Garment manufacturing in Laos: clustering and technological capabilities

Asia Pacific Business Review !} Routledge

Vol. 17, No.2, April 2011, 193-207 I\. rayiorl.FrancisGroup

..

Garment manufacturing in Laos: clustering and technological

capabilities

.

Rajah Rasiaha*, Vanthana Nolinthab and Latdavanh SongVilayb : .

aCentre of Regulatory Studies, University of Malaya, Kuala Lumpur, Malaysia,' bNationalEconomic

Research Institute, Vientiane, Laos

This study examines the impact of systemic pillars' on technological capabilities in

gannent manufacturing in Laos. The evidence shows that gannent manufacturing

employment rose strongly over the period 2000- 2006 but has been confined to low

value added activities because of low technological capabiljties. While acknowledging

the importance of employment creation, this work argues that the systemic pillars in

Laos must be strengthened for firms to introduce superior technological capabilities to

sustain their competitiveness.

Keywords: cluster; gannent; Laos; technological capabilities

.

1. Introduction

Export-orientation became the springboard of manufacturing expansion in small

economies such as Ireland, Singapore and Taiwan. Similar promotions, albeit confined

to export-processing zones, mushroomed in larger economies such as Malaysia, the

Philippines, Thailand and Indonesia with mixed results (see Rasiah 2003). The transition

economies Qf Cambodia, Laos and Vietnam entered the fray in the late 1990s to promote

garment manufacturing. Whereas Cambodia and Vietnam are blessed with open sea

frontage to support quick exports and imports for low value added industries such as

garments, Laos is landlocked and hence less able to keep delivery times low.

Foreign aid assisted the development of the requisite infrastructure for the setting up of

light manufacturing activities such as garments and agro-processing in Laos in the late

1990s and since. The provision of preferential access by the European Union (through the

'everything but arms' clause in 2001) and the United States (through the bilateral trading

agreement since 1999) complemented government initiatives to promote industrialization

in Laos. The other developed economies such as Japan and Canada have followed similar

practices since. Although the landlocked status and small population (6 million in 2008) of

the country has discouraged large scale relocation of labour-intensive manufacturing

activities, the preferential access agreement has remained instrumental in attracting

foreign direct investment in simple on cut, make and trim (CMT) operations.

Given that the window of opportunity offered by the preferential agreements is

unlikely to continue for long, combined with the tendency for relative prices to rise as

countries develop, the important question to ask will be whether garment firms in Laos are

enjoying the necessary technological upgrading for their operations to be sustainable over

the long run. Thus, this study examines the extent of knowledge depth achieved in garment

*Corresponding author. Email: [email protected]

ISSN 1360-2381 print/ISSN 1743-792X online

@ 2011 Taylor & FrancisDOl: 10.1080/13602381.2011.533~m ~~- --- - -~

194 R. Rasiah et al.

fimls in Laos. Section two provides the literature review. Section three discusses the

methodology and data used. Section four examines the strength and cohesion of the

.. relationships between the four systemic pillars considered the key institutional pillarsnecessary to drive upgrading in fimls and sustainable improvements in employment,productivity and wages. Section five examines the state of technological intensities.Section six presents conclusions and implications. Most gamlent fimls are located in themost populous province of Vientiane, which also enjoys the best infrastruct~ in Laos,

and hence the empirical data used is focussed there. !

2. Theoretical guideThis section introduces the systemic quad, whIch is adopted as the model to examine the

strength of the institutional and systemic support and technological capabilities enjoyed bygarment fimls in Laos. The framework combines important contributions from heterodox,

industrial district, growth pole and evolutionary economists.. Clusters can be defined as regionally networked sets of units - economic and social

agents embodied as individuals, fimls and organizations - that refer to localized systemsconnecting all critical economic agents necessary to drive learning, innovation andcompetitiveness. Clusters here are considered to produce the most synergies when allrequisite institutions to drive learning, innovation and competitiveness and economicagents are horizontally connected (interdependent interface is important). Clusters cangenerate an egalitarian network if all participants are effectively networked so that all

