Measuring Industrial Upgrading through Integration into Global Value Chains: The Case of Mexico’s Denim Apparel Industry By Jonathan A. Fink Palo Alto College San Antonio, Texas
Introduction <ul><li>Global Value Chain Theory : Industrialized world buyers govern transnational value/supply chains by transferring tacit knowledge to upstream suppliers situated in LDC’s. Transfer of knowledge and skills places LDC firms on dynamic learning curves and spawns industrial upgrading at both firm and industry level. </li></ul><ul><li>Purpose of Paper: </li></ul><ul><ul><li>Part 1: Review past fifteen years of GVC based literature and assess status of the current discourse. </li></ul></ul><ul><ul><li>Part 2: Replicate a model of industrial upgrading proposed by Kaplinsky & Readman (2004) to assess upgrading trajectory of Mexico’s export oriented denim apparel sector 1989-2005. </li></ul></ul><ul><ul><li>Key Research Question : Has Mexico’s denim apparel industry experienced measurable upgrading over a period in which the industry experienced transformation from maquiladora to full package OEM and OBM manufacturing. </li></ul></ul>
<ul><li>Functional Upgrading : Moving up the chain assembly to turn-key/full package </li></ul><ul><li>Product Upgrading : Higher quality which constitutes higher per unit prices </li></ul><ul><li>Process Upgrading : Use of efficiency enhancing capital, technology and processes </li></ul><ul><li>Inter-industry Upgrading : Movement to new industries in higher value added chains </li></ul><ul><li>Note: Delineation of upgrading types developed by Humphrey & Schmitz, 2000; 2001. </li></ul>
Measuring Industrial Upgrading: Kaplinsky & Readman (2004) <ul><li>Industrial Upgrading : Innovation at the firm level which leads to increase in per unit prices and enhanced market share relative to competitors in same segment of an industry (Kaplinsky & Readman 2004; Amighini 2006). Kaplinsky & Readman (2004) define possible outcomes for product upgrading or downgrading within an industry. </li></ul>
Measuring Upgrading: Kaplinsky & Readman’s Product Upgrading Quotient. <ul><li>PUQ = Composite Index number that reflects changes in both unit prices and market share. Equal 50/50 weight given to each of the two variables that define upgrading trajectory. </li></ul><ul><li>PUQ = d P% X + ∆ MS X where: </li></ul><ul><li>a. d P% X is equal to the deviation of the percentage change in unit price from Year 1 to Year n for country X from the average percent change of unit price from Year 1 to Year n for the product sector and, </li></ul><ul><li>b. ∆ MS X is the change in market share from Year 1 to Year n for country X. </li></ul><ul><li>Upgrading : Increase in both unit price from Year 1 to Year n relative to change in the average unit price for all countries in sample and an increase in the market share of country X from Year 1 to Year n. </li></ul><ul><li>Downgrading : Country X experiences a decline in unit price from Year 1 to Year n relative to change in the average unit price for all countries in sample and a loss in the market share of country X from Year 1 to Year n. </li></ul>
The Study: Methodology & Data Collection <ul><li>Study replicates Kaplinsky & Readman’s PUQ as applied to the case of Mexico’s denim apparel industry. USA market used as proxy for Mexico’s upgrading trajectory in world market. </li></ul><ul><ul><li>According to official trade statistics compiled by Instituto Nacional Estadistica e Geografia (INEGI) in 2005 the U.S. accounted for 98% of entire export market for Mexican origin Men’s and boys denim jeans and 99% of women’s/girl’s denim jeans. (INEGI,2006) </li></ul></ul><ul><li>Data Source : US Department of Commerce, Office to Textiles and Apparel Major shippers report. Disaggregated trade date at 10-digit harmonized system level. </li></ul><ul><li>Sample set for study = Exporting countries (i.e. competitors) considered to be all countries with at least 2% market share of US import market in 2005. </li></ul>
