trade integration of Vietnam over the past few years is likely to have contributed to a shift in comparative advantage in Textlile and Clothing Industry in the world market

The Study identifies the pattern of comparative advantage using the

Balassa (1989) index for export data The index has been calculated at the sector and commodity level of the Harmonized System of classification The paper also analyses comparative advantage according to factor intensity The analysis shows broad in the structure of comparative advantage of Vietnam Textile and Clothing Industry

I do hope that this paper will serve as a useful source and provide valuable reference material for researchers and policymakers associated with and interested in export promotion strategy in Vietnam

Chapter I

INTRODUCTION 1.1 Problem Statement

The textile industry has long been a pillar of Vietnam’s economy thanks to its advantage in factor endowments and market scale After severe times, Vietnam has made tremendous efforts to become a main component in the textile industry

in Southeast Asia From humble beginnings since the reunification of its northern and southern regions, Vietnam has become an important member in the global textile market The textile and clothing industry plays a major role in increasing the country's prosperity State-owned enterprises make up just 0.5 percent of Vietnam's businesses; however, 75 percent are joint stock or limited companies The Vietnamese textile industry, with more than 3,800 companies, is the leading export sector

Vietnam’s textile and garment industry has developed rapidly in recent years and has become a vital activity within the country’s economy Export value of textile and garment products in recent years has been ranking number two in the country’s total export revenue, earning a major source of foreign exchange and contributing significantly to Vietnam’s gross national product and budget In 2006, the sector exported textiles and garments to the value of 5.8 billion US dollars, making it Vietnam’s second largest export earner after crude oil Vietnam’s joining the WTO in 2007 provided it tremendous opportunity to develop Vietnam receives equal treatment and benefits in preferential trade just like other members of WTO; further, it can access world markets conveniently The textile and garment sector has since taken strong and stable development steps The trade volume of the textile sector has increased by 7.6 times from 2001 to 2011 Despite the recent global economic downturn, the sector is seeing impressive export performance Export revenue exceeded 11 billion US dollars in 2010, up 24% against 2009, 14 billion US dollars in 2011, accounting for 16.5% of the country's total export revenue and up 38% against 2010 The production and exports of Vietnamese textile products contribute a considerable share in the world, accounting for 18.6% of the world’s total exports in textiles in 2010 The

country ranks fifth worldwide in textile and clothing exports and has a labor force

in that sector of more than 2 million people, representing 4.7% of total employment within the country, of whom 1.3 million are working directly in the industry

Vietnam can be proud of this commendable performance Consider that its textile industry was the only sector in the country to maintain its overall growth and export earnings compared to the previous year This resulted largely from the sector’s maintaining its traditional export markets (the US, EU, Japan), and expanding to new export markets (Korea, Taiwan, the Middle East, and Singapore) as well as marketing to the domestic market The sector targets to ship 15 billion US dollars in 2012, an increase of 11% against 2011

1.2 Objectives

1.2.1 General Objective

The general objective of this research is to analyze the patterns and dynamics of Vietnam’s comparative advantage in textile and clothing industry in the period 2001-2011

1.2.2 Specific Objectives

 To systematize the theoretical foundation and empirical evidence of comparative advantage, making contribution to the development of new theory about comparative advantage

 To investigate the patterns of Vietnam’s comparative advantage in textile and clothing

 To analyze the dynamics of Vietnam’s comparative advantage in textile and clothing

 To assess the determinants of Vietnam’s comparative advantage in textile and clothing

 To derive policy implications based on the empirical findings

Chapter II

LITERATURE REVIEW 2.1 Theoretical Foundation

2.2.1 Definition of comparative advantage

Comparative advantage is one of the oldest and most enduring concepts in economics (Evans, 1989) Comparative advantage is commonly expressed as international differences in the opportunity costs of goods; that is, the quantity of other goods sacrificed to make one more unit of that good in one country as compared to another country In economics, comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another Even if one country is more efficient in the production of all goods (absolute advantage in all goods) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies

2.2.2 Theories of comparative advantage

Comparative Advantage framework

Figure 1: Comparative advantage framework

Trade Enhancing National Policies/ International Policies (WTO, IMF, World Bank…)

Technology/ Scale Economies/Supporting Industries

Quantity and Quality of

Physical and Human

Resources

Demand /Market Size

INDUSTRY

2.1.4 Competitive advantage

Figure 2: Determinants of National Competitive advantage

Competencies/Resources to benefit from Comparative Advantage and convert it in

to Competitive Advantage

Innovation Strategies related to Demand Factors

& Product Differentiation

Figure 3: Linking Comparative Advantage and Competitive Advantage

Competencies/Resources to benefit from Comparative Advantage and convert it in

to Competitive Advantage

Innovation Strategies related to Demand Factors

& Product Differentiation

Technology/ Scale Economies/Supporting Industries

Quantity and Quality of

Physical and Human

Resources

Demand /Market Size

INDUSTRY

Chapter III

RESEARCH METHODOLOGY 3.1 Measuring comparative advantage

3.1.1 Revealed comparative advantage

n

i ij ij

ij

X X X X

RCA

1 1

3.1.2 Trade balance index

Trade Balance Index (TBI) is employed to analyze whether a country has specialization in export (as net-exporter) or in import (as net-importer) for a specific group of products (Lafay, 1992) This index is simply formulated as follows:

ij ij

ij ij M X

M X TBI

ij n

i ij

ij

M

M X

X MI

1 1

ij ij X

X

MS 

3.1.4 Alternative Specifications of Revealed Comparative Advantage

Vollrath (1991) offers three specifications of revealed comparative advantage

The first is relative trade advantage (RTA) which takes exports and imports into

account The index is calculated using the following formula:

ij ij

ij RXA RMA

Where RXAij stands for relative export advantage, which is RCA index RMAij

stands for relative import advantage, which is computed as follows:

n

i ij ij

ij

M M M M

RMA

1 1

Where Mij is imports by country j of commodity i, Miw is world imports of

commodity i Therefore, relative trade advantage equals to:

n

i ij ij

n

i iw iw

n

i ij ij

ij

M M M M

X X X X

RTA

1 1

1 1

3.2 Analyzing the Structural Stability

3.2.1 Stability of Revealed Comparative Advantage

ij t ij i i t

RCA2   1 

3.2.2 Intra-Distribution Dynamics

In this dissertation, the transition probability matrix is constructed using Hinloopen and van Marrewijk (2001) The transition probability matrix provides some empirical insights into the dynamic nature of comparative advantage from time t to time t+1 It determines the probability of moving between different classes of comparative advantage Hinloopen and van Marrewijk (2001) decomposed the interpretation of RCA index in four categories (class a, b, c, and d)

 Class a (0<RCA≤1): refers to commodities with a comparative disadvantage

 Class b (1<RCA≤2): refers to commodities with weak comparative advantage

 Class c (2<RCA≤4): refers to commodities with medium comparative advantage

 Class d (4<RCA): refers to commodities with strong comparative

advantage

3.3 Measure of Export Concentration

In this dissertation, the commodity concentration is determined using the Herfindahl index (Sj,t) The index for the country j at year t is computed as follows:

jt s S

1 2

ijt

X

X s

1

Xij,t is country j’s export of commodity i in year t, n is total number of commodities

in the country j It follows that sijt is the share of export of commodity i in country

j’s total exports The value of the Herfindahl index ranges from 0 to 1 The higher the index the more specialized in export the country is, with maximum concentration when the index equals to unity

3.4 Trade Compatibility

The trade compatibility index measures the degree of compatibility between Vietnam’s exported products and those products imported by the foreign market The index of compatibility (Cx/m) is computed using the following formula:

C

1 /

2

11

3.5 Data sources

The present analysis is based on the annual time series data on Vietnam’s exports and imports, compiled by UNComtrade The data have been collected at 3- and 4-digit Standard International Trade Classification (SITC) over the period