. views are equally embodied in policy fomlulations. Governments in developing

economies tend to accept the public-private partnerships over the egalitarian stakeholderframework because of the interest on growth not realizing that the effective pursuance of it

taking account of all members of society is pertinent for balanced development.1. What is important when examining stakeholders (e.g. government, industry, non-

governmental organizations) is not a rigid demarcation of their roles in influencing theconduct of fimls, organizations and other actors in the clusters. Dynamic clusters are oftendriven by a myriad of institutions where actors enjoy overlapping and changing roles. Forexample, whereas the industrial technical research institutes in Taiwan played a key role'indeveloping and relocating their research output in fimls through incubation activities, fimls

such as Samsung and Hyundai internalized much of these activities in Korea (see Rasiah

and Lin 2005, Rasiah et ai. 2008). In addition, governments can promote a particular

agglomeration of competence to provide a snowballing effect to attract the relocation of

other fimls or the creation of new ones. A government can also screen particular clus.ters

and identify bottlenecks, holes and weaknesses to ease, fill and ameliorate these problems.Such problems can take the foml of critical basic infrastructure, high-tech infrastructure, orsupplier fimls. Given the problems of infomlation asymmetries between government andfimls, intemlediary organizations such as chambers of commerce, training institutions andR&D laboratories often help resolve collective action problems. Interdependent

relationships that are driven by the discipline of the market, the participation of

government when public goods are involved and complementation through trust-loyalty to

extract social commitment from the people directing all of them, is vital for the

development of competitive clusters. Industry-government-consumer/labour coordination

councils often help foml and expand social capital.A combination of a lack of fiml-level drive, and a lack of the requisite human capital

and high-tech institutions necessary to stimulate innovation and with it competitiveness

have often undemlined the capacity of such clusters to enjoy sustainable differentiation

Asia Pacific Business Review 195

and division of labour. These are also the prime reasons for the stagnation that has

characterized export-processing zones and industrial estates in developing economies.Central to any effort to revive fading old industrial concentrations must be a focus onplanting the right pillars to stimulate upgrading, innovate, industrial differentiation andnew firms. The strategy must be one of mapping the regions of their firms, institutions,

policy framework and their integration with markets (global and local), and to identify the

drivers or the lack of drivers that explain the vibrancy of the region. However, even themost successful government strategies are not bereft of failures as reported by Fitzgeraldand Young (2004). Successful governments have always used an appraisal mechanism that

is agile to limit policy failures (see Johnson 1982, Wade 1990).Although clusters as a concept was arguably most popularised by Porter (1990),

Marshall (1890) made the first articulation of the concept arguing in the process over theeconomic synergies that arise from agglomeration of firms generate economic synergies.

Marshall's logic of clusters however comprised hundreds of small firms that operated with

systemic flows of knowledge. Dynamic clusters are characterized by innovation and

strong horizontal relationships between the firms, and firms and meso-organizations(Brusco 1982, Piore and Sabel 1984, Best 2001). The focal point of innovation in a

dynamic cluster is essentially the interdependent and interactive flow of knowledge and

information among people, enterprises and institutions. It must obviously includecoordination between the critical economic and technological agents across value chainswho are needed in order to turn an idea into a process, product or service on the market.In dxnamic clusters such as the Silicon Valley and Route 128, innovations evolve from a

complex set of inter-relationships among actors located in a range of enterprises,universities and research institutes. The execution and appropriation of these innovations,

inter alia, will extend further actors in dynamic clusters to intermediary organizations such

as suppliers, venture capitalists, property rights lawyers and marketing specialists.The government is a major player providing a significant share of the funding publicgoods. Government funding in the United States comes in the form of research supportedin the military, universities, undertaken in firms and public laboratories (Nelson 1993). ,Mytelka (1999) and Ernst et al. (1998) offer both a taxonomy and empirical validation of "

clustering. Significant innovation synergies also evolve in multinationals and diffuse to

local firms (see Rasiah 1994, Hobday 1995).Most efficiently governed industrial estates and Export Processing Zones (EPZ) in the,

past only focused on the elements. that are shaded blue. The long term objective ofgovernment policy in these economies has been to ensure sustained increase in labopr forceparticipation, and wages so that the broader objectives of poverty alleviation and humandevelopment are met. The original exponents call to limit the role of government to just the

provision of excellent basic infrastructure proved to be the shortcoming of the EPZ strategy.