A Critique of GVC Theory and Avenues for further Research <ul><li>Ignores Path Dependency : GVC Theory Disregards diversity of endogenous institutions. Institutions are culturally and historically path dependent. (Whitley 1996; Bair 2005). </li></ul><ul><li>Western Centric : Commodity chains within an industry have differing structures of governance and are shaped by national business norms, regulations and culture. Gereffi’s conceptualization= western centric. (Hassler 2003) </li></ul><ul><li>Simplistic: Only two chain types? (Dicken et al., 2001; Raikes, Friis and Ponte 2000.) </li></ul><ul><li>Brand Ownership or Technology? Perhaps the ability to govern the chain is due to access to technology rather than brand ownership? Thus rents to the chain driver are economic rents and not design rents (Raikes, Friis and Ponte 2000) </li></ul><ul><li>Overemphasis on Governance? : Gereffi identifies four dimensions of value chains, but analysis is almost exclusively on governance (Dicken et al.). Need to define and measure the upgrading process with quantitative studies that assess changes in value added along the chain (Appelbaum 2004; Wood 2001). </li></ul>
Why Mexico? <ul><li>Between 1990 and 2000 Mexico’s export oriented denim apparel industry exhibited both dynamic growth and transformation from pure assembly maquiladora to full package manufacturing (Bair & Gereffi 2001, 2003). </li></ul><ul><li>Facts and Figures : </li></ul><ul><li>US imports of textiles and apparel grew from $26b in 1989 to $93b in 2006. </li></ul><ul><li>China is leading supplier to USA with 29% market share in 2006 </li></ul><ul><li>Mexico was 2 nd leading supplier to USA with 7% market share in 2006. </li></ul><ul><li>Mexico’s textile and apparel industry experienced dynamic growth between 1989 and 2006 rising from 11 th leading supplier to 2 nd . </li></ul><ul><li>Mexico’s specialization = men's and women’s denim jeans. In 2005 Mexico held 52% market share of men’s/boys denim imports and 39% share of women’s/girls denim imports. </li></ul><ul><li>Denim pants accounted for 32% of Mexico’s total apparel exports to USA in 2005. </li></ul><ul><li>Apparel production capacity in denim cluster of La Laguna increased from 500 thousand pieces per week in 1990 to 6 Million pieces per week in 2000. </li></ul><ul><li>Figures compiled from US Department of Commerce Office of Textiles and Apparel, Major Shippers Report. (http://www. http://otexa.ita.doc.gov/ ). </li></ul>
Building on Kaplinsky & Readman’s Model <ul><li>Assertion: The concept of upgrading is only relevant if economic and social conditions at the firm and industry levels are improving in a sustainable manner over time. Gains in per unit prices must provide for potential across the board real gains in social welfare measured in real wages for those employed in the industry. </li></ul><ul><li>Implication = Per unit prices currently measured in current $US should be converted into Real inflation adjusted prices. </li></ul><ul><li>Chart below depicts changes in real per unit prices for Mexico’s leading apparel exports to the USA over period 1993-2005. Table created by converting per unit prices in $US to Pesos using average annual exchange rates. Per unit prices in Pesos adjusted to constant Pesos (base year 2000) through use of Mexico CPI general indices at www.laborsta.ilo.org . </li></ul>
Conclusions <ul><li>Kaplinsky & Readman’s PUQ is a rudimentary model of upgrading based on arbitrary notion of equally weighted variables DOES ALLOW for identification of countries that have systemically experienced upgrading or downgrading trajectories. But caution should be used in interpretations due to sensitivity related to specific period under investigation. </li></ul><ul><li>Research calls for evaluation of per unit prices to be based on inflation adjusted prices instead of nominal prices in order to better assess potential for real wage gains over time. Upgrading needs to be defined as a process that yields the potential for social welfare gains. </li></ul><ul><li>Analysis of two key outcome related variables (per unit prices and market share) indicates: </li></ul><ul><ul><li>Despite a near perfectly competitive market structure, denim apparel industry does not exhibit law of one price. </li></ul></ul><ul><ul><li>China has not (as originally predicted—see USITC, 2004) displaced regional supplier exports to the USA. Ongoing regional presence highlighted by upgrading of Guatemala’s denim exports and Chinese downgrading in men’s/boy’s niche. </li></ul></ul><ul><ul><li>Trade Policy is dictating geographical shifts in supply patterns. Exemplified by rise of Lesotho, Jordan & Kenya as global denim suppliers. </li></ul></ul><ul><ul><li>Mexico has experienced unambiguous upgrading if measured over the period 1989 -2005 but a clear pattern of downgrading has taken place in the men’s/boy’s niche since 2000 and in the women’s/girls denim export niche since 2003. </li></ul></ul>
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