1998 to 2011

Chapter IV

EMPRICAL FINDINGS

4.1 Vietnam’s Export Performance in Textile and Clothing

4.1.1 Overview of Vietnam’s Economy and Textile and Clothing Exports

Table 1: Basic Economic Indicators of Vietnam

Import growth (percent) 11.74 23.09 26.45 5.86 -3.87

Source: International Monetary Fund

Table 2: Contribution of Textile and Clothing to Vietnam’s Total Exports

Commodity

group 2001 2004 2007 2008 2009 2010 2011

Textile (SITC-65) 2.34 2.42 2.72 2.49 3.52 4.24 3.89 Clothing (SITC-

Source: The author’s own calculation

Table 3: Annual Growth Rate of Vietnam’s Textile and Clothing Exports (in

Textile and

Source: The author’s own calculation

4.1.2 Structure of Vietnam’s Textile and Clothing Exports

Table 4: Structure of Vietnam’s Textile and Clothing Exports (in percent) Commodity Group 2001 2004 2007 2010 2011 SITC-65 15.88 13.10 15.15 22.76 22.28

Source: The author’s own calculation

4.1.3 Direction of Vietnam’s textile and

Table 5: Top 10 Textile and Clothing Export Markets of Vietnam (in percent)

Table 6: Importance of Vietnam in World Exports of Textile and Clothing Exports

Năm

Vietnam’s Exports (Million

USD) World Exports (Million USD)

Share of Vietnam in World

Exports (%) SITC-65 SITC-84 Total SITC-65 SITC-84 Total SITC-65 SITC-84 Total

4.2 Patterns of Vietnam’s Comparative Advantage in Textile and Clothing

4.2.1 Patterns of Vietnam’s Comparative Advantage in Textile and Clothing

The summary of statistics of Vietnam’s revealed comparative advantage in textile and clothing is presented in Table 4

Table 7: Summary of Statistics

Source: The author’s own calculation

Table 8: Measures of Trade Specialization

Year Mean

RCA

Share of RCA>1

Mean RMA

Share of RMA >1

Mean RTA

Share of RTA >0

Source: The author’s own calculation

Table 9: Vietnam’s Revealed Comparative Advantage in Textile and

Clothing

Textile and Clothing 2.68 3.30 3.60 3.68 3.53

4.2.2 The Dynamics of Vietnam’s Comparative Advantage in Textile and Clothing

Table 10: Galtonian Regression

Source: The author’s own computation

Table 12: Mobility Indices

4.2.3 Concentration of Vietnam Textile and Clothing Exports

Table 13: Herfindahl Index

Source: The author’s own computation

4.3 Determinants of Vietnam’s Comparative Advantage and Competitiveness in Textile and Clothing

Table 14A: Tariff rates applied by Vietnam on Imports of Textile (in percent)

Table 14B: Tariff rates applied by Vietnam on Imports of Clothing (in

4.4 Trade Complementary and Forecasting Vietnam’s Potential Exports

Table 15: Trade Complementary

on outward processing using the country’s unskilled and cheap labor This

outward processing does not generally require very high levels of technology The excessive reliance on cheap labor and backward technology to promote exports has prevented Vietnam from moving up the comparative advantage ladder

In addition, the government and industry associations ought to analyze

Agreement on Textiles and Clothing (ATC) to find good means for Vietnam’s textile exports, improve policy cooperation with other countries, investigate trade policies of textile importing countries, introduce flexible measures to stimulate exports, and settle trade disputes through negotiation within WTO framework with other WTO members Vietnamese government and industrial associations should make active efforts to establish a government-guided industrial early-warning system which involves government, industrial associations and firms Government and industrial associations should also construct industrial

information centers and databases In order to overcome technical trade barriers, government and enterprises should provide textile enterprises with assistance, especially in information collection toward technology statutes, technique

standards and assessing procedures

The government also needs to provide incentives and practical support for textile and clothing firms to raise their technology capacity through R&D activities On the firm level, firms in the textile industry ought to strengthen input on R&D,

persistently improve technology and release new products into international market as well as impose new technology to present categories Technology is the soul for enterprises’ development and core to competitive advantage, while technological innovation practitioners are enterprises