Without a policy to ensure learning and innovation, increased integration in the globaleconomy undermined the capacity of these regions to compete against rising wages, theemergence &f new sites such as G::hina, and to meet the rising technological deepening

requirements in them (e.g. electronics) with deleterious consequences to underemploy-

ment, poverty and human development. Lall (200 1) was to assert that economies that failed

to develop their technological capabilities became losers in the globalization process.Central to the failure of EPZs and industrial estates in developing economies has been

the lack of development of an effective enabling environment for technological upgrading, "differentiation and division of labour, and new firm and industry creation. Figure I

identifies the critical pillars that drive dynamic clustering. The first central pillar of adynamic cluster is a strong role by governments (federal or local) to provide stability

...


HIGH TECH INFRASTRUCTURECritical

Institutions to drive learning and stakeholders.. innovation, technology diffusion, :

licensing training and R&D INTEGRATION IN GLOBAL

, MARKETS AND VALUE

CHAINS

.. Dynamic Cluster 0 0. D o.,.. o. 0 0 0 Scope, scale, competJtJon and. luerentlation and divIsion of al h 0

.. lb vuecams ... a our -

: Upgrading and value additiOll I

.. New finn creation: New processes and products. ..

..

BASIC INFRASTRUCTURE

Electricity and water COHESION

transport, health careTelecommunication, schools, C t o o ty d C rdinatJ °on0 0 0 onnec lVl an 00 -

stability, s:cunty, and interactive and interdependent. bu~ucratlc and customs social capital

efficiency

Figure 1. Systemic quad.Source: Rasiah (2007, Figure 1).

. (macroeconomic, political and security) and efficient basic infrastructure. The secondpillar refers to high-tech infrastructure and the institutions coordinating learning and

innovation to stimulate technology acquisition and development through learning bydoing, licensing, adaptation, training, standards appraisal mechanisms, a strong intellectualproperty right framework to prevent moral hazard prQblems facing innovators, and R&D.The second is vital for the continuous upgrading of technological capabilities in the cluster.

The third pillar connects clusters to global markets and value chains. Global marketsprovide the economies of scale and scope and the competitive pressure to innovate. Globalvalue chains assist economic agents in the cluster to orientate their strategies to the criticaldynamics that determine upgrading and value addition (see Gerrefi 2002, Gerrefi 2005).Examples of such changes include the introduction of cutting edge just in time and flexiblespecialization techniques in electronics, and the proliferation of software technology in theuse of cad-cam machines and the interface between firms, assembly activities and the

major markets abroad. In Indonesia for example, Texmaco which is located in an EPZ .on

the outskirts of Jakarta responded to the changing nature of global value chains in thegarment industry by integration assembly, fashion design, packaging and logistics tosupply brand-name holders. Lacking in institutional support - both basic and high-tech

infrastructure - Texmaco has managed to compete globally despite facing tremendoustransactions costs in Indonesia. Indeed, this firm has even branched out into themanufacturing of machinery and equipment such as air jet looms and computer numericcontrol (CNC) machines, which are complementary to its textile and garmentmanufacturing activities.

The fourth pillar produces know ledge and pecuniary synergies through networkcohesion. Lundvall (1988) expanded the elements of interdependence and interactivenessby articulating the role of producer-user relations in innovation. The nature of interfaceand coordination between vertically connected economic agents is vital in the horizontalevolution of innovation activities. Connectivity and coordination is critical for knowledge


flows - beyond simply codified infonnation that markets can coordinate. Intermediaryorganizations such as industry-government coordination councils and chambers ofcommerce play an important role in increasing connectivity and coordination in dynamicclusters. In emerging regions, governments have initiated such platfonns (e.g. Penang inMalaysia) (see Rasiah 2002).2 The appropriation of knowledge through interaction aspeople employed by the critical economic agents in the cluster meet and interact, and

the movement of tacit knowledge embodied in individuals to start new firms rises as

trust-loyalty (social capital) becomes a critical coordination mode.

