comparative advantage of vietnamese textile and clothing industry

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comparative advantage of vietnamese textile and clothing industry

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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 Innovation Strategies related to Supply Factors & Supporting Industries Business Environment/ Government policies/ Supporting industries FIRMS 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 Innovation Strategies related to Supply Factors & Supporting Industries Business Environment/ Government policies/ Supporting industries FIRMS 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 Chapter III RESEARCH METHODOLOGY 3.1. Measuring comparative advantage 3.1.1. Revealed comparative advantage      n i iw iw 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: ijij ijij MX MX TBI    3.1.3. Trade specialization In this dissertation, I measure the trade specialization via the Michaely index (Michaely, 1967). The computation of this index is presented as follows:    n i ij ij n i ij ij M M X X MI 11 3.1.3. Market share An indicator of competitiveness is market share, the percentage of a world commodity market held by an exporter. Shifts in market share reflect changing competitiveness across countries. Market share (MS) can be defined as: iw 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: ijijij RMARXARTA  Where RXA ij stands for relative export advantage, which is RCA index. RMA ij stands for relative import advantage, which is computed as follows:      n i iw iw n i ij ij ij M M M M RMA 1 1 Where M ij is imports by country j of commodity i, M iw is world imports of commodity i. Therefore, relative trade advantage equals to:          n i iw iw n i ij ij n i iw iw n i ij ij ij M M M M X X X X RT A 1 1 1 1 3.2. Analyzing the Structural Stability 3.2.1. Stability of Revealed Comparative Advantage ij t ijii t ij RCARCA   12 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 (S j,t ). The index for the country j at year t is computed as follows:      n i ijtjt sS 1 2 where    n i ijt ijt X X s 1 X ij,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 s ijt 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 [...]... 1.39 3.46 2.60 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 Indicators 0< RCA  1 1< RCA  2 2< RCA  4 RCA > 4 Mean Maximum Standard Deviation 2001 0.53... Commodity Group 2001-2004 2004-2007 2007-2011 2001-2011 Textile (SITC-65) 22.05 27.30 29.96 26.75 Clothing (SITC84) 31.56 20.31 15.45 21.56 Textile and Clothing Total Exports 30.14 21.27 18.02 22.52 20.79 22.39 18.85 20.49 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 SITC-65... Concentration of Vietnam Textile and Clothing Exports Table 13: Herfindahl Index SITC 2001 2004 2007 2010 2011 SITC-65 0.25 0.28 0.28 0.31 0.30 SITC-84 0.30 0.23 0.24 0.24 0.24 Total 0.26 0.20 0.21 0.20 0.20 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... Recommendations Enhancing human capital and raise technology capacity of textile and clothing firms Optimization of industry structure, enhancement in human capital and technology are preconditions to continuing development, comparative advantage, technological innovation as well as to industrial upgrade in Vietnam’s textile industry In recent years, a large number textile firms in Vietnam have capitalized... 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. .. 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 (SITC84) 12.42 16.05 15.24 13.92 14.96 14.38 13.57 Total 14.76 18.46 17.96 16.41 18.47 18.62 17.46 Source: The author’s own calculation Table 3: Annual Growth Rate of Vietnam’s Textile and Clothing Exports (in percent)... 0.63 0.63 0.64 0.60 0.60 0.65 0.63 0.66 0.64 Chapter V CONCLUSION AND POLICY RECOMMENDATIONS 5.1 Conclusion: To foster future production and export, so as to reach continuing development in textile and clothing industry, more relevant policy should be implemented to move the economy and its export sector towards a desirable comparative advantage structure Based on the above analysis, some policy recommendations... 7.67 6.86 SITC-844 1.64 7.24 6.13 5.90 5.58 SITC-845 3.62 3.71 4.68 5.94 5.44 SITC-846 2.50 1.57 1.58 1.28 1.28 SITC-848 1.28 1.96 2.43 2.15 2.01 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 Start Year End Year 2001 2002 2002 2003 α β R β/R P-value 0.079 0.960 0.905 1.061 0.000 2003 0.033 0.953... 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 Indicators 2001 2004 2007 2010 2011 GDP growth (percent) 6.90 7.79 8.46 6.78 5.89 32.52 45.45 71.11 103.58 122.72 413.34 554.07... 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 . 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. 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. 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

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