3. Methodology and data

This work makes comparisons of simple means using one-tail 't' tests to examine the

differences in finns' assessment of institutional and systemic instruments that face them,

as well as technology of foreign and local firms in Laos. Likert scale scores ranging from

0-5 were used to score firms' rating of connections and coordination quality with critical

: institutions. The estimation of the technological intensity variables is shown in Table 1.

Taxonomies and trajectories were used to differentiate technology, and technologicalintensities were captured by nonnalizing related proxies (see Table 2). The survey was

. conducted using the support of the National Economic Research Institute (NERI).3In the first exercise, finns ratings based on Likert scale scores of the components of the

four systemic pillars were analyzed. In the second exercise, the nature of technologicalactivities by taxonomy and trajectory was screened to locate the knowledge depth of each

of the sampled garment firms. Because none of the sampled firms in Laos undertook R&D

activities, and were not engaged in product adaptation or design no attempt was madeto estimate R&D here.4 Nevertheless, incidences of participation in levels 1, 2 and 3

. of product technology - the stages before R&D begins - is examined in the study

(see Table 2). In the first stage, employees in Laos simply carried out CMT operations

under supervision by foreign employees. In stage two, local employees participated in the

supervision of CMT operations from foreign technology transferred from abroad. In stage

three, local personnel began to master CMT operations.

In the third exercise, the selected technological capabilities of each of the garmentfirms were estimated. Training expenditure (TE) in payroll was chosen as the proxy for

human resource practices. Process technology expenditure (PTE) was chosen as the proxy.

for process technology. The adaptive engineering (AE) variable was preferred for R&D

because of the lack of levels 4-6 knowledge activities. Most garment operations in thedeveloping economies are dominated by low end activities without any sig{nficantparticipation in level 4-6 knowledge-intensive activities. The figures are then compared

with figures from selected Asian economies.

Table 1. Vafiables, proxies and mea~urement formulas, garment firms.. "

Variable' Proxies Specification

HR Training expenditure in payroll, HR Normalized using formula:

practices and skill-intensity (Xi-Xmin)/(xmax-XmiJ

Process technology Age of machinery and equipment, Normalized using formula: ..

inventory and quality control systems, (Xi-XmiJ/(xmax-Xmin)

expenditure on inventory and qualitycontrol systems, process patent


Table 2. Taxonomy and trajectory of garment firms.

Knowledge depth HR Process Product

Simple activities (1) On the job and in- Dated machinery Simple CMT operations

house training with simple inventory and knitting through

control techniques foreign supervisionMinor improvements (2) In-house training and Advanced machinery, Localized supervision of

..

performance rewards layouts and problem' garment manufacturing;--

solving IMajor improvements (3) Extensive focus on Cutting edge inventory Mastery of CMT '

training and retraining; control techniques, operations by local .

staff with training SPC, TQM, TPM personnel using foreign

responsibility . technology

Source: Developed fr;om Rasiah (1992, 2007).

The data on Laos used in this study is drawn from surveys coordinated by the authors

during 2007 - 2008. The national sampling frame was supplied by the Statistics

Department of Laos. The data obtained is shown in Table 3. Unless otherwise stated all

information presented is for the year 2006.

.

4. Systemic pillars

Using the systemic quad presented in section 2, this section analyzes the strength and

extent of connectivity and coordination between garment firms and the critical

meso-organizations and relationships identified. As was argued earlier the long run

sustainability of garment manufacturing in Laos will require continuous and simultaneous

upgrading of the four pillars that constitute the systemIc quad.

Basic infrastructure

The infrastructure in Laos is poor by most standards, however, focused development in the

specially classified EPZs has helped offer reasonable support for fairly good roads, utilities

and telecommunication connections (see Table 4).

With large endowments of power generating capabilities and water, firms in Laos rated

the supply of electricity and water fairly high, but lack of proxitimity to the sea and the

presence of only a small number of firms has left it weak on the transport coordination of

shipments (see Table 4).

Although quick deliveries such as those demanded by high-tech firms in electronics

manufacturing are not critical yet in garment manufacturing, it will help for the

government to improve basic infrastructure further to improve delivery times by the firms.

~$ The garment lead times (between order and delivery) in Laos (and Cambodia) were the

longest in 2004 among the selected economies shown in Table 5 (see Rasiah 2009,

reproduced in UNCT AD 2007, p. 17). Although the statistics presented in Table 5 put

ITable 3. Breakdown of sampled data, garment firms, 2006.

Cut, make and trim operations

Mailed 100

Responses 87Interviewed 5

Source: Compiled from JETRO (2007b).

,

~ ~IIIIIIIIII.- -

~ - :,-" 'COo;:'

.~ ~,tc

-Asia Pacific Business Review 199

Table 4. Basic infrastructure supporting garment manufacturing, Laos, 2006.

Mean SD

Water 2.7* 1.0

Electricity 3.0* 0.3

Primary and secondary schools 2.1 * 1.1

Health care 2.0* 1.3

Customs 2.8** 2.2

Security 2.6* 1.3

Transport 2.2* 1.0

Telecommunications 2.3** 1.0

N 87

No~e: Likert scale score of firms (0-5 with from none to highest possible rating); * and ** - statistically

significant at 1 % and 5% respectively.Source: mE Survey (2007).

Laos in the same position, interviews show that the lead times of finns are a few days

longer than those recorded in Cambodia.5

. Although a number of finns complained of security, theft, corruption and other

unnecessary transactions costs they were considered less serious than what they believed

existed in Mrica.

High-tech infrastructure

Given the poor infrastructure and low educational levels of the labour force none of the

, garment finns had in place any significant R&D activities. Most finns were engaged in

f,i"; ~ ad~pta~ion activit~es. The only ~g~-te~h i~sti.tutions of ~igni~c~ce that ~s :~ported!: beIng Interested In Laos are trmmng InstitutIons, technIcal Institutes, umversIties and

:' standards organizations.

.,

!-: Laos relies extensively on foreign official development aid to develop their

infrastructure including the construction of technical schools and universities. At the time !:'""

of the fieldwork there were no clearly designated standards organizations in Laos. Agents (,,"ii'

appointed by buyers largely handled quality inspections at manufacturing sites.

Two critical institutions that the finns sought in Vientiane are examined here. There

were neither public nor private tecPnical training institutes to supporting garment skills'

,

,

::- ,~ Table 5. Garment lead times, 2004 (days)..

';1:

1 '; " . .

"', ,.;,,: Woven CIrcular Knit

,. ,-:,

,i', ~:fJ Bangladesh, 90-120 60-80

'. Cambodia I 90-120 90-120

,

China '..., 40-60 50-60

. '"

India 50- 70 60- 70 ~

Indonesia 60- 90 60- 70

Laos 90-120 90-120

Malaysia 60-90 50-60

,Sri Lanka 60-90 60- 70

Thailand 60-90 50-60 '"

Vietnam 60-90 60- 70

Source: ADB (2004); Rasiah (2009),

;?t

~:::;

!


:fable 6. High tech infrastructure, garment firms, Laos, 2006.-- - '"' - ~~

Mean SD

~ ~

University 1.5* 0.5

Technical Schools 1.3* 0.9

Training Institutions 1.4* 0.3

N 87 .

- . '- --

Note: Likert scale score of finDS (0-5 with from none to highest possible rating); * and ** - st,atistically

significant at I % and 5% respectively.

Source: Computed from mE (2007) survey.

development in Laos in 2006. The lack of such initiatives was reported as a serious

drawback. Although Chinese firms are regarded to be largely disinterested in providing

off-firm training, the other firms reported that the presence of such organizations would

help them reduce defects and upgrade their operations.6

Network cohesion

.

i Being relatively new to capitalist integration following stagnation under an isolationist

,I;:;: regim~, .the level of coordination in L~os can be ex~ec~ed to be low. Unlike the experience

t" of Effilha Romagna where a commUnIst style egalitanan framework attracted small scale

!~ artisanal operations and drove them to globally competitive enterprises, the garments firms

I.. in Laos are largely foreign-owned enterprises with little bonds with the local residents.

: The firms were asked to rate the degree of connectivity and coordination with critical

~ basic and high-tech institutions. The empirical evidence shows that firms in Laos enjoy

low levels of connectivity and coordination with critical basic and high-tech institutions

(see Table 7).

Perhaps the agglomeration of garment firms around Vientiane led to firms in the rating

better cohesion with the embedding basic infrastructure of licensing, customs and security

than firms in the latter. Firms rated poorly connectivity and coordination with universities

and chambers of commerce.

Table 7. Network cohesion, garment firms, Laos, 2006.- --

Mean SD

- -

Ministries 2.3* 0.5

Utilities 2.5* 0.3

Licensing Authorities 2.7* 0.5

Security Authorities 2.3* 0.7

Customs 2.1* 0.5

Industry Association 1.9* 1.3

Training institutions 1.1 * 1.0

Technical Institutes 1.2* 0.9

Universities 1.4* 0.7

Development Organizations 1.8* 0.7

N 87

Note: Likert scale score of finDS (0-5 with from none to highest possible rating); * and ** - statistically significant

at 1 % and 5% respectively.

- ,..~ ;lpn from UNU-MERIT, World Bank and DFID Survey (2004).

_1"). Asia Pacific Business Review 201

Integration in global markets and value chainsAll surveyed gannent firms in Laos are directly integrated in global markets and most of ~

them are either owned or controlled by foreign investors. Laos attracted gannent firms i

from abroad largely because of the preferential agreements they entered into with the

United States in 1999 (bilateral), the European Union in 2001 and with Japan and Canada

to import clothing manufactures under preferential terms accorded to the least developed

countries.All surveyed exporters use brand names from foreign firms and specialize largely on

cut, make and trim (CMT) operations (see Figure 2). Most investment came from EastAsian economies with Thai investment (45%) dominating in Laos. There was some

foreign direct investment from developed economies but it was tiny in comparison to the

in~ows from the East Asian economies. Among the surveyed firms the breakdown in

ownership by totally foreign, totally local and joint-ventures in Laos was 61, 15 and 11 in

2006.

Foreign firms enjoyed production technology from their operations at parent sites -

using their ownership-specific know-how (Dunning 1979) while local firms enjoyed

access to know-how supplied from buyers. None participated in R&D - including product ~z:J

adaptation. All firms relied on brand names that were accessed from independent brand ~~

holders in developed markets. Machinery suppliers from abroad were also a major source

of training in Laos.

5. .Technological capabilities

'~ This section seeks to discuss the depth of technological capabilities that have evolved in

.~, gannent firms facing the institutional environment discussed in section 4. Given that all

~ four systemic pillars in Laos are still evolving and weak, gannent firms are not expected to

:[~~ demonstrate high-technological capabilities. Nevertheless, the evidence can support the

L")""." critical areas where government and systemic support will be most urgent.

}~

Knowledge depth

This sub-section examines technological capabilities acquired or developed using theframework of knowledge depth in the gannent firms in Laos. Only embodied technology -

in people, processes and equipment, and product - is examined here (see Table 8). Each of ,the three technology components are differentiated by knowledge depth (see also Table 2).

The scores show the incidence of participation of firms in the respective knowledge

,I / '

C ::;;;;rast Asi.an I Laos I - ..

.~ EconomIes I L4U~ r

..

~

- -.. Export using brand names from developed

. ..

econOmIes

Figure 2. Main markets and investment source of gannent fim1s, Laos, 2006.

Source: Established from Sasakawa-IDE (2007) survey.

. " ';

. ~

~'I'~


categories. Because of the weak high-tech infrastructure pillar no firm reported,- participation in levels 4, 5 and 6 knowledge activities in Laos.

The evidence shows that the overall incidence of participation of firms in

high-technology activities is low in Laos (see Table 8). Firms in Laos only participated

in levell, 2 and 3 knowledge activities. Participation in product technology was extremelylow. None of the firms were engaged in levels 4, 5 and 6 knowledge activities from where

I product adaptation, design and R&D activities are carried o~t. It may be too early to e~pect

the transition to levels 4, 5 and 6, given that there has been less than 10 years of p~QductionI and export experience in the industry. However, the sustenance of the industry over the long; run would require entering at least level 4 activities where the capacity to adapt process

c

[! flow layouts, machinery and equipment, and inventory and quality control techniques will

~ be important in lowering throughput time while raising quality and efficiency.

; .

r.

Technological intensities

. For reasons explained in the methodology section above, garment firms in Laos cannot be

" expected to participate in high-tech activities. This is possible despite the industry's

integration in global value chains because garment manufacturing is diverse and its low

end, operations have remained labour-intensive. When compared to selected Asian

economies, ,garment firms in Laos also enjoy the lowest technological intensities despite

the intensities shown for its competitors from China, Indonesia, the Philippines, Sri Lanka,

. Thailand and Myanmar in earlier years (see Table 9).

At 8.7%, the skills intensity (SI) of garment firms in Laos was significantly lower than

the mean of 12.1 % for Cambodia. The means for other countries are much higher.

The percentage share of training expenditure in payroll (TE) of Laos was higher than that

of My.anmar, but much lower than those of the other countries. The percentage share of

process technology expenditure in sales (PT) of Laos was equal to that of Myanmar but

much lower than those of the other countries. Investment in adaptive engineering (AE)

was generally low in all the countries shown in Table 9. However proper R&D expenditure

was excluded for firms in China, Indonesia, the Philippines, Sri Lanka and Thailand and

hence, the engineering capabilities of garment firms in Cambodia, Laos and Myanmar can .

be considered to be significantly lower than what the adaptive engineering scores show.

Even here, along with Myanmar, Laos' had the lowest AE among the countries.

Typical of underdeveloped economies starting at the lower end of the'S' curve,learning and innovation in the garment industry appears to be low in Laos. The lack ofhuman capital, poor infrastructure and the uncertainty associated with the preferential

access opportunities in the developed markets were cited as the main reasons as to wliy firms in Laos are engaged only in levels 1, 2 and 3 knowledge activities, and had low ~

technological intensity scores compared to China, Indonesia, the Philippines, Thailand and

Table 8. Knowledge activities, gannent firms, Laos, 2006 (incidence).

Knowledge Depth HR Process Product

(1) 87 87 87

(2) 59 59 55

(3) 23 23 5

Total 87 87 87

Source: Compiled from IDE (2007) survey.::; ~

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Cambodia. However, for Laos to be able to sustain garment manufacturing alongsideimprovements in value, added to support wage increases, the government with the

a~istance of other meso-organizations must strengthen the four systemic pillars to support

firm-level technological upgrading.

6. Conclusion c;"

This study examined the impact of incorporation into global value chains on L,6s'economy using the systemic quad. Breaking into global value chains helped expandexports, and with that, employment. Preferential access privileges rather than massivereserves of labour have been the prime driver of growth in garment manufacturing in thecountry. However, while the opportunities have emerged almost fortuitously against itsnatural endowments the sustainability of the industry in Laos depends very much on thecapacity of the government and other institutional actors to stimulate improvements in the

four systemic pillars. Because Laos is still faced with poorly developed systemic pillars,

. even foreign firms enjoying considerable technological capabilities in their parentlocations have only redeployed low technology to carry out low value added activities.Indeed, lead times reported by garment firms in Laos were much longer than garment firms

in competitor countries.Laos enjoyed double digit annual average growth in employment and exports over the

period 2000- 2006. Given the high unemployment and underemployment rates faced by

Laos, the growth in jobs had obviously generated material improvements in the living

conditions of the people. However, the slow development of basic and high-tech

infrastructure has combined to restrict technological upgrading in garment firms in Laos.

Unlike Cambodia, where a large agglomeration of garment firms has encouraged the creationof training institutes, the smaller production base has discouraged similar developments inLaos. The lack of support for technological upgrading has also restricted upgrading in

silk-based garment manufacturing in which Laos enjoys natural resource endowments.

Laos obviously faces severe natural disadvantage against latecomers such as

Cambodia and Vietnam as the country is landlocked and has a much smaller population.Neoclassical prescriptions on a country only recently integrated into the global economy

and endowed with poor infrastructure and low intensities of human capital would simply

call for continued specialization in existing low end activities until relative factor priceschange. Two obvious reasons call for a departure from such arguments and a focus by the

government on stimulating technological upgrading and productivity growth in Laos by

improving the four systemic pillars. Firstly, preferential access to markets offered bydeveloped economies cannot be taken for granted as they can be withdrawn at any time.

Secondly, technological deepening - in human resources, process and product

technologies - must take place to sustain firm-level competitiveness. Otherwise thegarment firms will lack the requisite capabilities to compete in international markets once

the preferential trading arrangements are removed.

Notes

1. Buckley (2004) offers an analytical framework to explain Asian network firms.2. Within the same country some regions have responded differently to government policies

compared to other regions. Hence, electronics synergies are far more dynamic in Penangcompared to Johor in Malaysia (see Rasiah 2002, Rasiah and Asokkumar 2009).

3. Interviews by Authors carried out on 18 December 2007.

4. This survey was funded by the Japan External Trade Organization (JETRO).


5. See Rasiah (2008) for a broader explication of taxonomies and trajectories involving more

advanced economies.

6. Interviews by authors on 10 December 2007.

Notes on contributors

Rajah Rasiah currently holds the Khazanah Nasional Chair of Regulatory Studies and is also

Professor of Technology and Innovation Policy at University of Mal.aya. He is also a Professorial

Fellow at the Maastricht Economic and social Research and training centre on Innovation andTechnology (MERIT), United Nations University. He obtained his doctorate in Economics from

Cambridge University in 1992 and his research specialization includes science and technology

policy, firrn...levellearning and innovation, healthcare services, foreign investment, cluster mapping

and designing technology roadmaps with fieldwork research experience in over 35 countries. Among

his recent books include The New Political Economy of Southeast Asia, Cheltenham: Edward Elgar,

2010 (Edited with Johannes Dragbaek Schmidt) and Innovation and Learning in Industrializing

East Asia, London: Routledge, 2011 (Edited with Thiruchelvam Kanagasundram and Keun Lee),

and The Malaysian Economy: Unfolding Growth and Social Change, Kuala Lumpur: Oxford

University Press, 2011 (edited). He has also undertaken consultancies for UNCTAD, World Bank,

UNIDO, UNDP, Harvard Institute of International Development (mill), ILO, Asian Development

Bank (ADB), UNESCAP, JETRO, PES and Stanford Research International (SRI).. Vanthana Nolintha is a Researcher at Lao PDR' s National Economic Research Institute (NERI). He

obtained his master's degree in Economics from the Australian National University in 2008. Hisresearch interests include the role of trade and foreign direct investment, the impact of the natural

resource sector and regional integration. His latest research paper is 'Cities, SEZs and Connectivity

in Major Provinces of Laos', published with the Bangkok Research Center, illE-JETRO in 2011.

Latdavanh S~ngvilay is a Researcher at National Economic Research Institute, Ministry of Planning

and Investment, Vientiane, Lao PDR. She has a master's degree from Japan on Public Policy in 2009.. She has co-authored several research papers and is a key team member to conduct short term

economic indicators in Laos.

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Garment manufacturing in Laos: clustering and technological capabilities

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